Tarsus Pharma: Excellent Data, Nice Execution, Unclear Market Potential (NASDAQ:TARS)

Summary

Tarsus Pharmaceuticals (NASDAQ:TARS) is developing a molecule called TP-03 for an ocular disease but an easily available, inexpensive treatment currently in use will make it difficult for Tarsus to capture the market. This substance is tea tree oil or TTO, and it is available for a few dollars on Amazon (AMZN). TP-03’s data is good enough for an approval. Tarsus also makes an effort to point out certain problems with TTO. However, in order to prove that, I believe that Tarsus should have done a trial with TTO in the control arm, instead of with placebo. This, it did not do. So, even if its drug gets approved, I doubt it will be able to dislodge TTO from the market that easily. This is the key thesis of my coverage.

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20 years ago, there was no dry eye disease in the world – a disease that is now known to occur in millions of people worldwide. “It wasn’t until we had a prescription treatment (cyclosporine) and improved diagnostics that we started actively looking for DED – and then we found it everywhere.”

This is also true of demodex blepharitis, another ocular surface disease or OSD that is thought to affect up to 25 million Americans. Demodex blepharitis is irritating, annoying, lowers quality of life, but where very few diagnoses are made – simply because there is no treatment for it.

The disease blepharitis is caused by the infestation of demodex mites, the most common ectoparasite in the human body. Blepharitis causes eyelid inflammation, redness, and irritation. 58% of the 45 million Americans who visit an eye care clinic annually have collarettes, a pathognomonic sign of Demodex blepharitis. There are no approved treatments.

TP-03 is a topical ophthalmic formulation of lotilaner being developed by Tarsus Pharmaceuticals, a small company in California, which, if approved, will be the first FDA-approved treatment for demodex blepharitis. Lotilaner is a veterinary medicine used to treat ticks in small animals. TP-03 has been evaluated in two pivotal trials across over 800 patients, in both of which it met all primary and secondary endpoints, and was generally well-tolerated.

Saturn-1 was a prospective, randomized, controlled, double-masked, phase 2b/3 clinical trial in 421 patients. Outcome measures according to the registry were the number of collarettes on the eyelid (primary endpoint), and secondary endpoints were participants with demodex mites eradicated, and a composite cure of collarette and erythema.

Data showed that more patients achieved collarette cure in the drug arm compared to placebo (81.3% vs. 23.0%; P < 0.0001), where we see a very highly statistically significant p-value. This was the primary endpoint, and the trial met this one resoundingly. Demodex mites were eradicated in 67.9% patients in the drug arm vs. 17.6% in the placebo arm with a P < 0.0001. This was one key secondary endpoint. The other one was a composite score of collarette and erythema, and here also, data showed 13.9% drug arm figures vs. only 1.0% placebo figures, which gives a P < 0.0001. Thus, the trial met the primary endpoint and key secondary endpoints solidly. However, like I said, the comparison and rivalry is not with placebo, but with TTO, and it comes down to a price rivalry, as well as safety and efficacy ones. TTO was not in the control arm, so the company’s contentions against TTO is not proven by data.

The adverse event profile was as follows:

The proportion of patients with at least 1 ocular treatment-emergent adverse event (TEAE) was 19.8% (42/212) in the study group and 21.5% (45/209) in the control group. All ocular TEAEs in the study group were mild, with the most common being instillation site pain (11.8%), compared with 7.7% in the control group. Other ocular TEAEs, with more than 1.0% incidence in either study or control group, included instillation site pruritis (1.4% vs. 3.3%), reduced visual acuity (2.8% vs. 2.9%), eye pain (1.4% vs. 1.4%), eye discharge (1.4% vs. 1.0%), and chalazion (0.5% vs. 1.4%), which were all mild.

The tox profile was mild, as the company claims, and this should have given it premium pricing power over TTO, and formularies should have accepted it, however, for that, they would need TTO in the control arm.

A second study called Saturn-2 was done, but I failed to see the purpose of this study, since it did not include TTO in control. It basically confirmed the first study’s data, which is fine, but it did not much more. The drug candidate was able to convincingly resolve Demodex blepharitis. The safety profile was similar to Saturn-1. 56% of patients on TP-03 achieved the primary endpoint of complete collarette cure. This is similar to Saturn-1, and serves little purpose in proving to a prospective client (a doctor, an ophthalmologist), that TP-03 is better than TTO.

Now we will discuss the current treatment option, which is Tree Tea Oil or TTO. Terpinen-4-ol –, the active ingredient in TTO, is also used. However, according to Tarsus, TTO is not very effective, and Terpinen-4-ol – has a poor toxicity profile; plus it is not very effective either. However, research by Fromstein, Harthan, Patel and Opitz suggests:

Terpinen-4-ol has acetylcholinesterase-inhibiting effects that produce the acaricidal effect.³⁷ This leads the mite to exit the hair follicle and migrate onto the skin before mating.⁹,³²,³⁷ Studies have demonstrated that as low as 5% concentration (when applied to the lids twice daily) and as high as 50% concentration (when applied once weekly) of tea tree oil are effective at reducing Demodex infestation when applied to the lids and base of the eyelash follicle.³²,³⁷ A 38% concentration of terpinen-4-ol has been shown to reduce Demodex effectively over a period of 4 weeks.³⁷

Contrast that with the company’s statement:

Currently, there are no FDA-approved treatments for Demodex blepharitis. Management may include the use of lid scrubs and warm compresses as well as mechanical removal of the eyelash collarettes, typically as an in-office procedure.4 Over-the-counter Demodex shampoos and lid hygiene products containing tea tree oil (TTO) have shown varying and questionable efficacy in treating Demodex blepharitis.24,26–28 Known side effects of topical tea tree oil, including contact dermatitis, ocular irritation, and allergic reactions, have limited its use.12,29,30 In addition, terpinen-4-ol (T4O), one of the components of tea tree oil, has been reported to be toxic to human meibomian gland epithelial cells in vitro.

So there are two opinions here about the effectiveness and safety of TTO and its key constituent. Admittedly, Tarsus could be right and the researchers’ view could be wrong. But where is the original scientific data to prove that? Despite spending money on two separate trials, the company did not consider using the established if unapproved molecule in control. Thus they did not generate data that would prove their key contention – that not only is TP-03 effective and safe (proven), but more critically, it is safer and more efficacious than TTO.

This will be the key issue with TP-03. Its safety and efficacy are beyond doubt. It should be easily able to clear the PDUFA. However, once in the market, TP-03 will face competition from TTO, which is a very easily available, inexpensive eyecare/fashion product. There will be very little pricing opportunity for TP-03. The data, though, is good – for what it is worth.

Based on this data, the company filed an NDA in September 2022. In their Corporate Presentation, they say that PDUFA is on August 25, 2023.

Financials

TARS has a market cap of $388mn and a cash reserve of $227mn. The company also notes – “$30 million in expected milestones through 2024 from China out-license with $10 million in December 2022 and $5 million in 1Q 2023.” Third quarter research and development expenses for 2022 were $10.9 million, while G&A was $12mn. At that rate, the company has enough cash to last them 8-9 quarters.

Bottom Line

I like a company that takes up a niche indication, develops a molecule, and brings out clear data from thoroughly run trials. It is unfortunate that there isn’t much of a market, given the preponderance of TTO. I may take a position in TARS if I get more clarity on the question about the market. I have very little doubt the drug will get approved in August. Since the stock is trading near 52-week lows, a small pilot may actually be recommended.