Ocular Therapeutix, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Financial statement amounts are unaudited and, unless stated otherwise, in millions of dollars. Ocular Therapeutix is a development-stage ophthalmology biopharmaceutical company; ReSure Sealant was its only product generating sales.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $0.477 | $0.429 | $1.376 | $1.314 |
| Product revenue | $0.477 | $0.388 | $1.334 | $0.960 |
| Operating expenses | $9.715 | $11.603 | $32.230 | $29.236 |
| Operating loss | $(9.238) | $(11.174) | $(30.854) | $(27.922) |
| Net loss | $(9.596) | $(11.524) | $(31.881) | $(29.111) |
| Net loss per share | $(0.39) | $(0.47) | $(1.29) | $(1.28) |
- Q3 product sales rose $0.089 million year over year; total revenue also included $0.041 million of collaboration revenue in Q3 2015, with none in Q3 2016. The prior feasibility agreement ended in Q2 2016.
- For the first nine months, product revenue increased $0.374 million, while collaboration revenue declined $0.312 million. Product revenue was principally from ReSure Sealant.
- Cost of product revenue was $0.112 million for Q3 and $0.316 million for the nine months. The filing does not report a consolidated gross-margin measure.
- Research and development was $5.686 million in Q3 (down from $8.263 million) and $19.737 million for nine months (essentially flat year over year). Q3 decline chiefly reflected lower allergic-conjunctivitis trial spending. Selling and marketing and general and administrative costs increased.
- Operating cash used was $26.389 million for nine months, versus $25.107 million in 2015. Investing activities provided $47.947 million, mainly reflecting maturities of marketable securities; financing activities used $0.108 million. Cash and cash equivalents rose to $52.234 million from $30.784 million at year-end 2015.
- At September 30, cash, cash equivalents and marketable securities totaled $75.747 million; current assets were $76.824 million and current liabilities $8.243 million. Restricted cash was $1.728 million.
- Debt principal was $15.6 million under a facility bearing 8.25% stated interest (10.6% effective annual rate). Principal payments were scheduled to begin in January 2017; the facility matures December 1, 2019 and is secured by substantially all personal property, excluding intellectual property. Total scheduled debt payments including interest and final payment were $18.522 million.
Material developments and outlook
- DEXTENZA regulatory status: FDA issued a Complete Response Letter in July 2016 for the post-surgical ocular-pain NDA. The cited concerns involved manufacturing processes and controls, not clinical efficacy or safety, and FDA did not request additional clinical trials in the CRL. The company described one remaining corrective-action issue concerning identity testing of an incoming inert gas and said FDA also requested documentation of automated analytical testing. Management expected to complete corrective actions and resubmit in Q4 2016. FDA would decide whether to reinspect during review; management estimated about two months for a minor review without reinspection or up to six months if reinspection were required, while acknowledging review could take longer.
- The company had completed enrollment and follow-up of 436 patients in a third Phase 3 DEXTENZA trial for post-surgical inflammation and pain and expected topline data in Q4 2016. If results were favorable and the pain indication received approval, management planned an inflammation supplement. A U.S. launch for pain was expected in the second half of 2017, conditional on approval, which management then anticipated in the first half of 2017.
- DEXTENZA’s allergic-conjunctivitis Phase 3 results were mixed: the first trial met the itching endpoint but not redness; the second did not meet its primary itching endpoint. The company planned a 2017 human study of a faster-resorbing placebo depot. The dry-eye program remained under assessment.
- OTX-TP: The first of two planned Phase 3 glaucoma/ocular-hypertension trials began in September 2016. Each trial was expected to enroll about 550 patients. Management highlighted retention and clinical efficacy as important development uncertainties.
- Regeneron agreement, signed October 10, 2016: The parties agreed to research a sustained-release aflibercept formulation for retinal disease. Regeneron received an option for an exclusive worldwide license. If exercised, it would pay $10 million; Ocular Therapeutix could also qualify for development/regulatory milestones of up to $145 million per licensed product, $100 million per product upon first commercial sale, up to $50 million in sales milestones across licensed products, and tiered royalties. Ocular Therapeutix would reimburse certain development costs through the initial clinical trial, capped at $25 million, potentially increased by $5 million. These are contingent potential payments, not reported revenue or guaranteed funding.
- Management believed existing cash and marketable securities would fund operating expenses, debt service and capital expenditures into Q4 2017, but warned estimates depend on assumptions and that additional capital would be needed. No committed external funding source was identified.
- A new 70,712-square-foot facility lease begins February 2017 and runs to July 2027. Planned facility improvements were estimated at $6.5–$7.0 million before up to $2.8 million of landlord allowance; equipment spending was estimated at $2.0–$2.5 million. Total contractual obligations were $38.551 million, including leases, purchase and manufacturing commitments, and debt.
Risks, contingencies and other items
- Key risks include DEXTENZA manufacturing remediation and FDA review, clinical-trial outcomes and enrollment, product retention, limited product sales, substantial cash burn and future financing needs, manufacturing capacity and supplier dependence, reimbursement and market acceptance, competition, and intellectual-property challenges.
- The company reported an accumulated deficit of $161.057 million and stated it did not expect significant product revenue for several years, if at all. ReSure Sealant sales alone were not expected to support profitability.
- Management reported no material legal proceedings, effective disclosure controls as of September 30, 2016, and no material change in internal control over financial reporting during the quarter. No off-balance-sheet arrangements were reported.
- Other notable commitments include a $1.5 million restricted-cash security deposit for the new lease. The Regeneron agreement was a subsequent event after quarter-end.
Investor verification priorities
- Confirm completion and FDA acceptance of manufacturing corrective actions, NDA resubmission timing, and whether FDA requires a facility reinspection.
- Check the third Phase 3 DEXTENZA trial results and the regulatory implications of its outcomes, including the separate inflammation indication.
- Track cash burn, capital spending, the stated Q4 2017 cash runway, and the start of scheduled debt principal payments in 2017.
- Verify OTX-TP Phase 3 enrollment, efficacy and insert-retention results; review the implications of the failed second allergic-conjunctivitis Phase 3 endpoint.
- Monitor whether Regeneron exercises its option, the associated cost-reimbursement obligations, and whether any milestone or royalty conditions are actually achieved.