Ocular Therapeutix(OCUL) - 2022 Q3 - Quarterly Report

Forward-Looking Statements - The company's forward-looking statements cover ongoing and planned clinical trials (OTX-TKI for wet AMD, diabetic retinopathy; OTX-TIC for glaucoma; DEXTENZA in pediatric subjects), preclinical development (gene therapy, complement inhibitor for dry AMD), DEXTENZA commercialization, regulatory approvals, future revenue/expenses, and financing plans[9] - Actual results may differ materially from forward-looking statements due to substantial risks and uncertainties, as detailed in the 'Risk Factors' section[12] PART I – FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Presents unaudited condensed consolidated financial statements and related notes, highlighting accounting policies, financial instruments, ongoing losses, and financing needs Condensed Consolidated Balance Sheets | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change | | :-------------------- | :----------- | :----------- | :----- | | Cash and cash equivalents | $120,950 | $164,164 | $(43,214) | | Total current assets | $145,615 | $191,300 | $(45,685) | | Total assets | $158,579 | $204,887 | $(46,308) | | Total current liabilities | $29,269 | $26,337 | $2,932 | | Total liabilities | $112,350 | $116,888 | $(4,538) | | Total stockholders' equity | $46,229 | $87,999 | $(41,770) | | Accumulated deficit | $(601,300) | $(545,804) | $(55,496) | Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) | Metric (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------- | :---------------------------- | :---------------------------- | :---------------------------- | :---------------------------- | | Product revenue, net | $11,913 | $12,153 | $36,555 | $31,214 | | Collaboration revenue | $52 | $— | $864 | $— | | Total revenue, net | $11,965 | $12,153 | $37,419 | $31,214 | | Total costs and operating expenses | $33,509 | $31,682 | $96,712 | $91,202 | | Loss from operations | $(21,544) | $(19,529) | $(59,293) | $(59,988) | | Change in fair value of derivative liability | $(1,133) | $23,837 | $8,598 | $62,249 | | Net (loss) income | $(24,188) | $2,657 | $(55,496) | $(2,703) | | Net (loss) income per share, basic | $(0.31) | $0.03 | $(0.72) | $(0.04) | Condensed Consolidated Statements of Cash Flows | Metric (in thousands) | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------- | :---------------------------- | :---------------------------- | | Net loss | $(55,496) | $(2,703) | | Net cash used in operating activities | $(42,645) | $(50,397) | | Net cash used in investing activities | $(1,565) | $(563) | | Net cash provided by financing activities | $996 | $2,184 | | Net decrease in cash, cash equivalents and restricted cash | $(43,214) | $(48,776) | | Cash, cash equivalents and restricted cash at end of period | $122,714 | $181,045 | Condensed Consolidated Statements of Stockholders' Equity | Metric (in thousands) | Dec 31, 2021 | Sep 30, 2022 | | :-------------------- | :----------- | :----------- | | Total Stockholders' Equity | $87,999 | $46,229 | | Accumulated Deficit | $(545,804) | $(601,300) | | Additional Paid-in Capital | $633,795 | $647,521 | - Common stock shares outstanding increased from 76,731,940 at December 31, 2021, to 77,010,385 at September 30, 2022, due to stock option exercises and employee stock purchase plan issuances[25] Notes to Condensed Consolidated Financial Statements - The company is a biopharmaceutical company focused on ophthalmic therapies using a proprietary bioresorbable hydrogel platform, with DEXTENZA and ReSure Sealant as FDA-approved products[29][31] - As of September 30, 2022, the company had an accumulated deficit of $601.3 million and expects to continue generating operating losses and negative cash flows, requiring additional capital beyond 2023[32][33] - The COVID-19 pandemic has adversely affected DEXTENZA sales due to recruitment and retention challenges at surgical centers and within the company's sales force[37] | Accrued Expenses (in thousands) | Sep 30, 2022 | Dec 31, 2021 | | :------------------------------ | :----------- | :----------- | | Accrued payroll and related expenses | $6,700 | $6,597 | | Accrued rebates and programs | $2,666 | $3,615 | | Accrued professional fees | $1,306 | $1,227 | | Accrued research and development expenses | $1,565 | $1,102 | | Accrued interest payable on 2026 convertible notes | $8,181 | $6,475 | | Accrued other | $1,196 | $1,105 | | Total | $21,614 | $20,121 | - The 2026 Convertible Notes have an embedded conversion option accounted for as a derivative liability, which was valued at $11.6 million as of September 30, 2022, down from $20.2 million at December 31, 2021, primarily due to a decrease in the common stock price[54][55] - Collaboration revenue of $52 thousand (Q3 2022) and $864 thousand (YTD Q3 2022) was recognized from the AffaMed license agreement for the OTX-TIC Phase 2 clinical trial[74] - Unrecognized stock-based compensation cost totaled $22.546 million as of September 30, 2022, to be recognized over a weighted average period of 2.6 years[92] - The company extended its manufacturing space lease until July 31, 2028, with rent to be determined based on fair market value[96] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Analyzes financial condition, results of operations, and future outlook, covering product commercialization, pipeline, collaborations, COVID-19 impact, liquidity, and funding needs Overview - The company focuses on bioresorbable hydrogel-based therapies for eye diseases, aiming to build commercial experience and develop a clinical pipeline for unmet needs[99] - Current FDA-approved products include DEXTENZA (post-surgical ocular inflammation/pain, allergic conjunctivitis) and ReSure Sealant (wound leaks, not currently manufactured)[100] - The clinical pipeline includes OTX-TKI (wet AMD, diabetic retinopathy), OTX-TIC (glaucoma/ocular hypertension), OTX-DED (dry eye disease, short-term), and OTX-CSI (dry eye disease, chronic)[102] Commercial Portfolio - DEXTENZA is an FDA-approved intracanalicular insert for post-surgical ocular inflammation/pain (launched July 2019) and ocular itching associated with allergic conjunctivitis (launched Q1 2022)[104][105] - DEXTENZA is separately payable in ASCs through 2023 and has a Category 1 physician reimbursement code[106] - A Phase 3 clinical trial for DEXTENZA in pediatric subjects following cataract surgery is ongoing as an FDA post-approval requirement[107] - ReSure Sealant, approved for preventing wound leaks after cataract surgery, has generated limited revenue and its production was suspended in Q4 2021 to focus on DEXTENZA[109][110] Clinical Portfolio - OTX-TKI (axitinib intravitreal implant) is in Phase 1 trials for wet AMD in Australia and the US, showing general tolerability and a preliminary signal of biological activity with extended duration (6+ months for >60% subjects)[111][113][115] - Interim 7-month data from the US Phase 1 OTX-TKI trial showed stable BCVA and CSFT, with 80% of subjects rescue-free up to six months and 73% up to seven months[118] - Plans include a Phase 2/3 U.S.-based clinical trial for OTX-TKI (wet AMD) in Q3 2023 and a Phase 1 U.S.-based clinical trial for OTX-TKI (diabetic retinopathy) in Q1 2023[120][121] - OTX-TIC (travoprost intracameral implant) Phase 1 data showed a clinically meaningful decrease in IOP for six months or longer in glaucoma/ocular hypertension patients, with a favorable safety profile, supporting potential chronic dosing[124] - A Phase 2 clinical trial for OTX-TIC is ongoing, with topline data expected in Q4 2023[123] - OTX-DED (dexamethasone intracanalicular insert) Phase 2 trial for dry eye disease achieved its primary endpoint (bulbar conjunctival hyperemia reduction) but was not powered for statistical significance. Further trials are planned to develop an appropriate placebo comparator[127][128] - OTX-CSI (cyclosporine intracanalicular insert) Phase 2 trial for chronic dry eye disease did not show separation from placebo for the primary endpoint, and durability was shorter than expected. Formulation work is ongoing[130][131] Collaboration Agreements - The AffaMed License Agreement grants exclusive rights for DEXTENZA and OTX-TIC development/commercialization in mainland China, Taiwan, Hong Kong, Macau, South Korea, and ASEAN countries[132][134] - Under the AffaMed agreement, the company received an upfront payment of $12 million and is eligible for up to $91 million in development, regulatory, and commercial milestone payments, plus tiered royalties[133][134] - AffaMed initiated a real-world study of DEXTENZA in China and received approval for DEXTENZA in Macau for post-cataract surgery inflammation/pain[135][136] - Collaboration with Mosaic Biosciences focuses on identifying new targets and discovering novel therapeutic agents for dry AMD, yielding lead compounds for a preclinical complement inhibitor program[137] Business Update Regarding COVID-19 - COVID-19 has slowed cataract procedures and created employee recruitment/retention challenges for ASCs and HOPDs, reducing opportunities for DEXTENZA use[138] - The company's own sales force has faced recruitment and retention challenges, adversely affecting DEXTENZA marketing efforts[138] Financial Position | Metric (in millions) | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2022 | Accumulated Deficit (Sep 30, 2022) | | :------------------- | :---------------------------- | :---------------------------- | :--------------------------------- | | Net (loss) income | $(24.2) | $(55.5) | $(601.3) | | Total costs and operating expenses | $33.5 | $96.7 | N/A | - The company expects to incur substantial sales, marketing, and R&D expenses as it commercializes DEXTENZA and develops its product candidates[141] - As of September 30, 2022, cash and cash equivalents of $121.0 million are expected to fund operations through 2023, but additional financing will be needed for continued operations[147] - The company has financed operations through product sales, equity offerings, convertible notes, and credit facilities, raising $641.4 million in net proceeds through September 30, 2022[143] - DEXTENZA in-market unit sales for July, August, and September 2022 were 8,348 units, 9,410 units, and 8,649 units, respectively, with October 2022 sales at approximately 11,500 units[145] Financial Operations Overview - DEXTENZA is the primary source of net product revenue, with sales for ocular itching associated with allergic conjunctivitis launched in Q1 2022. ReSure Sealant production was suspended in Q4 2021[148] - Three specialty distributors accounted for significant portions of gross product revenue and accounts receivable for both the three and nine months ended September 30, 2022 and 2021, indicating customer concentration[149][150] - Research and development expenses are expensed as incurred and are expected to increase with ongoing clinical trials for OTX-TKI, OTX-TIC, and DEXTENZA, and planned trials for OTX-DED/OTX-CSI[155][161] - Selling and marketing expenses are increasing due to the expansion of the commercial workforce to support DEXTENZA commercialization[164] - The company's 2026 Convertible Notes include an embedded derivative liability, which is measured at fair value each reporting period, with changes recorded in the statement of operations[167] Critical Accounting Policies and Significant Judgments and Estimates - Preparation of financial statements requires significant estimates and assumptions, including revenue recognition and fair value of derivatives[168][169] - No significant changes to critical accounting policies have occurred since the beginning of the fiscal year[170] Results of Operations | Metric (in thousands) | Sep 30, 2022 | Sep 30, 2021 | Increase (Decrease) | | :-------------------- | :----------- | :----------- | :------------------ | | Total revenue, net | $11,965 | $12,153 | $(188) | | Cost of product revenue | $1,073 | $1,310 | $(237) | | Research and development | $13,719 | $12,719 | $1,000 | | Selling and marketing | $10,186 | $9,576 | $610 | | General and administrative | $8,531 | $8,077 | $454 | | Loss from operations | $(21,544) | $(19,529) | $(2,015) | | Change in fair value of derivative liability | $(1,133) | $23,837 | $(24,970) | | Net (loss) income | $(24,188) | $2,657 | $(26,845) | - Net product revenue decreased slightly due to DEXTENZA sales being adversely affected by recruitment/retention challenges at ASCs/HOPDs and within the sales force, and a reduction in physician payment for DEXTENZA insertion[173] - The significant change in net income/loss for the three months was primarily driven by a $25.0 million negative change in the fair value of the derivative liability, linked to a decrease in common stock price[180] | Metric (in thousands) | Sep 30, 2022 | Sep 30, 2021 | Increase (Decrease) | | :-------------------- | :----------- | :----------- | :------------------ | | Total revenue, net | $37,419 | $31,214 | $6,205 | | Cost of product revenue | $3,528 | $3,298 | $230 | | Research and development | $39,919 | $37,505 | $2,414 | | Selling and marketing | $29,390 | $26,054 | $3,336 | | General and administrative | $23,875 | $24,345 | $(470) | | Loss from operations | $(59,293) | $(59,988) | $695 | | Change in fair value of derivative liability | $8,598 | $62,249 | $(53,651) | | Net loss | $(55,496) | $(2,703) | $(52,793) | - Net product revenue for the nine months increased by $5.3 million, primarily from DEXTENZA sales due to increased market acceptance and commercialization efforts[183] - The significant increase in net loss for the nine months was primarily due to a $53.7 million decrease in the positive change in fair value of the derivative liability[190] Liquidity and Capital Resources - The company has a history of significant operating losses, with a net loss of $55.5 million for the nine months ended September 30, 2022, and an accumulated deficit of $601.3 million[191] - As of September 30, 2022, cash and cash equivalents were $121.0 million, expected to fund operations through 2023, but substantial additional funding will be needed thereafter[198][199][211] - The company's Credit Facility has a total borrowing capacity of $25.0 million, fully drawn, with an interest rate of 9.31% as of September 30, 2022[193][194] - The 2026 Convertible Notes have an aggregate principal of $37.5 million, accruing 6% annual interest, convertible into common stock at $6.50 per share[196] | Cash Flow Summary (in thousands) | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :------------------------------- | :---------------------------- | :---------------------------- | | Cash used in operating activities | $(42,645) | $(50,397) | | Cash used in investing activities | $(1,565) | $(563) | | Cash provided by financing activities | $996 | $2,184 | | Net decrease in cash and cash equivalents | $(43,214) | $(48,776) | - Future capital requirements depend on DEXTENZA sales, commercialization costs, R&D progress for pipeline candidates (OTX-TKI, OTX-TIC, OTX-DED, OTX-CSI), regulatory approvals, manufacturing scale-up, and intellectual property protection[207][208][209][212][213] - The company expects to finance cash needs through equity/debt offerings, collaborations, and licensing, noting that existing debt covenants limit additional debt financing[216] Contractual Obligations and Commitments - Most contracts are cancelable on notice and not considered long-term contractual obligations[217] - The company exercised an option to extend its manufacturing space lease until July 31, 2028, with rent to be determined[219][220] Off-Balance Sheet Arrangements - The company has no off-balance sheet arrangements[221] Recently Issued Accounting Pronouncements - Refer to Note 2 for details on recently issued accounting pronouncements[222] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces market risk from interest rate changes affecting cash equivalents and variable debt, but a 100 basis point shift would not materially impact its portfolio or cash outflows - The company's primary market risk exposure is interest rate sensitivity, affecting cash equivalents (money market funds) and variable interest rate debt[223][226] - A 100 basis point change in interest rates would not materially affect the fair market value of the investment portfolio or anticipated cash outflows from variable interest rate debt[223][226] - The derivative liability associated with 2026 Convertible Notes was valued at $11.6 million as of September 30, 2022, and a 10% change in valuation model inputs would not have a material effect on its fair value[225] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2022, with no material changes in internal control over financial reporting during the quarter - Disclosure controls and procedures were evaluated and deemed effective at a reasonable assurance level as of September 30, 2022[227][229] - No material changes in internal control over financial reporting occurred during the three months ended September 30, 2022[230] PART II – OTHER INFORMATION Item 1. Legal Proceedings The company is not currently involved in any material legal proceedings, nor is management aware of any threatened actions - The company is not currently involved in any material legal proceedings[232] Item 1A. Risk Factors Readers are directed to the Annual Report on Form 10-K for a comprehensive discussion of risk factors that could materially affect the business - Readers are directed to the Annual Report on Form 10-K for a detailed discussion of risk factors[233] Item 6. Exhibits This section lists exhibits filed with the Quarterly Report on Form 10-Q, including executive officer certifications and XBRL documents - The report includes certifications from the Principal Executive Officer and Principal Financial Officer (Exhibits 31.1, 31.2, 32.1, 32.2)[237] - Inline XBRL documents are filed as exhibits (Exhibits 101.INS, 101.SCH, 101.CAL, 101.LAB, 101.PRE, 101.DEF, 104)[237][238] SIGNATURES - The report was signed by Donald Notman, Chief Financial Officer, on November 7, 2022[241]