OCULAR THERAPEUTIX, INC annual report, FY2017

Ocular Therapeutix, Inc. — FY 2017 Form 10-K

Reporting period: Fiscal year ended December 31, 2017; filed March 8, 2018. The company is a development-stage ophthalmic biopharmaceutical business built around a sustained-release hydrogel platform. Its only marketed product was ReSure Sealant; its principal drug candidates were DEXTENZA and OTX-TP.

Financial performance and position

Metric	FY 2017	FY 2016
Total revenue	$1.923 million	$1.887 million
Product revenue, primarily ReSure	$1.923 million	$1.845 million
Operating expenses	$63.846 million	$45.213 million
Loss from operations	$(61.923) million	$(43.326) million
Net loss	$(63.386) million	$(44.703) million
Net loss per share	$(2.20)	$(1.80)
Cash used in operating activities	$(50.473) million	$(34.001) million

Product gross profit was approximately $1.466 million, or 76% of product revenue, based on reported product revenue less cost of product revenue. The company remained substantially loss-making; revenue was small relative to operating expenses.
Research and development expense was $30.880 million, up from $27.065 million. Selling and marketing expense rose to $17.000 million from $6.701 million, largely reflecting DEXTENZA launch preparation, professional fees and severance. General and administrative expense increased to $15.509 million from $11.004 million.
At year-end, cash and cash equivalents were $41.538 million; there were no marketable securities. Working capital was $29.914 million, total assets $55.431 million, and total stockholders’ equity $26.147 million.
Debt was $18.016 million, including $5.545 million current and $12.471 million long-term. The credit facility bears interest at a floating rate based on LIBOR plus 7.25%, subject to a 1% LIBOR floor; the stated indicative rate at amendment was 8.25%. Substantially all personal property, excluding intellectual property, secures the debt.
Following a January 2018 stock offering, the company received approximately $35.1 million net. Management estimated that year-end cash plus offering proceeds would fund operating expenses, debt service and capital expenditures through the first quarter of 2019, excluding potential Regeneron payments. The auditor and management nevertheless disclosed substantial doubt about the company’s ability to continue as a going concern.
Q4 2017 snapshot: Revenue was $487,000 and net loss was $13.102 million, versus revenue of $511,000 and net loss of $12.822 million in Q4 2016.

Material changes and operating developments

Annual net loss widened by $18.683 million, while operating cash use increased by $16.472 million. Revenue grew only modestly, by $36,000, and no collaboration revenue was recorded in 2017.
Cash and cash equivalents increased to $41.538 million from $32.936 million, in part because of equity financing and maturities of marketable securities. Property and equipment rose to $10.478 million from $3.313 million, reflecting facility investment.
The company eliminated 30 positions in a July 2017 restructuring and recorded $2.506 million in restructuring and other costs. It also reduced commercial-launch activity after DEXTENZA’s FDA setback.
ReSure Sealant continued to generate limited revenue and had no dedicated sales support. The company did not expect meaningful ReSure revenue in 2018.

Outlook, pipeline and key risks

DEXTENZA: The FDA issued a second Complete Response Letter in July 2017, citing manufacturing-process and analytical-testing deficiencies, including concerns relating to particulate matter. The company reported remediation work and planned to resubmit its post-surgical ocular pain NDA in the first half of 2018, contingent on resolving FDA observations and demonstrating consistent commercial manufacturing. Approval was not assured. A supplemental application for post-surgical inflammation was planned subject to approval of the pain indication. Allergic-conjunctivitis trials had mixed results: one Phase 3 trial met the itching endpoint, while the second did not meet its primary endpoint.
OTX-TP: The first of two Phase 3 glaucoma trials was underway; more than 60% of planned enrollment was reported by February 28, 2018, with topline data expected in Q4 2018. The earlier Phase 2b trial did not achieve non-inferiority to timolol. The company said the pivotal program must show statistically superior and clinically meaningful IOP reduction and generate longer-term safety data.
Other programs: OTX-TIC and OTX-TKI were early-stage; neither had enrolled a patient as of February 28, 2018. The company planned to initiate U.S. OTX-TIC and non-U.S. OTX-TKI Phase 1 studies in the first half of 2018. Regeneron had begun funding an initial preclinical tolerability study of hydrogel-delivered aflibercept; its option had not been exercised by year-end.
2018 spending outlook: Management estimated R&D expense of approximately $38.0–$40.5 million, including $28.0–$29.0 million of external R&D costs, and $1.5–$2.0 million of manufacturing and R&D capital equipment. It estimated external program costs of $8.0–$8.5 million for DEXTENZA post-surgical pain/inflammation, $14.0–$14.5 million for OTX-TP, and $6.0–$6.5 million for OTX-TKI; these estimates are components of the stated external R&D outlook and should be checked against the filing’s detailed budget assumptions.
Liquidity and execution risks: Management expected continuing losses and additional financing needs. A DEXTENZA sales force was not fully included in the operating plan and would require additional capital. Financing may dilute shareholders or impose restrictive terms; failure to raise funds could force delays or reductions in development.
Legal and regulatory matters: The company faced securities class actions and shareholder derivative suits associated with statements about DEXTENZA and FDA manufacturing observations. It also received a non-public SEC subpoena in December 2017 seeking DEXTENZA-related records; the SEC stated the inquiry was not an indication that violations occurred. Outcomes and potential costs were uncertain.
Other risks: Clinical efficacy and safety, manufacturing remediation, insert retention, reimbursement and market acceptance, competition from existing and sustained-release therapies, reliance on licensed intellectual property and suppliers, and the company’s going-concern status remain significant uncertainties.

Important facts for investors to verify

Whether the FDA accepted DEXTENZA’s manufacturing remediation and the timing and outcome of any NDA resubmission or review.
Actual cash runway after the January 2018 offering, quarterly cash burn, debt amortization and any financing required for commercialization.
OTX-TP Phase 3 enrollment, retention and safety results, and whether the Q4 2018 data timeline was achieved.
Whether Regeneron exercises its option, and the company’s resulting reimbursement obligations, milestones and potential royalties.
Developments and financial exposure in the shareholder litigation and SEC inquiry, together with progress on ReSure’s required post-approval registry study.
The 2018 R&D budget and product-level estimates, including whether overlapping cost categories or later program changes alter expected spending.