Tarsus Pharmaceuticals, Inc. (TARS) Earnings Call Transcript & Summary

Good morning, everyone. Thanks for joining us at the Barclays Healthcare Conference sessions for the day. I'm delighted to have Jeff Farrow, the Chief Financial Officer at Tarsus Pharmaceuticals with us. Tarsus is a company we've been covering over the last couple of years, has had a pretty strong execution with XDEMVY until now, also reflected in how the stocks performed too. Jeff, delighted to have you here. Thanks for joining us at the conference.

Well, thank you for having us. It's a pleasure to be here.

Yes. I would love to invite you to start with some opening remarks. You recently reported Q4 results, provided some 2025 outlook. Would want you to start with some opening remarks there, I'm sure we can get into questions.

Sure. Happy to do so. So Tarsus Pharmaceuticals is a commercial stage company. We launched our first product, XDEMVY in 2023, in September of 2023. It's for a drug for a disease called demodex blepharitis. It impacts about 25 million patients in the United States. We're targeting 9 million of those 25 million. And these are patients that are actively going in to see their physicians for either demodex blepharitis or various other eye care underlying diseases. We've had a very robust launch, as Balaji had highlighted. Our first year sales was about $180 million, and the team has done an amazing job on managing the gross to net discounts. We have broad payer coverage that is over 90%. And of those 9 million patients, we've really only scratched the surface. We've only dispensed bottled 165,000 since launch. So we have a long way to go, and this is just the early start of the launch. Beyond XDEMVY, we also have an interesting pipeline. We recently discussed ocular rosacea, which we think is another exciting groundbreaking opportunity for us, much like demodex blepharitis. It's a disease that is really sort of ocular rosacea or rosacea that goes around the eye orbital area. It impacts somewhere between 15 million to 18 million patients out there. And a large majority of those are thought to be caused by demodex mites, and we know that we're very efficacious against these mites. There's no other approved therapies out there. So we're excited about this opportunity, and we'll be kicking off a Phase II study later this year. And then we have an interesting program in Lyme disease. It's an oral prophylactic for the treatment of lyme that is a big unmet need, much like the other therapies that we have. And we do think, ultimately, this is probably better suited for a partner just given the call point is likely a GP, but it's a unique potential therapeutic that would be taken the night before you go out on hike and get therapeutic levels by that next morning. And based on the PK and the recent data that we presented on Phase II data that it shows that it's durable to beyond 30 days. So a unique opportunity and potentially an opportunity to do some nondilutive financing down the road.

Great. We'll dig into each of these. But firstly, 2025 outlook. So -- and post Q4 results recently, I mean, we got a lot of questions around the quarterly cadence, understandable. Clearly, gross to net evolution is something which is a huge focus for investors and understandably so. The other thing we also got questions around was like OpEx spend and where -- what are the components of it. So I would love to get your thoughts around each of these moving parts here and what drives the outlook for each for 2025?

Sure. Happy to. So maybe I'll start with the gross to net. And maybe I'll back up into the third quarter of last year. So in the third quarter, we had a gross to net discount of about 40%, but that included about 3% or $3 million that was related to an accrual reversal that we did there. We had anticipated that Medicare donut hole would impact us in the first half of the year, but that didn't turn out to be the case. In fact, it appears that most of our patients don't have as many comorbid diseases as maybe some of the typical patients do. So we ended up reversing that $3 million in that third quarter. So if you think about an unaffected gross to net discount, it was probably closer to 43%. And then we had guided, given that Medicare donut hole dynamic that we expected to have more pressure in the back half of the year. And we did see that in fact in the fourth quarter, we said we expected a 1% to 2% increase in the fourth quarter, and that's ultimately what we saw. We saw a 45% gross to net discount. Then in the -- we do always see all manufacturers, not just Tarsus, typically have a little bit more pressure on the gross to net discount. As deductibles reset, you typically provide more patient assistant programs. And so we expect very similar to that. So what we guided to was a 46% to 49% gross to discount. And that's really driven by some of those programs that we'll be providing patients. We do expect that gross to net discount to stepwise decrease, particularly as we get the more patients coming online. And so by the fourth quarter, we expect our gross to net discount to be in the low 40s, think about 42% to 43%. And that should be more or less our steady-state gross to net discount beyond that time frame now that we've got that 90% payer coverage. So that's where we sort of expect to land there on an ongoing basis.

Got it. Beyond gross net stepping up, what about the revenue cadence for the year? How are you thinking about this? And maybe any potential seasonal variation?

Yes. So there is some seasonal variation not due to the disease, but really just the dynamics of the eye care professionals and the patients. And so beyond that gross to net pressure we see in Q1, we've also seen eye care patients tend to prioritize other medical visits in the first quarter because of some of those deductible resets. And so we've expected some -- we expect growth. We had guided to 62,000 to 67,000 bottles dispensed on top of the 58,500 that we saw last quarter. And that we expect to see in Q2 a pop-up in that growth rate there, just given that most of the patients have gone through those deductible resets. And so we expect to see more patients coming in to visit their eye care professionals in the second quarter. We do expect to see a tempering of growth, but still growth in acute in the third quarter, much like we saw last year. And we also looked at other eye care products as well, just particularly the NRxs there. And given the dynamics of patients going on holiday, doctors going on holidays, conferences and things like that, we expect to see a little bit slower growth in the third quarter. But then again, popping up in the fourth quarter, much like we saw last year due to people want to utilize our FSA and people getting back into the office there.

Got it. I want to dig a bit more into the clinical side of things. It's been now around 6 quarters, if I recollect right, that the product has been launched. And so tell me a bit more about the patients that are being prescribed XDEMVY at this point. You said that you want to target 9 million of the 25 million overall addressable market. And what kind of adoption trends are we seeing across different kinds of patient segments?

Yes. So I think initially, out of the gate, unsurprisingly, you saw probably most of the patients were coming in demodex blepharitis. That's about 1.5 million patients that had been previously diagnosed with demodex blepharitis prior to the launch of XDEMVY. And prior treatments were over-the-counter lid wipes, tea tree oils, that just weren't efficacious. And so having a new therapy that showed 85% of the patients positively reacted clinically and a positive safety profile, you could see that doctors were willing to -- and anxious to see a new therapy out there. And so initially, I think most of the patients were within that bucket. But as time goes on and we get to get out there and educate the doctors that they should be looking for these collarettes, which are pathognomonic for the disease on all of their patients. And it's very easy to diagnose. All the patients typically go through the slit lamp process where they stick their chin on the slit lamp and you ask the patients to look down. And if you've got these collarettes or the sort of scruffiness around the eyelids, the patients typically have demodex blepharitis. And so what we're encouraging doctors to think about is looking at all their patients that sit in that slit lamp. So that includes MGD patients, about 1.5 million. There's cataract patients. There are contact lens patients as well as dry eye patients. And so what we've heard from doctors is as many as 40% of them have started reaching down into these other categories and looking for these collarettes that are pathognomonic for the disease. So we'll continue to educate on that and drive -- basically, we've got what we call the 4 Es, evidence of -- evidence generation; and then education on that evidence; ensuring ease of access, which we have now with 90% payer coverage; and then just execution. And right now, we've talked about MGD in the past. We had some really strong Phase II data in MGD that we are getting out there and educating the physicians on. So that's all part of the process. And so we'll be generating further evidence, including in contact lenses and some of those other categories as time goes on.

Got it. Look forward to that. And as we think about maybe from evidence generation to education, what are the things that you're doing on the prescriber side to influence their prescription patterns and behavior. Now I think incorporating slit lamp examination in the practice, that's a relatively easy one. I'm sure many of the physicians have changed that. What do you want to do next there?

Yes. I think it's continued education on looking for all of their patients. I think the other practice dynamic that has helped is the Medicare coverage coming online. We had heard from some physicians that it's a painful process if you don't have either payer coverage on the commercial side or the Medicare side. And we got very robust commercial coverage by the middle of last year. And then we really turned on the payer coverage in Medicare in the fourth quarter, and that's going into impact in Q1 and Q2. But the prior auth process or getting the medical exceptions required a lot of time. And some of the physicians just said, well, I'm just going to wait until you get coverage before I start to prescribe. So educating the physicians that we now have the broad coverage and access should be much easier, will be part of the process. It's also educating on MGD, taking -- having the physicians be aware of -- take a look at your patients that have demodex blepharitis or MGD and see if maybe XDEMVY is a good therapeutic for that as well.

Got it. I'll follow through with the MGD part of your response. I mean this is an area that we had dug into quite deeply a couple of years ago, hosted a few KOL calls and really realized that there is a massive market opportunity and you're targeting this market, too. So help us understand the kind of initial traction that you've gotten on the MGD launch till now. And I think you had also mentioned that the use should build over time as ECPs kind of understand this product better and understand the data better. So what can you do to raise awareness there and the traction that you're seeing?

Yes. No, it's really been encouraging. It's early days. The data was released last year. So we've been really thinking about how to educate the physician community on this disease. I think what's resonated and it was right out of the gate when we had ad boards on the data, there's no FDA-approved therapeutic out there that shows clinically impactful results on the actual glans themselves and the secretion score. So we saw clinically improvement from sort of, I would say, moderately severe patients to moving into "normal" both in the meibomian gland secretion scores as well as the number of glands that are able to screen the optimal secretion. So that data has really resonated with the patient community or the physician community. And so we've been getting out at various conferences in educating the doctors on this disease state and then also doing peer-to-peer education as well. So doctors using this with patients that have demodex blepharitis and MGD and what's the practice patterns there.

Got it. And I think just looking into the revenue projection and the models, I think one of the things that I have in my model is retreatment rate. And I know that we're not anticipating much last year, but now that we are at around this 1.5 year time line, what kind of retreatment patterns are you seeing in the clinic? And how should we model this or factor this into our expectations for 2025?

Sure. it's still early days, just given where we are on the launch. We're only about 1.5 years into the launch. But our clinical study, Phase III clinical study, where we follow patients out to 12 months, we saw some of the patients start to develop collarettes again between 6 to 12 months, and that was about 40% of the patients. We expect that probably most patients will see some recurrence. These mites will migrate back up into the eyelid. They like that oily sebaceous environment. So they're coming from other parts of the skin, maybe from your hair, and reinfesting your eyelids there. So the best data we have is really coming from that clinical data where we saw the 40%. We're being conservative in saying that probably 20% of those will come back annually on the subsequent year. We're continuing to monitor this. IQVIA is currently showing a mid-single-digit retreatment, but they're really showing that as on a denominator of the weekly prescriptions. So it's probably not the best way to be taking a look at it. It's probably not the most complete data either. So it's really difficult to track refills, I think, in this series. So we'll be able to, as time goes on, be able to publish some results on that. But our expectation is that we will get to that 20% level over time. It's not going to be a light switch, but it will be sort of something that will be increasing year-over-year. But over time, we should get to that 20% or higher level.

Got it. I want to spend some time around the pipeline and especially around ocular rosacea that you started speaking about earlier this year. So walk us through the broader market opportunity here, the next steps for you, Jeff, and what stage are we currently?

For ocular rosacea?

Yes.

Yes. So this was a unique opportunity that came about in an unusual way. So we had shown the rosacea data coming off of Phase IIa data, which we initially thought we were going to partner because we are really an eye care company, and we wanted to stick to our knitting there. But as we presented this data to a group of KOLs and physicians at an ad board, they came to us and said, hey, have you thought about looking at ocular rosacea. And there's nothing out there that I can use to treat my patients, and I see it a lot in my practice, and I would love to have something there. So we spent more time looking at the market, doing some more KOL work. We wanted to make sure this wasn't just coming from a few doctors that see this, but is there a really broad market opportunity? And it turns out there is. There's about 15 million to 18 million patients that are thought to be impacted by this ocular rosacea. And as these physicians highlighted, there's really nothing out there from an FDA-approved therapeutic perspective. So much like demodex blepharitis, this is a complete white space and then really an opportunity to help patients that have nothing out there. So of those 15 million to 18 million patients, over 50% are thought to be caused by demodex mites. And so with that data, we are developing a Phase II study that will kick off in the second half of this year. And we're looking specifically at some endpoints that are pathognomonic for the disease and really are the major complaints of the patients. It's obviously, the redness that you see there as well as the vessels that sort of dilate and you can really see them pronounced on the eyelids that you typically don't see with other patients. And so we're developing a study that will look at those as well as some other secondary endpoints. And then ultimately, we'll kick off that study sometime in the back half of this year with a data readout sometime in 2026. But we're excited about this, just given the fact that it is an untapped area to really be able to help these patients that have nothing else out there. And it might be an opportunity much like demodex blepharitis out there that can be really impactful for the patients as well as for the company.

Got it. And help us understand why, especially as it's caused by demodex blepharitis, demodex mites, reasonable to assume that many of these patients will also have blepharitis -- demodex blepharitis. And so what is the overlap in this population of 15 million to 18 million? What is the overlap? And what are the incrementally new patient population that you have? That's one. And two, maybe also help us understand why XDEMVY itself is not able to resolve this and why do you need a new formulation?

Sure. So maybe I'll start with that second question. So we're looking at a gel-based version. We think an eye drop is not the topical of choice there for patients. It's not -- it probably won't penetrate the skin as readily as a gel as we're formulating right now. So you want a gel that you can apply once or twice a day that will sit there and allow the drug to penetrate into the skin appropriately. And with a drop, you're seeing things [indiscernible] down your face there. So that's the reason we're moving into a gel formulation. And then on the first part of your question, there shouldn't be -- this is really a distinct population there. So -- and one of the reasons that the physicians came to us was they were using XDEMVY as the eye drop, and they would clear up the redness around the eyelid margin, clear up around the eye, but they still had redness, the ocular rosacea, around the orbital area. So they -- some people said that you almost have like a racoon-like effect there with the red eye. So we view it as distinct opportunity there. So it would be above and beyond the opportunity in XDEMVY for demodex blepharitis. And there is some -- probably some overlap with patients that probably have demodex blepharitis also have ocular rosacea, but it will be a different therapeutic approach to how to treat those independent diseases.

Got it. And maybe a quick outlook on the Lyme disease program, too. So remind us of the recent guidance that you got from the FDA around the regulatory path forward here and the market. I mean, I've spoken to a few companies targeting this area before, but it's been a largely unmet need out there. So what's the market opportunity also looking like?

Yes. No, it's a huge unmet need. And I would say Valneva, Pfizer say it's about $1 billion market opportunity for their vaccine. They are taking a traditional vaccine approach where you get your initial shot and then you've got a couple of boosters and then you'd have to go back for your annual boosters. Ours is an oral, almost an on-demand prophylactic that you would take maybe a day before you go out on a hike, you would get to therapeutic levels the next day, and it shows durability for beyond 30 days. So it's a little easier presentation, requires less sort of forward planning and basically a unique opportunity that could perhaps be something probably that we talked about, better suited for a larger partner because it's going to be a GP call point there. But in terms of the clinical path forward, we see this as being a Phase II study would be the next step where we would take a look at several biomarkers that are indicators of Lyme disease. And the agency has given us some guidance on what that might look like. We're talking about several hundred patients that we would need to treat to get to that proof of concept. They were pretty clear that the Phase III study would need to be a disease prevention study that would be thousands of patients there. So -- and that would be something that we would look to partner with a potential partner and identify as quick a pathway to get to market for something like this. The clinical data that we showed, the Phase IIa data was pretty impressive. What we're essentially doing is killing the tick before it can transmit the bacteria that causes lyme disease. And that's not an immediate time frame. That typically takes anywhere from 24 to 48 hours. And our clinical data showed that we killed about 97% of the ticks within one day and that was durable beyond 30 days there. So pretty impactful tick kill study there. So the next thing would be to design a robust Phase II study that we're going to start in 2026 and then read out sometime after that.

Got it. Jeff, I know you have your hands full with the execution and the pipeline, multiple pipeline opportunity as we discussed but I also want to spend a couple of minutes around the business development plan. And I know that Bobby has in the past mentioned his desire to look at both the front of eye and back of eye opportunities. So how are you feeling about these plans? And where do you stand right now?

Yes. No, our goal is to be one of the best eye care companies out there, if not the best eye care company out there. And right now, all capital deployments and time and effort is being spent on the launch, especially given the increase in the [indiscernible] spend, we want to make sure we execute flawlessly there, much like we've been doing for the last 1.5 years. So that will be the key. But as time goes on, I think we can synergize our sales team to maybe get something else in the bag there that has a commercial that's already on market and synergize that. But we're also looking at other opportunities. We've done the landscape of the front of the eye and keeping track of other opportunities that we might want to execute on from a business development perspective. I would say nothing near term and nothing expensive at this point. But as time goes on and as we continue to execute on XDEMVY, we'll have an opportunity to do beyond that. And then as you highlighted, as time goes on, we might think about moving into the back of the eye as well into retina programs and other back of the eye programs. But again, that's something that's going to be evolving over time.

Got it. Great. Jeff, I think that will be a great spot to leave this discussion at. Thank you again for joining us at the Barclays conference, and I wish you a very productive conference.

Well, thank you very much. Appreciate you having us.