Executive Summary / Key Takeaways

• Category Creation Driving Explosive Growth: Tarsus Pharmaceuticals is rapidly establishing and dominating the Demodex blepharitis (DB) treatment category with XDEMVY, its first and only FDA-approved therapeutic. This strategy has fueled record Q2 2025 net product sales of $102.7 million, a 152% year-over-year increase, and is projected to drive XDEMVY to "blockbuster plus" status.
• Multi-faceted Commercial Engine: XDEMVY's success is propelled by an expanded 150-person sales force, broad payer coverage (over 90% of lives), and a highly effective direct-to-consumer (DTC) campaign that has tripled unaided awareness and boosted website engagement by nearly 400% since early 2025.
• Robust Pipeline Extends Lotilaner's Reach: Leveraging its proprietary lotilaner platform, Tarsus is advancing TP-04 for ocular rosacea (Phase 2 study H2 2025) and TP-05 for Lyme disease prevention (Phase 2b in 2026). These programs target large, underserved markets, aiming to replicate XDEMVY's category-creating success.
• Strong Financial Position and Strategic Investment: With $381.1 million in cash and equivalents (as of June 30, 2025) bolstered by a recent $135 million equity raise, Tarsus is well-capitalized to fund its aggressive commercialization efforts and pipeline development, including an annual DTC spend of $70-80 million.
• Untapped Market and Global Expansion: Despite significant early success, only a fraction of the estimated 25 million U.S. DB patients have been treated. Tarsus is pursuing global opportunities, with European approval for XDEMVY expected in 2027 and regulatory discussions underway in Japan, indicating substantial long-term growth potential.

The Genesis of a Category Creator

Tarsus Pharmaceuticals, incorporated in 2016, embarked on a mission to revolutionize patient treatments, initially focusing on eye care. Its journey began with foundational investments in R&D, capital raising, and establishing critical licensing agreements. This early strategic groundwork laid the foundation for its flagship product, XDEMVY, and a promising pipeline.

The company's core strategy centers on identifying and pioneering new therapeutic categories for underserved diseases. This approach has been instrumental in shaping its current market position and strategic responses to competitive dynamics. By targeting conditions with significant unmet needs, Tarsus aims to establish definitive standards of care rather than competing in saturated markets.

Technological Bedrock: Lotilaner's Differentiated Power

At the heart of Tarsus's innovation lies its proprietary active pharmaceutical ingredient (API), lotilaner. This molecule forms the basis for XDEMVY and its pipeline candidates, offering a unique mechanism of action. Lotilaner specifically targets and eradicates Demodex mites by inhibiting parasite-specific gamma-aminobutyric acid-gated chloride (GABA-Cl) channels, crucially with no GABA-Cl inhibition in humans. This targeted approach minimizes off-target effects, enhancing the safety profile.

XDEMVY (lotilaner ophthalmic solution 0.25%) is the first and only FDA-approved therapeutic for Demodex blepharitis (DB). This "first-in-class" status provides a significant competitive advantage, allowing Tarsus to define the treatment paradigm for a disease affecting an estimated 25 million people in the U.S. The tangible benefit of this technology is its ability to directly address the root cause of DB, offering a definitive solution where previously only symptomatic or off-label remedies existed.

Tarsus's R&D initiatives extend lotilaner's application. The Ersa and Rhea clinical trials for XDEMVY in DB patients with Meibomian Gland Disease (MGD) demonstrated statistically significant and clinically meaningful improvements in objective measures of MGD, such as meibomian gland secretion scores and the number of glands secreting normal or clear liquid. These studies also showed profound improvements in patient-reported symptoms like fluctuating vision, itching, redness, and burning. This expanded evidence base allows ECPs to broaden their use of XDEMVY, further solidifying its market position.

XDEMVY's Ascent: Redefining Eye Care

Tarsus's commercialization of XDEMVY, launched in August 2023, has been nothing short of remarkable. The company has executed one of the most successful launches in the prescription eye drop market, demonstrating a clear blueprint for category creation. This success is a powerful validation of its scientific innovation, strategy, and leadership.

The commercial strategy is multi-pronged, focusing on education, ease of access, and robust evidence generation. Tarsus expanded its sales force from approximately 100 to 150 representatives in Q3 2024, enabling more frequent and effective engagement with Eye Care Professionals (ECPs). This increased engagement is driving a "profound shift" in prescribing patterns, with ECPs moving from monthly to weekly and even daily prescriptions. Over 20,000 ECPs are now actively prescribing XDEMVY, exceeding the initial target of 15,000.

Financial performance reflects this aggressive market penetration. In Q2 2025, Tarsus reported record net product sales of $102.7 million, a substantial 152% increase year-over-year. For the first six months of 2025, net product sales reached $181.0 million, up from $65.5 million in the prior year period. This growth was driven by approximately 91,000 bottles dispensed in Q2 2025 and 163,000 bottles in H1 2025. The gross-to-net discount for Q2 2025 was approximately 45%, with management expecting continued improvement to the low 40s by year-end 2025. Gross margins have remained consistently strong at approximately 93%.

A significant catalyst for XDEMVY's accelerating growth is the direct-to-consumer (DTC) advertising campaign, which expanded from streaming platforms to network television. This campaign has meaningfully contributed to prescription growth, with consumer unaided awareness more than tripling and website engagement on XDEMVY.com increasing by nearly 400% since early 2025. Patients are increasingly motivated to seek treatment and ask for XDEMVY by name, driving new office visits.

Tarsus has also achieved broad payer access, securing commercial, Medicare, and Medicaid reimbursement for over 90% of covered lives. This achievement has removed a major barrier to physician adoption, ensuring affordability and accessibility for patients. Management believes the peak potential for XDEMVY is "even greater than originally envisioned," seeing it as a "blockbuster plus opportunity" with only about 350,000 of an estimated 25 million U.S. DB patients treated to date.

Expanding Horizons: A Robust Pipeline for New Categories

Beyond XDEMVY, Tarsus is strategically leveraging its lotilaner platform to create new therapeutic categories. The company is advancing two key pipeline candidates: TP-04 for ocular rosacea and TP-05 for Lyme disease prophylaxis.

TP-04 is an investigational sterile aqueous gel formulation of lotilaner for the potential treatment of ocular rosacea (OR). OR is a highly prevalent and underserved eye disease, affecting an estimated 15 million to 18 million Americans, with a majority of cases linked to Demodex mites. There is currently no FDA-approved therapy for OR. Tarsus plans to initiate a Phase 2 study for TP-04 in the second half of 2025, with R&D costs for this study projected between $7 million and $10 million, split across 2025 and 2026. The FDA has aligned on the protocol and endpoints, indicating a clear development path for this "next transformative category in eye care."

TP-05 is an investigational oral systemic formulation of lotilaner for potential Lyme disease prophylaxis and community malaria reduction. This candidate is unique as it is currently the "only non-vaccine, drug-based prophylaxis in development that targets ticks." Positive Phase 2a results from the Carpo trial demonstrated a greater than 90% tick-killing rate compared to placebo. The FDA has agreed to a Phase 2b clinical trial involving several hundred subjects, planned for initiation in 2026. However, a subsequent Phase 3 study would require thousands of patients in a disease prevention field study. Given the extensive scope of a Phase 3 trial and the general practitioner (GP) call point, Tarsus believes TP-05 "may be best suited for a larger partner in the long term."

Competitive Arena: Tarsus's Strategic Edge

Tarsus operates as a challenger in the biopharmaceutical market, particularly within ophthalmic and dermatology niches. Its core competitive advantage stems from its proprietary lotilaner technology. This platform offers targeted benefits and potentially superior efficacy in treating parasitic and inflammatory conditions. This differentiation can translate into stronger customer loyalty and robust growth by commanding premium pricing, especially in markets where XDEMVY is the first and only approved treatment.

Compared to larger, more diversified competitors like AbbVie (ABBV), Bausch Health (BHC), Novartis (NVS), and Alcon (ALC), Tarsus exhibits strengths in focused innovation and agility. While these larger players benefit from extensive R&D capabilities, established global distribution networks, and diversified product portfolios, Tarsus's specialized approach allows for quicker pivots in development and a concentrated effort on unmet needs. For instance, XDEMVY's Q2 2025 revenue growth significantly outpaced the broader anterior segment prescription eye drop market, including other recent launches, highlighting its strong market penetration.

However, Tarsus's smaller scale presents certain vulnerabilities. It may lead to higher operational costs and R&D dependencies, potentially resulting in lower margins and cash flow compared to its larger rivals. The company's less diversified portfolio also means a higher reliance on the success of XDEMVY. Nevertheless, the stringent regulatory requirements and high R&D costs inherent in the biopharmaceutical industry act as significant barriers to entry, which Tarsus, with its proven development blueprint, can leverage to defend its niche.

Financial Health and Outlook

Tarsus maintains a solid financial footing, with $381.1 million in cash, cash equivalents, and marketable securities as of June 30, 2025. This position was strengthened by a $135 million equity financing in Q1 2025. Management estimates these resources are sufficient to fund operations for at least the next 12 months. The company also has access to a remaining $50 million tranche from its 2024 Credit Facility, contingent on sales milestones.

Looking ahead to Q3 2025, Tarsus expects bottles dispensed to be in the range of 95,000 to 100,000, with the gross-to-net discount improving to 43-45% and further into the low 40s by year-end 2025. Selling, General, and Administrative (SG&A) expenses are projected to remain consistent with Q2 2025, as the company maintains its annual DTC advertising spend in the $70 million to $80 million range. While the company has not provided long-range guidance on cash flow positivity, it is strategically prioritizing investments in its pipeline, particularly the TP-04 ocular rosacea program.

Despite typical seasonal headwinds in Q1 and Q3, Tarsus anticipates continued strong near- and long-term growth for XDEMVY. Management's conviction in XDEMVY's "blockbuster plus" potential is reinforced by accelerating market adoption and the ongoing success of its commercial initiatives. The expected steady-state annualized retreatment rate of approximately 20% for XDEMVY further contributes to the long-term revenue outlook.

Risks to the Thesis

Investing in Tarsus carries inherent risks, primarily stemming from its dependence on XDEMVY as its sole approved commercial product. While the launch has been successful, sustained market acceptance requires continuous education of ECPs and patients, and there is always a risk that the estimated market size for Demodex blepharitis may be overestimated.

The company's reliance on third-party manufacturers and single-source suppliers for lotilaner introduces supply chain vulnerabilities. Clinical development for pipeline candidates, TP-04 and TP-05, is lengthy and expensive, with uncertain outcomes. Delays or failures could impact future revenue streams. Furthermore, intellectual property protection, particularly in international markets, remains a critical factor, as any challenges could erode Tarsus's competitive advantage. Macroeconomic conditions and regulatory changes, such as those impacting drug pricing and reimbursement, could also affect profitability.

Conclusion

Tarsus Pharmaceuticals stands at a pivotal juncture, having successfully transitioned from a development-focused entity to a commercial-stage biopharmaceutical company. Its core investment thesis is firmly rooted in its proven ability to create and dominate new therapeutic categories, exemplified by the explosive launch of XDEMVY. The proprietary lotilaner platform, coupled with a meticulously executed commercial strategy, has not only addressed a significant unmet medical need in Demodex blepharitis but also established a robust foundation for future growth.

With a promising pipeline targeting other large, underserved conditions like ocular rosacea and Lyme disease, Tarsus is strategically investing its strong financial resources to extend its technological leadership. While challenges inherent to the biopharmaceutical industry persist, the company's focused innovation, commercial acumen, and commitment to patient impact position it as a compelling opportunity for investors seeking exposure to a dynamic and expanding segment of the healthcare market.