OCULAR THERAPEUTIX, INC annual report, FY2022

Ocular Therapeutix, Inc. — FY2022 Form 10-K

Reporting period: Fiscal year ended December 31, 2022. This is an annual filing; it does not provide standalone fourth-quarter financial statements. Ocular Therapeutix is an ophthalmology-focused biopharmaceutical company developing therapies using its bioresorbable hydrogel drug-delivery platform. Its marketed product is DEXTENZA; its principal clinical programs include OTX-TKI and OTX-TIC.

Financial performance and liquidity

Metric	FY2022	FY2021
Total revenue	$51.5 million	$43.5 million
Net product revenue	$50.5 million	$43.5 million
Operating expenses	$130.1 million	$121.6 million
Loss from operations	$78.7 million	$78.0 million
Net loss	$71.0 million	$6.6 million
Net cash used in operating activities	$59.6 million	$65.6 million

• DEXTENZA accounted for all 2022 product revenue. Revenue increased about 18% year over year, attributed by management to increased market acceptance and continued commercialization. The company also recognized $1.0 million of collaboration revenue for OTX-TIC clinical-trial work.
• Product cost was $4.5 million against $50.5 million of net product revenue, implying an approximate 91% product gross margin before other operating expenses. Total operating expenses rose about 7%; R&D was $53.5 million, selling and marketing $39.9 million, and general and administrative expense $32.2 million.
• The sharp increase in net loss largely reflects a smaller noncash gain from revaluing the convertible-note derivative: $13.8 million in 2022 versus $78.1 million in 2021. Operating loss was broadly stable. Interest expense was $7.0 million.
• Cash and cash equivalents were $102.3 million at year-end, down from $164.2 million. Operating cash use was $59.6 million; investing cash use was $3.7 million and financing provided $1.5 million. Accumulated deficit was $616.8 million.
• Debt included $25.0 million face value under a fully drawn credit facility and $37.5 million principal on 2026 convertible notes, plus $8.8 million accrued note interest. The credit facility rate was 10.87% at year-end; interest-only payments run through April 2024, with principal payments beginning in May 2024. Convertible notes carry a 6% stated coupon, mature March 2026, and have a 14.8% effective annual interest rate reported through year-end.
• Management estimated existing cash would fund planned operations, debt service and capital spending into mid-2024, but that estimate excludes planned pivotal OTX-TKI trials. The auditor highlighted the need for additional financing. The company reported no committed external funding source.

Material changes and business developments

• DEXTENZA net product revenue increased from $42.0 million in 2021 to $50.5 million in 2022; ReSure Sealant generated $1.5 million in 2021 and no reported 2022 product revenue. ReSure production had been suspended in late 2021, and the product was not commercially available in the United States.
• DEXTENZA gross-to-net provisions were 24.9% of gross product sales in 2022, versus 25.5% in 2021. The company introduced an off-invoice discount program in Q3 2022. Three specialty distributors represented 86% of 2022 revenue, indicating substantial customer concentration.
• DEXTENZA’s Medicare pass-through status ended December 31, 2022. For 2023, separate payment was available in ambulatory surgery centers under a surgical-supply provision, but was not required in hospital outpatient departments. Management noted that the CMS policy and procedure reimbursement may affect adoption and revenue.
• R&D expense increased $3.4 million, while direct program spending declined overall due principally to trial timing; unallocated personnel and other costs increased. Selling and marketing expense rose $4.7 million as the company expanded its commercial team.
• Cash and cash equivalents declined by $61.9 million during 2022. The company made no common-stock sales under its $100 million 2021 at-the-market program through March 3, 2023.

Outlook, risks and notable items

• Commercial outlook: Management reported that in-market DEXTENZA billable units in Q4 2022 exceeded 31,000 and that sales during the first two months of 2023 were running more than 20% ahead of the same period in 2022. These are management-reported operating indicators, not revenue guidance. A customer assistance program for commercially insured patients was planned for 2023.
• Development plans: The company aimed to be prepared to start a pivotal wet-AMD OTX-TKI trial as early as Q3 2023 and a diabetic-retinopathy pivotal trial as early as Q1 2024, subject to FDA discussions, favorable results where applicable, and financing. OTX-TIC Phase 2 topline data were expected in Q4 2023. A small OTX-DED study to evaluate a placebo control was planned for the first half of 2023. These are forward-looking plans, not assured outcomes.
• Clinical risks: OTX-TIC enrollment in the 5 μg arm was stopped after IOP elevations in six subjects; enrollment continued in the 26 μg and comparator arms. OTX-CSI Phase 2 did not separate from vehicle on its primary tear-production endpoint. OTX-DED Phase 2 met its prespecified primary endpoint, but symptom improvements showed little separation from vehicle.
• Early OTX-TKI data: The filing describes preliminary Phase 1 findings, including tolerability and potential biological activity. It also reports interim U.S. trial data announced in February 2023, after the fiscal year-end; these small early-stage results do not establish pivotal-trial success or regulatory approval.
• Funding and operating risks: The company expects ongoing losses and needs substantial additional capital. Failure to obtain funding could delay or reduce development programs. Its single-site manufacturing operation, reliance on some single-source suppliers, high debt burden, customer concentration, clinical and regulatory uncertainty, and dependence on DEXTENZA commercialization are material risks.
• Reimbursement and competition: Reduced or unavailable separate reimbursement could weaken DEXTENZA demand, particularly in hospital outpatient departments. Products also face branded and generic alternatives, and active ingredients in several programs are available generically.
• Accounting and audit: The auditor issued an unqualified opinion on the financial statements and identified valuation of the $6.4 million convertible-note derivative liability as a critical audit matter. Management reported effective disclosure controls and internal control over financial reporting. No material legal proceedings were reported.

Most important facts for investors to verify

• Whether DEXTENZA unit growth converts into durable net revenue and whether discounts, rebates and reimbursement changes affect realized pricing.
• Whether cash burn, working capital and debt service remain consistent with the stated mid-2024 runway, especially because pivotal OTX-TKI trial costs are excluded.
• Availability and terms of financing needed for pivotal trials, and the potential dilution or rights concessions associated with funding.
• FDA feedback and actual trial designs, enrollment, safety and efficacy results for OTX-TKI and OTX-TIC; in particular, whether the OTX-TIC IOP signal affects the remaining trial.
• The treatment of DEXTENZA in hospital outpatient departments and any subsequent CMS changes to separate product and procedure reimbursement.
• The derivative-liability valuation assumptions and the resulting noncash effects on reported earnings and diluted loss per share.