OCULAR THERAPEUTIX, INC quarterly report, Q2 FY2023

Ocular Therapeutix, Inc. — Q2 2023 Form 10-Q

Reporting period: Three and six months ended June 30, 2023. Amounts below are in millions of dollars unless otherwise noted. The company develops and commercializes ophthalmic therapies using its ELUTYX hydrogel technology. DEXTENZA is its only marketed product; its other leading candidates are in clinical development.

Financial performance and liquidity

Metric	Q2 2023	Q2 2022	Six months 2023	Six months 2022
Net revenue	$15.2	$12.3	$28.6	$25.5
Product revenue, all DEXTENZA	$15.0	$12.1	$28.2	$24.6
Operating loss	$(20.6)	$(19.9)	$(43.1)	$(37.7)
Net loss	$(20.7)	$(18.8)	$(51.0)	$(31.3)
Basic and diluted loss per share	$(0.26)	$(0.24) basic	$(0.66)	$(0.41) basic

• Product revenue grew about 24% in Q2 and 15% for the first half year. Management attributed first-half growth to greater market acceptance and commercialization efforts.
• Product gross margin, calculated from reported product revenue and cost of product revenue, was approximately 91% in Q2 2023 versus 90% in Q2 2022, and 91% versus 90% for the six-month periods.
• Q2 operating expenses were $35.8 million, up from $32.2 million. First-half R&D was $29.8 million, selling and marketing $22.0 million, and general and administrative $17.3 million. The increases primarily reflect clinical-program activity and commercial workforce expansion.
• First-half net loss increased substantially, in part because the derivative liability generated a $5.4 million expense, compared with $9.7 million of income in the prior-year period. This non-cash fair-value change does not affect anticipated cash outflows.
• Operating cash use was $40.0 million for the first half, versus $29.5 million a year earlier; investing cash use was $5.4 million, chiefly for leasehold improvements and equipment. Financing provided $9.7 million, including $8.8 million net proceeds from common-stock sales. Cash, cash equivalents and restricted cash fell by $35.7 million.
• At June 30, cash and cash equivalents were $66.6 million; current assets were $100.7 million and current liabilities $32.4 million. Total liabilities were $119.5 million and stockholders’ equity was $3.1 million, down from $35.4 million at year-end 2022.
• At June 30, debt included $25.0 million principal under the MidCap facility and $37.5 million principal of convertible notes, plus $9.8 million accrued convertible-note interest. The balance sheet carried the notes payable at $25.4 million and convertible notes, net of discount, at $30.0 million.

Material changes and subsequent financing

• On August 2, 2023, the company borrowed the full $82.5 million under a new secured Barings term loan and received $77.8 million net of discount and fees. It used $26.2 million to repay MidCap, including $1.1 million in exit and prepayment fees. The Convertible Notes’ maturity was extended to 91 days after the Barings facility maturity.
• The Barings loan bears interest at SOFR, subject to a 1.50% floor, plus 6.75%; it is secured by substantially all assets, including intellectual property. It also includes a $20.0 million minimum-liquidity covenant and a royalty fee tied to 3.5% of quarterly DEXTENZA net sales, subject to contractual terms and offsets.
• Management believes cash at June 30 plus net proceeds from Barings after MidCap repayment, subject to the liquidity covenant, can fund its planned expenses, debt service and capital expenditures into 2025. That plan funds initiation of the first planned pivotal OTX-TKI wet AMD trial, but not its completion, a second pivotal wet AMD trial, or other pivotal trials; additional financing would be needed for those activities.

Outlook, clinical programs and key risks

• Management expects ongoing operating losses and negative operating cash flows, with substantial R&D and commercialization spending. It expects selling and marketing expenses to continue increasing; clinical trial expenses were expected to remain approximately level for the rest of 2023, reflecting the planned wet AMD pivotal-trial start and ongoing studies.
• Management intended to initiate the first of two pivotal OTX-TKI trials for wet AMD in Q3 2023. The Phase 1 trial reported 60% of subjects rescue-free through month 12 and an 89% reduction in treatment burden; results remain preliminary and from a small study.
• The HELIOS Phase 1 NPDR trial completed enrollment at 22 subjects; interim six-month data were expected in Q1 2024. A pivotal NPDR trial was conditional on favorable data and additional financing.
• OTX-TIC Phase 2 enrollment was completed in July 2023; the 5 μg arm had been discontinued after IOP elevations in six subjects. Topline data were expected in Q1 2024. OTX-DED and OTX-CSI development plans remain dependent on further assessment; prior OTX-CSI Phase 2 results did not show separation from vehicle on the primary endpoint.
• DEXTENZA Q2 in-market sales exceeded 36,000 billable units, approximately 40% above Q2 2022. Medicare Part B coverage was 100%, Medicare Advantage coverage over 90%, and commercial coverage over 70%. CMS’s draft 2024 OPPS recommendation continued separate payment in ASCs; the final rule was pending.
• Commercial and execution risks include reliance on DEXTENZA, reimbursement and adoption uncertainty, clinical and regulatory uncertainty, need for additional financing, and dependence on a small number of specialty distributors and third-party manufacturers. Three distributors represented 58%, 21% and 10% of Q2 gross product revenue and 59%, 22% and 10% of quarter-end receivables.
• The company reported no material legal proceedings and said disclosure controls were effective. A post-quarter board ratification addressed historical employee stock-purchase-plan share issuances that may not have been properly authorized.

Most important facts for investors to verify

• Actual cash runway after Barings proceeds, MidCap repayment, required minimum liquidity, debt service and the DEXTENZA-linked royalty fee.
• Whether DEXTENZA revenue growth, unit sales, gross-to-net deductions and reimbursement support management’s assumptions.
• Timing, enrollment, safety and efficacy results for OTX-TKI pivotal and NPDR studies, and OTX-TIC Phase 2 results.
• Financing needed to complete the first OTX-TKI pivotal trial and support additional pivotal programs, including potential dilution or further secured debt.
• Accounting and economic effects of the Barings facility and amended Convertible Notes; the filing stated that the accounting impact was still being determined.