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Arcutis Buys British Drug Developer

Arcutis Biotherapeutics Inc. has acquired a smaller biotech company in a move that significantly changes the corporate profile of Arcutis.

The Westlake Village-based drug development company bought Ducentis BioTherapeutics Ltd., which is headquartered in Oxford, England, for its drug used in the treatment of atopic dermatitis, or eczema. The price was $30 million but could go higher if certain performance benchmarks are met.

Frank Watanabe, chief executive of the Conejo Valley firm, said in an interview with the Business Journal that there are about 20 million Americans who suffer from the disease.

“Across the board there are significant unmet needs in the management of atopic dermatitis,” Watanabe said. 

Ducentis was founded in 2015 by Philip Huxley, David Blackbourn and Rebecca Ashfield. It is a small company, and it has just two employees – Huxley and Ashfield. It had operated by outsourcing its operations. 

Ashfield will stay on as a consultant — but not as an employee — of Arcutis, Watanabe said.

“We can continue to leverage her expertise,” he added.

Arcutis has the resources, experience, and commitment needed to accelerate the clinical development of Ducentis’ drug as an important new treatment option for patients with atopic dermatitis, said Huxley, the former chief executive of the company. 

“With Arcutis’ depth of knowledge and capabilities in dermatology, and its team’s experience developing, manufacturing, and commercializing biologics, we are confident that Arcutis is well positioned to build on the preclinical work that the Ducentis team has completed to date,” Huxley said in a statement. 

From the time the deal was announced until last week, Arcutis’ stock has dropped from about $22 a share to $19, but the overall Nasdaq declined as well. It had a market cap last week of about $1.16 billion.

Expanding pipeline

Arcutis was founded in 2016 and became a public company in January 2020. Its first drug, Zoryve, which is used in the treatment of plaque psoriasis, was approved in July by the Food and Drug Administration in a cream formulation.

As for the acquisition of the British firm, what it means for Arcutis is the ability to expand its pipeline. 

“We are not a one-trick pony,” Watanabe said. “A lot of smaller drug companies have a single asset and that is it. We have never been a company like that. We’ve always had multiple programs.” 

In its product pipeline are primarily topical drugs – creams, lotions, foams, gels and ointments.

The drug purchased with Ducentis is different in that it is the first injectable being developed by Arcutis, Watanabe said. 

Doctors are seeking to treat patients of severe skin conditions with biologic or systemic drugs, such as pills or an injection, he added. 

The purchase shifts the profile of Arcutis from being just a topical drug maker to one that makes both topical and systemic drugs, Watanabe explained.

“It puts us in a very elite league of companies that are developing a biologic and in a very, very elite group of companies that are developing both topicals and biologics,” he said. 

Brent Reinke, founder and chairman of the BioScience Alliance, a Westlake Village group that provides resources to the life sciences industry along the 101 corridor, said that companies like having a diverse pipeline and not being reliant on one or two drugs, particularly if they are still in the clinical testing stage. 

“Until it gets final FDA approval and taken into commercialization anything can happen at the clinicals, whether it’s phase one, phase two or phase three,” Reinke said. “They may get results that end up killing the drug development of that particular effort.”

One of the reasons why Ducentis saw Arcutis as a good partner is that a significant portion of its employee base had experience with injectable drugs, Watanabe said.

Over half of the company’s clinical, commercial and manufacturing teams have worked on biologics at previous jobs, including at Amgen Inc., he said.

“We really have the expertise necessary to not only develop dermatology drugs but specifically dermatology biologic drugs,” Watanabe added.

Negotiations

Arcutis’ Frank Watanabe

Arcutis began negotiating with Ducentis earlier this year. As the talks progressed, it became obvious to both companies that the drug would be more valuable in the hands of Arcutis than staying with Ducentis, Watanabe said.

The reason was pretty clear – Ducentis is a drug-discovery company, while Arcutis is a drug-development company, he said. 

“We figure out how to manufacture, we know how to do clinical studies, how to get regulatory approval, and then how to commercialize those products,” Watanabe added. “They don’t have any of those capabilities.”

The Conejo Valley company was able to negotiate a mutually beneficial offer to acquire Ducentis and its assets, Watanabe said.

Under the terms of the transaction, Arcutis will acquire the outstanding shares of Ducentis for an upfront cash payment of approximately $16 million and Arcutis stock valued at approximately $14 million, as well as future contingent payments based on development and commercial success, according to a release from the company. 

Arcutis did have the financial resources to make the deal.

At the end of the last quarter, it had about $280 million on its balance sheet, Watanabe said.

In the last month, it has raised $125 million in debt and $162 million in equity, he said.

That combined nearly $570 million allowed the company to grow as it launched Zoryve, Watanabe added.

From his talks with Arcutis executives, Reinke said that he knows they are developing the commercialization team to get its first approved drug in front of doctors and patients. 

“You go through all this expense to get a drug approved and now you have to sell it,” he said. “That is a whole different level of expense and team-building that has to go on.” 

What is happening at Arcutis with the Ducentis transaction, Reinke said, is that it is going to have expenses in the sales and commercialization team for Zoryve, so it only makes sense for the company to find other drugs it can commercialize rather quickly. 

“If you have that in place you might as well use that same team to sell other similarly situated drugs that are complementary to the one you already have,” Reinke said.

Arcutis recently finished phase three clinical tests – the ones that use a large number of patients – on a foam that will be used to treat seborrheic dermatitis, Watanabe said. 

“We plan to file with the FDA for approval on our foam in the first quarter of next year,” he added. 

In addition, in the next month or so the company will complete phase three studies on its foam used to treat scalp psoriasis, and by the end of the year will wrap up two phase three studies on the Zoryve cream to treat eczema. 

“It is the exact same drug, but it is just in a different concentration,” Watanabe said.

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