Tarsus Pharmaceuticals, Inc. (TARS) FY 2023 MD&A

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our “Selected Financial Data” and our financial statements and the related notes to those statements included elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to, those discussed under the section titled “Risk Factors” and elsewhere in this Annual Report on 10-K. See the section titled “Special Note Regarding Forward-Looking Statements” elsewhere in this Annual Report on Form 10-K.

Overview

Our Business

We are a commercial stage biopharmaceutical company focused on the development and commercialization of therapeutics, starting with eye care. Our lead product, XDEMVY® was approved by the U.S. Food and Drug Administration ("FDA") on July 24, 2023 for the treatment of blepharitis caused by the infestation of Demodex mites, which is referred to as Demodex blepharitis. Blepharitis (“Blephar” is a reference to eyelid and “itis” is a reference to inflammation) is an ophthalmic lid margin disease characterized by inflammation of the eyelid margin, redness and ocular irritation, including a specific type of eyelash dandruff called collarettes, which are pathognomonic for Demodex blepharitis. Poorly controlled and progressive blepharitis can lead to corneal damage over time and, in extreme cases, blindness. There may be as many as approximately 25 million people in the U.S. who suffer from Demodex blepharitis. XDEMVY is the first and only therapeutic approved by the FDA and we believe is the definitive standard of care for the treatment of Demodex blepharitis.

XDEMVY targets and eradicates the root cause of Demodex blepharitis – Demodex mite infestation. The active pharmaceutical ingredient ("API") of XDEMVY, lotilaner, paralyzes and eradicates mites and other parasites through the inhibition of parasite-specific gamma-aminobutyric acid-gated chloride ("GABA-Cl") channels.

To date, we have completed seven clinical trials that include a Phase 3 Saturn-2 trial, a Phase 2b/3 Saturn-1 trial, four Phase 2 trials, and a Phase 1 trial for XDEMVY in Demodex blepharitis, all of which met their primary, secondary and/or certain exploratory endpoints, with the drug well tolerated throughout each trial. We have also completed, and/or have ongoing clinical trials for TP-03 for the potential treatment of MGD, TP-04 for the potential treatment of rosacea and TP-05 for potential Lyme disease prophylaxis.

We intend to further advance our pipeline with the lotilaner API to address several diseases in human medicine, including eye care, dermatology, and infectious disease prevention. We are investigating the development of our product candidates to address targeted diseases with high unmet medical needs, which currently include TP-03 for the potential treatment of meibomian gland disease ("MGD"), TP-04, a novel gel formulation of lotilaner for the potential treatment of rosacea, and TP-05, a novel investigative oral formulation of lotilaner, for potential Lyme disease prophylaxis and community malaria reduction.

Recent Business and Clinical Highlights

XDEMVY: XDEMVY was approved by the FDA in July 2023, as the first and only approved therapeutic for Demodex blepharitis, a highly prevalent eyelid disease that impacts approximately 25 million eye care patients in the U.S. XDEMVY targets the root cause of Demodex blepharitis and in pivotal trials demonstrated significant improvement in eyelids (reduction of collarettes, the pathognomonic sign of the disease, to no more than two collarettes per upper lid), mite eradication (mite density of zero mites per lash) and erythema cure (grade zero).

•Generated strong prescription and sales growth of XDEMVY in 2023 enabled by the execution of key commercial initiatives, including the deployment of our sales force targeting 15,000 eye care providers ("ECPs"), representing more than 80% of all eye care prescriptions and high-impact education leading to ECP adoption. We recognized $14.7 million in product sales, net of XEMVY during the year ended December 31, 2023.

◦Delivered approximately 17,400 bottles of XDEMVY to patients

◦Approximately 6,000 ECPs have started patients on XDEMVY with more than 50% of ECPs prescribing XDEMVY to multiple patients as of February 23, 2024

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•We are actively engaged in contracting discussions with all the key commercial and Medicare accounts and we are on track to potentially secure broad commercial coverage sequentially throughout 2024 and broad Medicare coverage in 2025

•During 2023, six manuscripts were published in peer-reviewed journals including:

◦Saturn-1, one year extension data highlighting the safety and durable response of XDEMVY

◦Two independent meta-analyses validating efficacy, safety and impact of our study results

•We presented additional Saturn-2 pivotal data at the American Academy of Optometry and the American Academy of Ophthalmology conferences further demonstrating XDEMVY as the standard of care for Demodex blepharitis

•The American Academy of Ophthalmology added XDEMVY as the first and only FDA-approved therapeutic for Demodex blepharitis in their Preferred Practice Patterns (PPP) guidelines

TP-03 Meibomian Gland Disease, Ersa Trial: In August 2022, we announced the enrollment of our first patient in the Company's Phase 2a Ersa clinical trial studying TP-03 for the treatment of MGD. On December 11, 2023, we announced positive topline results of the Ersa Phase 2a clinical trial evaluating TP-03 (lotilaner ophthalmic solution, 0.25%) administered twice daily or three times a day for 12 weeks for the treatment of MGD in patients with Demodex mites. TP-03 demonstrated statistically significant and clinically meaningful improvements compared to baseline in two objective measures of the disease – the presence and quality of liquid secretion as measured by the Meibomian Gland Secretion Score ("MGSS") and the number of glands secreting normal (clear) liquid and was well tolerated. We plan to discuss and determine the potential regulatory path with the FDA.

TP-04 Rosacea, Galatea Trial: In March 2023, we initiated the Galatea trial, a Phase 2a trial evaluating TP-04, a novel gel formulation of lotilaner, for the treatment of rosacea. On February 27, 2024, we announced positive topline results from the Galatea trial evaluating TP-04 for the treatment of rosacea which demonstrated statistically significant improvements (p0.05) in inflammatory lesions and Investigator's Global Assessment (IGA) score (change in baseline and success rate) were observed compared to vehicle at week 12. TP-04 was generally well tolerated. We plan to discuss and determine the potential regulatory path with the FDA.

TP-05 Lyme Disease, Callisto and Carpo Trials: In December 2022, we announced positive topline results from the completed Phase 1 Callisto trial and enrollment of the first patient in the Phase 2a Carpo trial. The Carpo trial is designed to evaluate TP-05, a novel investigative oral, non-vaccine pharmacological prophylactic for the potential prevention of Lyme disease in humans. The Carpo trial evaluated the efficacy of TP-05 in killing lab grown, non-disease carrying ticks after they have attached to the skin of healthy volunteers, as well as confirm the safety, tolerability, and blood concentration of TP-05. On February 22, 2024, we announced positive topline results from the Carpo trial, which demonstrated statistical significance in the mortality of ticks compared to vehicle (p.001), regardless of treatment arm, and was well tolerated. We plan to discuss and determine the potential regulatory path with the FDA.

We believe TP-05 is currently the only non-vaccine, drug-based prophylaxis in development that targets ticks, and potentially prevents Lyme disease transmission. It is designed to rapidly and durably provide systemic blood levels of lotilaner potentially sufficient to kill infected ticks attached to the human body before they can transmit the Borrelia bacteria that causes Lyme disease.

TP-03 China Territory Out-License: In March 2021, we executed an out-license agreement (the "China Out-License") with LianBio Ophthalmology Limited ("LianBio"), granting exclusive commercial rights to TP-03 for the treatment of Demodex blepharitis and MGD within The People’s Republic of China, Macau, Hong Kong, and Taiwan (the "China Territory").

In February 2023, a specified milestone was triggered based upon the signing of an agreement for which the Company has no ongoing obligations, resulting in $2.5 million recognized as license fees and collaboration revenue in the Statements of Operations for the year ended December 31, 2023. As of the date of this filing, we have received aggregate contractual cash proceeds from LianBio of $82.5 million, representing initial consideration of $15.0 million and $67.5 million for the achievement of specified milestone events. We also received equity in LianBio as part of this China Out-License, a portion of which remains subject to a China-based regulatory vesting provision.

On February 13, 2024, LianBio announced its completion of a comprehensive strategic review and determined to initiate the wind down of its operations, including the sale of remaining pipeline assets, the delisting of its American Depositary

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Shares, deregistration under Section 12(b) of the Exchange Act, and workforce reductions. As of the date of this filing, it is uncertain if and when we will receive any royalties or future milestone consideration under the China Out-License, including but not limited to the milestone achievement of an additional drug supply agreement execution.

Corporate and Financial Overview

We were incorporated as a Delaware corporation in November 2016, and our headquarters are located in Irvine, California. Since our inception, we have devoted substantially all of our resources to organizing and staffing our company, acquiring intellectual property, clinical development of our product candidates, building our research and development capabilities, raising capital, and enhancing our corporate infrastructure.

To date we have financed our operations through private placements of preferred stock, convertible promissory notes, net proceeds from issuance of common stock in our Initial Public Offering ("IPO"), our subsequent follow-on public offerings in May 2022 (the "May 2022 Public Offering") and August 2023 (the "August 2023 Public Offering", collectively the "Follow-On Public Offerings"), and our sales agreement prospectus (the "2023 ATM Prospectus"), as well as proceeds from product sales, net, our China Out-License, and drawdowns from the Credit Facility.

We have incurred significant net operating losses in every year since our inception and expect to continue to incur significant operating expenses as we commercialize XDEMVY for Demodex blepharitis, and, as we advance our other product candidates through clinical trials, regulatory submissions, and potential commercialization. Our net loss was $135.9 million and $62.1 million for the years ended December 31, 2023 and 2022, respectively. Our net losses may fluctuate significantly from quarter to quarter and year to year and could be substantial. We anticipate that our operating expenses will increase significantly as we:

•commercialize XDEMVY and our other products for which we obtain regulatory approvals;

•maintain regulatory approval for XDEMVY and seek regulatory approval for our other product candidates that successfully complete clinical development, if any;

•advance the clinical development of TP-03 for the potential treatment of MGD, TP-04 for the potential treatment of rosacea and TP-05 for the potential Lyme disease prophylaxis;

•engage with contract manufacturers to ensure a sufficient supply chain capacity to provide commercial quantities of XDEMVY and any other products for which we may obtain marketing approval;

•maintain, expand and protect our intellectual property portfolio;

•hire additional staff, including clinical, scientific, technical, regulatory, marketing, operations, financial, and other support personnel, to execute our business plan; and

•add information systems and personnel to support our product development and commercialization efforts, and to enable us to operate as a public company.

We began generating product sales during the year ended December 31, 2023 following the FDA approval of XDEMVY in July 2023 and our subsequent commercial launch in August 2023. Our reported revenue within license fees and collaboration revenue is from our China Out-License and clinical supply agreement; we expect to report additional revenue under this caption in future periods.

Until such time as we can generate significant revenue from product sales and achieve profitability, if ever, we expect to finance our operations through public equity or debt financings, or collaborations, strategic alliances, or licensing arrangements with third parties. Adequate funding may not be available to us when needed on acceptable terms, or at all. If we raise additional funds through collaborations, strategic alliances, or licensing arrangements with third parties, we may have to relinquish valuable rights to our intellectual property, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional capital or enter into such agreements as and when needed, we could be forced to significantly delay, scale back, or discontinue our product development and/or commercialization plans, which would negatively and adversely affect our financial condition.

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Because of the numerous risks and uncertainties associated with drug product development and commercialization, we are unable to accurately predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate significant revenue from product sales, net we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels.

As of December 31, 2023, our aggregate cash, cash equivalents and marketable securities was $227.4 million – see the section below titled "Management's Discussion and Analysis of Financial Condition and Results of operations —

Liquidity and Capital Resources."

Impact of the Macroeconomic Environment

Recently, the economy has experienced downward pressure, and together with high rates of inflation and energy supply issues experienced in certain regions, war and geopolitical conflicts, have led to regional and/or global macroeconomic challenges, the effects of which may be of an extended duration.

In addition, we may be exposed to credit risk on deposits at financial institutions to the extent our account balances exceed the amount insured by the Federal Deposit Insurance Corporation (“FDIC”). We maintain cash held in deposit at financial institutions in the U.S., including SVB, a division of First Citizens Bank. While these deposits are insured by the FDIC in an amount up to $250,000 for any depositor, to the extent we hold cash deposits in amounts that exceed the FDIC insurance limitation, we may incur a loss in the event of a failure of any of the financial institutions where we maintain deposits. We invest our excess cash in highly liquid investments, including money market fund accounts, that are readily convertible into cash without penalty. We believe the Company is not exposed to significant credit risk due to the financial position of the depository institution and the types of accounts we hold, but we will continue to monitor regularly and adjust, if needed, to mitigate risk, including any ongoing or new events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions.

See the section titled Risk Factors for further discussion of the potential adverse impact of unfavorable global and geopolitical economic conditions on our business, results of operations and financial condition.

Components of our Results of Operations

Product Sales, Net

We recognize product sales, net of XDEMVY when a customer obtains control of promised goods or services, which occurs at a point in time, typically upon delivery of the Company's product to the customer. We record the amount of revenue that reflects the consideration we expect to receive in exchange for those goods or services. We apply the following five-step model in order to determine this amount: (i) identification of the promised goods in the contract; (ii) determination of whether the promised goods are performance obligations, including whether they are capable of being distinct; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue as each performance obligation is satisfied.

We sell XDEMVY to customers in the U.S., which became available for commercial sale during the third quarter of 2023. We sell XDEMVY to a limited number of specialty pharmacies and distributors (i.e., its customers) who in turn sell it directly to clinics, hospitals, pharmacies and federal healthcare programs. Revenue from product sales is primarily recognized upon physical delivery of the product (when the customer obtains control of the product), in return for agreed-upon consideration. Shipping and handling activities are considered to be fulfillment activities rather than a separate performance obligation and are recorded within selling, general and administrative expenses in the Statements of Operations and Comprehensive Loss.

Revenues from product sales are recorded at the net sales price, or the transaction price, which may include fixed or variable consideration for (i) invoice discounts for prompt payment and distribution service fees, (ii) government and private payer rebates, chargebacks, discounts and fees, (iii) product returns and (iv) costs of co-pay assistance programs for patients, as well as other incentives. Estimates of variable consideration are calculated based on the actual product sales each reporting period and the nature of the variable consideration related to those sales. Where appropriate, we utilize the expected value method to determine the appropriate amount for estimates of variable consideration based on factors such as the current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. The amount of variable consideration that is included in the transaction price may be constrained and is included in product sales, net only to the extent that it is probable that a significant reversal in the amount of the cumulative

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revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. These estimates reflect our best estimate of the amount of consideration to which we expect to be entitled based on the terms of the contract. Actual amounts of consideration ultimately received may differ materially from estimates. If actual results in the future vary from estimates, we will adjust these estimates, which would affect product sales, net and earnings in the period such variances are adjusted. We categorize product sales deduction estimates as follows:

Distribution Service Fees: We engage with wholesalers and specialty pharmacies to distribute our products to end customers. We pay the wholesalers and certain specialty pharmacies a fee for services such as: inventory management, chargeback administration, and service level commitments. We estimate the amount of distribution services fees to be paid to the customers and adjust the transaction price with the amount of such estimate at the time of sale to the customer. An accrued liability is recorded for unpaid distribution service fees.

Prompt Pay Discounts: We provide our customers with a percentage discount on their invoice if the customers pay within the agreed upon timeframe. We expect that our customers will earn prompt pay discounts. We estimate the probability of customers paying promptly based on the percentage of discount outlined in the purchase agreement between the two parties, and deducts the full amount of these discounts from gross product sales and accounts receivable at the time revenue is recognized.

Product Returns: Our customers are contractually permitted to return the product within the contractual allowable time before and after the applicable expiration date. In the initial sales period, we estimate a provision for returns based on industry data and adjust the transaction price at the time of the product sale to the customer. Once sufficient history has been collected for product returns, we will utilize that history to inform its returns estimate. Once the product is returned, it is destroyed since it cannot be resold.

Chargebacks: A chargeback is the difference between our invoice price to the wholesaler and the wholesaler’s customer's contract price. The wholesaler tracks these sales and charges us back for the difference between the negotiated prices paid between the wholesaler's customers and wholesaler's acquisition cost. We estimate the percentage of goods sold that are eligible for chargeback and adjust the transaction price and accounts receivable at the time of sale of the product to the customer.

Co-payment Assistance: Patients who meet certain eligibility requirements may receive co-payment assistance. We record contra-revenue for co-payment assistance based on actual program participation and estimates of program redemption using data provided by third-party administrators. An accrued liability is recorded on unredeemed co-payment assistance related to products for which control has been transferred to the customer.

Rebates and Discounts: We accrue rebates for contractually agreed-upon discounts with commercial insurance companies and mandated discounts under government programs such as the Medicaid Drug Rebate Program, Medicare Part D Prescription Drug Program, and other government health care programs in the U.S. We estimate for expected utilization of commercial insurance rebates based on data received from our customers. The estimates for rebates under government programs are based on statutory discount rates and expected utilization as well as historical data we have accumulated since product launch. Our rebate calculations may require estimates, including estimates of customer mix, to determine which product sales will be subject to rebates and the amount of such rebates. We update our estimates and assumptions on a quarterly basis and record any necessary adjustments to revenue in the period identified. Rebates are generally invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for known prior quarters’ unpaid rebates. If actual rebates vary from estimates, we may need to adjust accruals, which would affect product sales, net in the period of adjustment. An accrued liability is recorded for unpaid rebates related to product for which control has transferred to the customer.

License Fees and Collaboration Revenue

License fees and collaboration revenue is primarily attributable to contractual milestones under the China Out-License. These amounts represent the contractual milestones achieved or allocated under the China Out-License that had been fully or partially completed by period end. These allocated amounts represented the satisfaction of the transfer of license rights to LianBio and the completion of related performance obligations. License fees and collaboration revenue also includes the satisfaction of performance obligations under an existing clinical supply agreement.

We will recognize additional license fees and collaboration revenue under the China Out-License to the extent other events occur, specifically related to (i) milestone achievement of an additional drug supply agreement execution, (ii) milestone achievement of certain regulatory events in the China Territory, and (iii) royalties and milestones from our licensee's

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product sales of TP-03 in the China Territory. As of the date of this filing, it is uncertain if and when we will receive any royalties or future milestone consideration under the China Out-License, including but not limited to the milestone achievement of an additional drug supply agreement execution.

Cost of Sales

Cost of sales consists of direct and indirect costs related to the manufacturing and distribution of XDEMVY, including raw materials, third-party manufacturing costs, packaging services, and freight-in, as well as third-party royalties payable on our product sales, net and amortization of capitalized intangible assets associated with XDEMVY. Cost of sales may also include period costs related to certain inventory warehouse and distribution operations and inventory adjustment charges. Prior to FDA approval of XDEMVY, manufacturing and other inventory costs were recorded to research and development expenses. Therefore, cost of sales of XDEMVY will reflect a lower average per unit cost until the related inventory is sold, which we expect to sell during 2024.

Cost of License Fees and Collaboration Revenue

Cost of license fees and collaboration revenue includes the proportion of expense recognized under the terms of the China Out-License payable under the terms of our in-license agreement for lotilaner.

Research and Development Expenses

Research and development expenses consist of expenses incurred in connection with the development of our product candidates, including:

•fees paid to third parties to conduct certain research and development activities on our behalf, including under agreements with CROs;

•payments under licensing agreements, such as our upfront in-license fee for lotilaner;

•consulting costs and certain allocated payroll, employee benefit and other employee-related costs (including stock-based compensation, salaries, payroll taxes) for personnel engaged in research and development functions;

•costs related to compliance with clinical regulatory requirements;

•costs of procuring drug products for use in our preclinical studies and clinical trials; and

•facilities expenses, which include direct and allocated expenses for rent of our laboratory.

We expense both internal and external research and development expenses as incurred or as certain upfront or milestone payments become contractually due to licensors upon achievement of clinical or regulatory events. We recognize external research and development costs based on an evaluation of the progress-to-completion of (i) specific tasks performed or deliverables provided by CROs and CMOs and (ii) patient visits for dosing or other follow-up. To estimate period expense for recognition, we use information provided to us by our service providers and we then apply the corresponding fee schedule.

We track our external research and development expenses on a program-by-program basis, such as fees paid to CROs, CMOs, and research laboratories in connection with our pre-clinical development, process development, manufacturing and clinical development activities. However, we do not currently track employee time on a program-by-program basis. Prior to commercialization of XDEMVY, for the years ended December 31, 2023 and 2022, the vast majority of our external and internal research and development expenses were attributable to the development of XDEMVY.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist of personnel-related costs including salaries, benefits, stock-based compensation and other personnel-related expenses for our executive, finance, sales and marketing, and other administrative functions. Other selling, general and administrative expenses include sales and marketing costs to support our commercial launch, consulting fees, legal services, rent and other facilities costs, patient assistance donations, and other general operating expenses, not otherwise classified as research and development expenses.

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We expect that our selling, general and administrative expenses will increase substantially in the future as a result of expanding our operations, including hiring personnel, continued commercialization of XDEMVY, preparing for potential commercialization of our other product candidates, and additional facility occupancy costs, as well as various incremental costs associated with being a public company, including: increased legal and accounting fees, regulatory costs associated with maintaining compliance with the rules of the Nasdaq Stock Market and SEC regulations, investor relations activities, directors and officers liability insurance premiums, and other accompanying compliance and governance costs.

Other Income, Net

Other income, net primarily consists of (i) interest income earned on our cash, cash equivalents, and marketable securities, (ii) interest expense on the Credit Facility, and (iii) the change in estimated fair value of the LianBio equity warrants and LianBio common stock we received as part of the China Out-License.

Benefit from Income Taxes

Since our inception, we have not recorded any U.S. federal or state income tax benefits for the net operating losses we have incurred in each year, or for our earned research and development tax credits, due to our uncertainty of realizing a benefit from either. As a result of the Tax Cuts and Jobs Act of 2017, net operating losses (for U.S. income tax purposes) generated prior to December 31, 2017 can be carried forward for up to 20 years, while net operating losses generated after December 31, 2017 can be carried forward indefinitely, but are limited to 80% utilization against taxable income. Our California net operating losses will begin to expire in 2037. The federal research and development tax credits begin to expire in 2040 unless previously utilized, and the California credit carryforwards are available indefinitely.

Results of Operations

Comparison of the Years Ended December 31, 2023 and 2022

The following table summarizes our results of operations for the periods indicated:

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Product Sales, Net

During the year ended December 31, 2023, in conjunction with the launch of XDEMVY, we recognized revenue of $14.7 million from product sales, net of rebates, chargebacks, discounts, and other adjustments driven by approximately 17,400 prescriptions of XDEMVY to patients. During the year ended December 31, 2022, there were no product sales, net recognized.

License Fees and Collaboration Revenue

For the years ended December 31, 2023 and 2022, we recognized $2.5 million and $25.8 million, respectively, of license fees and collaboration revenue primarily attributable to contractual milestones under the China Out-License. These amounts represent the contractual milestones achieved or allocated under the China Out-License that have been fully or partially completed by the period ends. These allocated amounts represented the satisfaction of the transfer of license rights to LianBio and the completion of related performance obligations.

For the year ended December 31, 2023, we recognized $0.2 million of other license fees and collaboration revenue from the satisfaction of performance obligations under an existing clinical supply agreement. No revenue was recognized under such arrangement for the year ended December 31, 2022.

We will recognize additional license fees and collaboration revenue under the China Out-License to the extent other events occur, specifically related to (i) milestone achievement of an additional drug supply agreement execution, (ii) milestone achievement of regulatory events in the China Territory, and (iii) royalties and milestones from our licensee's product sales of TP-03 in the China Territory. As of the date of this filing, it is uncertain if and when we will receive any future royalties or milestone consideration under the China Out-License, including but not limited to the milestone achievement of an additional drug supply agreement execution.

Cost of Sales

For the year ended December 31, 2023, we recognized $1.6 million in cost of sales for XDEMVY. Cost of sales consists of direct and indirect costs related to the manufacturing and distribution of XDEMVY, including raw materials, third-party manufacturing costs, packaging services, and freight-in, as well as third-party royalties payable on our product sales, net and amortization of capitalized intangible assets associated with XDEMVY. During the year ended December 31, 2022, there were no cost of sales recognized.

Cost of License Fees and Collaboration Revenue

For the year ended December 31, 2023, we did not recognize any cost of license fees and collaboration revenue. For the year ended December 31, 2022, cost of license fees and collaboration revenue was $1.0 million. This amount relates to our contractual payment obligations to Elanco, in proportion to our recognized license fee and collaboration revenue under the China Out-License arrangement in the same period.

Research and Development Expenses

Research and development expenses increased by $7.7 million for the year ended December 31, 2023, as compared to the year ended December 31, 2022. The increase was primarily due to (i) $10.6 million of increased payroll and personnel-

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related costs (including increased stock-based compensation expense of $2.1 million), for 25 employee additions year-over-year to drive our product development initiatives, (ii) $0.6 million of increased other indirect expenses, (iii) $1.0 million of milestone expense related to our in-license agreement with Elanco, (iv) $2.1 million of increased TP-05 program expenses primarily related to the Carpo trial initiated in December 2022 and the new food effect study initiated during the first quarter of 2023, and (v) $0.6 million of increased spend related to other early-stage programs. These increases were partially offset by decreases in direct external expenses for the TP-03 and TP-04 programs of $6.1 million and $1.1 million, respectively. The decrease in our TP-03 program expenses was primarily due to significantly reduced clinical trial costs of $6.9 million given the completion of our Saturn-2 trial in the first half of 2022 and $1.0 million of reduced preclinical study expenses, partially offset by $0.9 million of increased API manufacturing and $0.6 million of increased clinical trial expenses related to the Ersa trial. The decrease in our TP-04 program expenses was primarily due to $1.4 million of decreased preclinical expenses and $0.9 million of decreased clinical trial expenses from the Phase 1 Galatea trial, partially offset by $1.4 million of increased clinical trial expenses related to the Phase 2a Galatea trial that began in March 2023.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $63.8 million for the year ended December 31, 2023, as compared to the year ended December 31, 2022. The increase was primarily due to (i) $27.7 million of increased payroll and personnel-related costs (including increased stock-based compensation expense of $4.1 million) for 157 employee additions year-over-year to support our business growth and commercial leadership hires for our recent commercial launch of XDEMVY, (ii) $0.9 million of severance costs related to our former Chief Financial Officer's separation from the Company in June 2023, (iii) $22.3 million of increased commercial costs as we continued our commercial expansion and prepared for the recent commercial launch of XDEMVY, (iv) $6.2 million of increased IT applications, legal and other professional expenses to support the continued growth and expansion of our corporate infrastructure and (v) $6.5 million of increased facilities and office and administrative expenses. Sales and marketing headcount and associated vendor spend increased significantly during 2023 due to our commercial launch and related activities for XDEMVY.

Other Income, Net

Other income, net increased by $6.6 million for the year ended December 31, 2023. The increase is primarily due to (i) $6.8 million of increased interest income earned on our cash, cash equivalents and marketable securities, (ii) $0.6 million change in estimated fair value of the LianBio equity warrants we received as part of our China Out-License in March 2021, and (iii) $0.5 million change in fair value of the LianBio common stock. These increases to other income were partially offset by increased interest expense of $1.1 million on the Credit Facility.

Benefit from Income Taxes

We maintain a valuation allowance against our net deferred tax assets as of December 31, 2023 and 2022 due to the uncertainty that such assets will be realized. We evaluate the recoverability of our deferred tax assets on at least an annual basis.

Liquidity and Capital Resources

Sources of Liquidity

Overview

Since our inception, we have financed our operations substantially through private placements of preferred stock, net proceeds from the issuance of common stock through our IPO, Follow-on Public Offerings, and the 2023 ATM Prospectus, as well as proceeds from product sales, net, the China Out-License, and drawdowns from the Credit Facility. As of December 31, 2023, we had cash, cash equivalents and marketable securities of $227.4 million.

IPO, Follow-On Public Offerings and ATM Prospectus

In connection with our October 2020 IPO, we sold 6,325,000 shares of our common stock (inclusive of the full exercise of the underwriters' option to purchase 825,000 shares of common stock). After deducting underwriting discounts, commissions and other related expenses, our IPO proceeds were $91.7 million.

In May 2022, we completed the May 2022 Public Offering in which 5,600,000 shares of our common stock were sold at a public offering price of $13.50 per share. We also granted the underwriters a 30-day option to purchase up to 840,000 additional shares of common stock at the public offering price, less underwriting discounts and commissions. In June 2022, the

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underwriters partially exercised their option to purchase an additional 289,832 shares of common stock at the offering price of $13.50 per share, before underwriting discounts and commissions. After giving effect to the exercise of the underwriters’ option, we sold 5,889,832 shares for total net proceeds received of $74.2 million, after underwriting discounts, commissions and other offering-related expenses.

In August 2023, we completed the August 2023 Public Offering in which 5,714,285 shares of our common stock were sold at a public offering price of $17.50 per share for aggregate net proceeds received of approximately $93.5 million, after deducting underwriting discounts, commissions, and other offering-related expenses. We also granted the underwriters a 30-day option to purchase up to 857,142 additional shares of our common stock at the public offering price. In September 2023, the underwriters partially exercised this option and the sale of an additional 355,164 shares of common stock at the public offering price of $17.50 per share. After giving effect to the exercise of the underwriters' option, we sold a total of 6,069,449 shares and received aggregate net proceeds of $99.3 million, after deducting underwriting discounts, commissions, and other offering-related expenses.

In December 2023, we sold 1,000,000 shares of our common stock for $20.00 per share under a sales agreement prospectus filed in November 2023, pursuant to the 2023 Shelf Registration Statement (defined below) covering the sale of up to $100.0 million of our common stock pursuant to an Open Market Sale AgreementTM (the "2023 ATM Prospectus") with Jefferies LLC ("Jefferies"). This resulted in net proceeds of $19.2 million, after deducting broker commissions and offering related expenses.

China Out-License

As of the date of this filing, we have received $82.5 million of total proceeds in connection with our China Out-License. In February 2024, LianBio announced its plan to wind down its operations. As of the date of this filing, it is uncertain if and when we will receive any royalties or future milestone consideration under the China Out-License, including the specified milestone of $2.5 million and the remaining $120.0 million of potential future regulatory and sales achievement milestones.

Credit Facility

In February 2022, we executed the Credit Facility with Hercules and SVB. Capital draws are at our election and are in $5.0 million increments. Concurrent with the execution of the Credit Facility we drew $20.0 million. This Credit Facility was amended in January 2023 and August 2023. The Credit Facility, as amended, set a maximum interest rate, updated the terms of prepayment under the Credit facility and includes an extended period to drawdown the tranche associated with the NDA submission, from March 15, 2023 to March 15, 2024 provided at least $5.0 million was drawn on or before March 15, 2023 and at least an additional $5.0 million was drawn on or before September 15, 2023. On March 15, 2023 and September 15, 2023, respectively, we made draws of $5.0 million (including SVB's commitment of $1.25 million) from the $25.0 million tranche associated with the NDA submission of TP-03. The Credit Facility includes a four-year period of interest-only payments and is extendable for a fifth year to February 2027 maturity, upon our expected achievement of required conditions. We currently have no other financing commitments, such as lines of credit or guarantees.

As of the date of this filing, we have $125.0 million of remaining tranched availability as follows:

•$15.0 million, which became available in September 2022 upon our NDA submission of TP-03 to the FDA;

•$35.0 million, which became available in July 2023 upon FDA approval of XDEMVY;

•$50.0 million upon achievement of certain quarterly revenue thresholds; and

•$25.0 million available with lender approval.

Funding Requirements

Liquidity

Our operating expenditures currently consist of cost of sales, research and development costs (including activities within our preclinical, clinical, regulatory, and drug manufacturing initiatives) and selling, general and administrative costs. Our use of cash is impacted by the timing and extent of payments for each of these activities and other business requirements. We have incurred significant losses and negative cash flows from operations since our inception and had an accumulated deficit of $244.7 million as of December 31, 2023.

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We believe that our cash, cash equivalents and marketable securities of $227.4 million as of December 31, 2023 is sufficient to fund our current and planned operations for at least the next twelve months from the date of filing this Annual Report on Form 10-K. We also anticipate having at least $50.0 million of available capital from our Credit Facility through March 2024 and an additional $75.0 million of additional tranched availability through December 2024. The Credit Facility requires interest-only debt service payments that are expected to remain through its maturity in February 2027 and its remaining tranches are subject to undrawn expiry in either March 2024 or December 2024. Our cash runway estimate is predicated on current assumptions for future revenue, operating expenses, and debt availability and may require future adjustments. Accordingly, we may be required to raise additional capital earlier than we currently expect based on our cash requirements and market dynamics.

Shelf Registration Statements

On November 9, 2023, we filed a shelf registration statement on Form S-3 that was declared effective by the SEC on November 21, 2023, (the "2023 Shelf Registration Statement"), which replaced the November 2021 Shelf Registration Statement, as defined below, and permits us to offer up to $300.0 million of common stock, preferred stock, debt securities and warrants in one or more offerings and in any combination, including in units from time to time.

As part of the 2023 Shelf Registration Statement, we concurrently filed the 2023 ATM Prospectus with Jefferies. Under the terms of the 2023 ATM Prospectus, Jefferies will act as the Company's sales agent and is entitled to compensation for its services equal to 3% of the gross proceeds of any shares of common stock sold. In December 2023, we sold 1,000,000 shares of our common stock under the 2023 ATM Prospectus for $20.00 per share and received net proceeds of $19.2 million, after deducting broker commission and offering-related expenses.

On November 1, 2021, we filed a shelf registration statement on Form S-3 that was declared effective by the SEC on November 5, 2021 (the “2021 Shelf Registration Statement”), which permitted us to offer up to $300.0 million of common stock, preferred stock, debt securities and warrants in one or more offerings and in any combination, including in units from time to time. The 2023 Shelf Registration Statement replaced the 2021 Shelf Registration Statement.

Also, as part of the 2021 Shelf Registration Statement, we concurrently filed a sales agreement prospectus covering the sale of up to $100.0 million of our common stock pursuant to an Open Market Sale AgreementTM (the “2021 ATM Prospectus”) with Jefferies LLC. We did not sell any shares of our common stock under the 2021 ATM Prospectus. On July 31, 2023, in connection with the August 2023 Public Offering, we terminated the sales agreement prospectus relating to the 2021 ATM Prospectus.

Other Liquidity Risks

We expect to incur significant operating losses for the foreseeable future, and for these losses to further increase, as we expand our clinical development programs for our other product candidates and given the recent commercial launch of XDEMVY. We may also encounter unforeseen expenses, difficulties, complications, delays and other currently unknown factors that could adversely affect our business.

We may require additional capital to fully develop our product candidates and to execute our business strategy. Our requirements of a future capital raise will depend on many factors, including:

•the amount of revenue received from commercial sales of XDEMVY or our product candidates, should any of our product candidates receive marketing approval;

•the cost and timing associated with commercializing XDEMVY or our product candidates, if they receive marketing approval;

•the scope, timing, rate of progress and costs of our drug discovery efforts, preclinical development activities, laboratory testing and clinical trials for our product candidates;

•the number and scope of clinical programs we decide to pursue;

•the cost, timing and outcome of preparing for and undergoing regulatory review of our product candidates;

•the scope and costs of development and commercial manufacturing activities;

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•the achievement of milestones or occurrence of other developments that trigger payments under any collaboration agreements we might have at such time and availability of our Credit Facility;

•the extent to which we acquire or in-license other product candidates and technologies;

•the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;

•our ability to establish and maintain collaborations on favorable terms, if at all;

•our efforts to enhance operational systems and our ability to attract, hire and retain qualified personnel, including personnel to support the development of our product candidates and, ultimately, the sale of our products, following FDA approval;

•our implementation of various computerized information systems;

•impact of health epidemics on our clinical development or operations; and

•the costs associated with being a public company.

A change in the outcome of any of these or other variables with respect to the development of any of our product candidates could significantly change the costs and timing associated with the development of that product candidate. Furthermore, our operating plans may change in the future, and we will continue to require additional capital to meet operational needs and capital requirements associated with such operating plans. If we raise additional funds by issuing equity securities, our stockholders may experience dilution. Any future debt financing into which we enter may impose upon us additional covenants that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, repurchase our common stock, make certain investments or engage in certain merger, consolidation or asset sale transactions. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders.

Adequate funding may not be available to us on acceptable terms or at all. Our potential inability to raise capital when needed could have a negative impact on our financial condition and our ability to pursue our business strategies. If we are unable to raise additional funds as required, we may need to delay, reduce, or terminate some or all development programs and clinical trials. We may also be required to sell or license our rights to product candidates in certain territories or indications that we would otherwise prefer to develop and commercialize ourselves. If we are required to enter into collaborations and other arrangements to address our liquidity needs, we may have to give up certain rights that limit our ability to develop and commercialize our product candidates or may have other terms that are not favorable to us or our stockholders, which could materially and adversely affect our business and financial prospects. See the section of this Annual Report on Form 10-K titled “Risk Factors” for additional risks associated with our substantial capital requirements.

Contractual Obligations and Commitments

We have entered into arrangements that contractually obligate us to make payments that will affect our liquidity and cash flows in future periods. Such arrangements include those related to the contractual obligations described below:

Lease Commitments

Our operating lease commitments reflect payments due for our active lease agreements in Irvine, California, for adjacent office and laboratory suites which expire on January 31, 2027. As of December 31, 2023, our contractual commitments for our leases were $2.4 million, which will be paid over the remaining lease term of 3.1 years.

Purchase Obligations

As of December 31, 2023, we have entered into manufacturing supply agreements for the commercial supply of XDEMVY. These amounts do not represent all of our anticipated purchases, but instead represent the contractually obligated minimum purchases or firm commitments of non-cancelable minimum amounts, as follows:

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Milestone Obligations

The terms of our Eye and Derm Elanco Agreement and All Human Uses Elanco Agreement require us to make future development milestone payments aggregating up to $6.0 million and future commercial and sales-based milestone payments aggregating up to $152.0 million upon our achievement of the specified milestones. The amount and timing of such obligations are unknown or uncertain as of December 31, 2023.

Summary Statement of Cash Flows

The following table sets forth the primary sources and uses of cash and cash equivalents for each of the periods presented below:

Net Cash Used in Operating Activities

Net cash used in operating activities was $117.5 million for the year ended December 31, 2023, which primarily consisted of a net loss of $135.9 million and a change in net operating assets and liabilities of $0.3 million, partially offset by net non-cash and other charges of $18.1 million. The change in net operating assets and liabilities was primarily due to an increase in accounts receivable of $16.6 million and an increase in prepaid expenses of $2.9 million, partially offset by an increase in accounts payable and other accrued liabilities of $13.2 million and an increase in accrued payroll and benefits of $7.7 million. The net non-cash and other charges were primarily related to stock-based compensation expense of $19.8 million.

Net cash used in operating activities was $49.0 million for the year ended December 31, 2022, which primarily consisted of our net loss of $62.1 million and a change in net operating assets and liabilities of $1.0 million, partially offset by net non-cash and other charges of $14.0 million. The change in net operating assets and liabilities was primarily due to an increase in other receivables of $3.5 million partially offset by an increase in accrued payroll and benefits of $2.7 million. The net non-cash and other charges were primarily related to stock-based compensation expense of $13.5 million.

Net Cash Provided by (Used in) Investing Activities

Net cash provided by investing activities was $140.6 million for the year ended December 31, 2023, and relates to $174.8 million of proceeds from maturities of investments. This cash provided by investing activities was offset by (i) $28.7 million of purchased investments, (ii) $4.0 million of intangible asset additions, and (iii) $1.5 million of purchased furniture, fixtures, office equipment and leasehold improvements for our laboratory and administrative offices.

Net cash used in investing activities was $144.6 million for the year ended December 31, 2022, and relates to $149.4 million of purchased investments and $0.5 million of purchased office equipment and leasehold improvements for our laboratory and administrative offices. This cash used in investing activities was offset by $5.3 million of proceeds received from maturities of investments.

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Net Cash Provided by Financing Activities

Net cash provided by financing activities was $130.2 million for the year ended December 31, 2023 which consisted of (i) $99.4 million of net proceeds from the issuance of common stock from our August 2023 Public Offering, (ii) $19.2 million of net proceeds from common stock sold under the 2023 ATM Prospectus, (iii) $10.0 million of proceeds from our Credit Facility, (iv) $1.0 million of proceeds from our employee stock purchase plan, and (v) $0.6 million of proceeds from the exercise of vested employee stock options.

Net cash provided by financing activities was $94.0 million for the year ended December 31, 2022 which consisted of (i) $74.4 million of net proceeds from the issuance of common stock from our May 2022 Public Offering, (ii) $20.0 million of proceeds from our Credit Facility, partially offset by $0.9 million of issuance costs, (iii) $0.5 million of proceeds from our employee stock purchase plan, and (iv) $0.1 million of proceeds from the exercise of vested employee stock options.

Critical Accounting Policies, Significant Judgments and Use of Estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue earned and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions. Historically, revisions to our estimates have not resulted in a material change to the financial statements.

While our significant accounting policies are described in the notes to our financial statements also included in this Annual Report on Form 10-K, we believe these critical accounting policies are the most important to understanding and evaluating our reported financial results.

Revenue Recognition

(i) Product Sales, Net

We recognize product sales of XDEMVY net of reserves established for applicable discounts and allowances that are offered within contracts with our customers. Such reserves include estimates for rebates and discounts, product returns, and chargebacks. The liability for such rebates consists of invoices received for claims from prior quarters that remain unpaid, or for which an invoice has not been received, and estimated rebates for the current applicable reporting period. Such estimates require us to project the magnitude of our product sales that will be subject to such rebates and are based on actual historical rebates, as supplemented by our judgement. We estimate chargebacks based on the percentage of goods sold that are eligible for chargeback and adjust the transaction price, accounts receivable, and in-channel inventory at the time of sale to the customer. There is a time-lag between us receiving rebate notices and the actual calculation of chargebacks for in-channel inventory. To date, actual amounts have not differed materially from our estimates.

Recent Accounting Pronouncements

A description of recent accounting pronouncements that may potentially impact our financial position, results of operations or cash flows is disclosed in the notes to which they relate within our financial statements.

Indemnification Agreements

As permitted under Delaware law and in accordance with our bylaws, we indemnify our officers and directors for certain events or occurrences while the officer or director is or was serving in such capacity. We are also party to indemnification agreements with our officers and directors. We believe the fair value of the indemnification rights and agreements is minimal. Accordingly, we have not recorded any liabilities for these indemnification rights and agreements as of December 31, 2023.

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JOBS Act Accounting Election

The Jumpstart Our Business Startups Act of 2012 permits an emerging growth company such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have irrevocably elected to opt out of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted.

We will remain an emerging growth company until the earliest of (1) December 31, 2025, which is the last day of our first fiscal year following the fifth anniversary of the completion of our IPO, (2) the last day of our first fiscal year (a) in which we have total annual gross revenues of at least $1.235 billion or (b) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million, as of the prior June 30th and (3) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.

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