Ocular Therapeutix, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Financial amounts below are in millions of dollars unless otherwise noted; statements are unaudited.
Business context
Ocular Therapeutix develops ophthalmic products using a bioresorbable hydrogel platform. ReSure Sealant, approved by the FDA in January 2014 to close corneal incisions after cataract surgery, was the company’s only product generating sales. Its lead drug-delivery candidates, OTX-DP and OTX-TP, remained in clinical development. The company completed its IPO and underwriters’ over-allotment in July and August 2014.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $0.143 | $0 | $0.267 | $0 |
| Cost of revenue | $0.032 | $0 | $0.061 | $0 |
| Research and development | $4.482 | $2.784 | $13.732 | $7.675 |
| Selling and marketing | $0.479 | $0.148 | $1.324 | $0.428 |
| General and administrative | $1.926 | $0.503 | $4.697 | $1.381 |
| Operating loss | $(6.776) | $(3.435) | $(19.547) | $(9.484) |
| Net loss | $(7.294) | $(3.522) | $(20.694) | $(9.812) |
| Net loss per share, basic and diluted | $(0.48) | $(1.34) | $(2.93) | $(3.79) |
Gross profit was approximately $0.111 million for Q3 and $0.206 million for the nine-month period, equivalent to gross margins of about 78% in each period. Sales remained small relative to operating costs. Accumulated deficit was $81.5 million at September 30.
Cash and cash equivalents were $80.9 million, compared with $17.5 million at December 31, 2013; current assets were $82.3 million and current liabilities $3.4 million. Total assets were $83.9 million and total liabilities $18.3 million. Notes payable had a $14.8 million net carrying amount, primarily long-term; the credit facility’s original borrowing was $15 million. The company had $5 million of additional borrowing capacity available through December 31, 2014, subject to conditions.
For the first nine months, operating cash use was $14.9 million, investing cash use $0.8 million, and financing cash inflow $79.1 million. Financing included approximately $66.4 million of net IPO proceeds and $14.9 million of net credit-facility proceeds. The company reported no income-tax provision and maintained a full valuation allowance against deferred tax assets.
Material changes versus prior comparable periods
- Revenue began in 2014 following ReSure Sealant’s approval and launch; no revenue was reported for the comparable 2013 periods.
- Nine-month operating expenses more than doubled to $19.8 million, with R&D up $6.1 million, G&A up $3.3 million, and selling and marketing up $0.9 million. Increased clinical activity, staffing, public-company costs, and commercialization spending were cited.
- Nine-month net loss increased by $10.9 million to $20.7 million. Higher interest expense and warrant fair-value expense also contributed to the increase in other expense.
- The IPO raised $66.4 million net, preferred shares converted into common stock, and the prior preferred-warrant liability was converted to equity-classified common-stock warrants.
- Operating cash use increased from $9.2 million to $14.9 million year over year, primarily reflecting the larger operating loss.
Outlook, management commentary, risks and unusual items
- Management expected cash, ReSure sales and the remaining conditional credit-facility capacity to fund operations, debt service and capital spending at least through the first half of 2016. It cautioned that estimates depend on assumptions and cash could be used sooner.
- Management expected expenses to rise as clinical programs, manufacturing, ReSure commercialization and public-company operations expanded; it did not expect ReSure sales alone to support profitability or other product sales for several years, if ever.
- OTX-DP Phase 3 enrollment for post-surgical inflammation and pain was complete. The company expected results in Q1 2015 and, if favorable, an NDA submission in Q2 2015. In the allergic-conjunctivitis Phase 2 trial, it reported significant differences at specified time points but did not meet one of two primary efficacy measures; further analysis and FDA discussions were planned.
- The first patient had been enrolled in a Phase 2b OTX-TP trial for glaucoma and ocular hypertension. The filing emphasizes that clinical outcomes, regulatory review, plug retention, manufacturing scale-up, market acceptance and reimbursement remain uncertain.
- ReSure was subject to two FDA-required post-approval studies; enrollment in the clinical study was expected to begin in November 2014. The company also identified dependence on a sole-source PEG supplier, reliance on third-party suppliers, and the need to expand manufacturing capacity.
- Debt bears 8.25% interest, has a 3.75% final payment, is secured by substantially all assets other than intellectual property, and includes restrictive negative covenants. Contractual obligations totaled $21.2 million, including $18.4 million of scheduled debt obligations and $2.8 million of lease commitments.
- Unusual non-cash related-party equity payments included $1.7 million of R&D expense for expanded Incept license rights and $0.7 million of G&A expense for consulting services. A $0.25 million feasibility-agreement payment remained deferred; no related milestones had been achieved. No material legal proceedings were reported.
Most important facts for investors to verify
- ReSure Sealant sales growth, gross margin, distributor performance, reimbursement and results or timing of required post-approval studies.
- OTX-DP Phase 3 results and timing of any NDA, plus FDA feedback and next-trial design following the mixed allergic-conjunctivitis Phase 2 results.
- OTX-TP Phase 2b progress, plug retention and safety data, and eventual pivotal-trial requirements.
- Cash burn against management’s first-half-2016 runway estimate, access conditions for the remaining $5 million facility tranche, and scheduled debt service.
- Manufacturing expansion, supplier continuity—especially PEG—and whether additional financing may be needed sooner than expected.