Ocular Therapeutix, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Dollar amounts below are in millions unless noted. The company develops and commercializes ophthalmic therapies using a bioresorbable hydrogel platform. DEXTENZA was its primary marketed product; ReSure Sealant was not being manufactured or commercially available in the U.S.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $12.0 | $12.2 | $37.4 | $31.2 |
| Operating loss | $(21.5) | $(19.5) | $(59.3) | $(60.0) |
| Net income (loss) | $(24.2) | $2.7 | $(55.5) | $(2.7) |
| Operating cash flow | Not provided for the quarter | $(42.6) | $(50.4) |
- Revenue: Q3 net product revenue was $11.9 million, down about 2% year over year; collaboration revenue was $0.1 million. Nine-month product revenue increased about 17% to $36.6 million, all attributable to DEXTENZA in 2022, with $0.9 million of collaboration revenue.
- Margins and expenses: Product gross margin was approximately 91% in both the quarter and nine-month period, based on net product revenue less cost of product revenue. Total operating expenses rose 6% to $33.5 million in Q3 and 6% to $96.7 million year to date. R&D and selling and marketing were the principal areas of spending.
- Cash and liquidity: Cash and cash equivalents were $121.0 million at September 30, 2022, down from $164.2 million at year-end 2021; cash, equivalents and restricted cash totaled $122.7 million. Current assets were $145.6 million and current liabilities $29.3 million. Nine-month cash used in investing activities was $1.6 million; financing provided $1.0 million. Total cash, equivalents and restricted cash decreased $43.2 million.
- Debt: Credit-facility principal was $25.0 million, at a 9.31% rate on September 30, with interest-only payments through May 2024 and maturity in November 2025, subject to an extension condition. The 2026 Convertible Notes have $37.5 million principal, 6% stated interest and a March 2026 maturity; accrued interest was $8.2 million. Balance-sheet carrying values were $25.2 million for notes payable and $28.2 million for the convertible notes, net of discount.
- Equity: Stockholders’ equity was $46.2 million, versus $88.0 million at December 31, 2021; accumulated deficit was $601.3 million. Shares outstanding at September 30 were 77.0 million.
Material changes versus prior periods
- Nine-month revenue grew primarily with increased DEXTENZA market acceptance and commercialization. Q3 product revenue declined, which management attributed to staffing challenges at surgery centers and hospitals and within its sales force, as well as lower physician payment associated with the procedure-code change effective January 1, 2022.
- Nine-month operating loss was slightly lower than in 2021, but net loss increased substantially. Results are affected by noncash fair-value changes in the convertible-note derivative: the nine-month gain was $8.6 million in 2022 versus $62.2 million in 2021; Q3 2022 recorded a $1.1 million loss from remeasurement, versus a $23.8 million gain in Q3 2021. These changes do not affect expected cash outflows.
- Q3 selling and marketing costs rose to $10.2 million, while R&D rose to $13.7 million. For the nine months, R&D increased to $39.9 million and selling and marketing to $29.4 million; general and administrative expense declined slightly to $23.9 million.
Outlook, commentary and risks
- Management expected September 30 cash to fund planned operating expenses, debt service and capital expenditures through 2023. This estimate depends on DEXTENZA sales, expenses, development pace and other assumptions; management warned cash could be used sooner and additional financing may be needed. The company expects continuing operating losses and negative operating cash flow.
- Planned development included a U.S. Phase 2/3 OTX-TKI wet-AMD trial targeted for Q3 2023, subject to FDA discussions; a Phase 1 OTX-TKI diabetic-retinopathy trial targeted for Q1 2023; and OTX-TIC Phase 2 topline data expected in Q4 2023. DEXTENZA’s pediatric post-approval trial remained ongoing. Timelines and outcomes are uncertain.
- Interim U.S. OTX-TKI Phase 1 data reported stable visual acuity and retinal thickness at seven months; 73% of the OTX-TKI arm was rescue-free through month seven. Data were interim, based on a small study, and some rescues were at investigator discretion rather than meeting protocol criteria. OTX-CSI’s Phase 2 study did not separate from placebo on its primary endpoint; further formulation work was planned. OTX-DED follow-up work was planned to address placebo-comparator performance.
- COVID-19-related staffing shortages at ASCs/HOPDs and the company’s own sales force impaired cataract procedure volume and DEXTENZA promotion. Three specialty distributors accounted for 86% of Q3 gross product revenue, and three customers represented 89% of accounts receivable, creating customer concentration exposure. The company also depends on a limited number of third-party manufacturers.
- Further capital may be required. The company had an unused $100 million at-the-market sales agreement as of November 4, 2022, but no shares had been sold under it. Equity financing could dilute shareholders; debt and partnership financing may impose restrictions or require rights to be shared.
- On October 18, 2022, the company extended its manufacturing-space lease by five years through July 2028. Future rent had not been set, so the financial effect was not estimable. The filing reported no material legal proceedings and no off-balance-sheet arrangements. Management considered disclosure controls effective.
Most important facts for investors to verify
- Whether DEXTENZA sales and utilization recover from the Q3 decline, and how reimbursement and provider staffing affect adoption.
- Whether cash burn remains consistent with management’s through-2023 runway estimate and whether additional financing is required.
- Upcoming clinical data, FDA feedback and trial timing for OTX-TKI and OTX-TIC, and the development plans for OTX-CSI and OTX-DED.
- The terms and cash burden of the credit facility and convertible notes, including accrued interest and potential conversion-related dilution.
- Distributor and receivables concentration, manufacturing supply continuity, and the eventual cost of the extended manufacturing lease.