TARS - Tarsus Pharmaceuticals Inc. - Barking Up The Wrong Tree

2023-10-19 11:54:12 ET

Summary

• XDEMVY launch unlikely to succeed.
• Unlikely that Demodex-caused blepheritis is a common condition.
• Highly likely that Tarsus will never break even.

Tarsus Pharmaceuticals (TARS) has made an impressive effort to transform a nasty dog flea and tick medicine into a shiny ophthalmology drug for a condition that - in my opinion - doesn't exist. Wall Street has bought into the hype, but I believe the commercial launch will predictably disappoint.

Background

XDEMVY (lotilaner) is a member of the Isoxazolines class of drugs, which for many years have been used as dog and cat flea and tick treatments . Given the toxicity of these drugs, the breeder of my dog contractually forbids their use to her owners.

In September 2018, the US FDA alerted pet owners and veterinarians that isoxazolines, including afoxolaner, fluralaner, sarolaner, and lotilaner , can have neurologic effects in some dogs, such as muscle tremors, ataxia, and seizures.

XDEMVY is a low-dose version of lotilaner applied topically, which hopefully will lead to minimal systemic absorption and avoid neurological side effects in people.

Does "Demodex Blepheritis" Exist?

Over the last 20 years, it has been common knowledge that there are two major types of blepheritis, based on its cause: Bacterial or Viral. The idea that Demodex may be a major cause of blepheritis has been implied by TARS more recently, but not actually proven by anyone. In fact, I believe the Phase 3 data developed by TARS shows clearly that Demodex is NOT a major cause of blepheritis, which prescribing doctors will experience very quickly and the XDEMVY launch should fail.

TARS has recreated a lot of old data on the prevalence of demodex in the population . It has been known for nearly 40 years that demodex is common, especially among the elderly. This is a publication from 1986 showing that almost 70% of the elderly can have Demodex: Prevalence of Hair Follicle Mites, Demodex Folliculorum and D. Brevis (Acari: Demodicidae), in a Selected Human Population in Western New York, USA | Journal of Medical Entomology | Oxford Academic (oup.com)

TARS has not presented any data on HOW Demodex may be causing blepheritis. On slide 23 of their Corporate Presentation, they quote "Internal company data" that 71% of doctors "believe" that collarettes are "pathognomonic" to blepheritis, meaning they are present, but no discussion of causation.

Random doctors/websites speculate that Demodex may be causing blepheritis by promoting bacterial growth - in which case the blepheritis could be treated with inexpensive antibiotic drops vs the $1,850 WACC priced XDEMVY. (No wonder the company has been talking about 80% gross to net discounts). Or the Demodex may be mechanically blocking tear ducts, in which case they can be removed by inexpensive scrubs. (I believe these scrubs are not effective in treating blepheritis, because the mechanical blockage is usually not the cause of the disease.)

Why I Think XDEMVY Launch Will Fail

In their very own research, TARS announced the following about "Demodex Blepheritis" symptomology:

The most common symptoms reported were itchy eyes (55%) and dry eyes (46%).

However, the Company chose NOT to measure these in their Phase 3 trials, rather they chose "redness," a very easy endpoint to hit. In principle, if Demodex in fact caused blepheritis, then eradicating the mites should resolve the symptoms of blepheritis. This information was captured by TARS in the secondary endpoint called "Composite Cure."

Interestingly, neither the TARS Corporate Presentation nor their AAO Poster reveal what the % of patients who experienced resolution of symptoms as well as the resolution of Demodex. I believe this data looks EXTREMELY underwhelming (This somewhat reminds me of OCUL a number of years ago, when they included positive-looking data in investor and medical conference slideshows, and the negative-looking data was only included in documents investors had to look for.)

In the Saturn-1 Phase 3 trial, only 12.4% (placebo-subtracted), and in the Saturn-2 Phase 3 trial, only 15.2% (placebo-subtracted) showed elimination of redness, together with the cure of Demodex. The vast majority of patients whose Demodex was cured didn’t experience resolution of symptoms. In my opinion, this low response rate clearly shows that only in RARE cases treating Demodex will lead to resolution of blepheritis symptoms. Doctors may initially try XDEMVY in their practice, but when they see that their patients' symptoms don't generally resolve, they should stop using the medication rather quickly.

It's not surprising that the initial prescription data are looking rather anemic so far:

Valuation

TARS stock is owned by healthcare hedge fund managers much smarter than me. In this case, I think they are mistaken, but it's hard to know at what point they'd throw in the towel. I believe TARS stock is worth $0/share, because I don't see XDEMVY as anything other than a tiny niche product, and don’t see TARS coming close to breaking even.

Since the cause of dry eye has been closely studied during the last 20 years, I don't believe there is any chance that XDEMVY will treat dry eye signs and symptoms.

TARS had nearly $300mm in cash as of June 30, pro forma for a $100m offering in August, and they are expected to burn about $300m over the next three years. Therefore, even if they were to hit street numbers, I don’t see much upside above the current $450mm valuation.

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