Ocular Therapeutix, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet figures are as of March 31, 2019. Dollar amounts below are in millions unless noted.
Business context
Ocular Therapeutix develops and commercializes ophthalmic therapies using a bioresorbable hydrogel drug-delivery platform. DEXTENZA, approved in November 2018 for post-surgical ocular pain, was preparing for commercial launch; ReSure Sealant was the company’s only source of product revenue in Q1. Other programs include OTX-TP and OTX-TIC for glaucoma, OTX-TKI for wet AMD, and a Regeneron collaboration involving aflibercept.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Product revenue | $0.492 | $0.340 |
| Cost of product revenue | $0.128 | $0.080 |
| Research and development | $11.317 | $8.227 |
| Selling and marketing | $3.347 | $0.717 |
| General and administrative | $5.358 | $4.771 |
| Total operating expenses | $20.150 | $13.795 |
| Operating loss | $(19.658) | $(13.455) |
| Net loss | $(17.124) | $(13.765) |
| Net loss per share, basic / diluted | $(0.41) / $(0.45) | $(0.40) / $(0.40) |
| Cash used in operating activities | $(19.386) | $(12.473) |
Cash and cash equivalents were $76.251; restricted cash was $6.614, bringing cash, cash equivalents and restricted cash to $82.865. Q1 financing provided $42.300, primarily from the 2026 convertible notes and ATM stock sales. Cash increased $22.189 during the quarter.
At quarter-end, current assets were $79.172 and current liabilities $8.614. Total liabilities were $75.842 and stockholders’ equity $25.648. The existing credit facility had $25.0 of principal outstanding ($24.843 carrying value, net of discount); the company also issued $37.5 of convertible-note principal. The convertible notes were carried at $23.014, net of a substantial discount, and had a separately recorded $11.462 derivative liability.
Management estimated existing cash would fund operations, debt service and capital expenditures into Q2 2020, but concluded substantial doubt about the company’s ability to continue as a going concern existed within one year of issuance of the financial statements. Additional financing is needed.
Changes and notable items
- Revenue rose $0.152 year over year, but remained limited and came from ReSure Sealant, not DEXTENZA.
- Net loss widened by $3.359. Operating expenses rose $6.355, notably as selling and marketing spending increased for DEXTENZA commercialization and R&D costs increased.
- Q1 included a $3.223 non-cash gain from remeasurement of the convertible notes’ embedded derivative, primarily reflecting a decline in the company’s share price. The estimate uses significant unobservable inputs and may fluctuate.
- The company adopted the new lease accounting standard on January 1, 2019, recording operating lease assets of approximately $5.3 and liabilities of approximately $8.8; adoption did not affect reported earnings.
- After quarter-end, the company entered a new $50.0 ATM stock-sale facility with Jefferies; it reported no shares sold under it through May 9, 2019. A new office sublease is expected to add approximately $2.0 of lease assets and liabilities.
Outlook, milestones and risks
- DEXTENZA was available through distributors, and the targeted sales team was trained; management expected samples to reach surgery centers by mid-May 2019. A preliminary recommendation for a permanent J-code was received in April, potentially effective January 1, 2020. The company had applied for transitional pass-through reimbursement.
- The FDA set November 10, 2019 as the target action date for the DEXTENZA supplemental application for post-surgical ocular inflammation. Management planned additional DEXTENZA trials later in 2019.
- Management expected topline results from the first OTX-TP Phase 3 trial in Q2 2019 and planned to discuss the results with the FDA before deciding on the second Phase 3 trial.
- Regeneron had not exercised its option. Development of the initial proposed formulation had ceased, and the parties were discussing an alternative. Potential option, milestone and royalty payments are contingent, not assured; exercise could also require Ocular Therapeutix to reimburse development costs up to $25.0, potentially $30.0 in specified circumstances.
- ReSure Sealant remained available, but the FDA warning letter concerning the required post-approval registry study remains a material regulatory risk; failure to satisfy the FDA could lead to further action, including withdrawal of approval.
- The company expects continuing losses and increased spending. Key risks include financing availability, DEXTENZA uptake and reimbursement, clinical and regulatory outcomes, manufacturing capacity and compliance, competition, and debt obligations. The credit facility is secured by substantially all assets, including intellectual property, and includes a $5.0 minimum-cash covenant.
- Subsequent legal developments: the securities class action was dismissed on April 30, 2019, potentially subject to appeal; the SEC notified the company on May 2, 2019 that it had concluded its investigation and did not intend to recommend enforcement action. Related shareholder derivative cases remained stayed.
Most important facts for investors to verify
- Actual DEXTENZA launch progress, prescriptions, sales, reimbursement access and adoption beyond the initial targeted surgery-center market.
- Whether cash runway tracks management’s estimate into Q2 2020, and the timing, terms and dilution from any additional financing.
- OTX-TP Phase 3 results and subsequent FDA feedback; progress and safety findings for OTX-TIC and OTX-TKI.
- FDA resolution and completion plan for the ReSure Sealant post-approval study and warning letter.
- Convertible-note conversion, derivative valuation and debt-service implications, along with the status of the Regeneron formulation and option.