OCULAR THERAPEUTIX, INC annual report, FY2019

Business context and reporting period

Ocular Therapeutix, Inc. is a biopharmaceutical company developing ocular therapies using a bioresorbable hydrogel drug-delivery platform. This Form 10-K covers the fiscal year ended December 31, 2019; fourth-quarter figures below are unaudited. DEXTENZA, approved for post-surgical ocular pain and inflammation, launched in the United States on July 1, 2019. ReSure Sealant remained marketed, with limited sales support.

Financial results and liquidity

Fourth-quarter 2019 revenue was $2.3 million, operating loss was $21.4 million, net loss was $26.0 million and basic loss per share was $0.53.

FY 2019 gross profit was approximately $1.9 million, or about 45% of revenue, calculated from reported revenue less cost of product revenue. The company reported $54.4 million cash and cash equivalents, $48.1 million working capital and $78.7 million total assets at year-end. Stockholders’ equity was negative $3.6 million. Cash and cash equivalents were approximately unchanged year over year, but operating cash outflow increased.

Year-end debt included $25.0 million principal under a secured credit facility and $37.5 million principal of 2026 convertible notes (6% stated interest, due March 2026). The credit facility is secured by substantially all assets, including intellectual property; interest-only payments were scheduled through December 2020, followed by principal installments beginning January 2021. The convertible notes’ carrying value was $24.3 million, net of discount and including accrued interest; a separately recognized derivative liability was $12.1 million.

Material changes versus the prior year

• Revenue rose $2.2 million, reflecting the initial DEXTENZA launch; 2018 revenue was primarily from ReSure Sealant.
• Operating expenses increased $28.9 million. Selling and marketing rose $19.5 million as the company launched DEXTENZA and built its commercial team; R&D increased $4.2 million and G&A increased $3.3 million.
• Net loss widened by $26.4 million, while operating cash use increased by $28.4 million.
• The company issued $37.5 million of convertible notes and raised approximately $32.7 million net through its 2019 at-the-market stock sales during the year. Common shares outstanding increased from 41.5 million to 50.3 million.

Outlook, risks and unusual items

• Funding and going concern: Management estimated that year-end cash, together with first-quarter 2020 stock-sale proceeds, would fund planned operations, debt service and capital expenditures into Q1 2021. The auditor and management stated that substantial doubt exists about the company’s ability to continue as a going concern; additional financing is not assured.
• 2020 spending outlook: Management estimated R&D expense of approximately $15–$22 million, including approximately $5–$10 million of external R&D costs. It expected selling and marketing expenses to increase as DEXTENZA commercialization continued. No quantified DEXTENZA revenue guidance was provided.
• Development execution: The OTX-TP Phase 3 trial did not meet the FDA’s standard for clinical meaningfulness; the company did not plan another Phase 3 trial without a partner. DEXTENZA’s third Phase 3 allergic-conjunctivitis trial was fully enrolled, with results anticipated in Q2 2020. OTX-TIC and OTX-TKI remained early-stage clinical programs.
• Regulatory and collaboration risks: ReSure Sealant remained subject to an FDA warning letter over a required post-approval study; failure to resolve the requirement could lead to further regulatory action, including possible withdrawal of approval. The initial Regeneron aflibercept formulation was discontinued after it failed to meet program goals, and an alternative formulation was under discussion.
• Restructuring and contingencies: In November 2019, the company reduced its workforce by 55 employees, approximately 22%, and recorded $0.6 million in restructuring costs. Securities class-action claims were dismissed but on appeal; related derivative cases remained pending or stayed. The SEC closed its investigation without recommending enforcement action.
• Other risks: The filing identifies commercialization, reimbursement, manufacturing, intellectual-property, financing and clinical-trial risks, as well as potential disruption from the novel coronavirus outbreak.

Important facts for investors to verify

• DEXTENZA’s post-launch sales, customer reorder patterns, gross margin and reimbursement realization; the filing reports customer concentration, with two customers representing 27% and 11% of 2019 revenue.
• Cash burn and available financing after the reported Q1 2020 stock sales, alongside the stated Q1 2021 runway and going-concern uncertainty.
• Debt service, credit-facility covenants and collateral terms, and potential dilution or cash settlement under the convertible notes.
• FDA feedback and completion requirements for the ReSure post-approval study, and outcomes and timelines for the DEXTENZA and OTX-TIC/TKI programs.
• Progress in the Regeneron collaboration and whether an alternative formulation and option exercise are agreed.