Business context and reporting period
Ocular Therapeutix, Inc. is a biopharmaceutical company developing eye treatments using a bioresorbable hydrogel drug-delivery platform. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2019; financial amounts below are in millions of dollars unless otherwise noted.
DEXTENZA, approved for post-surgical ocular pain in November 2018 and inflammation in June 2019, launched commercially in the U.S. on July 1, 2019. ReSure Sealant was also marketed, but management anticipated only limited sales.
Financial results and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $0.829 | $0.498 | $1.971 | $1.486 |
| Cost of product revenue | $0.806 | $0.115 | $1.486 | $0.348 |
| Research and development | $10.235 | $9.685 | $30.966 | $26.657 |
| Selling and marketing | $6.777 | $1.067 | $17.349 | $2.651 |
| General and administrative | $6.155 | $4.447 | $16.571 | $13.665 |
| Operating loss | $(23.144) | $(14.816) | $(64.401) | $(41.835) |
| Net loss | $(18.778) | $(15.010) | $(60.355) | $(42.579) |
| Basic loss per share | $(0.40) | $(0.38) | $(1.37) | $(1.15) |
Product gross profit was approximately $0.023 million in Q3 and $0.485 million for the first nine months, equivalent to approximate gross margins of 3% and 25%, respectively. These figures reflect product revenue less product costs and are not company-wide operating margins.
For the first nine months, operating cash use was $58.111 million, investing cash use was $1.637 million, and financing provided $66.250 million. Cash, cash equivalents and restricted cash totaled $67.178 million at period-end, including $65.414 million of unrestricted cash and cash equivalents. The accumulated deficit was $357.598 million.
At September 30, the company reported $25.0 million outstanding under its credit facility and $37.5 million principal of 2026 convertible notes. Their balance-sheet carrying amounts were $24.952 million and $23.146 million, respectively; the notes’ embedded derivative was separately recorded as a $9.1 million liability. The credit facility is secured by substantially all assets, including intellectual property. Current liabilities were $11.005 million versus current assets of $69.636 million.
Material changes versus the prior comparable period
- Nine-month revenue increased $0.485 million, including initial DEXTENZA shipments beginning in June 2019; growth was modest relative to the increase in operating costs.
- Nine-month operating expenses rose $23.051 million. Selling and marketing increased $14.698 million, principally to support DEXTENZA’s launch; R&D increased $4.309 million and G&A increased $2.906 million.
- Nine-month net loss widened by $17.776 million, while operating cash use increased by $22.532 million.
- Financing included $37.275 million net proceeds from the convertible notes and proceeds from common-stock offerings, including the at-the-market program. Shares outstanding increased to 48.1 million from 41.5 million at December 31, 2018.
- Q3 2019 net loss included a $5.717 million non-cash gain from remeasurement of the notes’ derivative liability; the nine-month gain was $7.334 million. The gain was primarily associated with a decline in the company’s share price and may fluctuate with valuation inputs.
Outlook, management commentary, risks and unusual items
- Management estimated that September 30 cash, anticipated DEXTENZA receipts and restructuring savings would fund planned operations, debt service and capital expenditures through Q4 2020. It nevertheless concluded substantial doubt existed about the company’s ability to continue as a going concern within one year of issuance. DEXTENZA had a limited commercialization history, and management did not expect substantial DEXTENZA revenue in 2019; additional financing may be required.
- On November 6, 2019, after quarter-end, the company announced a workforce reduction of approximately 22% (55 employees) and elimination of 31 vacant positions, with certain development programs deferred. It estimated $0.7 million in restructuring costs, approximately $11 million in future annualized savings and $14 million in one-time program deferrals. Management expected expenses to decrease in 2020.
- DEXTENZA received a permanent J-code effective October 1, 2019, replacing its temporary C-code. The ongoing Phase 3 allergic-conjunctivitis trial was expected to produce topline data in the first half of 2020.
- OTX-TP did not meet its Phase 3 primary endpoint of statistically significant superiority at all nine IOP measurement times. Management said it would not initiate another Phase 3 trial without a collaborative partner; an open-label safety extension continued.
- ReSure Sealant remained commercially available, but the FDA warning letter concerning an incomplete post-approval registry study remained unresolved. The company was preparing a proposed retrospective study protocol for FDA submission.
- Regeneron had not exercised its option under the collaboration, and development of the proposed formulation had stopped while the parties discussed an alternative. Potential option, milestone and royalty payments are contingent and not assured.
- A securities class action dismissed by the district court was on appeal; related shareholder derivative cases were stayed. The SEC notified the company in May 2019 that its investigation was concluded and it did not intend to recommend enforcement action.
Important facts for investors to verify
- Whether DEXTENZA adoption, reimbursement under the J-code and product gross economics support management’s cash-flow assumptions.
- Whether the forecasted runway through Q4 2020 remains achievable given operating cash use, debt service, and the uncertain pace of commercialization and clinical spending.
- Whether restructuring delivers the projected annual savings and program deferrals, and how they affect development timelines and commercial execution.
- Updates on the DEXTENZA allergic-conjunctivitis trial, OTX-TIC and OTX-TKI, and the implications of OTX-TP’s missed primary endpoint.
- Resolution of the FDA’s ReSure Sealant post-approval study requirements and any consequences for its approval or sales.
- Potential dilution and financial obligations associated with further equity financing, the convertible notes, the secured credit facility and any future collaboration costs.