TARS - Tarsus Pharmaceuticals: 3 Clinical Catalysts In The Next 4 Months Xdemvy Launch Underway

2023-12-04 12:09:00 ET

Summary

• TARS has launched a new drug, Xdemvy, for the treatment of Demodex blepharitis, with net product sales of $1.7M in the first five weeks following launch.
• TARS has readouts from three clinical trials due in the next four months, with one due in Q4'23.
• TARS completed a follow-on offering in August, raising net proceeds of $99.4M. TARS had $246.9M in cash at the end of Q3'23.

Tarsus Pharmaceuticals ( TARS ) is in the early stage of a commercial launch of a new drug, Xdemvy, but also has three clinical trials anticipated to readout in the next four months. This article takes a look at the recent progress and what lies ahead.

Xdemvy: A new drug

On August 24, 2023, TARS launched Xdemvy (lotilaner ophthalmic solution) for treatment of the eye disease Demodex blepharitis. Patients with Demodex blepharitis will have blepharitis (eyelid margin inflammation) and its associated symptoms like redness, ocular irritation and collarettes (buildup around the base of the eyelash). Since Demodex blepharitis involves an infestation of Demodex mites, the anti-parasitic agent lotilaner is of use, as TARS showed with its Saturn-1 and Saturn-2 clinical studies. For example, in Saturn-1 (n=421 patients), 81.3% of those treated with Xdemvy achieved a clinically meaningful collarette cure vs just 23% of those treated with placebo (P < 0.0001). The results from the 400+ patient Saturn-2 study were also positive. On some endpoints, the numbers might be ostensibly less impressive. For example in Saturn-1, rates erythema cure were 19.1% in the drug group vs. 6.9% in the placebo group (P = 0.0001), but it is possible that erythema could remain due to other factors like allergies or other eye diseases, which lotilaner does not treat.

In any case, physicians are already prescribing Xdemvy, and TARS notes that up to 25M patients in the US could be effected by Demodex blepharitis. Even if only 7M of those are seeking treatment, that's still a sizable patient base to tap into.

With Q3'23 earnings, reported on November 9, TARS reported net product sales of $1.7M, although considering the drug launched on August 24, it hasn't had close to a full quarter of sales reported yet.

Multiple clinical catalysts ahead

While each quarter of sales numbers from the launch of Xdemvy in Demodex blepharitis provides a catalyst for TARS, there are also multiple clinical trials in other indications underway.

Ersa: A phase 2a trial in meibomian gland disease

TARS also has a trial of its lotilaner ophthalmic solution (a preservative free form of Xdemvy is under development) in an eye disease called meibomian gland disease (MGD). The meibomian gland produces lipids for the tear film over the eye. In MGD, the lipids are of poor quality or produced less, causing redness and itching of the eye, among other symptoms. Demodex mites could play a role in the disease, and so as with Demodex blepharitis, the anti-parasitic lotilaner could be of use. The Ersa phase 2a trial of TP-03 (Xdemvy) is a randomized, double-blind, vehicle-controlled study of TP-03 in 40 MGD patients. In Ersa, TP-03 is tested in two regimes, twice daily or three times a day, and compared to a vehicle control, for 85 days. The study includes safety and efficacy endpoints (such as improvement in lower lid meibomian gland secretion).

Part of the inclusion criteria for the Ersa trial is that patients have to have the presence of one or more mites in the upper and lower lids, so TARS won't be looking at MGD patients who aren't impacted by Demodex. This factor could help the drug perform as not all MGD patients have Demodex mites. TARS expects to report results from Ersa in Q4'23.

Galatea: A phase 2a trial in rosacea

For the inflammatory skin condition rosacea, in particular the subset of patients with papulopustular rosacea, TARS had an aqueous gel formulation of lotilaner, referred to as TP-04. TARS corporate presentation notes that Demodex mites are found in the skin of rosacea patients and might play a role in the disease.

TARS is running the randomized, double-blind, vehicle-controlled phase 2a Galatea trial in 30 patients with moderate to severe papulopustular rosacea. Treatment is twice daily (with TP-04 or vehicle control gel) for twelve weeks. I note however, that the clinicaltrials.gov entry for the trial lists an actual enrolment of 37 patients, whereas TARS corporate presentation suggests 30 patients. Given the study does include a vehicle control arm, it will be possible to get potential high impact insights from the trial (i.e. a significant beat of the control group on an efficacy endpoint). Of course that would be easier to do, assuming the drug works, with 37 patients rather than 30. TARS expects to report topline data in Q1'24.

Carpo: A phase 2a trial in Lyme disease prevention

For something more ambitious, but still expected to report results fairly soon (Q1'24), TARS has developed TP-05, an oral formulation of lotilaner to prevent Lyme disease. Carpo is a phase 2a , randomized, double-blind, placebo-controlled study of TP-05 (at high and low dose) in 30 healthy volunteers. The design of the study involves healthy volunteers being exposed to ticks (that have tested negative for human pathogens) and then being treated with TP-05 or placebo. Tick mortality will then be assessed. The tick placement and removal is repeated on Day 30 and Day 31, respectively.

I wouldn't participate in this study even if you paid me. Who wants to have a tick placed on them on purpose? Perhaps that is why the clinicaltrials.gov entry still lists the trial as "recruiting." By comparison Ersa (MGD study) and Galatea (papulopustular rosacea study) are listed as "completed." I wouldn't be surprised if we see some slippage in the timeline of the study, but perhaps it could just be reported later in Q1'24, with Galatea being reported earlier in the quarter.

Q3'23 earnings

TARS reported total revenues of $1.9M in Q3'23, with $1.7M in net product sales of Xdemvy. R&D expenses were $12.1M in Q3'23 ($1.7M of which was non-cash) and SG&A was $30.3M ($3.6M of which was non-cash). Net loss for Q3'23 was $39.1M and net cash used in operating activities was $78.2M in the first nine months of 2023. As of September 30, 2023, TARS had cash, cash equivalents and marketable securities of $246.9M. However, while some of TARS phase 2a clinical studies will be completing, the launch of Xdemvy is a recent thing and SG&A expenses have increased. Further the company had $29.7M of liability related to its term loan on the balance sheet, although the interest only period extends until February 1, 2026 and unpaid amounts under the loan become due on February 2, 2027.

As such, using net cash used in the first nine months of 2023 might result in an overly generous estimation of cash runway. Looking at the net cash used in operating activities in Q3'23 of $32.4M, and subtracting off the $29.7M in liability relating to the term loan from TARS cash balance, we might predict around 6-7 quarters of cash remaining for TARS. Of course all of this would assume no uptick in sales, which I don't see as likely as the existing indication will continue to grow. Further, subtracting off the loan from cash is a little conservative in terms of cash runway calculation, as it isn't due to be repaid in 6-7 quarters. In any case, I'm not concerned about TARS cash near-term, but it could become something to consider more closely next year, especially if sales growth is modest and TARS kicks up marketing more or begins several larger studies.

As of November 3, 2023, there were 33,104,612 shares of TARS common stock outstanding, giving it a market cap of $525.0M ($15.86 per share). As of September 30, 2023, there were 4,737,575 options outstanding with weighted-average exercise price of $16.60, and 1,739,693 unvested restricted stock units outstanding.

Xdemvy continuing to perform in Q4'24

There were 1,700 bottles of Xdemvy shipped to patients in the first (partial) quarter of launch (August 24, to September 30, 37 days). TARS notes that from launch to the time of a November 9 corporate presentation, that more than 2000 physicians had started patients on Xdemvy with nearly half being repeat prescribers.

If we assume 1100 physicians prescribed Xdemvy once, and another 900 physicians prescribed Xdemvy twice, the we could already be at 2900 bottles dispensed by November 9. Subtracting off the 1700 bottles of Xdemvy delivered to patients in Q3'23, that would mean at least another 1200 bottles had already been delivered from the end of Q3'23 to November 9, 2023 (40 days). In reality, some repeat prescribers may have prescribed Xdemvy more than twice, and there may be more than 2000 prescribers (since TARS notes ">2000" prescribers). As such TARS seems easily on track to report sales growth in Q4'23, of course it is aided by having a full quarter of sales but at this stage continued growth of the prescriber base, and the existence of repeat prescribers is encouraging.

Conclusions, ratings, risks

I rate TARS a buy based on two factors. Firstly, the fact that conservative calculations point to another 1200 bottles of Xdemvy having been delivered to patients in the first 40 days of Q4'23. That means the drug hasn't flopped following initial strong use in what could've been warehoused patients (physicians familiar with the results of Saturn-1 and Saturn-2 waiting to prescribed Xdemvy to patients as soon as it became available). Secondly, the company has multiple shots on goal in additional indications. Results from Ersa could be out this week, but beyond that in Q1'24, certainly results from Galatea could provide an exciting result for sufferers of papulopustular rosacea. While I'm a little more skeptical about the immediate impact of Carpo and whether or not it will readout on time, it does represent another chance for TARS to show off lotilaner as a pipeline in a drug.

I stopped short of rating TARS a strong buy since one quarter of sales, and some (estimated) numbers on bottles shipped in Q4'23, isn't a lot to go off with regards to predicting how Xdemvy might perform in 2024. Further, the company trades at over twice cash and while the company's clinical trials provide additional shots on goal, there aren't any human efficacy data to consider in the indications of MGD, papulopustular rosacea or Lyme disease (lotilaner is used in canines too).

The fact that these clinical trials have a lot of risk associated with them (there is no guarantee of efficacy) is the first risk to any long position. A negative result in these trials, such as a lack of compelling efficacy findings, would likely cause TARS to fall.

Beyond the risk associated with the trials. TARS could provide an update in early 2024 with preliminary sales of Xdemvy in January 2024, meaning it might not be necessary to wait for Q4'23 earnings to hear if Xdemvy continues to perform. Of course if Xdemvy sales don't deliver, then TARS could fall sharply.

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