Ocular Therapeutix, Inc. — Q2 2019 Form 10-Q
Business context and period. The company develops ophthalmic therapies using a bioresorbable hydrogel drug-delivery platform. This unaudited report covers the quarter and six months ended June 30, 2019. DEXTENZA was approved in June 2019 for post-surgical ocular inflammation, in addition to its prior approval for post-surgical ocular pain; the U.S. commercial launch occurred July 1, 2019. The company remained at an early stage of commercialization and reported substantial doubt about its ability to continue as a going concern.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $0.65m | $0.65m | $1.14m | $0.99m |
| Cost of product revenue | $0.55m | $0.15m | $0.68m | $0.23m |
| Gross profit / margin | $0.10m / 15% | $0.50m / 76% | $0.46m / 40% | $0.76m / 76% |
| Research and development | $9.41m | $8.75m | $20.73m | $16.97m |
| Selling and marketing | $7.23m | $0.87m | $10.57m | $1.58m |
| Operating loss | $(21.60)m | $(13.56)m | $(41.26)m | $(27.02)m |
| Net loss | $(24.45)m | $(13.80)m | $(41.58)m | $(27.57)m |
| Net loss per share | $(0.57) | $(0.37) | $(0.98) | $(0.76) |
| Operating cash used | — | $(38.57)m | $(24.71)m |
Revenue was nearly flat in Q2; initial DEXTENZA customer shipments began in June. The filing does not provide a clear product-by-product revenue split. The calculated product gross margins reflect the reported revenue and product costs; the filing does not characterize them as a sustainable margin measure.
- Q2 total operating expenses rose $8.04m year over year, principally due to a $6.36m increase in selling and marketing as the company prepared for DEXTENZA commercialization. Six-month selling and marketing expense increased $8.99m.
- At June 30, cash and cash equivalents were $61.77m; restricted cash was $6.76m, making cash, cash equivalents and restricted cash $68.53m. Current assets were $65.44m and current liabilities $10.13m.
- Cash used in investing activities was $1.22m for the first six months. Financing provided $47.64m, including $37.28m net proceeds from the convertible notes and about $10.07m net proceeds from stock offerings.
- Debt included $25.0m principal under the secured credit facility ($24.90m carrying value) and $37.5m principal of 2026 convertible notes ($23.90m carrying value after discount and accounting for accrued interest). The notes bear 6% stated interest, payable at maturity, and initially convert at $6.50 per share. Interest expense was $2.65m for the six-month period.
- Total liabilities were $81.48m and stockholders’ equity $8.26m. The company had an accumulated deficit of $338.82m.
- After quarter-end, the company raised $14.84m net through its at-the-market program through August 5, and lenders released restrictions on $5.0m of cash effective August 2. Management estimated funding into Q3 2020, conditional on assumptions including DEXTENZA sales, but still concluded substantial doubt about going concern existed within one year of issuance of the financial statements.
Material changes and operating developments
- DEXTENZA sales began in June, with full U.S. launch July 1. CMS approved transitional pass-through reimbursement (C-code effective July 1); a permanent J-code was assigned in July and was expected to take effect October 1.
- OTX-TP’s first Phase 3 trial did not meet its primary endpoint of statistically superior IOP reduction at all nine time points. Treatment showed greater reduction than placebo at all nine, statistically significant at eight. Management said it would not start a second Phase 3 trial before reviewing the data with FDA.
- The company began an 80-subject pivotal Phase 3 trial of DEXTENZA for allergic-conjunctivitis itching in Q3 2019 and planned a pediatric post-approval study in Q4.
- Early OTX-TIC data from five patients indicated IOP lowering for up to 13 months, but some subjects had low-grade inflammation and peripheral anterior synechiae; modified formulations were being developed.
- For OTX-TKI, the independent safety committee recommended moving to a higher dose in the next cohort, anticipated in Q3 2019.
- The proposed Regeneron aflibercept formulation was discontinued as not final. The parties were discussing an alternative formulation; Regeneron had not exercised its option as of June 30.
Outlook, risks and unusual items
- Management expected continued losses and rising commercial, clinical-development, manufacturing and facility costs. It said additional capital would be needed; no committed external funding source was in place. Further equity financing may dilute shareholders, while debt is constrained by covenants and liens on substantially all assets, including intellectual property.
- The FDA warning letter concerning ReSure Sealant’s overdue post-approval registry study remained unresolved. The company proposed a retrospective IRIS Registry analysis and expected to submit a protocol in Q3 2019; failure to satisfy FDA requirements could lead to further regulatory action, including withdrawal of approval.
- OTX-TP’s efficacy result, commercial uptake and reimbursement for DEXTENZA, manufacturing capacity and compliance, and the ability to raise additional capital are material uncertainties. The company also identified a sole-source PEG supplier and risks from competition, clinical-trial outcomes, regulatory requirements and intellectual-property protection.
- Q2 included a $1.61m non-cash loss from remeasurement of the embedded conversion derivative; the six-month statement reported a $1.62m gain overall. Fair-value changes depend on unobservable model inputs and can fluctuate.
- Outstanding securities litigation over prior DEXTENZA and manufacturing disclosures was dismissed at the district-court level, but plaintiffs appealed. Related derivative actions were stayed. The SEC notified the company in May 2019 that it had concluded its investigation and did not intend to recommend enforcement action.
- The company adopted the new lease accounting standard in January 2019, recognizing lease assets and liabilities; adoption did not affect reported operations. The report states disclosure controls were effective at the reasonable-assurance level.
Investor verification checklist
- Track DEXTENZA launch demand, net pricing, channel inventory, reimbursement and subsequent revenue disclosures; Q2 revenue largely preceded the July launch.
- Review the full OTX-TP Phase 3 data and FDA feedback, including the endpoint not met and the implications for any further trial.
- Monitor cash burn, the stated Q3 2020 runway assumptions, additional financing needs and dilution from the ATM program.
- Confirm the status and FDA acceptance of the ReSure post-approval study plan and any related regulatory developments.
- Review debt terms, conversion and settlement provisions, derivative valuation movements, and the continuing going-concern disclosure.
- Follow the securities-litigation appeal and stayed derivative cases; distinguish these from the SEC investigation, which the SEC closed without recommending enforcement.