Tarsus Pharmaceuticals Inc

NASDAQ:TARS

Earnings Call Analysis

Advancing Clinical Programs with Strong Potential

The company has made significant strides in its clinical portfolio, reporting promising top-line data from all Phase II programs. The treatment candidates TP-03, TP-04, and TP-05 have shown potential in tackling unmet medical needs in Meibomian Gland disease, Papulopustular Rosacea, and Lyme disease prevention, respectively. These developments are particularly noteworthy as they all harness the same active ingredient, lotilaner, and target the underlying causes of these conditions. The positive data suggest that the company is positioned to bring forward new, impactful treatments subject to forthcoming discussions with the FDA and full data presentations.

Sound Financial Performance with Robust Product Sales

Financially, the company reported XDEMVY net product sales of approximately $13.1 million for the fourth quarter and $14.7 million for the full year of 2023. These figures were driven primarily by the thousands of Eye Care Professionals prescribing XDEMVY, culminating in over 17,400 bottles delivered to patients. Additionally, the company successfully secured several payer contracts, which signals robust commercial coverage and outreach potential. This includes a major plan covering over 19 million lives, poised to reflect in future financials as the company expects the realization of these contract benefits to begin in the first quarter of 2024.

Navigating Gross-to-Net Discounts and Operating Expenditures

Anticipating the dynamics of the first quarter, the company projects that gross-to-net discounts will be stable to slightly higher, with an improvement to a steady state of 50% expected by 2025. Total operating expenses were reported at approximately $57.5 million for the fourth quarter and $160.6 million for 2023, with the increase attributed to expanded commercial efforts. These investments in marketing, education, and sales infrastructure bolster the launch potency of XDEMVY. Moreover, the company managed to retain a high gross margin of 91% in the fourth quarter, and upcoming operating expenses are anticipated to align with recent levels.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, and welcome to Tarsus' Fourth Quarter and Year-End 2023 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 begin.

[David Nakasone, executive]

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 morning are Bobby Azamian, our Chief Executive Officer and Chairman; Aziz Mottiwala, our Chief Commercial Officer; Sesha Neervannan, our Chief Operating Officer; and Jeff Farrow, our Chief Financial and Chief Strategy 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.

[Bobak Azamian, executive]

Thank you, Dave. Good morning, everyone, and thank you for joining us on the call today.2023 was the defining and foundational year for Tarsus as we successfully started our next chapter as a commercial company. We made significant progress on several programs in our pipeline and, most importantly, launched our first commercial product, XDEMVY, the first and only FDA-approved treatment for Demodex blepharitis. Since its launch in late August, we have seen tremendous demand and growing uptake of XDEMVY among eye care professionals, or ECPs, and Demodex blepharitis patients who have long awaited an effective treatment for this damaging and impactful eyelid disease.Today, I am pleased to report on the great progress made in XDEMVY's first full quarter in the marketplace as we continue to reach patients affected by this disease. For the full year 2023, we reported nearly $15 million in net product sales and delivered more than 17,400 bottles of XDEMVY to patients. These are impressive early numbers, exceeding even our own expectations. Throughout the fourth quarter of 2023 and early weeks of 2024, XDEMVY has continued to solidify its place as an innovative category-creating therapeutic. Diagnosed patients with Demodex blepharitis, or DB for short, have driven initial demand for XDEMVY, and we expect this to continue as we work to reach the 1.5 million patients in the U.S. who are already diagnosed prior to the approval of XDEMVY.In parallel, we are seeing early signals that we are reaching the next wave of DB patients proactively visiting ECPs for complementary eye conditions, such as dry eye disease, cataracts and patients who struggle to maintain their use of contact lenses. We estimate that these groups make up a significant portion of the more than 7 million patients currently visiting the ECPs who we aim to reach with XDEMVY, and we are already seeing increasing use across all these patient segments. This traction is attributed to the tremendous strides we've made with ECPs over the last couple of years. We've engaged with all of our 15,000 target ECPs. More than 1/3 have written at least 1 dispensed prescription and more than half have become repeat prescribers who see the clear benefit of XDEMVY and are taking action to help their patients find relief.Just this past weekend, we met with many of the top surgeons at the American-European Congress of Ophthalmic Surgery, or AECOS for short, and we heard very consistent and positive feedback about their experiences with XDEMVY and, more importantly, the benefits their patients are experiencing. Our focus for 2024 is serving more ECPs and more patients. We expect to accelerate XDEMVY's reach by adding to the base of current prescribers, increasing the number of prolific writers and working with payers to secure broad coverage. In fact, our improving gross to net underscores the strong traction we've already made with payers in just the first few months of launch. We are delivering on the high expectations we set for ourselves and look forward to making even more progress throughout the year.I am also proud of our continued pipeline progress as we work to bring more new categories of therapeutics to patients with Meibomian Gland disease, rosacea and Lyme disease prevention. Finally, I would like to thank all Tarsans for their incredible contributions, relentless execution and passion for serving patient needs. Together, we look forward to serving countless more patients and advancing additional category-creating medicines.And with that, I will turn the call over to our Chief Commercial Officer, Aziz Mottiwala, for more on the strong launch of XDEMVY.

[Aziz Mottiwala, executive]

Thanks, Bobby.As I said last quarter, the response to XDEMVY has been truly remarkable, and the results we're seeing so far demonstrate that our unique strategy and executional strengths are delivering exactly as planned. It's clear from our results that the launch of XDEMVY is off to a tremendous start. During the first month of launch, we have served a significant number of patients with DB, engaged and educated a broad foundation of prescribing ECPs and made significant early progress with payers. We've noted from the beginning that creating the next category in eye care takes time and requires teams to educate providers, not only on the strength of XDEMVY but also in the disease itself. As such, high-impact disease education campaigns and ECP engagement have been among the key pillars to our success, and we're beginning to see the initial waves of ECP adoption, leading to growing prescription volumes and meaningful patient outcomes.Prior to approval, we launched action-oriented, visually-focused physician and patient education campaigns to familiarize both groups with the impacts of DB and reinforce the simplicity and ease of diagnosis. We've also kept ECPs engaged through active peer-to-peer scientific exchanges conducted by our all-optometrist medical force. Clearly, these efforts are paying off. As of February 23, approximately 6,000 ECPs have started patients on XDEMVY and more than half are repeat prescribers. As a result, more than 17,400 bottles have been delivered to patients in 2023. We're thrilled with these results and the impact we're having on patients. We've also learned a lot, and we're leveraging these insights to further optimize our sales strategy, particularly when it comes to transforming the next wave of ECPs into routine and repeat prescribers.While we continue to call on existing writers, we are shifting gears with a focus on reaching the next group of ECPs who are familiar with DB and ready for a solution that may need a little more experience with XDEMVY before becoming routine writers. Based on our experience, this behavior shift often requires multiple visits by our sales force. Our goal is to make XDEMVY a regular part of ECP clinical practices, and we found that this usually happens after prescribers write 5 to 10 prescriptions and see the positive impact of XDEMVY on their patients. This threshold is not only important because they become frequent writers. They also become more confident and look more proactively across all the patient segments for additional DB patients that can be helped by XDEMVY.Our most recent market research indicates that 75% of ECPs plan to more proactively look for and diagnose DB. And 90% of those that have prescribed XDEMVY expect to write more, given their positive experience with this medicine. These numbers are powerful and reflect the strong potential growth opportunity ahead. So while having the next 6,000 target ECPs prescribed may take more time and effort on the part of our sales team, we have great confidence in our ability to convert this next wave of ECPs to proactive prescribers.In addition to the tremendous strides we've made in reaching ECPs and their patients, we've also had great success with payers. I'm pleased to report that we have secured several payer contracts since our last earnings call, including a major commercial plan with more than 19 million covered lives that has put XDEMVY on preferred status. We should begin to see the benefits of this coverage in the first quarter of 2024. In the meantime, and due to the clear value proposition of XDEMVY, we continue to see initial noncontracted coverage that resulted in better-than-expected gross to net discounts of 58%. This substantial improvement in gross-to-net discount is based on our differentiated approach to distribution and patient access and all the work we've done over the past couple of years and will continue to do with payers.Before I turn the call over to Sesha, I would like to take this opportunity to express how proud I am of our commercial organization. This is a team that was strategically and thoughtfully assembled based on their expertise in eye care and successful new product launch experience. And they've executed exceptionally, and we are setting a new standard in product launches.I will now turn the call over to Sesha Neervannan, our Chief Operating Officer, who also leads our research and development to cover the progress we're making on our clinical programs. Sesha?

[Seshadri Neervannan, executive]

Thank you, Aziz.I'm pleased to share that we have made significant progress across our entire clinical portfolio since our last earnings call, reporting 3 very positive top line data sets for all our Phase II programs. These data highlight the potential of TP-03 in Meibomian Gland disease, TP-04, in Papulopustular Rosacea and TP-05 for the prevention of Lyme disease. All 3 product candidates target high unmet needs and are based on lotilaner, the same active ingredient found in XDEMVY. And like XDEMVY, all 3 target the underlying cause of disease.In December 2023, we announced top line results from the Ersa Phase IIa clinical trial evaluating TP-03 for the treatment of Meibomian Gland disease, or MGD, in patients with Demodex mites. TP-03 demonstrated statistically significant and clinically meaningful improvements compared to baseline in 2 objective measures of disease. One, the presence and quality of liquid secretion as measured by the Meibomian Gland secretion score; two, the number of glands secreting normal or clear liquid as measured in the central 15 glands of the lower eyelid, and the treatment was well tolerated.Much like XDEMVY for DB, these data demonstrate the immense potential of TP-03 in addressing the underlying cause of MGD, a disease that can lead to permanent changes in the tear film and progressive gland loss. We plan to present the complete data set from this trial at a major medical meeting later this year and look forward to discussions with the FDA before the end of the year regarding the path forward for TP-03 in MGD.As you may have seen in this morning's earnings release, we announced positive top line results from the Phase IIa Galatea trial evaluating TP-04 for the treatment of Papulopustular Rosacea, or PPR. TP-04 is a topical aqueous gel formulation of lotilaner in development for the potential treatment of PPR, a chronic skin disease characterized by facial redness, inflammatory lesions, burning and stinging. TP-04 is designed to potentially treat PPR by eradicating Demodex mites, which may play a key role in triggering inflammatory responses associated with the disease.In the Galatea trial, statistically significant improvements in inflammatory lesions and IGA score were observed at week 12 compared to vehicle. These are well-established regulatory end points for PPR and the data also show that TP-04 was generally well tolerated. The next steps for TP-04 will be complete data analysis and a potential meeting with the FDA by the end of the year to determine a path forward.The last of the 3 studies, but certainly not the least, last week, we reported results from the Phase IIa Carpo trial for TP-05 for Lyme disease prevention. As a reminder, TP-05 is an oral tablet designed to be an on-demand solution for prevention of Lyme disease. It is believed to be the only non-vaccine drug-based preventative therapeutic in development that targets and kills infected ticks before they can transmit the Borrelia bacteria that causes Lyme disease. Results from the Carpo trial demonstrated statistically significant benefit in killing attached sterile ticks versus placebo within 24 hours at both day 1 and day 30 after a single dose. No significant differences were observed between the high and low dose groups and the TP-05 was generally well tolerated.These data demonstrate that TP-05 has a potential to provide both rapid and durable protection against multiple tick-borne diseases. We plan to report the full data set from this trial later in 2024 and look forward to providing updates on our conversations with the FDA regarding the regulatory path forward. In parallel with the incredible success we've had with XDEMVY, we are also advancing a clinical pipeline that we believe has the potential to deliver even more category-creating medicines, and we look forward to additional catalysts later in the year. Lastly, I would like to take a minute to thank all the investigators and patients who made these studies successful.With that, I will turn the call over to Jeff to discuss the financial results.

[Jeffrey S. Farrow, executive]

Thank you, Sesha.In 2023, we made great progress on our goal to further strengthen our financial foundation in support of our strategic priorities. Our fourth quarter and full year results reflect our ability to generate meaningful revenue while continuing to advance our pipeline of innovative therapeutics. And I'm proud to report that we generated fourth quarter XDEMVY net product sales of approximately $13.1 million and full year 2023 product sales of approximately $14.7 million. As a reminder, we recognize revenue when we ship XDEMVY from our warehouse to the distributors, not on bottles received by patients.As mentioned earlier, sales for the year were driven by the thousands of ECPs who have started their patients on XDEMVY to more than 17,400 bottles that were delivered to patients and better-than-expected gross-to-net discounts of approximately 58%. As stated, 2024 is off to a strong start. We are pleased with the increasing number of bottles dispensed thus far, and we have secured several payer contracts since our last earnings call, including as Aziz noted, a major commercial plan with more than 19 million covered lives, and we remain on track for broad commercial coverage by the end of the year and Medicare coverage beginning in 2025.To be clear, the benefits of this new major commercial plan are not reflected in the fourth quarter numbers we are reporting today. As many of you are likely aware, signing a contract with a payer does not have an immediate impact, and it can take time for coverage to be reflected in the gross-to-nets. So we expect to begin recognizing the benefits of these contracts in the first quarter of 2024. I also want to note that while the gross-to-net discounts we're reporting today is very strong, this improvement is primarily due to an increase in the noncontracted coverage we saw in the fourth quarter. Remember, payers have the ability to make changes that could impact gross-to-nets in future quarters until we secure these additional payer contracts. This could include increasing co-pays or coinsurance, which could result in greater bridging and higher gross-to-net discounts.Further, we expect to see the typical first quarter dynamics on scripts and net sales, including higher patient out-of-pocket costs due to the planned resetting of deductibles, the Medicare coverage gap, both of which would increase the gross-to-net discounts. The impact of the holidays, winter storms across the country and the out-of-office impact of medical conferences as well as other potential patient dynamics, all 3 of which could impact script numbers. As such, we expect gross-to-net discounts to be flat to slightly higher in the first quarter and then improving to our expected steady state of 50% in 2025.Turning to our P&L. Our total operating expenses were approximately $57.5 million and $160.6 million for the fourth quarter and full year 2023, respectively. The increase in operating expenses quarter-over-quarter and year-over-year was primarily driven by increases in selling, general and administration 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 fourth quarter were 91%, which includes the royalties that we pay to Elanco. Looking at Q1, we expect total operating expenses to be in line with the fourth quarter of 2023.With that, I'll turn the call back to Bobby for final remarks.

[Bobak Azamian, executive]

Thank you, Jeff.Looking at the progress we've made within our pipeline and in the early months of launch, I remain confident about Tarsus' ability to become a leading eye care company, and we look forward to keeping you updated as we continue executing on an already successful launch trajectory.Operator, please open the line for questions.

[Operator]

[Operator Instructions] Our first question comes from Francois Brisebois with Oppenheimer.

[François Brisebois, analyst]

Congrats on a very nice full quarter here. Just in terms -- a couple of questions, and thanks, Jeff, for the clarity on the gross-to-net, very helpful. Is there any possibility here that your peak 50% gross-to-net can end up being better? Or are we sticking to that, and this is kind of more of an effect of a noncontracted plans with the gross-to-nets here?

[Bobak Azamian, executive]

Thank you, Frank. This is Bobby. I'm just going to reflect for a moment sitting here with the team at this early point in our launch, about a couple of things I'm really proud of, and then pass it to Jeff. Just to reiterate, first and foremost, what an excellent first quarter, serving our patients, doctors, payers, as you know, and generating revenues. And all of these, as you've seen, are above target and signify the large impact that we anticipate with XDEMVY and really the category-creating commercial leadership that we're pioneering in eye care.Secondly, I'm really proud that we can create additional categories through our now demonstrated ability to deliver other new medicines, 3 positive Phase IIa readouts in the last 3 months. And I think all this signifies a very bright future for Tarsus, with both XDEMVY and our future products and routes to becoming an eye care leader.So with that, I'll pass it to you, Jeff, to answer Frank's question.

[Jeffrey S. Farrow, executive]

Thanks, Bobby, and good morning, Frank. It's early days yet. I think we're cutting a new pathway here with XDEMVY and we don't really have a strong analog we can point to. So I think we're going to continue to guide to an ultimate steady-state gross-to-net of around 50% at this point. As time goes on and we print a few more quarters, we might adjust that. But at this point, I think it's appropriate to keep it at about 50% gross-to-net.

[François Brisebois, analyst]

Great. And then just maybe a question on patients coming back. And I'm just wondering, obviously, some prescribers are going to want to see how this works with their patients. And any feedback there that you're getting in terms of patients coming back, just to make sure everyone stays confident here that this isn't kind of a bolus start and these prescribers will keep going. And just any anecdotal feedback of patients coming back for a checkup after having XDEMVY.

[Aziz Mottiwala, executive]

Frank, it's Aziz. Thanks for that additional question. I'll tell you that one of the most exciting parts of this launch is hearing that feedback from doctors and patients. Almost every single prescriber we talk to has had an extremely positive experience. So you're seeing physicians bring patients back mid treatment, at the end of treatment and almost universally, you're hearing vast improvements in these patients, positive feedback. I think that's actually one of the reasons we've been able to penetrate 40% of the prescriber base so quickly is that these doctors are hearing from their colleagues how great things are working. So I think this is going to continue to be a strength for us going forward. The drug doesn't disappoint. Feedback is positive. And I think doctors are really taking it back by how impactful this has been on their patients.And I think ultimately, what happens is it potentiates the physicians to think about additional patients in the practice. So you're starting to see them more proactively diagnose, moving on beyond just the typical Demodex blepharitis patients, but thinking about potentially their recalcitrant dry eye patient, their cataract surgery patient or someone that can't stay in their contact lenses. So I think it's really 2 things that we're seeing there. One is positive experiences leading to additional uptake and two, really broadening the funnel in terms of how doctors think about the patient base.

[François Brisebois, analyst]

Okay. Great. And then, Bobby, I think in your remarks, you talked about the team just being in Europe for the conference. Can you just help us understand the thought process of XDEMVY's potential U.S. versus ex U.S.?

[Bobak Azamian, executive]

Yes. Thanks, Frank. To be clear, the conference I was referring to was called AECOS. It's the American-European Congress of Surgeons actually held here and in Europe. So we were at the one here. But it's a good question about Europe. And I'll pass to Sesha to talk about some of the regulatory and opportunities there. And then also, Jeff, to talk about some of the broader strategic potential there.

[Seshadri Neervannan, executive]

Thanks, Bobby. Frank, Sesha here. Yes, with respect to Europe, we are proceeding with our plans to develop a product -- preservative-free product for Europe. As you know, Europe is very big on preservative-free medicines and really prefer that over preserved products. So we are developing a preservative-free medicine. And in parallel, we are also in the process of seeking input from the European Medicines Agency for a pathway for regulatory filing and approval. And hopefully, we'll be able to report on that later in the year. And Jeff, do you want to address the other part?

[Jeffrey S. Farrow, executive]

Sure. Yes. So we, Frank, are in the process of doing a study that looks at both pricing and launch strategy over in Europe. I think right now, it's a little early to make an ultimate decision on which pathway we're going. We're exploring all opportunities, whether it be a build it ourselves, distributor relationship or licensing. So that will be probably something we will update later during the year.

[François Brisebois, analyst]

Okay. Great. And congrats guys on a great start here.

[Operator]

Our next question comes from Andrea Tan with Goldman Sachs.

[Omotolani Uthman, analyst]

Tolani on for Andrea. Congrats on the quarter. First here, what's your -- if you could describe your level of confidence that the ramp seen to date with XDEMVY can continue as the prescriber education goes on and more patients are treated? And then related to that, could you characterize the level of inventory stocking for 4Q?

[Aziz Mottiwala, executive]

Yes. So I'll start with the ramp. And I think, as I mentioned earlier, we've been really pleased. I think the key things here are: one, the penetration into the ECP market, right? We've got 6,000 prescribers already writing this product. We're seeing a very high repeat prescriber rate of over 50%. And that's only in 6 months. And I think that's really remarkable. I've been doing this for a long time. And to get to that level of penetration in just a few short months, really speaks to the impact XDEMVY has on patients and also the need in the marketplace that's there longer term.I think secondly, we've made great progress with payers. And I think as we continue to do that, that will also enhance the uptake as we have consistency and depth in our payer coverage. And then I think lastly, as I mentioned in the earlier question, the feedback here is really remarkable. I think that we're seeing a lot of additional support as doctors are on podium at these conferences sharing their before and afters, their impact it's having on patients. We actually had to update our website to let doctors upload the before and after pictures because they're so excited about the results they're seeing.So I think we remain very confident in the continued progress that we're going to make in the launch. With that said, we mentioned in the opening comments that 6,000 doctors are really remarkable number, getting to the next 6,000, it's going to take additional work, right? We've gotten through sort of the early adopters. So the next wave is going to take a little bit more work. The sales force is out there hitting the pavement. So I think we're going to continue to make that progress, but it's definitely going to take continued effort and consistency in those efforts to have that come to fruition.And I'll let Jeff speak to the other part of the question there.

[Jeffrey S. Farrow, executive]

Thanks, Aziz. Tolani. On the inventory, much like any manufacturer, there's always going to be a certain amount of inventory in the channel, be it in our case, at the pharmacies. We've contractually limited the amount of inventory that these pharmacies can hold to between 2 to 3 weeks. And I would just say that we are within that contractual period. If there is any sort of event that causes us to sort of go outside of that realm, we'll certainly highlight it because it could impact the following quarter. But at this point, we're within that range.

[Omotolani Uthman, analyst]

Perfect. Really helpful. And then a second question here. On the back of the Lyme disease [ and rosacea ] data, I believe you touched on it earlier, but if you could just reiterate the next steps and then how you're thinking about strategic options regarding partnering versus [Technical Difficulty] [ externally ]? And lastly, if you could share details again around the commercial opportunity.

[Seshadri Neervannan, executive]

Thanks, [ Andrea ], for the question. This is Sesha again. Yes, first, let me highlight again the data from the Carpo trial. It's a remarkable data to see. This is a very unique trial where we attach sterile ticks to healthy volunteers to look for tick-kill, which is our [indiscernible] mechanism of action for preventing Lyme disease with our drug. And then the data, we're really, really pleased with the data and to see that ticks kill within 24 hours before it has a chance to prevent Lyme disease is a very important component.Our plan is to continue to complete our analysis from this trial and take it to the FDA later this year and explore pathway for additional studies in this particular indication. And will -- it's too early to predict how that study -- those studies are going to go, but we'll have a -- once we have a chance to talk to them, we'll be happy to report that. And then I'll pass it on to Jeff for the partnering question that you have.

[Jeffrey S. Farrow, executive]

Sure. Thanks, Sesha. So as Sesha mentioned, we're going to be developing TPPs for both of these products, and we'll have some discussions with the agency. What's interesting about rosacea is the eye care professionals have been expressing quite a bit of interest in this program. They see rosacea in their patients and they want to ultimately treat that if they have an opportunity to. So we're going to explore that from a market research opportunity and see if there's an opportunity to potentially drop this into our sales reps bag and then potentially the derm indication could be partnered with maybe a derm company.On the Lyme program, we are really excited about this program. I mean the data is pretty profound. I think what we would like to do is also have some discussions with the agencies and then potentially talk with some partners about a pathway forward. It is a likely large clinical study ultimately as a pivotal study, and the call point will likely be sort of a general practitioner. So we would probably partner that one out, either following this program readout or potentially we might do a smaller Phase IIb data if we think there's a good return on investment there.

[Operator]

Our next question comes from Jason Gerberry with Bank of America.

[Jason Gerberry, analyst]

And congrats on all the progress here. So a couple for me. Just would love to get your comment on this sort of early adopter 6,000 prescribers, how that nets out between optometrists and ophthalmologists and early observations from the field in terms of whether you've got a right-sized field force to go after the next kind of leg of prescribers? Or if you feel there may be a need down the line to increase the size of the field force. And then ultimately, given the massive prevalence, is there a revenue threshold that you get to that DTC advertising campaign to either patients or providers is something that you can justify and make sense?

[Aziz Mottiwala, executive]

Jason, it's Aziz. Thanks for those questions. I think first off, when we think about the uptake, as we mentioned, we've been really pleased with how things are going. The sales force has done a remarkable job here. And I think the 85 territories we have was absolutely suitable for the 15,000 targets that we've had, right? And when you think about how we reached those doctors, the 6,000 is roughly 60% optometrists, 40% ophthalmologists, but we're seeing great uptick in utilization across both those segments. I think as we look at going forward, one thing we have seen is that there's a high degree of promotional sensitivity, which makes sense when we're making calls, doctors are more proactive about seeing things here.And as we think about converting the next wave of adopters, we certainly do think about things like sales force expansion, primarily focused on frequency. Can we see these doctors more often accelerate that change in behavior and create more deep adoption among these doctors, including having them think about additional patient types. So it is something we're contemplating. I think that's something if we continue the momentum we have, we could do sooner than later, but it's something that will be really rigorous and disciplined in how we approach.I think same thing applies here in terms of direct-to-consumer. I think it's less of a revenue threshold to your point. I think it's a little bit more around do we continue to see the level of physician adoption. Do we have enough doctors out there that would provide a "landing pad" for these patients if we drive them in. And then the second factor we really think about is continued progress and coverage and gross-to-net so that we're able to drive the highest value for those incremental patients we drive them through a campaign.And I would also say that we think about those things sequentially, right? You can think about a sales force expansion to really help broaden that adoption in parallel with coverage going. And then when you have a great base, both on prescribers as well as gross-to-net, then you'd layer in a more assertive direct-to-consumer campaign to educate and drive patients in. So a really good point in terms of how we think about those levers, and I think we're contemplating both of those in the not-too-distant future.

[Bobak Azamian, executive]

And Jason, I'll just add to that. This is Bobby. We're in the field every month as a team. I mean, I'm personally in the field every month as a team, and it's been really striking the waves of adoption that Aziz alluded to. We're certainly seeing some of those folks that are still being educated about DB and take a few visits from the sales force. But more and more, we're seeing doctors that have had great experience with XDEMVY and are thinking about other patients in their practice. We've even heard doctors thinking about family members and treating them. There's such a strong response to this medicine, and we're seeing really no shortage of uptake by the ECPs. So I just want to reiterate that. And as Aziz mentioned, this is very promotionally sensitive. So that would -- with the strategy that we've implemented commercially, that would be the rationale for potential expansion to really bring doctors along that journey more rapidly in the future.

[Jason Gerberry, analyst]

If I could squeeze a pipeline question in with Lyme, the update there. Just curious, now that you've got this initial data, do you think that there is a stronger argument now for a pathway that's different than the VALOR study that Pfizer is running, which is nearly a 10,000-patient study, given that you seem to have demonstrated being able to deliver something that's more on demand with maybe a faster clinical proof point. So just curious, I mean, obviously, you don't want to front run your FDA interactions here. But just your thoughts, it seems like probably a key swing point perhaps in how you can partner and secure value for the asset.

[Seshadri Neervannan, executive]

Thanks, Jason. Sesha again here. Yes, we're really pleased with the results that we saw, as I mentioned earlier. And the FDA hasn't -- we haven't taken this to the FDA, obviously, but our hope is that the FDA views this data favorably as well. And as far as the comparison to the Lyme disease -- the vaccine, the vaccine is a very different approach compared to what we have. As you know, we have a tick-kill mechanism, whereas vaccine targets the actual bacteria that causes the Lyme disease and is very specific for the strains of those bacteria as whereas we are not. And so the mechanism is inherently different, and the way we approach it is very different. It's early to speculate how the FDA will view our data. This is a brand-new mechanism. So this is something that they have to absorb and understand as well. And we do hope to negotiate a trial that can effectively assess the Lyme prevention through this mechanism, but it's too early to tell exactly how we will -- how that will go. And we'll certainly keep that in mind when we talk to them.

[Operator]

Our next question comes from Oren Livnat with H.C. Wainwright.

[Oren Livnat, analyst]

I was hoping if we could just talk a little bit more about gross-to-nets. After the 3Q call, so in November, you told us to be cautious going forward on gross-to-nets and/or volume, I guess, given some expected maybe unbudgeted pushback from payers given the early uptake. And clearly, you dramatically outperformed that, improving meaningfully quarter-over-quarter. So can you just help us just better understand, I guess, how is that happening? Is this just due to persistence of docs getting through prior auths and getting, I guess, essentially full coverage for some mix of this product balanced out with bridging volume? Or is there something different going on behind the scenes that we don't understand? And I have a follow-up.

[Aziz Mottiwala, executive]

Oren, thanks for the question. Yes, I think what you're seeing here is a real uptick in noncontracted coverage, and I think this is due to a couple of things, right? One is we've been working with the payers for quite some time, right? We've initiated our engagement with them well in advance of launch with disease education and obviously, post-approval really sharing the value proposition that XDEMVY brings. I think the other part of this is our really unique distribution network. That network really optimizes coverage for patients. We've obviously streamlined the process for PAs, appeals, what have you for the physician's office. And I think that has allowed us to maximize this opportunity.I think as Jeff mentioned in the opening comments, it is something that we want to keep an eye on in terms of headwinds because when you have noncontracted coverage, of course, those policies can change at any given time. And that's really what motivates us to continue to secure contracts. And we're making great progress there. We remain confident in our ability to get the vast majority of commercial lives covered by the end of this year in 2024. And you see the progress there with the win that we mentioned earlier. And then Part D would kick in, in early 2025.So we're continuing to make progress there. The way to think about that is that progress is to really solidify and secure where we are. And I think the other point is we've obviously made great strides and we have better-than-expected gross-to-net. But getting to that 50% threshold that Jeff mentioned earlier, that next step up is going to take a lot of work, and that's going to take those contracts coming into place. So that's where our focus is now is securing those contracts, securing the long-term value potential. But again, we're really pleased with starting from a great point and the progress we've made so far.

[Oren Livnat, analyst]

Okay. And I know it's really early, but you've talked about physicians having a lot of positive experience. And I guess, has that already translated to an understanding of durability of response? I mean, for the early -- I guess, earliest patients who might have been on drug for a while. Are we seeing them having, I guess, 6 months efficacy, so to speak, or something approaching that? Or are they already coming back for repeat treatments? And if there are refills or retreatment, how is that as far as being treated by insurance, is it any different than the first script? Is there more resistance to a refill, so to speak? And how is that being contemplated in your contracting efforts?

[Aziz Mottiwala, executive]

Yes. So it's still very early, right? We're just 6 months into the launch. So we wouldn't anticipate a lot of retreatments, right? I think what we've said historically is that we'd anticipate to really start to see that start kicking in, in 2025 when you've got a large bolus of patients that have been treated and then would be coming back in. If you really think about it, even if a patient started 6 months ago, they probably haven't come back in for their follow-on visit, right, or their annual exam. So I think that's something that we'd see later on down the line. With that said, we do see some exceptional cases where the doctors have had patients come in, had a great response, want to keep them on therapy. But I would say that's more the exception than the rule, and I think it's something we'd watch over time.In terms of how we view that from the payer perspective, that is something that we've contemplated into our planning and discussions with payers. But again, this is something that will really be a phenomenon we'd see a little bit more meaningfully in 2025. And of course, the contracts that we're working on now would account for that in the go-forward thinking. Congrats on the great early performance

[Operator]

Our next question comes from Balaji Prasad with Barclays.

[Balaji Prasad, analyst]

Congrats again. So it's great to see the pipeline progress. And what I seem to have heard from your comments till now is that most of the progress in the pipeline is dependent on FDA meetings, which are anticipated towards the end of the year. So can you kind of tie up these 3 data points that you've seen recently and take us through the next milestones that we need to await with each of this? Secondly, can you also comment around the business development environment you're seeing with both front and back of eye opportunities? What kind of -- how competitive are these discussions and how reasonable are the valuation expectations in this space? And what should we be expecting from you towards the year in terms of BD?

[Seshadri Neervannan, executive]

Thanks, Balaji. This is Sesha. I'll address the first part with respect to the pipeline. Yes, you're correct. I think all 3 of our programs, the next steps is really to complete the analysis from these studies where we've just issued top line and then look at the pathways and discuss the pathways with the agency. Beyond that, these are actually 3 very different programs. The pathways are slightly different. The indications are obviously different. So they all take a different flavor. But it's -- the theme is that we are treating the underlying cause, we're showing the mechanism of eradicating the underlying root cause of all of these diseases. And it's really going to be a discussion with the FDA based on these trials and how we want to contemplate taking it forward. It's going to be a discussion that it's too early for me to predict how it will go. But the next steps clearly is on a development pathway because these are somewhat different pathways for each of these programs.

[Bobak Azamian, executive]

Yes. And this is Bobby. On the BD question, thanks for asking that, Balaji. As we've mentioned, we see our expertise really in 2 areas at this point. One is creating new categories with really successful and focused development efforts. And the second is actually pioneering a new category commercially. And so when we look at BD, we really think about those 2 capabilities that we believe we have in strength. And so as you mentioned, we are looking actively at front of the eye opportunities. We're going to be diligent and patient there. We are really seeking things that could satisfy those 2 aims, creating new categories and new indications where we can serve patients that haven't really been served before in the front of the eye.And also, now we have a leading sales force, and they're calling on 15,000 ECPs. So we'd like to find additional medicines that we can serve those ECPs and patients with. Over time, we do expect to look beyond the front of the eye. And I think the back of the eye and even some adjacencies to areas of expertise would be areas over the course of years that we would expect to look at. And we see in the front of the eye a lot of promising assets out there, but we are going to be taking our time, and we're very mindful of our focus and our balance sheet at this point in time.

[Operator]

Our next question comes from Cory Jubinville with LifesSci Capital.

[Cory Jubinville, analyst]

Congrats on the early launch metrics. Just building off a question that was asked previously. Again, last quarter, you spoke to us about the potential payer headwinds as these noncontracted payers may start to implement more prior auths. In particular, for any payers who have included XDEMVY on their formularies, have you seen them step back on prior auth requirements and also now that the prior landscape in general has started to settle in a bit. What specifically are most payers requiring on these prior auth docs for reimbursement?

[Aziz Mottiwala, executive]

Yes, Cory, thanks for that question. I think the way to think about the payer coverage so far, right, because it's noncontracted, we've seen these PAs out there. And I think that's always good news in the sense that, that means there's a path to getting the product approved. And I think that's something that's really promising. It also provides incentive for contracting. If the payers are covering this, we're seeing that volume go through. I think in terms of any type of step back on a PA, I think that's something that we see as a headwind as volume increases. And the way to think about this is it's sort of a race, right? You want to get these contracts in place as your volume increases so that you don't have any of these hurdles to that extent.When we see these PAs right now, typically, they're pretty straightforward. They're limited to an eye care doctor, so the patient needs to be seeing an ophthalmologist or optometrist, which, of course, makes sense because they're diagnosed at the slit lamp. And then secondly, they're asking for a confirmation of diagnosis. This is typically the other slit lamp exam. So those are the 2 typical things. Of course, if you look out there, you're going to see some exceptions where it might be a little bit more cumbersome. But again, that is our motivation for contracting is to simplify these PAs, keep them consistent and, of course, avoid any step backs once the contracts are in place.

[Cory Jubinville, analyst]

That's helpful. And can you also walk us through your bridging program. In your experience to date, do providers and patients have a good sense of how to access that program? And if you were to estimate given the strong gross-to-nets we're seeing so far, approximately what percent of scripts have gone through that bridge program versus being fully covered by payers.

[Aziz Mottiwala, executive]

Sure thing. Yes. So I think the way to think about the bridging program here is a lot of that is managed on the back end through our pharmacy partners and our network. And essentially, what happens is we appeal the insurance. So we apply for coverage there. If it's covered, it goes through. If it's rejected, we appeal. And if it's still not covered at that point, if the patient is truly uninsured, essentially, their insurance is not covering the drug, then we'll bridge it. So there's a step-through process that we manage on the back end. I think that's really helped us capitalize on the coverage that we have available today.In terms of what percentage is bridged, we're obviously not going to that level of detail today, but I can tell you, even still, that is still the #1 channel, right? So you think about commercial, Medicare and then bring bridging. Bridging is still the #1 channel. And again, that's our motivation for contracting, right? And so that as we reach our steady-state gross-to-net of approximately 50% as we get that commercial coverage at the end of this year, Part D next year, then we can start to wind that bridging down next year and have it be the smallest component and have a very minimal volume going through that going forward.

[Cory Jubinville, analyst]

Fantastic. Congrats again.

[Operator]

Our next question comes from Eddie Hickman with Guggenheim Securities.

[Eddie Hickman, analyst]

Congrats on the strong launch. Just a few questions for me. As you reach deeper into those 15,000 target docs, how much of the hesitation is related to lack of payer coverage, in particular, Medicare? And how much is just familiarity, education that you spoke about? Would you expect a significant inflection on getting Medicare coverage given the DB population skews towards older patients?

[Aziz Mottiwala, executive]

Yes, I think it's a combination, right? I think any time you have physicians that are sort of sitting on the fence, I think, number one, it's a new behavior, right? And that's why we continue to put a lot of effort in market education, continuing these disease state efforts, having our sales force out there. It is a new behavior to have the physicians start looking for the disease than trying the product. And what we've seen is that there's a really clear threshold in which we're shooting for adoption, and that's about 5 to 10 prescriptions. And I think there's 2 things that happen. One is the doctor begins a routine of looking for this. They see the results in the patients.And the second to your point, Eddie, is the doctor and the staff become more comfortable with the reimbursement process. So it takes a few shots on goal for them to build that muscle, so to speak. And I think in terms of when you get Part D, I wouldn't expect a huge inflection point. I think the way to think about coverage is we're going to build that steadily over time, and I think that's going to facilitate ramp up steadily over time. So I don't imagine like a massive step up, what I imagine is continued progress. And think about this as the coverage comes in, you're also building the utilization among the doctors where they're starting to think about more patient types. They're building that familiarity with the diagnosis. And of course, the practice is building the familiarity with the reimbursement process.So I think those things will move in concert, and I think you'll see a steady ramp over time, and that will be on the back of both physician adoption and coverage improvement.

[Eddie Hickman, analyst]

Got it. And then what do you think you would need to see before you would be comfortable giving formal guidance either on a volume or a revenue basis going forward?

[Jeffrey S. Farrow, executive]

Yes, Eddie, it's Jeff. I would say, we'd like to get some more quarters under our belt, see how the payer coverage is proceeding and then get a sense of some of the dynamics as it relates to scripts, right? Is there some seasonality that we need to be aware of during the summertime, for example, or some other things? So it's probably sometime in 12 months down the road, we could probably start providing revenue guidance.

[Operator]

Our next question comes from Tim Lugo with William Blair.

[Tim Lugo, analyst]

Congratulations on the great launch so far. With the new payer contracts being signed and kicking in, in Q1, do you expect the script ramp due to these contracts at all? And will these contracts impact their GTN at all in Q1? Maybe I missed it, but if you provide any broad economics on these contracts or any sort of at least thoughts on how these contracts will impact GTN?

[Aziz Mottiwala, executive]

Yes. I'll start there and maybe Jeff can chime in on the gross-to-net impacts here. I think that there's a lot of great news here in terms of building that coverage, getting such a big commercial contract and making that progress towards building the commercial coverage this year. With that said, we do anticipate that should drive incremental utilization. But some of that is also offset by some of the headwinds we mentioned earlier, right? Q1 is always a difficult quarter. You have planned resets. You have a lot of issues in terms of [ weather ], when doctors aren't in the office, they're unable to diagnose and treat these patients. And obviously, this is a product that's dependent on getting those new diagnoses in, right? So I think that you're seeing a sort of an offsetting effort here where the contracts are going to drive incremental volume and utilization, but we are obviously in the first quarter seeing some of those headwinds come to fruition with doctors being out of the practice for a multitude of reasons and then the insurance impact that you see there.As we progress the year, obviously, we should see continued improvements both in volumes and gross-to-nets, but I'll let Jeff speak more specifically to that.

[Jeffrey S. Farrow, executive]

Yes, well said, Aziz, not much more to add. I think, to your point, we do expect to see some improvement on the gross-to-net, getting some of this coverage, but that will likely be offset by some of the headwinds that we talked about, really the plans resetting the Medicare coverage gap. So we've guided to flat to slightly higher gross to net discount just given some of those dynamics. But as Aziz said, as time goes on, we still expect to have the broad commercial coverage by the end of this year with Medicare coming in, in 2025 and ultimately ending at a 50% gross-to-net discount steady-state.

[Operator]

I'm showing no further questions at this time. I will now turn the call back to Bobby Azamian for closing remarks.

[Bobak Azamian, executive]

Just wanted to thank everybody for joining us today. We're very proud of this strong first quarter, and we look forward to a steady build from here. So we really look forward to keeping everybody updated on our progress as we continue to pioneer new categories in eye care and beyond. Have a great day.

[Operator]

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.