Tarsus Pharmaceuticals, Inc. ($TARS)

Going here with our next company presenter at the BofA Annual Healthcare Conference in Nevada. We've got Tarsus Pharmaceuticals, Jeff Farrow, CFO; and Aziz Mottiwala, Chief Commercial Officer. I'm Jason Gerberry, I cover biotech and pharma at BofA. We've been covering you guys for a couple of years now. You're kind of hitting a real inflection point with the commercial launch of XDEMVY for Demodex blepharitis. And by all signs, there's a lot of growth runway still in front of you and the pipeline in the story as well that is going to be coming more apparent to investors over the next year. So I think we have a lot to talk about.

Maybe we can just start with maybe, Jeff, just post 1Q, XDEMVY takeaways, where you saw performance? Any surprises as you think about that in the context of the full year outlook?

Sure. Happy to answer that. So -- and Jason, thanks for having us. It's great to be here. Maybe just a big picture, you alluded to some of our pipeline, I'll just quickly give an overview of Tarsus. So we are a commercial stage company. Our lead product is XDEMVY for the treatment of Demodex blepharitis. It's a disease of the eye. We've got an exciting pipeline, 2 assets in Phase II, one for ocular rosacea. It's a type of rosacea that's around the ocular area. And then also, we have a Phase II program for the prophylactic treatment of Lyme disease, and we can talk a little bit more about that later. But in terms of the Tarsus expectations for the year, we're really excited and pleased with how the tempo of growth has been. Q1 came in much like we had anticipated. We knew that with the deductibles resetting, there would be probably less patients visiting their offices until they get through that deductible reset. And so it came in line with our expectations. The one unusual aspect was we had some more heavy winter than what we were anticipating, but I think that impacted a lot of other therapeutics in the first quarter. But we firmly believe that our guidance of $670 million to $700 million for the year is still valid and achievable. And our revenues of $145 million for the quarter really are showing strong indicators of continued growth. All the underlying facts that -- in that quarter continue to grow, including depth of prescribing, employee engagement, and then we also had some really interesting Phase IV data that came out. So we feel really good about the tempo for Q1. And as we lead into Q2, we've had some nice all-time highs that we've seen in terms of the script data.

And so as we look ahead, you seem like you have an established quarterly cadence in terms of some of the seasonality factors. And you called out a few things in 1Q. So I think ahead to the next 3 quarters, similar quarterly cadence and catch-up that comes with maybe some of the headwinds that you experienced in 1Q?

Yes. Yes. No. You highlighted our seasonality that we typically see, we still are primarily an NRx business, and so we're impacted by quarterly issues like holidays, vacations, conferences and things like that. But typically, Q1, we see the deductibles reset. We see a little bit of less visits to the eye care professionals, and we saw that in this quarter. Q2, we expect to see a nice step-up in growth. And then Q3, while we expect to see continued growth, it's a little more tempered than what we see between Q1 and Q2. And then Q4 tends to be one of our biggest bottle -- or one of the biggest quarters from a pure bottle perspective. So -- and we saw that in the fourth quarter. So that's kind of how we see things play out. We might get a little bit of tailwinds, as you highlighted, because of some of the snow and some of the weather impact with those people being rescheduled into the second quarter as well.

Okay. What do you see as the catalyst for growth from here? What kind of ROI do you see from DTC? And as you -- and if you do see good ROI, does that sort of imply that maybe you should be doing more of it in subsequent years?

So this is a really great time for us in terms of, as Jeff mentioned, once we work through this Q1 seasonality, the underlying business, all the factors here look really positive and progressed nicely in Q1, everything around depth of prescribing, our consumer and physician response to the evidence we're generating. And those are really 3 catalysts that I think can continue to expand the impact of the business. So let's talk about depth of prescribing. We have more and more doctors writing this with heavy frequency. They're looking for incremental patient types. They're opening up their aperture. And to help accelerate that, we're employing a key account leader position. We expanded by about 10% with very high-level talent in the industry, experienced folks that are going to focus on the most valuable physicians and most valuable targets out there for us. They're being trained right now and will be out in the field and having impact in the back half of the year. So that's a catalyst that will help accelerate that depth of prescribing. DTC, we do a lot of work in modeling. And to answer your question, all the data and analytics support, our approximate $80 million spend, which is in line with what we did last year. The difference this year is the ROI continues to scale. So we're getting even better ROI now as we've gotten time on this. It's ahead of our expectations as well as on the high end of benchmarks. So that gives us a lot of confidence that we can execute differently with DTC. So we've got some big plans in the coming weeks to refresh the campaign, accelerate some of the noise around the business that, I think, will really open up a lot of eyes and create a lot of attention, which is going to be great. And the other factor that the team is able to do is because we've been doing this for a year, we're smarter, right? We know where to put the ads to get the best bang for the buck. So to your question, could we do more? I believe that with the $80 million we're spending, we're going to be able to do more just because of the way we're executing the knowledge we're applying and then some of the creative things we're going to be doing in the coming weeks. So DTC, I think, is going to continue to be a very impactful lever, and we'd anticipate the ROI to continue to scale in a positive way. The last catalyst, as Jeff mentioned, is some of the data generation. And Q1 was actually one of the record-breaking quarters for us in terms of the number of podium presentations and posters, including ones that really open up the TAM, give doctors new patients to think about. And we highlighted on our call the idea of like hordeola and chalazia, which is an area that patients come in all the time. They get lumps and bumps on their eyelids. Doctors don't like treating this. Sometimes it involves invasive procedures, and there's a high correlation of Demodex in these patients, and there may be benefit for those patients. And those doctors are hearing that from the podium. So when you look at where we are today, overall great underlying mechanics on the business and then really clear and actionable catalysts to continue to grow as we go through the rest of the year to achieve the guidance that Jeff alluded to.

Okay. You upped the peak sales guide to greater than $2 billion. Maybe can you talk about -- are you seeing -- is your expectation around the TAM through -- is that an underlying factor there? And you were involved with Restasis and creating dry eye category. Maybe a similar point in time, how do you see the evolution of Demodex blepharitis as a condition where doctors are focusing on it and sort of the metrics there, how do they stack up?

So we were really excited when we talked about the potential of this product. And to be clear, the $2 billion peak is U.S. sales for XDEMVY only. So it's actually very, very impactful to think about that. And I look at, historically, right, Restasis is a good example. And why is this different? Well, this is even more impactful because it's not just how patients feel, it's a visible disease, right? They get the redness, the crusting and impact. So patients are more motivated here, particularly with the mechanism, knowing its mites, that's different. The diagnostic criteria is really easy for doctors to employ. It's a simple slit-lamp exam. They just need to check your eyelids for crusting, and they can make a definitive diagnosis. So these are things that we believe allow XDEMVY to be an even bigger impact in the eye care market, i.e., the $2 billion peak versus, say, dry eye products, I think it's $1 billion, $1.5 billion. What are the underlying assumptions there? One is, as you alluded to, Jason, the expanding TAM. We started and said, hey, there's 25 million Americans out there. We started with about 9 million. What we're hearing from doctors very clearly is that there's far more use cases for this product. They're having really good success, they're contemplating different patient types. We talked about hordeola and chalazia. There's several other use cases. So beyond just the obvious, right? We talked about dry eye, cataract surgery, Meibomian gland disease. These become very obvious cases, but there's even more. So we think an expanding TAM is one factor. The other factor, which is really exciting, is a broadening prescriber base. When we started, we thought about 15,000 or so doctors. And a couple of quarters ago, we said, hey, we had over 20,000 doctors writing this product. So we have more doctors. So you're actually accessing the other part of the funnel, not just the TAM, but actually the ability to convert because you have a larger landing pad for these patients with over 20,000 doctors writing. And when you look at the most recent quarter, we actually saw a good step-up in terms of depth of prescribing. So this audience of 20,000 doctors is actually continuing to progress, how they're activating patients in their practice. So expanding TAM and expanding depth of prescribing are the 2 levers that we believe are going to untap the full potential.

Okay. And this is somewhat of a promotion-sensitive category. As we think about how you're resourcing the brand today, do you feel like the incremental growth from here is with a high degree of favorable operating leverage, meaning have you kind of reached high point in terms of resourcing? Is the incremental dollar spent in OpEx, is it something that you can allocate to R&D in different clinical programs or make an acquisition and place funding towards that? Or do you feel like investment and OpEx still has to scale with the growth of the brand? I mean, in support of that sales and marketing dollars to support the brand as opposed to other things that could drive alternative sources of growth?

Yes. So I'll talk about the commercial and then I'll let Jeff speak to where else we can deploy capital. But from a commercial perspective, we're in a really good spot. We have one of the largest sales forces in the eye care space. So we're well-resourced there. We talked about DTC, all of our analytics and data support, the level of spending we're at today. And again, we're looking for ways to get even more impact out of that investment. I think the only area we will continue to scale is there's always variable fees that go along with our business, right? So pharmacy fees, copay fees, et cetera. The more bottles you sell, those fees will go up in commensurate levels. So we see that as the only thing that scales, but implied there is to continue to generate operating leverage on the base commercial business. We're starting to show that in 2026. And I've committed to Jeff that I'm going to continue to do that going forward, and that hopefully, frees up capital to do other exciting things to grow the company, which Jeff can speak to.

Yes. No. I think, right now, the XDEMVY business is a profitable business if you think about it from a product P&L perspective. And so that leverage is going to continue as the revenues grow. And then we are -- really priority #1 in capital allocation is continued growth of XDEMVY, but we're also really excited about our pipeline and investing in the ocular rosacea on the Lyme programs as well. And then BD, we want to be an eye care leader and that means really focusing on the anterior segment, bringing more things into the bag for our sales team and then at some point, as we continue to grow, thinking about moving to the back of the eye as well.

Yes. Okay. And then maybe just thinking about sources of the business and uptake, be it either -- is there a patient profile or patients with comorbidities more likely to get treatment? And from a prescriber perspective, I'm just curious why ophthalmologists maybe lag ODs at this point. I think, at the time when you guys IPO-ed, it was an expectation to be more of a 50-50 balance. I think it's a little bit more skewed to ODs. And so I'm just kind of curious of your thoughts around maybe why ODs have gravitated to the product more so than MDs?

Yes. And I think to clarify, the products have performed really well across both segments. Ophthalmology is mentioned like it's actually not -- some of our top prescribers are ophthalmologists. It really has to do with practice dynamics more than a bias towards whether or not they see success with the product. So ophthalmologists, keep in mind that they spend a good proportion of their time outside the clinic. They're in the OR. So they have inherently less clinic days to treat these patients. With that said, some of the most prolific prescribers of the product are ophthalmologists who are doing cataract surgery and pretreating these patients that are seeing a high preponderance of them in Demodex blepharitis. So we see real value there. Optometry being, say, 2/3 of the business is really predicated, one, they're in the clinic all the time; two, a lot of optometrists are actually in clinic with ophthalmologists. So it's hiding the fact that, going back to what the 50-50 was, well, a lot of the prescribing that's happening in ophthalmology clinics is done by the OD, the optometrists. The surgeon is saying, I'm going to do the surgery, and the optometrist is going to manage that. So you have co-management, that's a factor there. And then third, for your stand-alone optometrists, this is a huge practice builder. They see this as a way to expand the practice. More and more optometrists are practicing medically. Those visits tend to reimburse significantly better than just a standard vision exam. And with this type of drug -- or sorry, this type of disease where we know there's a potential for recurrence, there's a dynamic output where they can see the palpable impact of the drug. There is a desire to bring these patients back. So they're coming in for a follow-up visit to see the impact of the treatment and also to see recurrence down the line. So for an optometrist, this becomes a great way to retain patients in the practice, bring them back and really create value for the practice. So all of those factors would tell you it's right where it should be. And if anything, we continue to see great response in both specialties.

Right. And can you maybe just outline for optometrists, I know that there's an opportunity to sort of get a greater value capture for the medical diagnosis versus the optical. Is that something that's realized just on the initial script and use of the slit lamp? Or is it also a confirmatory follow-up visit to make sure that the therapy has accomplished the goal of clinical care?

It's both, right? So a lot of times, they'll initiate the therapy in the first visit. And if they can code an ICD-10, then they can bill because they're not treating a medical condition versus just doing a vision exam. So they're essentially converting this to a medical visit. And then the vast majority of optometrists will then bring the patient back a couple of months later to 6-week course of therapy. So they'll bring them back in 2 months to see the response. And actually, that's a real driver of patient satisfaction. Hey, I found a problem that's been bugging you for a long time. I gave you a targeted solution. They bring them back and say, look, how great the outcomes were. Isn't this wonderful? It's a great way to retain the patient as well as drive value for the practice.

Yes. Okay. And then we were getting more questions from investors about competitor Phase II Glaukos data. And any insights you guys have in terms of the antiparasitic API that they use in their therapy and how that may work as well or maybe doesn't work as well as lotilaner?

Yes. No, we have a very good competitive intelligence group, and so we're aware of this and monitoring it as well. So what we understand is they've got a clinical study that they are looking at. It's a part of their gel-based formulation that they plan on putting on the eyelid, and I guess they're doing it BID, which is twice a day, and then they also are trying it out once a day as well. I do think, we did explore a method of application when we thought about lotilaner, and based on our work, the preferred method was via eyedrops. I think patients are more familiar with eyedrops for those type of things. And so that's the route we chose. And I do think it's going to get -- from a competitive perspective, it's going to be a high bar to really exceed what XDEMVY has been able to accomplish, right, in terms of very good efficacy. I think in real world, you're probably hearing 9 out of 10 patients are extremely satisfied. It's extraordinarily safe. And there's a great deal of patient satisfaction and being able to see those collarettes disappear. So I think it's going to be challenging for anybody to come in and exceed that. And I would also say our mechanism is very specific, and it's targeted at the mite. So it targets the chloride channel of the mites and there's no off-target human implications of that. So it's very specific to the parasite and it kills the parasite directly.

Okay. So as XDEMVY grows and expands, usually, there is a target on any drug's back with payers as you get above a $1 billion threshold. And so just curious, how you're thinking about the net pricing dynamics evolving as you get bigger? Are you seeing coverage, restrictions around coverage getting more difficult or status quo over the past year to 2?

Yes. So for coverage, this has been an area of strength for the business. We have over 90% of lives covered across both commercial and Part D. And reminding folks, it's about an equal split about 45% of the business, commercial 45% of the business, Part D and the rest other government channels. And we've got great coverage across both, and that continues to persist. We don't anticipate any major changes to that because this is such a great value to patients. And when we sit across from payers, we talk about a high rate of effectiveness, as Jeff outlined, super safe. This is not something that people have to take every single month. They take 1, maybe 2 treatments a year. We talked about a 20% retreatment rate, which is a great value. We sit across from payers and say, how many drugs do you pay for today that almost every single patient has a really robust response that can get you a durability of effect for almost a year? And they'll say, okay, we pay for a lot of things that don't work very well, but we do it because it's there. So this is a very differentiated offering when it comes to the payer. And we've got a really great team that's established a really strong value proposition. I think the other thing we'll continue to do is generate more data, generate more use cases of how this can positively impact patient outcomes for patients that would otherwise make multiple visits, get unnecessary procedures, use unnecessary medications. Those are all cost savings for the payer. But as XDEMVY grows, it is actually an offset. So the more we can model that through pharmacoeconomic modeling, that will be a great value offering. So we don't see any risk of significant price erosion over time. I think we've said that we're in that kind of target gross to net range, and we're going to be really diligent with our relationships with the payers to maintain that.

Okay. So let's shift to pipeline in the last 10 minutes. We've got Phase II ocular rosacea data, first half '27. This is the same API in XDEMVY, just given in a different dosage format. Maybe just how much confidence can you derive from what you've seen in Demodex blepharitis to that study result?

Sure. So a little background on ocular rosacea. It impacts about 15 million to 18 million patients, and there is no other approved FDA therapeutic out there for it. And of those 15 million to 18 million patients, the vast majority of ocular rosacea is caused by Demodex blepharitis. And so we knew with XDEMVY, we're very good at killing the mites. And so we've created this sterile gel formulation, which is better suited for around the orbital area and are moving forward with the Phase II study. We initiated the clinical study in December of last year and are enrolling it with top line data in the first half of '27. And the objective here, based on discussions with the FDA, is to show improvement in 2 of the hallmarks of the disease. One is, of course, the redness that you typically see in ocular rosacea or any type of rosacea; and the second is a reduction in these pronounced vessels that are one of the hallmarks of the disease on the upper eyelid and the lower eyelid. And so importantly, we don't have to show a cure, but just an improvement based on that feedback. And so we've developed a proprietary scale that we've developed and trained all the clinical sites on. And the goal here is to show a 1-level improvement in either the redness reduction or in the reduction in vessels. And what gives us confidence, as you might recall, Jason, that we had a Phase II study in papulopustular rosacea, which is also caused by Demodex mites. And so in that study, we showed a stat-sig reduction in the redness, but also a stat sig reduction in the pustules that are caused by these Demodex mites. And so that gives us some good confidence that we will be successful in this study as well.

Can you talk a little bit about the patients you'll be enrolling in this study, the severity of the rosacea, the phenotype of these patients? I'm just trying to get a sense of how that might compare to the supportive Phase II study that you cited there in rosacea?

Yes. So in general, we're taking a fairly broad patient population that have ocular rosacea because we want to get some data there. And so they, generally, will be present with a certain form of both the redness as well as the vessels that we see there.

What do you see as the biggest risks then to this trial?

I think it's really the execution on the scale, right, and making sure that the sites are consistently reading. Dr. A is reading a 1-point reduction as Dr. B at a different site and continuing to sort of read that scale of improvement.

Yes. And in your FDA interactions so far and how that informs the data that we see if that's going to be a repeatable registrational-type study?

The feedback we've gotten is either one of those endpoints would be something that would be an approvable endpoint in Phase III.

And how much overlap is there with them in Demodex blepharitis? And when we think about this marketplace and that 15 million or so patients, how much general overlap do you have? Are you going to be getting both of these therapies potentially to have a more holistic strategy to eradicate the mite?

Yes. So we're doing a lot of work now to really understand that prevalence and overlap. It's thought to be a decent amount. But keep in mind, this is a distinct disease and a distinct therapy for that disease. So there's going to be patients that have Demodex blepharitis that will get XDEMVY. There's going to be patients that have ocular rosacea that will get TP-04. And then there's a cohort of patients that are going to have both manifestations, both diseases, and they would get potentially both to target each disease. And this is actually something we even heard even in early days when we're exploring this as an opportunity. A lot of doctors were telling us that they saw these overlapping patients that were treating the blepharitis with XDEMVY. And almost a contrast was very notable that the eyelid margin was clear, but there was still a lot of periocular redness, vascular telangiectasia. And they said, wow, if you had something that would fix this, and we said, okay, we might have something up our sleeve which should kind of help prompted us to accelerate and move this program into Phase II. So we think that's a really unique opportunity. Again, it's the exact same call point. So there's tremendous commercial synergy. We're already talking about it. Doctors are spending more time looking at the lids because of Demodex blepharitis, and there's an opportunity to treat each of these diseases with a unique and tailored therapy.

Talk about the work you've done on the profile, who the prescriber is, and are eye care professionals thinking about treating a dermatologic manifestation? And what role will derms ultimately play? And ultimately, would you need to perhaps expand the field force? Do you see derms playing a role at all in the treatment of ocular rosacea?

Potentially, we see this as really as an eye care-focused play though. And this is the same call point. So this is optometrists and ophthalmologists that are essentially anterior-segment focused. They focus on front of the eye diseases, like dry eye, like Demodex blepharitis, and they see this all the time. And they don't really think about this as treating a dermatological disease. They think about this as treating an eye disease. And they've been, for a long time, looking for solutions for ocular rosacea. There's nothing today. Some of these folks are trying to use IPLs. So there's a precedent that people are trying to solve this problem, this conundrum. And that gives us even more confidence in the potential of this -- this gets across the line, this is going to have a high utility for these doctors. They see these patients all the time.

Okay. Then maybe we'll go to Lyme disease. This is also lotilaner, but in an oral dosage format.

That's right.

And so maybe just the initial learnings from the -- I'm trying to -- I forget, it is like a tick-kill study, right? But the differences in the Phase II that you're running and how that could provide additional learnings and derisk the program more fulsome.

Sure. Yes. No, we've gotten a lot of interest in that since we announced the study starting. We talked a lot about it here. There's a lot of interest in it, a huge unmet need, as you know. So we -- just as a reminder, that tick-kill study was basically a bunch of college students that were exposed to non-Lyme-infected ticks. And we...

Lucky them.

Pardon me?

Lucky them.

Well, they were paid. They were paid money. But what we did is we exposed them to the ticks and then they took an oral dose. And then we measured the number of ticks that were killed within 24 hours. And then we reintroduced the ticks within 30 days. And within 24 hours, we killed about 98% of the ticks. And 30 days later, with that same dose, it killed about over 95% of the ticks. So it's fast acting within 8 hours, and it's durable. And so based on that data, we've decided to move forward in this Phase IIb study. It's about 700 patients that we're going to be enrolling in this one tick season. And very similar in terms of design. So it will be a once-monthly dose that these patients will be taking. And what we'll be measuring, since it is essentially a prophylactic, safety is going to be critical. So safety is the primary endpoint, but we'll also be measuring PK levels, drug levels. Knowing what we saw in the Phase IIa study in the tick-kill study, what was required in terms of drug levels to kill the ticks will be one of the other endpoints that we'll be looking at. And then we're looking at some other biomarkers to potentially identify Lyme disease as well, too. So -- and then, of course, we'll be measuring the number of patients that get Lyme versus don't get Lyme. But there -- in all reality, we're not going to likely see a stat sig signal there. We'll be measuring because it's going to be a very small n.

What will be the N roughly?

What will be the end? About 700 patients.

700 patients. Okay. And confidence that you can get this done in one season. I think Pfizer had a trial, and I think there was a lower incidence, but I guess this won't be incidence driven. This will just be driven by enrollment.

Yes. That's right. But we are doing it in high endemic areas because we did learn from, I think, from Pfizer's enrollment. So we're going into some of those areas and really seeing if there's an opportunity to maybe pull something from the biomarkers as well.

How do you see this competitively? I don't know if you have a view on if Pfizer is going to be able to get through FDA with its result, right, on the pre and then the second specified analysis. But if it is approved, ultimately, it's a 4-dose vaccination. So I guess there's, a, question of how does it competitively stack up against that? And then b, what would be a regulatory development pathway for an oral agent like this that's taken presumably less onerous schedule in a 4-injection vaccine schedule?

Yes. Great questions. I think it's hard to say on the Pfizer regulatory pathway. I do note that it's -- there's a huge unmet need, and this administration has highlighted this as being an important criteria for them to be focused on. So they could see approval. I think we have had discussions with the agency about a Phase III study. They have sort of reverted to the clinical study that the Pfizer team did in Lyme disease prevention study. So it would be a similar magnitude in terms of size. However, given the LYMERix program that the FDA has pushed forward, Kennedy's pushing on getting more therapies out there, we are having some discussions with parties within the FDA and other government agencies to see if there's a more abbreviated pathway in which to see approval more quickly.

Okay. Well, we're out of time. So I'd like to cut it off there. But thank you guys so much for joining us.

Thank you, Jason. Appreciate it.