OCULAR THERAPEUTIX, INC annual report, FY2014

Ocular Therapeutix, Inc. — FY 2014 Form 10-K

Reporting period: Fiscal year ended December 31, 2014. This is an annual filing; selected unaudited fourth-quarter results are also provided. The company develops ophthalmic therapies using a bioresorbable hydrogel platform and began U.S. sales of ReSure Sealant in February 2014.

Financial performance and liquidity

Metric	FY 2014	FY 2013
Total revenue	$0.772 million	None
Operating expenses	$27.866 million	$12.903 million
Operating loss	$27.094 million	$12.903 million
Net loss	$28.648 million	$13.317 million
Net loss per share, basic and diluted	$2.69	$5.11
Cash used in operating activities	$20.496 million	$12.645 million

• FY 2014 revenue comprised $0.460 million of ReSure Sealant product revenue and $0.312 million of collaboration revenue. Product cost was $0.091 million; product gross profit was approximately $0.369 million, or 80% of product revenue. ReSure was the company’s only product-sales source.
• R&D expense rose to $18.880 million from $10.517 million, while selling and marketing rose to $1.982 million from $0.625 million and G&A rose to $6.913 million from $1.761 million. Higher clinical, personnel, public-company, and stock-based compensation costs contributed to the increases.
• Fourth-quarter 2014 revenue was $0.505 million, operating loss was $7.547 million, and net loss was $7.954 million. The quarter included $0.312 million of collaboration revenue.
• At year-end, cash and cash equivalents were $37.393 million and marketable securities were $37.435 million, totaling $74.828 million; working capital was $70.309 million. Management estimated available resources would fund operations, debt service, and capital needs through at least the first half of 2016, subject to assumptions.
• Net cash provided by financing activities was $78.970 million, principally reflecting IPO proceeds and a new loan. The July/August 2014 IPO generated approximately $66.4 million in net proceeds.
• Debt carrying value was $14.865 million, including current maturities. The $15 million loan bears 8.25% interest, has a 3.75% final payment, and is secured by substantially all assets other than intellectual property. Contractual debt obligations, including interest and the final payment, totaled $18.126 million at year-end.
• Accumulated deficit was $89.428 million. The company reported no income-tax benefit and maintained a full valuation allowance against deferred tax assets.

Material developments and outlook

• ReSure Sealant received FDA approval in January 2014 and launched in the United States in February. FY 2014 product revenue was limited; management did not expect ReSure sales alone to support profitability.
• For OTX-DP in post-surgical inflammation and pain, the first of two Phase 3 trials met both primary efficacy measures with statistical significance: absence of pain on day 8 (76.1% versus 36.1%; p<0.0001) and absence of anterior-chamber cells on day 14 (33.7% versus 14.6%; p=0.0015). The second trial’s results were still pending at filing. Management planned an NDA submission in Q2 2015 if the combined results were favorable.
• OTX-DP’s Phase 2 allergic-conjunctivitis trial met one of two primary efficacy measures; management expected to start two Phase 3 trials in mid-2015. A Phase 2 exploratory trial for inflammatory dry eye began in January 2015.
• OTX-TP was in Phase 2b for glaucoma and ocular hypertension. Management expected efficacy data in Q4 2015; the trial was not powered for statistical significance. Later pivotal studies were expected to require substantial patient exposure and safety follow-up.
• The intravitreal anti-VEGF hydrogel depot remained preclinical. Management expected feasibility work with pharmaceutical collaborators to conclude in the first half of 2015. OTX-MP had completed Phase 1, but later-stage development was not then prioritized.
• Management estimated 2015 R&D expense of $28–$30 million, including $9.5–$10.8 million of external clinical-trial and regulatory costs for OTX-DP and OTX-TP. It expected operating expenses to rise and stated that meaningful product revenue sufficient for profitability was not expected for several years, if at all.

Risks, contingencies, and unusual items

• The company remained loss-making and dependent on additional financing or successful development and commercialization of pipeline products. Cash runway is management’s estimate and could be shorter than projected.
• Clinical and regulatory outcomes remain uncertain. In particular, the second OTX-DP Phase 3 result, future OTX-TP pivotal trials, plug retention, safety, and FDA approval are key execution risks.
• Following an FDA inspection, the company received a Form FDA 483 observation concerning procedures for documenting complaint follow-up and evaluating complaints for adverse-event reporting; it stated that procedures needed updating.
• FDA approval of ReSure requires two post-approval studies, including a registry of at least 4,857 patients intended to assess endophthalmitis using Medicare data. The company was seeking a Medicare tracking code and disclosed that one might not be obtained.
• Manufacturing is concentrated at the company’s Bedford facility; it also identified a sole-source PEG supplier and had no long-term supply agreements for raw materials or drug substances.
• Core technology is licensed from Incept, an entity in which CEO Amarpreet Sawhney is a general partner and 50% owner. In 2014, the company issued Incept 189,393 shares valued at $1.665 million to expand the license; it also issued 79,545 shares valued at $0.699 million to a former director and Incept stockholder for consulting services. The license includes low-single-digit royalties on covered net sales.
• The company disclosed potential third-party patent claims involving ReSure and hydrogel formulations used in OTX-TP and OTX-MP, while stating it believed the claims were invalid or did not cover its products. No material legal proceedings were pending.
• Auditors issued an unqualified opinion on the financial statements. Management concluded disclosure controls were effective; the filing did not include management’s internal-control assessment or an auditor attestation because of the new-public-company transition relief.

Important facts for investors to verify

• Whether the second OTX-DP Phase 3 trial succeeded and whether the combined results supported an NDA submission and FDA acceptance.
• Whether the 2015 R&D spending plan and stated cash runway remain achievable, considering operating cash use, debt service, and potential financing needs.
• ReSure Sealant sales trajectory, adoption, and whether the required post-approval studies can be completed, including obtaining the Medicare tracking code.
• OTX-TP Phase 2b efficacy and plug-retention data, and the cost and design of subsequent pivotal trials.
• Progress in remediating the FDA Form 483 observation, maintaining manufacturing compliance, and securing reliable supply of PEG and other inputs.
• Terms and governance implications of the Incept license and related-party transactions, as well as the status of identified patent risks.