OptiNose, Inc.
Q3 2021 Earnings Call Transcript

Published: 16 Nov 2021

[Jonathan Neely:]

Good morning, and thank you for joining us today as we review OptiNose’s third quarter 2021 performance and our plans for the remainder of the year. I’m joined today by our CEO, Peter Miller; our President and Chief Operating Officer, Ramy Mahmoud; and our CFO, Keith Goldan. The slides that will be presented on this call can be viewed on our website, optinose.com, in the Investors section. Before we start, I would like to remind you that our discussions during this conference call will include forward-looking statements. All statements that are not historical facts are hereby identified as forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those indicated by such statements. Additional information regarding these factors and forward-looking statements is discussed under the cautionary note on forward-looking statements section of the earnings release that we issued last night as well as under the Risk Factors section and elsewhere in OptiNose’s most recent Form 10-K and Form 10-Q that are filed with the SEC and available at their website, sec.gov, and on our website at optinose.com. You are cautioned not to place undue reliance on forward-looking statements. Forward-looking statements during this conference call speak only as of the original date of this call or any earlier date indicated in such statement, and we undertake no obligation to update or revise any of these statements. We will now make prepared remarks, and then we will move to a question-and-answer session. With that, I will now turn the call over to Peter Miller. Peter?

[Peter Miller:]

Thanks, Jonathan. Good morning, everybody. We appreciate you joining us today. We have important information to share regarding our commercial and clinical progress in third quarter, our expectations for full year 2021 and a comprehensive plan to address our financial profile that we announced last night and updated this morning. However, I’d like to start today by providing perspectives regarding the longer-term potential for our business because of our significant clinical milestones in the first half of 2022 that I believe create an imperative to

[Keith Goldan:]

Thank you, Peter, and thanks to everybody for joining us this morning. Turning to slide 13. As we reported, OptiNose recognized $21.8 million of XHANCE net revenue this third quarter, an increase of 41% compared to the third quarter of 2020. Year-to-date 2021 XHANCE net revenue stands at $51.1 million, an increase of 56% compared to the nine months ended September 30, 2020. Turning to slide 14. Based on available prescription data purchased from third-parties and also on data we received directly from our preferred pharmacy network, XHANCE average net revenue prescription for the third quarter of 2021 was $253, an increase of 13% compared to $224 of revenue per prescription in the third quarter of 2020. Year-to-date, 2021 average net revenue per prescription is $211 and reflects an increase of 21% compared to $175 for the nine months ended September 30, 2020. We believe year-to-date is a better measure for evaluating long-term performance, and so I’ll focus on that for a moment. We believe the 21% increase in year-to-date revenue per prescription is driven in large part by changes earlier this year to our co-pay assistance program. The absence this year of the onetime assist program that was available to patients in the second and third quarters of 2020 also contributed to the year-over-year increase. The changes to our co-pay assistance program are important going forward as they are intended to increase ongoing revenue per prescription by reducing the rate of growth in prescriptions filled by commercially insured patients and plans that do not cover XHANCE while sustaining the growth rate in covered plans. We believe the change has had the targeted effect, and we expect the benefits to revenue per prescription to continue going forward. Turning to slide 15. We are changing our financial guidance for full year 2021. The totality of the changes will result in similar use of cash through 2021 as we prepare for significant clinical trial data readouts in the first two quarters of 2022. We first, as Peter noted, we are continuing to be negatively influenced by the impact of the COVID-19 pandemic on XHANCE prescription growth and the resulting net revenues, most notably with respect to restrictions and limitations on territory manager access into physician offices and patient flows, which remain below pre-pandemic norms. Although a negative impact today, improvement in these areas is a potential driver of future growth. Based on the second half market and promotional environment we’ve experienced to date, we now expect XHANCE net revenue will be between $71 million to $75 million for full year 2021. I will note that the year-over-year growth rate for the fourth quarter of 2021 implied by that range is 27% to 53%. Second, with respect to XHANCE net revenue per prescription, we are increasing our expectations for full year 2021. We now expect XHANCE net revenue per prescription to exceed $210. Previously, we expected full year 2021 to exceed $200. As discussed, we are confident that the changes we made to our co-pay assistance are having the intended effects in driving sustainably more profitable prescription growth. Finally, for full year 2021, we now expect total operating expenses to be lower in the range of $132 million to $137 million, of which approximately $10 million is expected to be stock-based compensation. Total operating expenses, excluding stock-based compensation, are therefore expected to be in the range from $122 million to $127 million. The $5 million decrease in expected full year operating expenses is primarily a result of lower volume-based third-party costs, combined with reductions in other general and administrative expenses. Turning to slide 16. We’ve experienced strong growth rates in our business, and we are taking steps to add cash to our balance sheet and revise the terms of our outstanding debt. Terms which were, broadly speaking, prior to the COVID-19 pandemic and under very different assumptions about the business conditions in both 2020 and 2021 that affected the promotion and sale of XHANCE as well as our ability to recruit our Phase IIb chronic sinusitis trials. This morning, we announced the pricing of an offering of OptiNose common shares that upon closing, we’ll produce $40 million of gross proceeds. Upon the closing of the offering, the minimum trailing 12-month XHANCE net product sales covenants associated with our outstanding debt will be reduced. You can see the new covenants on the slide. For reference, some of the changes over the next five quarters include reductions from $80 million to $68 million for the 12-month period ended December 31, 2021. And from $90 million to $70 million for the 12-month period ended March 31, 2022, and from $106.25 million to $90 million for the 12-month period ended December 31, 2022. Also effective upon the closing of this offering, the debt modification will allow for a nine-month extension in the interest-only period alone from December 2022 to September 2023. I’ll now turn the call over to Ramy to discuss our development programs.

[Ramy Mahmoud:]

Thank you, Keith. Turning to slide 18. Regarding the two pivotal trials, which comprise our chronic sinusitis registration program, I’d first like to share that in October, we completed recruitment for the second trial, Study 3206 or ReOpen2. With recruitment complete in both trials, we are firmly on track to deliver top line results from ReOpen1 and ReOpen2 in the first and second quarters of 2022, respectively. I’d like to thank our clinical team, our participating investigators and our other partners for their efforts, particularly in the face of the unique challenges created by the pandemic. They made it possible to successfully complete recruiting for both trials. Most of all, I’d like to thank the patients that are participating in this important research as we seek to develop the first ever FDA-approved medicine for the treatment of chronic sinusitis. Second, I’d like to remind you that we previously reported having performed a preplanned blinded interim analysis to compare the observed variance in the co-primary endpoints from Study 3205 or ReOpen1 to the variants that had been assumed during initial trial design. In the third quarter of this year, we performed similar analyses for Study 3206 or ReOpen2. These analyses were similarly intended to assess whether the variance assumptions in our priority sample size calculations were consistent with the actual variance observed in the trial. The analyses were performed on blinded interim data from patients for whom full data was available. For the composite score of nasal symptoms, data was available for approximately half of patients projected to complete the study. And for the average percent of pacification of volume by CT scan data was available for approximately one-third of the patients that are projected to complete the study. The difference in data availability is primarily accounted for by one endpoint being observed at four weeks, while the other isn’t captured until 24 weeks. The result was that the observed variance for both endpoints was lower than the variance that had been assumed for the purposes of sample size estimation during the initial study design. Given this result, we reduced sample size from 399 to approximately 210 patients in trial 3206 while maintaining our full originally targeted statistical power for the final analysis. I’ll now turn the call back over to Peter for closing remarks. Peter?

[Peter Miller:]

Thanks, Ramy. Before moving to Q&A, I’ll take a moment to reiterate that overall, we’re pleased with the progress we have made in third quarter 2021 and are laser-focused on continuing to grow XHANCE and on completing our chronic sinusitis trials. Thank you. And now I’d like to open the call for Q&A. Question-and-Answer Session

[Operator:]

Our first question comes from Gary Nachman with BMO Capital Markets.

[Gary Nachman:]

Hi, guys. Good morning. First, just based on your revised full year guidance of $71 million to $75 million, 4Q could potentially be down at the lower end of it sequentially. So just a little bit more, Peter, on why that would be – are there also some dynamics with inventory drawdowns or something specific Keith with net revenue per prescription in the fourth quarter that we should consider because I thought those Rxs should be seasonally higher and up sequentially. Then I have a couple of more.

[Peter Miller:]

I mean, Gary, I’ll start, and I’ll then let Keith jump in. But if you take the midpoint of the range, we are going to have growth in fourth quarter this year of about 40% versus fourth quarter last year. And what we do see – you’ve seen our prescription trends, we feel good about how we’re growing the business right now. We do have some price dynamics that come into play in December that I’ll let Keith talk to. So Keith, I’ll let you pick it up.

[Keith Goldan:]

Yeah. And I just – in addition to the Peter kind of called out the midpoint of the range represented about 40% growth year-over-year. I’ll also comment that at the midpoint of the range is greater than 50% growth full year over full year. So that will be the first point. Second, what Peter was just referring to, there are, Gary, in the beginning of every year in January, we typically see what we call the year beginning effect, where we – patients high deductible resets as well as out-of-pocket Max’s reset. And because of that, we contribute more to their co-pay assistance. So as has been the case in 2020, 2019 and probably will be the case going forward, we see a lower average net revenue per prescription in the first quarter. So that means as we anticipate that and we value our inventory that we anticipated in the channel in the fourth quarter, we have to revalue that inventory at what we expect to receive for that inventory when we sell it. So that causes some pricing pressure every December. And again, that’s not an optimized effect. That’s a pharma industry effect.

[Peter Miller:]

So Gary, some of it by saying with respect to Q4, we believe net revenue per prescription is more likely to decrease sequentially and the prescriptions are more likely to increase from Q3.

[Gary Nachman:]

Okay. That’s helpful. And then I guess, what’s the level of in-person detailing now coming out of the pandemic? It’s obviously hampered, but to what extent and maybe talk about how the Kaleo co-promote is helping. And as you’re cutting back expenses, are you actually making any changes to the sales force at this point? Are you really trying to keep it intact to sort of benefit from when we fully come out of the pandemic hopefully soon?

[Peter Miller:]

So Gary, on the first question, relative to rep access, Gary, it’s hard for us to have exact numbers for this. In some of the regions, based on the reps I talked to, you see access only about 50% of what it was pre-pandemic. So there’s just no doubt that despite real changes in the environment that we all see, we’re just not seeing the same level of change in rep access to physician offices that we anticipated, frankly. So that’s relative to the first question. Relative to Kaleo, Gary, and this was released in our Q, we’ve mutually agreed to terminate that agreement effective December 31, 2021. The issue here was largely we expected recovery of pre-pandemic relative to rep access, and we just didn’t see that with the Kaleo reps in terms of their access to physician offices. So we’ve made a decision that it’s in the best interest of both parties to terminate that. Relative to our sales deployment, we feel very good about our deployment right now. The thing we know is we have a very promotionally sensitive brand that continues to be very true. When we make calls on doctors, we see real benefit in terms of promotional response. So no changes relative to our reps. And if the environment does see improvement, we think we can benefit from that improvement environment.

[Gary Nachman:]

Okay. And then my last question, Ramy, it sounds like you feel pretty confident, I guess, as confident as you could be, given how enrollment has gone for the two CS studies. So why are you guys raising equity now in front of that data. We’re not that far off. I mean it sounds like it might be related to the debt and the covenants, but maybe I just want to elaborate on the timing of that a little bit more. Thank you.

[Keith Goldan:]

Gary, this is Keith. If I could take that one. Yeah, I think you hit the nail on the head. The Pharmakon amendment that we announced this morning was contingent upon the closing of this financing. But that said, the additional cash definitely strengthens our balance sheet as we move into the two pivotal data events in the first quarter and second quarter of next year.

[Peter Miller:]

And Gary, I’ll say Ramy can jump in, but there’s no new information about success or likelihood of success of the trials. So it was – this raise was done, as Keith said, largely because of the issue Keith mentioned relative to the Pharmakon debt agreement.

[Gary Nachman:]

Okay. But I just want to make sure I heard correctly, Ramy, that you said that you did lower the number of patients that you had to enroll because of the interim analysis. So, I mean, I guess that’s a positive signal.

[Ramy Mahmoud:]

Yes. So as Peter said, we really don’t have new information that informs the likelihood of success of the trial. But we were able to lower the sample size while maintaining the full estimated – the fully planned originally estimated power to detect the difference in treatment. So it’s good that we were able to do that, and that’s what gives us confidence that we can complete the trials and produce top line results in the time frames that we just talked about.

[Gary Nachman:]

Okay, got it. Thanks, guys.

[Peter Miller:]

Thanks, Gary.

[Keith Goldan:]

Thanks, Gary.

[Operator:]

Our next question comes from David Amsellem with Piper Sandler.

[David Amsellem:]

Hey, thanks. So I just had a few. So Peter, you had mentioned that some plans were restricting coverage to patients with nasal polyps. I was wondering if you could elaborate on that, how widespread is that? And has that become more widespread as the footprint of XHANCE has grown? Just want you to touch on that. And then secondly, can you – and I apologize if I missed this, can you just talk about the mix between polyp and non-polyp patients currently and how that’s trended? And then I have a couple of follow-ups.

[Peter Miller:]

Yes. What I’ll say, David, thanks, David, for the questions. And relative to nasal pilot restrictions, you know from our prior calls that we really have very good commercial insurance coverage, 80% roughly is our commercial insurance coverage. And while the majority of the plans don’t have a prior authorization in place, we do have prioritizations in place with a reasonable number of our prescriptions by the payers. And as I mentioned on the call, David, we are seeing a situation that some payers – I want to be clear, it’s not all payers, it’s not all plans, but some payers do require an attestation, if you will, by the physician that the patient has nasal polyps. And we’re finding that, that’s limiting a bunch of physicians who it’s not for medical reasons that they’re not writing broader. And I want to be clear, we’ll never promote off-label. So we are only promoting based on the nasal polyp indication. But because of these payer issues, we believe there are a large reasonably large number of groups of physicians that are not – that are limiting the use of nasal polyps. And the point I’ll make on that, David, is that – and I said it in the script, that I’ll reiterate it, we have a nice business in this current market. There’s roughly 1 million patients who are diagnosed with nasal polyps. You guys know that we get four prescriptions per patient per year and about 200 net revenue per patient. So the Tano a value of $800 per patient per year, has 1 million patients, you have an $800 million TAM in a nasal polyp only diagnosed patient population, and we’re building a nice business there, but it does highlight the real potential value of the CS indication if it’s positive, would – not only we would be the first product approved for CS. That’s a very strong efficacy message, but this issue is significantly mitigated relative to the payer issues. Regarding your second question, David, I’ll turn it to Ramy to talk about sort of where prescribing is today relative to on indication and authentication.

[Ramy Mahmoud:]

Right. So all of our promotion is, of course, on label. We have a healthy skepticism about IQVIA data about the indication for which the product is used. There’s some challenges to capturing that kind of distribution. Having said that, we know that with nasal polyp promotion, there’s a subset of doctors, and you saw that on an earlier slide, who will choose to use the product broadly. And those are the earliest adopters, and they give a certain sort of distribution across diagnoses. As we grow the product and expand to a larger and larger number of physicians, we are encountering more and more physicians who don’t feel the same way about the breadth of prescribing that they choose to use for the product. So the impact of the constraint by indication becomes more evident in the larger population of doctors beyond that. And so the shift in prescribing proportions by indication will become more evident as we have more and more prescribers.

[David Amsellem:]

Okay. That’s helpful. And then if I may just sneak in another question. Just with the raise this morning, and I know you had – you explained the rationale, but I wanted to sort of ask a hypothetical to the extent that the non-polyp studies are successful, there’s obviously going to be some commercial implications there. Can you just talk about your cash runway in the wake of this raise? How you’re thinking about spend on the commercial organization. Obviously, you thought about potential co-promote. But just help us understand the road ahead, particularly with this morning’s raise.

[Keith Goldan:]

Yes, David, this is Keith. I’ll take that. Good to talk this morning. I’ll make a couple of comments. First, I’ll refer back to something that Peter said earlier in his comments, and that is that we think for the specialty business that our company is focused on the NT allergy that we’re appropriately sized today. I’ll emphasize that point by saying, if you look back over our operating expenses, sales and marketing, G&A, R&D, over the last three years, it’s relatively consistent. So we’re getting additional leverage off of a fixed infrastructure every year that we continue to grow XHANCE. Including this year, midpoint of the range, just over 50% growth year-over-year in an environment which Peter mentioned, we’re still seeing some pretty significant restrictions. The second point I’ll make, and we commented on this in our second quarter earnings call in August is that we have significant cost over the past few years that have been focused on the conduct of our Phase IIb clinical trial seeking the indication expansion for XHANCE into chronic sinusitis. We are completing our guidance is that we are to complete the impatient portion of those trials in the first half of the year. We’ll obviously have costs in the second half of the year, including medical writing, the PDUFA fee as we get ready to submit the NDA. But on a go-forward basis, we don’t have a clinical program behind the CS indication for XHANCE such that one could see a change in our P&L and a reduction in those R&D costs on a go-forward basis. So hopefully, I’ve answered your question in a roundabout way, we don’t provide specific cash guidance, but hopefully, that paints the picture of how we’re thinking about it.

[David Amsellem:]

It does. Thanks, guys.

[Peter Miller:]

Thanks, David.

[Keith Goldan:]

Thanks, David.

[Operator:]

The next question comes from David Steinberg with Jefferies.

[David Steinberg:]

Thanks. Good morning. A couple of questions. The first thing is, you guys had talked about this new algorithm that you thought could really accelerate the utilization of XHANCE. Has that started yet? Is it having any impact? Or do you see the impact coming next? And then secondly, on the last call, you guys were really optimistic about securing corporate partnership. And I can’t recall the exact words, but it seems like there was a lot of interest. Are you still seeing the same high interest level in a partnership for GPs assuming the data is good in the CS indication?

[Peter Miller:]

Yeah, Dave, I’ll take both of those. Nice to hear from me this morning. Relative to the algorithm, as you are aware, it was published in the June time frame. You know that summer is a little bit more difficult normally in terms of promotionally with doctors because of vacations of reps and doctors. So the fall is when we really geared up relative to broad dissemination to doctors of the algorithm. We did stuff, by the way, in June and over the summer. And there’s no doubt, David, we’re seeing impact, but it’s going to take some time for that as we get to doctors. We are, again, limited because of the pandemic. Our reach is not as broad in the physician audience that we had anticipated. But I have no doubt that it’s going to continue to be something that really could help us grow the business in the current footprint that we have. By the way, we’ve seen real nice gains in our preference share, which is market research of doctors interested in writing the product for patients with nasal polyps. So that takes a little bit while to translate into prescribing, but feeling very good about that document and the ability to continue to drive awareness of it. Relative to partnership, I still remain very optimistic of a partnership. So nothing’s changed there. As I mentioned on the call, there are multiple pharmaceutical companies that have deployment already against the doctors that we believe are going to be high prescribers of XHANCE with the CS indication. So yes, I feel very good about it. You probably know this, David, that typically deals are done post data. So I wouldn’t read into anything relative to timing. But as I said, I continue to feel very good that if we are to get positive data, we feel very good about the possibility of a partner in primary care.

[David Steinberg:]

And just to follow up. Typically, partnerships can often gives nondilutive financing in terms whether it’s an equity stake or an upfront or more upfront and lower back end. So just curious vis-a-vis the equity raise you just did. I mean you basically diluted the shares by 50%, which is really meaningful dilution. So I guess my question is, if you’ve had a number of companies who are interested in the demic due diligence, given that the data is not out yet, wouldn’t have some sort of partnership been much better for the P&L of the company than 50% dilution? Or were you about to face covenants that were tripped and you basically had to do it near term?

[Peter Miller:]

I mean, David, I’ll take comments I want to clarify first that the dilution is about a third. So I want to be clear on that, 25 million shares issued roughly. So relative to things that we considered, Keith mentioned that we believe the raise now was important to deal with to revise the debt covenants, the revenue covenants that we have with Pharmakon and the overall Pharmakon agreement. And I’m not going to comment, David, on how we weighed potential partnering discussions and how that played into it other than, as I said, we feel very good about productive discussions with partners. You can imagine there’s a real trade-off that you make relative to potentially encumbering the asset pre data. There’s a lot to be considered that goes into a decision on the partnering front. And as I said, I feel very confident that we got a partnership. I think this rate was something we thought we had to do now, and we feel very good about the long-term prospects.

[David Steinberg:]

Isn’t it 50% dilution, 50 million shares, 25 million on top of it?

[Peter Miller:]

Yes, I’m sorry, David. It depends on how you think about it. I was thinking of it as the denominator being ultimate shares that are ultimately outstanding as opposed to pre.

[David Steinberg:]

Okay. Thanks.

[Operator:]

The next question comes from Ken Cacciatore with Cowen.

[Ken Cacciatore:]

Hey, good morning, team. Thanks for taking the question. Along similar lines, you all are kind of single product company. It’s going to be tough even if you partner to really leverage that sales force and spending. And you did choose to do the equity offering now. Just trying to understand the thought process behind staying standalone. And to what degree this upcoming review and hopefully great data and then picking a strategic partner, what would be the impetus to stay stand-alone at this point? I’m not sure how you would leverage your own sales force? Maybe we’re jumping the gun. We have to see the data, but I want to hear you talk about, really, at this point, maximizing shareholder value and getting this product into as many hands as you can, would seemingly be better with someone else than with yourselves?

[Peter Miller:]

I mean, I’ll say this, Ken. I mean we’re going to evaluate in a positive trial scenario. And by the way, in a negative data scenario that we don’t expect, by the way. We think there’s a reasonably good chance of positive data scenario. We’re going to look at all options, Ken, is what I’ll tell you. We’ll look at strategic options. We’ll look at other options. But the thing that is clear in your question is that we have to find a way to create greater leverage of the organization on both sales force and infrastructure. So I’ll just stop there and say that it’s absolutely something that will be considered. Obviously, I talked a lot about the potential opportunity that CS opens up both in our ENT-allergy audience, as I said, three times the number of patients who are being treated by the same number of doctors with our current footprint of salesforce and obviously, the big opportunity in primary care.

[Ken Cacciatore:]

Thanks so much.

[Operator:]

And I’m not showing any further questions at this time.

[Peter Miller:]

Any other questions? So, I want to thank everybody for joining the call this morning. I appreciate the questions, and we look forward to our next call.

[Operator:]

Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect, and have a wonderful day.