Business context and reporting period
Ocular Therapeutix, Inc. is a biopharmaceutical company developing eye therapies using a bioresorbable hydrogel drug-delivery platform. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2018; amounts below are in millions of dollars unless stated otherwise.
ReSure Sealant, approved for sealing corneal incisions after cataract surgery, was the company’s only source of product revenue. DEXTENZA, its lead drug candidate, was under FDA review for post-surgical ocular pain. OTX-TP was in Phase 3 testing for glaucoma and ocular hypertension.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $0.498 | $0.523 | $1.486 | $1.436 |
| Cost of product revenue | $0.115 | $0.125 | $0.348 | $0.344 |
| Research and development | $9.685 | $8.126 | $26.657 | $22.972 |
| Selling and marketing | $1.067 | $3.238 | $2.651 | $16.097 |
| General and administrative | $4.447 | $4.230 | $13.665 | $11.230 |
| Operating loss | $(14.816) | $(15.196) | $(41.835) | $(49.207) |
| Net loss | $(15.010) | $(15.567) | $(42.579) | $(50.284) |
| Basic and diluted loss per share | $(0.38) | $(0.54) | $(1.15) | $(1.76) |
- Product gross profit was $0.383 million in Q3 and $1.138 million for the nine months, equivalent to approximate product gross margins of 77% and 77%, respectively. These figures relate to ReSure Sealant, not a profitable overall business.
- Cash and cash equivalents were $56.861 million at September 30, 2018, versus $41.538 million at December 31, 2017; restricted cash was an additional $1.614 million. Current assets were $58.274 million and current liabilities $13.406 million.
- Net cash used in operating activities was $35.579 million for the nine months; investing activities used $1.410 million and financing activities provided $52.312 million. Cash, cash equivalents and restricted cash increased by $15.323 million.
- Notes payable, net of discount, totaled $14.167 million ($6.094 million current and $8.073 million long term). The facility carries an effective annual interest rate of 10.5%; principal payments run through December 2020, with a $0.630 million final payment due at maturity.
- Accumulated deficit was $279.844 million. Common shares outstanding were 40.524 million at September 30, versus 29.658 million at year-end 2017; the filing reports 41.095 million outstanding as of November 1, 2018.
Material changes versus the prior comparable period
- Q3 revenue decreased $0.025 million year over year; nine-month revenue increased $0.050 million. ReSure Sealant sales remained limited.
- Nine-month net loss narrowed by $7.705 million, mainly as selling and marketing costs fell $13.446 million following the 2017 restructuring and reduced pre-commercialization activity. This was partly offset by a $3.685 million increase in R&D and a $2.435 million increase in G&A, including higher legal costs.
- Q3 R&D increased $1.559 million year over year, while Q3 selling and marketing fell $2.171 million. Q3 net loss improved by $0.557 million.
- Financing included $34.704 million net proceeds from a January 2018 follow-on offering and $21.241 million net ATM proceeds through September. The company repaid $4.114 million of debt principal in the nine-month period.
Outlook, commentary and key risks
- Management said September 30 cash was expected to fund operating expenses, debt service and capital spending into the second quarter of 2019. The company stated that its accumulated losses, operating cash outflows and expected future losses raised substantial doubt about its ability to continue as a going concern within one year of issuance. Additional financing was not committed; management said it might need to reduce or delay programs or commercialization if funding is unavailable.
- DEXTENZA’s resubmitted NDA received a December 28, 2018 PDUFA target date. The FDA completed a manufacturing-facility inspection in late October and issued Form 483 observations; the company was preparing responses. Approval depended on FDA assessment of manufacturing and inspection findings. A commercial sales force, if needed following approval, was not fully funded in the current operating plan.
- The company expected topline data from the first OTX-TP Phase 3 trial in the first half of 2019; it had enrolled 550 patients and planned to defer starting the second Phase 3 trial until reviewing results. Initial OTX-TIC trial results were also anticipated in the first half of 2019.
- Regeneron had not exercised its option under the aflibercept collaboration by September 30. Exercise would trigger a $10 million payment to Ocular Therapeutix, while the company could be required to reimburse development costs up to $25 million, potentially increased by $5 million under specified circumstances. Future milestones and royalties are contingent, not assured funding.
- On October 18, 2018, the company received an FDA warning letter concerning required data collection and reporting for ReSure Sealant’s Device Exposure Registry Study, which had not enrolled patients; the company appealed. ReSure remained commercially available without sales support.
- The company disclosed securities and shareholder derivative litigation relating to prior DEXTENZA manufacturing disclosures, and two SEC subpoenas, including one received in August 2018. It said it denied wrongdoing, intended to defend the lawsuits and would cooperate with the SEC inquiry; outcomes and potential costs were uncertain.
- Other material risks include dependence on successful clinical and regulatory outcomes, manufacturing compliance, the need for more capital, dilution from equity financing, debt-service and covenant constraints, competition, reimbursement and market acceptance, and reliance on licensed intellectual property and third parties.
Important facts for investors to verify
- FDA disposition of DEXTENZA by the December 28, 2018 target date, including whether the October inspection observations were resolved and whether manufacturing readiness was accepted.
- Actual cash runway and financing needs, particularly the costs of any DEXTENZA launch and the effect of subsequent capital raises or operating spending.
- OTX-TP Phase 3 efficacy, safety and insert-retention results, and whether they support a second trial and a viable regulatory path.
- Status and enrollment progress of the ReSure post-approval registry study, the FDA warning letter appeal and any effect on the product’s availability or sales.
- Developments in the securities litigation, derivative cases and SEC inquiry, including potential expenses or outcomes not covered by insurance.
- Regeneron’s option decision, potential reimbursement obligations and whether any contingent collaboration payments become payable.