OCULAR THERAPEUTIX, INC quarterly report, Q2 FY2017

Business context and reporting period

Ocular Therapeutix, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2017. The biopharmaceutical company develops ophthalmic therapies using a sustained-delivery hydrogel platform. ReSure Sealant, used after cataract surgery, was its only marketed product; DEXTENZA and OTX-TP remained in development.

Financial performance and position

Amounts below are in millions of dollars except per-share data. The filing presents financial statements in thousands.

Product gross profit was approximately $0.334 million in Q2 and $0.694 million for the six months (about 76% of product revenue in each period). The company reported no collaboration revenue in 2017; six-month 2016 revenue included $0.042 million from a feasibility agreement. Revenue remained limited to ReSure Sealant sales.

At June 30, cash and cash equivalents were $63.049 million and marketable securities were $3.000 million, totaling approximately $66.0 million. Total current assets were $68.328 million and current liabilities $13.130 million. Notes payable had $18.0 million principal outstanding; the balance sheet carrying amount, net of discount, was $17.818 million, of which $2.444 million was current. The facility’s stated indicative rate was 8.25% at amendment, with a 10.5% effective annual rate; interest-only payments were scheduled through February 1, 2018.

Material changes versus prior comparable periods

• Q2 revenue was essentially flat year over year; six-month total revenue rose slightly to $0.913 million from $0.899 million as product revenue growth offset the absence of prior-year collaboration revenue.
• Net loss widened by $7.249 million in Q2 and $12.432 million for the first half. The largest expense increase was selling and marketing, up $5.340 million in Q2 and $9.978 million in the first half, primarily from DEXTENZA pre-commercialization hiring and professional fees. R&D and G&A also increased.
• Operating cash use increased to $25.708 million from $19.058 million for the six-month comparison. Cash balances rose from year-end largely due to the January follow-on offering and ATM sales, plus debt proceeds; the company also spent $5.652 million on property and equipment.
• In March 2017, the credit facility was amended: $18.0 million was drawn, primarily to refinance prior facility balances, and two additional $10.0 million tranches became available subject to DEXTENZA regulatory and commercial milestones.

Outlook, commentary, risks and unusual items

• DEXTENZA regulatory/manufacturing risk: After the quarter, the FDA issued a July 2017 Complete Response Letter for the post-surgical ocular pain NDA, citing manufacturing-process and analytical-testing deficiencies following an inspection. The company reported particulate matter in certain lots and said it was working on corrective actions and process qualification; resubmission and approval depend on resolving the observations. The filing does not give a definite resubmission or approval date.
• Clinical programs: OTX-TP’s first Phase 3 trial was underway; topline efficacy data were expected in the second half of 2018, and a second Phase 3 trial was planned for 2017. DEXTENZA’s two allergic-conjunctivitis Phase 3 trials had mixed/unsuccessful primary-endpoint results. A Phase 2 dry-eye program was under reassessment.
• Liquidity outlook: Management estimated existing cash and marketable securities would fund operating costs, debt service and capital expenditures through the third quarter of 2018, based on current plans and forecasts. It cautioned that assumptions may prove wrong and additional capital may be needed. Milestone-dependent credit tranches were not assured funding.
• Post-quarter cost actions: On July 31, the board approved eliminating 26 positions, about 19% of the workforce. The company estimated approximately $1.5 million in restructuring costs, largely payable in the second half of 2017, with the balance in 2018. Management expected lower selling and marketing expense until a product receives approval.
• Legal contingencies: Three putative securities class actions and two shareholder derivative suits were filed after the quarter, alleging misleading statements relating to the FDA Form 483 and DEXTENZA manufacturing. The company denied wrongdoing, intended to defend the cases, and said outcomes and potential exposure could not be predicted.
• Regeneron collaboration: The option remained unexercised as of June 30, with no payments made. If exercised, the company could owe up to $25 million of specified development-cost reimbursements (potentially increased by $5 million) and would be eligible for option, milestone and royalty payments.
• The company moved its headquarters to a new Bedford facility in June. The lease extends through July 2027, and the company had a $1.5 million letter of credit as security. Management reported disclosure controls were effective at the reasonable-assurance level and no material change in internal control during the quarter.

Most important facts for investors to verify

1. Progress and FDA acceptance of corrective actions, process qualification, and any timing or terms for a DEXTENZA NDA resubmission.
2. Cash burn, spending reductions after the workforce restructuring, and whether the stated runway through Q3 2018 remains achievable.
3. OTX-TP Phase 3 enrollment and results timing, and the company’s plans for DEXTENZA’s other indications.
4. Availability of the contingent credit tranches, debt-service requirements, and potential need for further equity or other financing.
5. Developments and potential costs from the securities and derivative litigation, and whether insurance would cover any resulting costs or damages.