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

Thanks, everyone, for joining us. I'm Andrea Newkirk, one of the biotech analysts here at Goldman Sachs, and I'm really pleased to be joined by Jeff Farrow, CFO and CSO of Tarsus. Thanks so much, Jeff.

Thank you, Andrea. It's a pleasure.

Well, maybe we can get started at a high level here. XDEMVY has been on the market. You're coming up almost on 2 years since it's been commercially available. Would love to just hear your high-level thoughts as to what part or the facets of the launch to date have been most responsible for the progress that you've seen. It's been quite an extraordinary launch.

Well, thank you. And maybe just a quick overview of the company as well, too, before I answer to your question. But Tarsus is a commercial stage company. We launched our drug, as you highlighted, about 2 years ago in September of 2023. So we're on the sixth quarter of launch. We're focused on the eye care space and XDEMVY targets a therapy or a disease called Demodex blepharitis that impacts about 25 million patients in the United States, and we're targeting 9 million patients that are actually going into the office to seek treatment for various diseases, including Demodex blepharitis. The launch has gone very well, as you highlighted. It's been sequentially increases in demand, which is bottles dispensed, but also the corresponding revenues as well. Commercial coverage came in much more early than we anticipated, and then Medicare coverage came on in earnest in the beginning of this year. Beyond that, we have a pipeline that's pretty exciting. We've got something for potentially Ocular Rosacea that we'll be starting a Phase II study in the back half of this year. And then we also have something for potential prophylactic treatment of Lyme disease, which we would likely initiate a study next year at the start of the Lyme program or the Lyme disease therapy area. In terms of the success that we've seen quarter-over-quarter, I would say lately, it's been probably driven by the expanded sales force, right? So we hired 50 incremental sales reps that essentially hired them in the summertime of last year, and they hit the field in -- just after Labor Day. So that was about our first full quarter with the fourth quarter, and then this first quarter was really when they started to get their sea legs. So I think the fact that we are visiting these doctors more frequently, having less windshield time or time behind the wheel when they're trying to travel to these different offices just to remind the doctors that they should be looking at all their patients that potentially have collarettes. And there is no such thing as an asymptomatic patients, and they should be looking at all their patients, including patients that have dry eye, contact lens intolerance and these other sort of categories that we're targeting. So I think in the near term, it's really been driven by the expanded sales force.

Got it. And maybe on that point, as you think about your sales reps in the field, how many visits does it take on average for a sales rep to interact with these optometrists, ophthalmologists to really get them to be a believer in XDEMVY?

Yes. It varies. But generally, what we've seen is doctors that have -- are new to XDEMVY, it takes between 5 to 10 visits for them to really get comfortable with it. They want to try it on probably their worst of the worst patients, see how efficacious it is, see how tolerant patients are of it. But generally, once they've had that sort of reiteration of the visits with the doctors and start that, we see that they get a little bit more on almost autopilot that they'll start to write more frequently. So it takes about 5 to 10 visits and then they're going to want to try 5 to 10 patients before they really become comfortable and prescribe more frequently.

Got it. And you've had some nice progress in the breadth of ECPs that you've been able to reach. And it really seems like the next leg of this has been the breadth, where there's depth beyond the breadth. Maybe speak to us about how you're progressing against that. What proportion of your active ECPs right now are writing on a monthly basis versus a weekly versus a daily?

Okay. So just as a reminder, we're targeting about 15,000 eye care professionals, and they write about 85% of the scripts in the dry eye space, and that's typically how you target and did our sales force sizing at that point. We have been pleased with the depth of prescribing that we've seen since the start. In December, the year-end results, we highlighted that 40% of the ECPs are prescribing in the different categories beyond the Demodex blepharitis category. So we're pleased with that. It's something that we don't get real-time data. You really have to go back and do ATUs or patients -- eye care professional surveys in order to get that data, but we'll probably highlight that later. But we're talking about thousands of doctors that are writing on a regular basis there. The goal of the sales force and the expanded sales force, in particular, is to just remind the doctors that all patients could benefit from the treatment of XDEMVY, and they should be looking at all of their patients that have collarettes. And so that's driven, I think, some of that increased depth that we've been seeing. We haven't really disclosed or actually have this data in terms of what percentages are really writing monthly, weekly, daily, but that's the progress that we're trying to seek is getting the patient or the eye care professionals that are writing monthly to write weekly and then ultimately daily there.

What does it take to move someone from one bucket to another?

It's really experience, I think. So it's one of those things that they have a -- it's easy to diagnose. They have a positive experience with the drug. They get good feedback from the doctors. And so that really, I think, encourages doctors to try some of the other patients that might not be typically top of mind. And I think it's also -- we're a relatively new drug out in the marketplace in a new category. And so it's a little bit of reminding doctors that this is something that they should be screened for all their patients. And it just takes a while for that practice to be built in. I think over time, you're going to start seeing all their doctors doing it. But initially, it just takes a reminder that you should be screening for collarettes on all your patients that come in.

Got it. And when you think about these ECPs who are writing, how -- I guess, maybe what proportion of those eligible patients are actually receiving a script right now? So in other words, how deeply penetrated are they within their own patient population?

Yes. We haven't really talked about that yet. But what we do know is that our most active prescribers who are writing multiple scripts a day say they have not reached the glass ceiling, so to speak, right? They still have many, many more patients to go. So I think with 9 million patients that we're targeting, and we've only dispensed probably around 225,000 scripts, which would represent about 225,000 patients. So we've got a long ways to go in terms of getting to that depth.

Got it. And as you think about driving more depth, I mean, you've pointed to the benefit of this expanded sales force. How are you thinking about that on the forward? Does there come another point where you feel like augmenting that sales force is necessary again? Or are you at a good level right now?

We think we're in a good level. We have 150 sales reps targeting 15,000 ECPs. So that's about 100 doctors that are visited once a month. And so we think that's the right number. The number is really driven by the fact that, as I highlighted before, 85% of the scripts are being written there. Anything beyond that is really just diminishing returns in terms of targeting for sales team.

Got it. Maybe speak to us about the assumptions that underpin your 2Q guide, which is 85,000 to 90,000.

So we go into pretty good depth in terms of -- because we are essentially an NRx story. At this point, we do get the benefit of refills down the road, but probably not really seeing a big impact as a result of that. So I think about this as NRx products where we are impacted when there's holidays and eye care professionals aren't writing or a big meeting like ASCRS. And so we factor that into our model guidance. So based on that and also Memorial Day, we had a big impact last week. So all of that goes into our guidance there of the 85,000 to 90,000, and that also goes into our thinking about more broadly when we talked about being still growth in the Q3 bottles dispensed, but somewhat muted in terms of what that growth might be compared to, say, what we saw between Q4 and Q1 and Q1 to Q2. Primarily because of the eye care professionals being out of the office, taking vacations as well as patients generally not seeing their eye cares or any physicians during that time period as well. And that's really not an anomaly just for Tarsus, but almost all eye care products. If you look at NRx in particular, there tends to be a flattening of growth, sometimes even a deceleration of growth during that time frame.

And when you think about 3Q, last year in 3Q, you also had the same dynamic seasonality, but also some of your sales force getting pulled out of the field essentially to do the training. When you think about this year, then if you were to do a year-over-year comp, would you expect that, that effect to be diminished because you don't have the sales force impact? Or how should we think about it on a year-over-year basis?

Yes. I think we'll have better guidance when we get closer to the Q2 earnings release. We'll have at least a month behind our belt at that point. But as I highlighted before, it really is an NRx story, right? And so as our base grows bigger, the growth in terms of percentage is probably going to get a little bit smaller over time. But the bottles dispensed, we expect to continue to grow. So we wouldn't expect quite the percentage growth that we saw last year, just given we were early stages of launch, but we do expect to see significant bottle growth. I'd like to remind people that because we are in NRx story, we really start at 0 at the start of every quarter and have to grow that.

You've mentioned it now a couple of times that you guys are an NRx story right now. When do you transition to a TRx? Or when can we expect to see refills or retreatment that these patients become a larger part of the story?

Sure. No, I think right now, if you look at third-party reporting of our scripts, about high single digits, 8% to 9% are being reported as refills. That's probably not the right way to take a look at it because if you go back and think about our clinical history, we saw between month 6 and month 12 post treatment with XDEMVY in the clinical study. About 40% of the patients recurred and started to see collarettes again. So we had previously guided to probably 20% is a good number to think about just because you're not going to expect all those patients to come back. It's a little different in a clinical environment than a real-world environment. So that's why we guided to the 20%. So you really need to go back and take a look at the cohorts that started about a year ago. And if you do that, which isn't available on third-party reporting, you see that we are probably in the low teens, say, 12%, 13%, 14% on refills. So we're well on our way to getting to that 20% refill rate. The important thing, though, is that is a nice tailwind the refills will be, particularly with the holidays and things like that, that we see. The real growth opportunity here is in the 9 million patients that we're targeting, just like any therapy, what you're going for is the new patients because that's really what's going to drive growth and the revenue opportunity or so.

Maybe just from a mechanic standpoint, if you are looking at third-party sources IQVIA, for example, does a patient who's getting a refill account as -- I guess, how does that get captured within their system?

Yes. It's not very I think what would be the word right -- it doesn't fully capture the full refills to your point. Unless the doctor writes a refill, checks the box on a refill on the script, it's not likely to be counted as a refill. And if a patient comes in again and perhaps get the second script, it's probably going to be shown as an NRx. And of course, when it cuts over years, those are highly likely to be seen as an NRx as well. So it's really not capturing the true refill rate probably.

And what are the dynamics as it relates to refills from the physicians? What are you hearing from them? Are they proactively giving a refill to a patient? Are they waiting for patients to come back in with another round of DB? How is this playing out?

In both ways, it's coming in sort of multifactorial. I think we're having some patients. We're hearing -- we were at ASCO the other -- couple of weeks ago, and we've been hearing that physicians are getting patients coming back in and saying, "I'm starting to notice my eyes are itching and I just am noticing my eyeballs again when before I wasn't on XDEMVY." And so even without a lot of collarettes, the physicians are saying, "Oh, okay, these patients are noticing it." So they'll write a script for that. And then we'll hear some patients that perhaps finish a course of XDEMVY and perhaps there's a few more collarettes. And so the physician will give another refill to completely clear out all the collarettes. So those are some of the scenarios that we're hearing in terms of retreatment. Importantly, we haven't had any pushback on the payer side on that type of thing. So that has been very easy and efficient for the physicians to be able to do that.

Got it. And then the first example that you just described there where a patient is coming back with another round of DB, it sounds like it's pretty variable. But what is the average length of time that they're coming back over? Is it the 6 months, 9 months, now you're over a year and it's coming back?

It's variable, like you said. Yes, we're having some [Technical Difficulty] that are coming back in, in 10 months, some are coming back in a year. We don't have a long history yet. So some of those, we don't know how that's ultimately going to play out. But it's pretty variable at this point. I think over time, as we collect real world evidence, we'll be able to talk a little bit more openly about that data. But right now, the data set is pretty small.

Got it. And then just maybe one final point on the refills. I think you touched on this. But in the past, you have provided peak sales estimates of over $1 billion. How much does that embed this refilled phenomenon?

Right, it does embed the refill phenomenon, and it's at that 20% refill rate is what our best estimate at this point.

Okay. And path to peak is 7 years-ish, I think?

Yes. Yes. I think if you look at products similar to XDEMVY, say, 5 to 7 years to peak.

Okay. And then just as you've seen utilization of XDEMVY, you've initially started in just your DB population, but there's obviously overlapping comorbidities that come along with that. To the extent that you've been hearing from your ECPs, how much is XDEMVY being used in these other patient population?

Yes, much more frequently than when the launch first started. I think as you highlighted, probably the low-hanging fruit were the patients that had DB that were previously going and taking non-efficacious therapies like lid wipes or tea tree oil. But we did an ATU in December of last year that showed that 40% of the eye care professionals are prescribing each of those different categories that we talked about, MGD, dry eye, contact lens and cataract surgery. So relatively shortly after the launch, that started to happen and we expect that depth of prescribing to increase over time.

Does that require additional education from your sales force as it pertains to the datasets that you've had? Or is this just simply they need to be out there prescribing more and more and more and then that just is a consequence of it?

I think it's continued engagement with the eye care professionals. It's still relatively early days in the launch, excuse me. And continued data like the MGD data, will continue to, I think, drive further utilization. So we're looking at Phase IV studies in all of those categories that provide further support for the physicians to continue to prescribe XDEMVY in those different categories.

What's more -- or what's maybe most important to the eye care practitioners or the patients? Is it the -- because I think in your studies, you've looked at PRO, so kind of quality of life measures. You've also had objective measures. Like what is most important to a physician as they're thinking about prescribing XDEMVY?

I think it's both, right? These are very thoughtful physicians that connect the dots, I think, pretty easily when they look at the clinical data. So I think it's a combination of looking at the clinical data, like the MGD data, seeing that there was objective evidence of improvement in the secretion score as well as number of glands secreting, but also feedback from the patients that I'm suffering from this and also positive feedback that they get from patients, I think, opens the door to them prescribing more frequently.

And then maybe just touch on the efforts you've been engaging in with your DTC campaign. This has been going on in a more meaningful way over the last couple of quarters, but where do things stand with it right now?

So we started in the fourth quarter with a more streaming DTC campaign. And the nice thing about streaming is you can get very good data getting from an IP address to actually seeing a script get dispensed. And so we can see how that flows from the day of the commercial and the hour of the commercial to getting a script. And then in January, mid-February, we started in earnest network TV. And it's much broader, and we don't get the level of data that you typically get in streaming. But what we can measure is, in both cases, website interactions. And so we've seen really good feedback in terms of engagement at the website. So they're not just clicking on the XDEMVY website and then going away. They're actively getting engaged with various parts of the website, including a questionnaire that says, do I have Demodex blepharitis? Do I -- finding a doctor is another area. And then finally, there's also sort of a slider in which you can slide to see before and after impact of that. So all of that shows that there's really interest once they get into the website. So that shows us that I think we're definitely resonating with the commercial. Fundamentally, though, I'd like to see scripts being dispensed as well as revenues as a result of that. So that is our strategy there. We've basically budgeted between $70 million to $80 million in direct-to-consumer advertising, and that surrounds out. That's not just TV, but that's also social media and other aspects of it. But those costs are dated. So if we don't see a nice return on that investment, we can pare back or redistribute it. But it is something that seems to be resonating right now with the patient community.

Because there is more data for the streaming and you can track that a little bit easier. Maybe I guess, what is the time frame between when you recognize that a patient is -- they're streaming it, they're viewing it, how long does that take before you actually see a script?

Sure. That's a great question. So typically, it takes a quarter or 2 before you actually see a script. And the reason for that is -- and that isn't just XDEMVY related. It's typically in a therapeutic category where the patient has to see it 5 to 7x before it really -- the light bulb goes off. And then they get on the computer and look up xdemvy.com or take a picture of the QR code. Then to make an appointment and go to the appointment. And so all of that just takes time. So we've guided to thinking about this taking a quarter or 2 before we see the impact of the DTC campaign, especially in the network TV. So we expect most of that to really come through in the back half of the year, particularly in the fourth quarter, given some of the summer dynamics.

Got it. Is it fair to assume then that your DTC campaign? I guess maybe when you think about the length of time that you would be interested in running this campaign or at what point you would look at this and evaluate whether it makes sense continuing it? How long do you run this DTC campaign?

No, it's a good question. You typically -- what some companies do is they make a mistake of just running it for a short period of time because it can be expensive. And if you don't run it for a period of time, you really can't evaluate how successful it might be. So we are monitoring different aspects of it, including website traffic, and we talked about. But fundamentally, we want to see scripts being written as well. So you're going to want to run this for 6 months to 9 months before you make a decision on ROI there.

And is the $70 million to $80 million that you've spoken about on an annual basis, is that variable at all? Or is that's essentially a fixed cost every year if you were to run this campaign?

We think -- assuming we see a nice return on investment here where it is paying off, we think at least for the next couple of years, it's probably a fixed cost. Subsequent years, I think we can take a look at it and see what the ATU says in terms of patient awareness, doctors' awareness. And so we might pare back and perhaps pulse it and do it for a 6-month period or perhaps every other year. So that's something we'll evaluate. But I wouldn't anticipate it being a fixed cost added to an item.

Got it. Okay. And then maybe speak a little bit about the ex U.S. development plan here. Europe, Japan recently completed the prevalence study in Japan. Where do things stand across those territories as well as China where you're partnered already?

Sure. Yes. So China, I'll start there. We have a partnership with Grand Pharma. They have submitted their NDA equivalent over there. Typically it takes 18 to 24 months for an approval over in China, so it takes a little bit longer than it does in the United States. And we're waiting to see what kind of feedback we get from there. Fortunately, China is not on the MFN list as we know it. So we have -- we don't anticipate any impact from being approved in China. Europe, on the other hand, is a little different story. We're watching the MFN impact there when it sort of plays out. But there's a couple of geographies that we are interested over there, including Germany and the U.K. that could potentially be impacted there. But we do have some time to sort of see how the U.S. government is planning on handling that. So we wouldn't anticipate European approval until the second half of 2027. And the gating item there is really the fact that European regulatory authorities typically want to see a preservative-free formulation. And so that means a single-use nonpreservative formulation. And so that requires 12 months of stability before we file that NDA over in Europe. But it is something that we're exploring as an opportunity and doing some payer studies. We're also making some investments in market development over there as well. We're attending some conferences developing KOLs because regardless of what we do from a commercial perspective, whether we do it ourselves or if we partner it, that should help us as we think about reimbursement and ultimately pricing over there. So that's where we are in Europe. And in Japan, we expect to meet with the regulatory authorities in Japan to talk about next steps there, whether an incremental clinical study will be required and that will happen later this year that we'll have a discussion there. Typically, that is a nice geography to commercialize in. However, usually, it's done via partnership, and that's sort of our expectation as well there.

What would be -- what would encourage you to commercialize in Europe yourself versus finding a partner? I mean much more similar to maybe what the model would be in Japan and what you already have in China?

I think it really comes down to the NPV model, right? So fundamentally, does it make sense for us from a cash flow perspective to partner? Or does it make sense for us to go it alone? So if we thought it was going to be potentially profitable from a stand-alone business perspective, we might consider it, particularly if something like Ocular Rosacea was coming by in the near term or if we got another commercial asset where it would make sense, that could be a scenario where we might do it ourselves as well.

Great segue to Ocular Rosacea. Maybe speak to us a little bit about why you guys are so excited about this second opportunity here and where things stand in terms of preparing for this upcoming trial?

Sure. Yes. So as a reminder, we had Phase II data last year in a dermatologic type of rosacea called Papulopustular Rosacea. And we hit on the endpoints that are really critical, which is a reduction in the redness as well as reduction in the pustules. This is also a rosacea that's caused by mites. And so unsurprisingly, we hit on that endpoint because we're very good at killing mites. And so the thought initially with that was to partner it with a derm company because that's not one of our aspirations. We really want to be an eye care leader, but when we showed this data to some KOLs, they had highlighted that Ocular Rosacea is a problem they see in their clinical lot and there's really nothing out there from an FDA-approved product perspective and we should take a look at that. And the more we looked into it, we did see it's a big unmet need. There's about 15 million to 18 million patients that are impacted by this disease. And the majority are caused by Demodex mites. And we know we're again very efficacious in terms of killing mites. And so we thought this would be an opportunity for us to continue to focus on eye care in another untapped category, much like Demodex blepharitis. And so we've had discussions with the agency about what next steps might look like. And so we'll be starting a Phase II study in the back half of this year, focused on 2 areas: one, redness relief or reduction in redness. The other one is this prevalence of vessels that form on the upper eyelid. It's a hallmark sign of patients that have Ocular Rosacea. And we see they would like to see a reduction in the number of vessels or the pronouncement of the vessels. Importantly, it's not a -- we don't have to cure it. We just have to show a reduction based on FDA feedback. So we're in the process since this is -- there's never been a study done in Ocular Rosacea before. So we're really cutting a new pathway here. We're in the process of developing a scale for both that is easily interpretable by the clinicians that are running this clinical study because we want patient A or Doctor A to be able to say, this is a scale 3 out of 6 and the same doctor in another site saying I also see this as a 3. So we want to make sure it's very reproducible that such that there's not sort of ECP interplay there. So we're in the process of doing that. Once we finalize that, we will start the study in the back half of this year and have top line data in the second half of 2026.

What would be meaningful to see because, I mean, essentially, you are creating these scales. So help us understand what level of reduction would be meaningful? What are you looking to see to truly feel comfortable moving to another trial?

Fundamentally, it will be based on the discussion that we have with the agency in terms of what their expectations are. But we'd like to see a drop in each of those key indicators there, both the reduction in the number of vessels as well as the reduction in the redness score there. So I think once the scale is developed, we'll be able to be a little more specific on kind of reduction, what we expect there. So stay tuned on more information on that one.

And how much work needs to be done to reformulate?

Yes. No, that's actually done already. So we've created a gel-based version of XDEMVY, so to speak, the active ingredient in XDEMVY. It's a sterile formulation that you would wipe around the eye orbital area, and it drives in place in an invisible manner. So you want to be thoughtful about how you design it such that people are comfortable wearing it. It's not obvious. And so we've achieved that. So based on that, that's the formulation we'll be taking into the clinical study.

Different parts of the eye, but any risks that the work you're doing here in Ocular Rosacea somehow also impacts the mites in your eyelash?

Right, the DB opportunity. No, this is 2 distinct diseases. There's some overlap, right, where patients might have Ocular Rosacea and Demodex blepharitis. But if you think about DB, we formulated in the optimal formulation is an eye drop that is hydrophilic, loves to get into the back of the eyelashes, but it's not ideal for absorbing into the skin, right, and really having some lasting power, so to speak, to stay there. And so we don't think that they can be used interchangeably. And typically, if you think about putting a gel on your eyelid versus an eye drop, patients typically prefer eye drops much more.

Yes, just the convenience.

Just the convenience. Yes.

Let's talk really quickly about your Lyme disease program. How you're thinking about that? What level of evidence do you think you need to generate in-house before you can go out and talk to a potential partner?

Yes. So we're -- we had some really nice data. I think as everybody remembers, we showed that we killed the ticks. We killed 97% of the ticks before the window that causes the transmission of the bacteria that causes Lyme disease, which takes 24 to 36 hours. And so we killed 97% within that 24-hour window, and it's durable. It was durable to 30 days. So we are -- had discussions with the agency on next steps, and they said that we can take a biomarker approach in terms of various biomarkers to measure whether the patient has Lyme disease or has a bacteria within their system. So we'll be looking at that as a Phase IIb study. The agency did, however, indicate that a Phase III study would require a Lyme disease prevention. And so we're talking -- thinking about 7,000 to 8,000 to 9,000 patients for a study like that one. So it's an expensive study, but also from a commercial perspective, it's a GP call point, so require a larger sales force. And so we're taking a look at whether it makes sense to do the Phase IIb study to create more data and potentially a better source of nondilutive capital subsequent to that versus partnering it before we start the Phase II study. So we're doing some work there before we make that ultimate decision. But in the meantime, we are working to identify CRO as well as financing areas that have high endemic numbers of Lyme disease cases such that if we do start a study, we can move very quickly, and we would start that study or with a partner or without a partner sometime in 2026.

Do you have an idea of what the expected cost of Phase IIb study would look like here?

Not yet. We're still going through and determining the number of sites as well as the number of patients. So that will be something that we would probably update next year.

Got it. Maybe one last question here. As you think about these other opportunities, whether it's Lyme disease, Ocular Rosacea, how does that all tie together as to your IP strategy and being able to bolster the portfolio that you have?

Yes. So we've got really great IP. We've got composition of matter that runs through 2032, with 2 years Hatch-Waxman included in that. And then we have additional method of use in manufacturing patents for XDEMVY that we have 8 issued patents that get us to 2038. And then for Lyme disease and rosacea, we've got patents that have been filed that could potentially get to 2038 and 2040, respectively there. So nice long runway there through various potential uses such as composition of -- or method of use or manufacturing as well.

Great. Well, with that, thank you so much, Jeff.

Thank you, Andrea.

Thanks, everyone.