Tarsus Pharmaceuticals, Inc. (NASDAQ:TARS) Q1 2024 Earnings Call Transcript May 8, 2024
Tarsus Pharmaceuticals, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, and welcome to Tarsus’s First Quarter 2024 Financial Results Conference Call. As a reminder, this call is being recorded. At this time, I would like to turn the call over to David Nakasone, Head of Investor Relations, to lead off the call. Please go ahead.
David Nakasone: Thank you. Before we begin, I encourage everyone to go to the Investors Section of the Tarsus website to view the earnings release and related materials we will be discussing today. Joining me on the call this afternoon are Bobby Azamian, our Chief Executive Officer and Chairman; Aziz Mottiwala, our Chief Commercial Officer; Jeff Farrow, our Chief Financial Officer and Chief Strategy Officer; and joining us for the question-and-answer session Sesha Neervannan, our Chief Operating Officer. I’d like to draw your attention to Slide 3, which contains our forward-looking statements. During this call, we will be making forward-looking statements that are based on our current expectations and beliefs. These statements are subject to certain risks and uncertainties, and our actual results may differ materially. I encourage you to consult the risk factors contained in our SEC filings for additional detail. With that, I would like to turn the call over to Bobby.
Bobby Azamian: Good afternoon, everyone and thank you for joining us. 2024 is off to a great start for Tarsus, and I’m excited to share our progress with you today. We continue to build and grow a new category with exceptional commercial performance and make strides to do it again with the advancement of our pipeline. I’ll start with XDEMVY, the first and only FDA-approved treatment for Demodex blepharitis, or DB for short, which is continuing on a tremendous pace and not just in terms of sales. We are establishing a new market, and I know we are only scratching the surface of what we can achieve with XDEMVY for DB patients and their doctors. In just the second full quarter of launch, we are seeing increased adoption amongst both existing and first-time prescribers, as well as increasing demand among patients.
As a result, we have reported nearly $25 million in net product sales this quarter and delivered approximately $26,000 in DB patients. As of last week, more than 8,000 eye care professionals, or ECPs for short, have started their patients on XDEMVY and more than half are prescribing to multiple patients. These remarkable results are a testament to our category-creating approach, which centers on the clear compelling value proposition of XDEMVY for all stakeholders, the positive impact of our educational efforts in building a new market, and finally, the expertise and commitment of our commercial and medical teams and we’re only just beginning to see the impact of XDEMVY. I’ve been spending a lot of time in the field with our sales team and ECPs, and I see they’re excited to share their early patient experiences, which illustrate the importance of our efforts and the opportunity ahead.
Most recently, I was in Georgia visiting a variety of optometrists and ophthalmologists. I saw firsthand the journey each new eye care provider takes to understand, first, the sheer volume of patients in their clinics with DB, then how to prescribe and facilitate medication access for their patients, and finally, the initial experience with the first several XDEMVY prescriptions. The medicine does not disappoint and momentum is continuing to build. As doctors gain experience, they start looking more and finding more DB patients. Initially, those presenting with a chief complaint and over time, more and more are diagnosed upon further examination. Whether the ECP was gaining initial experience or has become a champion of XDEMVY, I did not hear anyone who felt they had realized the full potential of patients they could serve.
We have also made great strides in engaging our 15,000 target ECPs and inspiring more than half of them to action with XDEMVY so far. Other key drivers of our success are the creative and targeted educational initiatives we launched to raise awareness of DB among patients, providers, and payers. These include Mite Party, our first consumer-focused campaign launched earlier this quarter as well as prior ECP-focused campaigns. These strong initiatives help to promote the behavioral changes needed to increase awareness and diagnosis of DB. These efforts are also driving greater patient demand and utilization amongst the 1.5 million patients already diagnosed with DB and we’re beginning to see early traction among the patient segments, we believe makeup the remaining 5.5 million who visit the ECPs with complementary eye conditions, such as dry eye disease, cataracts and patients like myself, who struggle to stay in their contact lenses.
Not to mention the additional 18 million patients visiting ECP offices, who we know, can ultimately be served with XDEMVY. We knew this category-creating product had blockbuster potential and it makes me so proud to see the launch of XDEMVY off to such a strong start. But as we go beyond the early adopters, we know, it will take more time and more engagement to support the next group of ECPs to become routine riders and to reach deeper into the additional patient segments in the clinics. In my most recent visit to the field, I experienced firsthand the scale of the educational opportunity ahead. More visits by our field teams lead to more ECP engagement and more prescriptions, which is why beginning in the third quarter, we plan to add even more fuel to the fire with expansion of our sales force.
We’re also contemplating a consumer campaign in our reach even more patients. We are further investing in greater capabilities and capacity now because we see the demand, positive payer feedback, and growth potential of XDEMVY. With this further investment, we believe we will be able to achieve our goals even faster, and I look forward to keeping you updated on our progress. Before I turn the call over to our Chief Commercial Officer, Aziz Mottiwala, I also want to highlight the progress we made with our pipeline this quarter with the reporting of positive clinical data from two Phase 2 studies, one for the treatment of Rosacea and another for the prevention of Lyme disease. We remain on track with our plans to bring these data to the FDA by the end of this year along with the positive Phase 2 data for Meibomian Gland Disease we already reported.
I’m so proud of the foundation we have built here at Tarsus. The strength of our first commercial product launch has put us well down the path of becoming an eye care leader. Thanks to the relentless execution of our world-class team, we have only just begun to realize the full potential of XDEMVY. We look forward to boosting this launch with additional resources, while also continuing to advance the pipeline of other potential category-creating therapies. Aziz, over to you.
Aziz Mottiwala: Thanks, Bobby. The experience you shared represents we are hearing from the field more broadly about the positive impact of XDEMVY. Knowing to make a difference in the daily lives of patients is deeply motivating as we work to bring XDEMVY to millions of patients, who are living with this pervasive and debilitating eyelid disease. As Bobby noted, we generated nearly $25 million in XDEMVY sales this quarter. That’s an increase of almost 90% over last quarter. Additionally, more than half of our target 15,000 ECPs are now riding XDEMVY. And as anticipated, we maintained a consistent gross-to-net discount of approximately 55%, which was encouraging in the face of traditional first-quarter headwinds. These robust metrics highlight the success of the differentiated and disruptive approach to launch we laid out last year, as well as the commitment of our best-in-class sales force, which is continuing to raise the bar on new product launches.
And as Bobby noted, we’re just getting started. In the early weeks of launch, we are predominantly reaching patients already diagnosed with DB. Now, in addition to the already diagnosed patients, we’re also beginning to reach into the other patient segments. Those who are seeking treatment for complementary eye conditions, in particular, patients with dry eye or those presenting for cataract surgery. Likewise, we are making significant progress with ECP adoption. Our existing writers are increasingly prescribing to more patients and we are seeing initial signs of success in moving beyond the early adopters and into the next wave of ECPs. These successes are highly attributable to the educational efforts we initiated well before launch. The visually compelling patient and physician disease awareness campaigns that have become our hallmark, the peer-to-peer exchanges we are facilitating, and, of course, the commitment of our team.
All of this gives us great confidence in the full market potential of XDEMVY. But as we said, building a blockbuster takes time, and creating a new category requires a sizable disease education effort. We’re turning up the dial on our investment in the sales force and in the size and scope of our consumer educational efforts. Moving into the next phase of launch, we know that getting more ECPs to become prolific writers is going to take more time and more business. As part of our effort to increase demand within the current base of prescribing ECPs and to secure the next base of recurring writers, we plan to recruit, hire, and onboard approximately 50 new sales representatives and leaders by the end of the third quarter. While that’s no small feat, the success of the XDEMVY launch and the culture we’ve established at Tarsus has generated a high volume of interest from folks with and we’re excited to apply their experience to positively disrupting growth markets.
We also believe we can grow the market directly through impactful consumer advertising and marketing efforts, like our recent Mite Party campaign. This dynamic multi-channel campaign is designed to elevate awareness of DB and encourage people to visit an ECP per strain. Additionally, our most recent market research indicates that more than 80% of patients said that, if they experience symptoms of DB, they would seek out their ECPs for a proper diagnosis, giving us confidence in the potential impact of an even more fulsome and broad consumer campaign on streaming TV, which we’re thinking about launching later this year. On the payer front, I’m pleased to report that, we have secured payer contracts since our year-end earnings call just a couple of months ago, including two major commercial plans with approximately 18 million covered lives that have placed XDEMVY on preferred status.
Payers continue to value the high unmet patient needs and strong product efficacy of XDEMVY. As with the previous contracts, there is a lag before coverage begins and we should start to see the benefits of this coverage in the second quarter of 2024. I’d like to close by acknowledging the entire Tarsus team for their efforts in helping us reach more and more patients in need of a solution. Our tremendous results this quarter speak not only to the compelling value proposition of XDEMVY and the power of category creation, but also to the expertise, creativity and tenacity of our team and we’re continuing to invest in both. With that, I will turn the call over to Jeff to discuss our financial results and provide an update on our clinical pipeline.
Jeff?
Jeff Farrow: Thanks, Aziz. The first quarter of 2024 was another example of how we are continuing to raise the bar for eye care product launches. Among the key highlights, we generated $27.6 million in total revenues comprised of approximately $24.7 million in XDEMVY net product sales and approximately $2.9 million in license fees and collaboration revenue from the signing of a new China Health license agreement with Grand Pharma for TP-O3. As part of this agreement, LianBio, our previous partner made a one-time payment of $2.5 million and an equity warrant cancellation payment of approximately $400,000. We also completed an equity raise of nearly $108 million and strengthened our financial position with a $200 million non-dilutive financing commitment from Pharmakon Advisors, a leading life science investor.
We are encouraged by the increasing number of eye care professionals and patients benefiting from XDEMVY. We are also pleased with the progress we’re making with payers as evidenced by the additional payer contracts we secured since our year-end earnings call as Aziz mentioned earlier. And to be clear, the benefits of these new major commercial plans, we secured are not reflected in the first quarter gross-to-net numbers we’re reporting today, but are expected to benefit the second quarter and beyond. As expected, we saw a steady gross-to-net discount of approximately 55% despite the impact of typical first-quarter dynamics, including higher patient out-of-pocket costs due to plans resetting deductibles and the Medicare coverage gap. Looking ahead, we remain on track for broad commercial coverage by the end of the year and Medicare coverage beginning in 2025.
While we continue to work with the payers to establish commercial coverage, there’s always a chance that payers could decide to implement short-term hurdles potentially impacting XDEMVY’s near-term progress. Further, we expect to see similar dynamics on second-quarter scripts consistent with what we’ve seen over the last two quarters, including holidays and vacations, the out-of-office time because of medical conferences, as well as other patient dynamics, all of which could impact net sales. As a reminder, we recognize revenue when we ship XDEMVY from our warehouse to the distributors, not on the bottles dispensed to patients. In the first quarter, due to strong demand coming off the initial launch, our distributors increased their XDEMVY purchases, resulting in approximately one additional week of days on hand inventory at the end of the first quarter versus the fourth quarter of 2023.
We do not expect to see this incremental stocking in the second quarter. We further expect for the second quarter days on-hand inventory to remain consistent with the first quarter and an increase in the number of bottles dispensed to patients to be in line with the increase in the number of bottles dispensed to patients, we saw in the first quarter. We also expect gross-to-net discounts to improve incrementally in the second quarter and continue to improve quarter-over-quarter to our expected steady state of 50% in 2025. We ended the quarter with a strong balance sheet of approximately $298 million in cash and marketable securities inclusive of a $108 million equity raise. Additionally, in April, we refinanced our existing term loan with a new $200 million credit facility from Pharmakon Advisors, which enables us to borrow a larger sum on more flexible terms compared to our previous credit facility.
We elected to draw $75 million at the close, providing us with the net of approximately $40 million after the repayment of the previous facility in full. This will further enable our ongoing efforts to expand our pipeline, as we progress towards our goal of becoming a leader in eye care. Based on the health of the business and the success we are seeing in the early days of the launch, we plan to deploy a portion of this capital to support the following key launch initiatives that Aziz highlighted earlier. Hiring an incremental 50 sales representatives and leaders, ensuring we’re continuing to increase the depth and breadth of adoption, as we begin to engage with the next wave of target ECPs and potentially increasing our investment in direct-to-consumer advertising, including streaming TV to encourage more patients to see their eye care providers.
Turning to our P&L. Our total operating expenses were approximately $65.3 million. The increase in operating expenses quarter-over-quarter was primarily driven by increases in the cost of sales from the launch of XDEMVY and increases in selling, general, and administrative expenses due to the addition of commercial infrastructure, marketing, and education efforts and the sales force to support the launch of XDEMVY. Gross margins for the first quarter were approximately 93%, which includes the royalty we paid to Lonco [ph] Looking at the second quarter, we expect total operating expenses to be in line with the first quarter of 2024. As we move into the second half of 2024 and based on our current plan, we expect total operating expenses to increase due to the sales force expansion, which we expect to be fully deployed by the end of the third quarter, and potential ECP efforts in the fourth quarter.
Turning now to a quick review of our pipeline. We have recently reported three positive top-line data sets for all of our Phase 2 programs: TP-03 in Meibomian Gland Disease; TP-04 in Papular-Pustular Rosacea; and TP-05 for the prevention of Lyme disease. All three programs target the underlying cause of the disease, address high unmet needs, and are based on lotilaner, the same active ingredient found in XDEMVY. And the next steps for advancing all three programs include completing full data analysis of the Phase 2 studies and engaging with the FDA by the end of the year. We look forward to providing updates on each of these programs as they progress. Finally, we plan to continue strategically investing in XDEMVY, and our pipeline that is designed to create other new categories of medicines.
With that, I will turn the call back to Bobby for final remarks.
Bobby Azamian: Thank you, Jeff. What a tremendous start to the year and with so much more to come. Our foundational elements are strong and we believe we are only just beginning to unlock the full potential of Tarsus, XDEMVY, and our pipeline. We look forward to investing even further in the launch of XDEMVY and to advancing three more candidates with category-creating potential. We appreciate your time and engagement today and look forward to speaking with you soon. Operator, please open the line for questions.
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