TARS - Tarsus Pharmaceuticals: Worthy Of A Small Bet

2023-09-04 08:36:07 ET

Summary

• Tarsus Pharmaceuticals has received FDA approval for its lotilaner ophthalmic solution for the treatment of Demodex blepharitis.
• The company just launched this product known by the brand name Xdemvy and is targeting optometrists and ophthalmologists.
• Tarsus is also developing lotilaner for the treatment of meibomian gland disease, rosacea, and Lyme's Disease.
• Is Tarsus in the 'buy zone'? A full investment analysis follows in the paragraphs below.

Shallow men believe in luck or in circumstance. Strong men believe in cause and effect. ? Ralph Waldo Emerson

Today, we take a look at a pharmaceuticals firm that recently got its first product green lighted to hit the market. The stock has been knocked down by a recent secondary offering and some post FDA approval ' buy the rumor, sell the news ' trading action. An analysis follows in the paragraphs below.

Company Overview:

Tarsus Pharmaceuticals, Inc. ( TARS ) is an Irvine, California based biotechnology concern with an initial focus on the development of lotilaner for the treatment of multiple disorders. The company just crossed into commercial stage with the anticipated August 2023 launch of Xdemvy (lotilaner ophthalmic solution) 0.25% for the treatment of Demodex blepharitis after receiving FDA approval on July 25, 2023. Tarsus was formed in 2016 and went public in 2020, raising net proceeds of $91.7 million at $16 per share. The stock currently trades just south of $17.00 a share, translating to an approximate market cap of $545 million.

Lotilaner

The company's raison d'etre is lotilaner, an antagonist of insect and arachnid gamma aminobutyric acid-gated chloride (GABA-Cl) channels, which causes paralysis and death. Owing to its low affinity to mammalian GABA-CI and other ion channels, lotilaner is not toxic to the human nervous system. Furthermore, it is lipophilic, meaning it is more bioavailable in the oily sebum of the hair follicle, a frequent home of mites. Armed with its isoxazoline parasite killer, Tarsus is developing different delivery systems to attack various maladies.

TP-03 . The first version, an eye drop (TP-03), was recently approved as the first and only treatment for Demodex blepharitis, a condition characterized by eyelid inflammation (blepharitis), redness, ocular irritation, and eyelash dandruff (collarettes). Although rare, progressive blepharitis can lead to blindness. Its estimated that nine million Americans suffer from blepharitis caused by Demodex (a genus of mite) infestation.

In the clinic, lotilaner was a cure in over half the cases. Data from two clinical trials encompassing more than 800 patients demonstrated complete or near complete collarette clearance in nearly half the patients on TP-03 versus ~10% on vehicle at day 43. Also, complete mite eradication was achieved in 52% and 68% of patients on TP-03 in the respective trials at day 43 versus 15% and 18% on vehicle (both p<0.0001).

With the FDA approval coming one month ahead of its PDUFA date, Tarsus is ready for an August launch, spearheaded by eleven district managers and 85 sales reps targeting ~15,000 optometrists and ophthalmologists, who comprise more than 80% of the domestic market. Administered twice daily for six-weeks, Xdemvy will fetch $1,850 per treatment with patient out-of-pocket expense estimated at less than $100. Tarsus sees blockbuster potential for its eye drop in approximately four to six years.

It is also being evaluated in a Phase 2a study for the treatment of meibomian gland disease (MGD), a chronic disorder of glands on the inner part of the eyelid that secrete lipids essential to the production of tear film on the surface of the eye. MGD patients experience clogging of the meibomian gland, which results in a deficiency of tear film, a causative agent in two-thirds of the ~34 million domestic dry eye disease episodes. With Demodex mites believed to be the primary underlying cause, TP-03 has the opportunity to be the first and only approved therapy for this indication as well. Results from the trial are anticipated in 2H23. A Phase 3 trial in China covering both indications is expected to read out in 4Q23.

TP-04 . Tarsus is also developing a topical gel formulation of lotilaner (TP-04) for the treatment of rosacea, a chronic skin condition characterized by facial redness and lesions with the papulopustular version (PPR) (25%) presenting similar to a severe case of acne. It is estimated that 16 million Americans suffer from rosacea, which is currently treated with anti-parasitic creams and topicals such as ivermectin and azelaic acid, as well as antibiotics. These remedies have had moderate success reducing redness and limiting papules and pustules; however, complete eradication is rarely achieved. One of rosacea's causes is the same Demodex mites implicated in blepharitis. It is believed that they carry bacteria strains that are responsible for disease presentation. TP-04 is currently undergoing evaluation in a 12-week Phase 2a study in 30 patients with moderate to severe PPR. Topline data are expected in 2024.

TP-05 . Tarsus has also created an oral tablet version of lotilaner (TP-05) that is being assessed in the treatment of Lyme's Disease, a tick-bite driven malady that afflicts more than 400,000 Americans annually. It is believed to result from the transfer of Borrelia bacteria from the tick to the host, which is not believed to occur until more than 48 hours after attachment. Early symptoms include rash at bite site, fever, and fatigue, later developing into muscle and joint pain, neurological issues, and lymphocytic meningitis. If diagnosed early, antibiotics are effective; if not, symptoms become chronic. With lotilaner already used as a prophylactic therapy against ticks for dogs and cats, Tarsus is evaluating once-monthly TP-05 in somewhat the same role for humans, although its Phase 2a study will involve healthy subjects receiving TP-05 after being bitten with lab-grown, non-disease carrying ticks. The study should read out in 2H23.

Competition

As the first and only FDA-approved therapy for Demodex blepharitis, Xdemvy enjoys significant first-mover advantage with no other asset meaningfully in the clinic for that specific indication. Switzerland based Premark Pharma successfully completed a Phase 2 trial for its anti-inflammatory ocular ointment (PMP2207) treating blepharitis, but it does not address the root cause. Also, privately held Azura Ophthalmics has an MGD candidate (AZR-MD-101) that wrapped up a successful Phase 2 study but has not announced specific next steps for a pivotal trial.

In-Licensing and Collaborations

Lotilaner came to Tarsus via a 2019 in-license from Elanco AG, where the former paid $1 million upfront and is potentially on the hook for milestones totaling $83 million ($1 million paid to date) for eye and skin disease indications. It is also obligated to pay single digit royalties on net sales, as well as variable percentages beginning in the low-double digits on sublicenses.

Tarsus owns the worldwide rights to lotilaner, with the exception of China, where it outlicensed the two eye indications to LianBio ( LIAN ) for $15 million upfront in 2021. It has since collected $65 million in development and regulatory milestones and is eligible to receive an additional $125 million in development and commercial milestones, as well as low-to-high teen royalties.

Balance Sheet & Analyst Commentary:

The proceeds from LianBio and its recent $100 million secondary offering brought the company's cash holdings up to roughly $300 million and should provide sufficient funding as it launches Xdemvy. Tarsus has drawn $25 million from a credit facility and has access to an additional $130 million, of which $110 million is subject to certain conditions.

With little competition, it is not surprising to see the Street unanimously positive on Tarsus, featuring six buy or outperform ratings and a median price objective of $45. On average, they expect the company to generate sales of $7.5 million in FY23, followed by just under $55 million in FY24.

Verdict:

In a classic case of ' buy the rumor, sell the news ,' shares of TARS fell 25% to $18.03 in the trading session subsequent to Xdemvy's approval. It should be noted that Tarsus' stock did run up - presumably on a William Blair outperform initiation on July 18, 2023 - in the trading sessions prior to approval. Still, the market response has been perplexing.

Also, somewhat head scratching were the recent insider sales from Chairman & CEO Bobak Azamian. He appears to have a pre-arranged program of selling 8,000 to 9,000 shares a month. However, four days before Xdemvy's approval, he sold 103,900 shares at ~$20 a share. That said, the approval came a month before the PDUFA date, there are myriad reasons for selling, and he still owns over 910,000 shares in a living trust. A company director did buy nearly $160,000 worth of shares in mid-August it should be noted.

Back to Tarsus, with a value of less than $300 million net of net cash, the market is essentially projecting peak sales of $100 million for Xdemvy, while assigning no value to the balance of its lotilaner delivery pipeline. With a credible path to $1 billion in sales by 2030, its stock seems to be being overlooked and represents a solid buying opportunity and worthy of a small position within a well-diversified biotech portfolio.

It's hard to believe in coincidence, but it's even harder to believe in anything else . ? John Green

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