Ocular Therapeutix, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise.
Business context
Ocular Therapeutix is a biopharmaceutical company developing eye therapies using a bioresorbable hydrogel drug-delivery platform. Its principal commercial product is DEXTENZA, approved for post-surgical ocular pain and inflammation; ReSure Sealant is an approved surgical wound-sealant device with limited sales. Pipeline programs include OTX-TKI, OTX-TIC, OTX-CSI and OTX-DED. The company remains loss-making and depends on product growth and external financing.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $5.876 | $0.829 | $10.054 | $1.971 |
| Cost of product revenue | $0.450 | $0.806 | $1.403 | $1.486 |
| Approximate product gross margin | 92% | 3% | 86% | 25% |
| Research and development | $6.951 | $10.235 | $21.070 | $30.966 |
| Selling and marketing | $6.520 | $6.777 | $19.803 | $17.349 |
| General and administrative | $5.961 | $6.155 | $16.282 | $16.571 |
| Operating loss | $(14.006) | $(23.144) | $(48.504) | $(64.401) |
| Net loss | $(11.944) | $(18.778) | $(70.024) | $(60.355) |
| Basic loss per share | $(0.19) | $(0.40) | $(1.22) | $(1.37) |
Q3 revenue comprised approximately $5.4 million from DEXTENZA and $0.5 million from ReSure Sealant. For the nine-month period, the respective amounts were approximately $8.8 million and $1.2 million.
- Cash and liquidity: Cash and cash equivalents were $70.642 million at September 30, versus $54.437 million at December 31, 2019. Including $1.764 million of restricted cash, cash, cash equivalents and restricted cash totaled $72.406 million.
- Cash flow: Nine-month operating cash use was $47.308 million, investing cash use $0.588 million, and financing cash provided $64.101 million, producing a $16.205 million increase in cash and restricted cash.
- Debt: The $25 million credit facility was fully drawn. Principal repayments begin in January 2021, with 36 monthly installments scheduled through December 2023. The company also had $37.5 million principal amount of 2026 convertible notes, carried at $23.802 million net of discount; accrued interest was $3.619 million. The conversion price was initially $6.50 per share.
- Balance sheet: Total assets were $98.219 million, total liabilities $102.345 million, and stockholders’ deficit $4.126 million. Current assets of $81.903 million exceeded current liabilities of $22.906 million.
- Runway: Management said September cash plus the October 2020 public offering proceeds was expected to fund planned operations, debt service and capital expenditures into 2023, subject to operating assumptions. The October offering sold 8.257 million shares and generated $75.675 million net of underwriting discounts and commissions, before offering expenses.
Changes versus the prior comparable period
- Q3 revenue increased $5.047 million year over year, reflecting DEXTENZA’s commercial growth from its 2019 launch. Management cited increased market acceptance and a rebound in elective surgical volumes, though procedures remained below pre-pandemic levels.
- Q3 operating loss narrowed by $9.138 million, principally alongside lower R&D costs; nine-month R&D fell $9.896 million, largely due to lower unallocated personnel and other costs following the November 2019 restructuring. Nine-month selling and marketing expense rose $2.454 million, primarily from personnel costs supporting commercialization.
- Nine-month net loss increased by $9.669 million despite a narrower operating loss. The main driver was a $16.640 million non-cash loss from remeasuring the convertible-note derivative liability, compared with a $7.334 million gain in the prior-year period. Q3 included a $3.771 million derivative fair-value gain.
- Common shares outstanding increased from 50.3 million at year-end 2019 to 63.1 million at September 30, 2020, reflecting equity offerings and other share issuances.
Outlook, commentary and risks
- Management expected to file a supplemental application in Q4 2020 seeking a DEXTENZA allergic-conjunctivitis indication; if filed as planned, it expected a target FDA action date around October 2021. This is a stated plan, not a guarantee of filing or approval.
- Management planned an OTX-TKI U.S. IND by year-end 2020 and a Phase 2 trial in Australia in mid-2021; OTX-TIC Phase 1 topline data was expected in Q1 2021 and a Phase 2 trial around mid-2021. OTX-CSI Phase 2 topline data was anticipated in the first half of 2022.
- COVID-19 reduced elective cataract procedures and adversely affected commercial activity; the company anticipated continuing revenue effects into Q4 2020 and beyond. The pandemic also affected clinical-trial enrollment and data collection, including OTX-TIC and OTX-TKI.
- Revenue and receivables were highly concentrated: three customers represented 87% of Q3 revenue and 90% of September 30 accounts receivable. The company also depends on a limited number of third-party suppliers, including a sole-source PEG supplier.
- The company reported recurring losses and negative operating cash flows and stated that future viability depends on product sales, additional capital or spending reductions. Its runway forecast relies on assumptions about DEXTENZA sales, COVID-19, expenses and development pace. The filing also describes substantial doubt about going concern in the prior-year audited statements, while management’s current forecast included the October equity raise.
- Other unusual or material items: the derivative liability rose to $28.764 million and its fair value is sensitive to stock-price and other assumptions. The 2026 notes’ estimated fair value was $55.941 million, above their carrying value. The company amended its Regeneron collaboration work plan; the option remained unexercised as of September 30. In October, it entered an AffaMed license agreement covering specified Asian territories, with $12 million in upfront payments, up to $91 million in potential additional milestones and tiered royalties; accounting was still being assessed.
- The securities class action was dismissed, with the First Circuit affirming dismissal in April 2020; related derivative actions were voluntarily dismissed in October 2020. The company stated it could not predict outcomes of any remaining proceedings. ReSure’s FDA warning-letter matter received a close-out letter in September, but the retrospective study still needed to be completed in accordance with the FDA agreement.
Most important facts for investors to verify
- Whether DEXTENZA unit sales, reimbursement access and revenue growth recover and continue despite COVID-related procedure disruption; also monitor customer concentration and receivables collection.
- Whether the October 2020 offering proceeds and operating cash burn support management’s stated runway into 2023, including the impact of debt service beginning in 2021.
- FDA filing and review progress for the allergic-conjunctivitis indication, and clinical milestones, enrollment, safety and efficacy for OTX-TKI, OTX-TIC and OTX-CSI.
- Any changes in the convertible-note derivative valuation, its potential dilution or settlement implications, and the terms and cash requirements of existing debt.
- Whether ReSure’s required post-approval study satisfies the FDA, and whether the AffaMed and Regeneron collaborations generate payments or require material company-funded development.