Otonomy, Inc.
Q4 2018 Earnings Call Transcript

Published: 5 Mar 2019

[Operator:]

Good day, ladies and gentlemen, and welcome to the Q4 2018 Otonomy, Inc. Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I'd now like to introduce your host for today’s conference Mr. Robert Uhl with Westwicke. Sir, you may begin.

[Robert H. Uhl:]

Thank you, operator. Good afternoon, and welcome to Otonomy's fourth quarter and full-year 2018 financial results and business update conference call. Joining me on the call from Otonomy are Dr. David Weber, President and Chief Executive Officer; and Paul Cayer, Chief Financial & Business Officer. Before I turn the call over to Dr. Weber, I'd like to remind you that today’s call will include forward-looking statements based on current expectations. Such statements represent management's judgment as of today and may involve risks and uncertainties that could cause actual results to differ materially from expected results. Such statements include, but are not limited to, timing of results, patient recruitment and enrollment plans for, and design and conduct of, the Phase 3 clinical trial for OTIVIDEX; timing of initiation and results, patient recruitment and enrollment plans for, and design and conduct of, the Phase 1/2 clinical trial for OTO-313 and OTO-413; expectations regarding IND enabling activities for OTO-510; expectations regarding OTO-6XX development; the activity and timing of launch under, and potential benefits of, the co-promotion agreement between Otonomy and Mission; the benefits of the loan provided by Oxford Finance and the potential extension of the interest-only period; expectations regarding value creating milestones; expectations regarding funding of clinical development, program advancement; and company operations into 2021; and expectations regarding financial guidance including operating expenses for 2019 and 2020. Please refer to Otonomy's filings with the SEC, which are available from the SEC or on the Otonomy website for information concerning the risks -- excuse me, the risk factors that could affect the company. I will now turn the call over to Dave Weber, President and CEO of Otonomy.

[David Weber:]

Thank you, Robert. Good afternoon, everyone, and thank you for joining us on this call to discuss Otonomy's fourth quarter and full-year 2018 financial results and business update. I’m proud of the progress we made in 2018 which positions Otonomy to have three major clinical readouts next year and strengthen the financial position of the company. In my remarks, I will briefly review the status for each of our programs, including the ongoing Phase 3 trial of OTIVIDEX in Ménière’s disease, and upcoming initiation of clinical trials for OTO-313 in tinnitus and OTO-413 in hearing loss. Importantly, we remain on track with our plan to have results from all three of these trials in 2020. We also have ensured that we have the financial resources necessary to conduct these trials and advance our earlier stage programs by carefully managing our expenses, establishing a co-promotion commercial partnership for OTIPRIO, and completing a debt financing that extends our cash runway into 2021. Paul with then review the financial results from 2018 and guidance and we will open up the call for any questions. Beginning now with the OTIVIDEX Phase 3 trial in Ménière’s disease, enrollment is on track for results in the first half of 2020. The conduct and design of this study is based on the successful AVERTS-2 trial, which achieved its primary endpoint as well as a number of secondary endpoints. The AVERTS-2 results were presented at the American Academy of Otolaryngology's Annual Meeting in October. For this additional Phase 3 trial, we’ve retained the same primary efficacy endpoint, daily diary vertigo scale, use of a one-month lead-in period and primary analysis at 3 months after a single treatment. We’ve also taken additional steps to manage expectation bias on the part of the patient and the placebo response, including refinement of site selection criteria, emphasize on recruitment of well-characterized Ménière’s patients and use of a placebo response training program to manage communication between clinical sites and study subjects. We plan to enroll approximately 160 patients, in the United States and Europe with results expected in the first half of 2020. As is our practice, we will not be disclosing any metrics from the ongoing trial other than timing to top line results. The next product candidate in our pipeline is OTO-313, the sustained exposure formulation of the NMDA-receptor antagonist gacyclidine in development for the treatment of tinnitus. Tinnitus, which is a ringing or buzzing in the ear affects approximately 10% of U.S adults and can severely impact a person's ability to sleep or relax, this leading to anxiety and depression. We have completed a Phase 1 trial for gacyclidine in healthy volunteers with no safety concerns observed. While conducting this trial, we identified an improved formulation for gacyclidine that provides several weeks of inner ear drug exposure from a single intratympanic injection. Results from the Phase 1 trial and a review of the OTO-313 program were presented at the Society for Neuroscience Annual Meeting in November, and the Association for Research in Otolaryngology Annual Meeting last month. We are now preparing to initiate a Phase 1/2 proof-of-concept clinical trial in tinnitus patients in the second quarter of 2019. This trial will begin with an assessment of safety and tolerability and in an initial patient cohort followed by an exploratory efficacy study in approximately 50 patients with persistent unilateral tinnitus. Following a lead in period, patients whose tinnitus symptoms exceed a threshold level will be randomized one-to-one to a single IT injection of OTO-313 or placebo. While not powered for statistical significance, we will be evaluating a number of efficacy endpoints in this trial and expect to be able to demonstrate a clinical signal for OTO-313. We are looking forward for advancing gacyclidine for this important unmet medical need. We are also excited to be initiating clinical development for OTO-413 with the Phase 1/2 trial expected to start in the third quarter of this year. OTO-413 is a sustained exposure formulation of brain-derived neurotrophic factor or BDNF. As our Chief Scientific Officer Dr. Kathy Bishop reviewed during the last quarter's call, we are developing OTO-413 for the repair of cochlear synaptopathy. Recent research has identified damage to synaptic connections as the underlying pathology in noise and age related hearing loss that manifest the speech and noise hearing difficulty. Neurotrophic factor including BDNF have therapeutic effect in the cochlear by promoting a survival of spiral ganglion neurons, increasing neurite outgrowth and reconnecting neurons with cochlear hair cells after damage. The exciting potential for this program was recognized by the Society for Neuroscience through the selection of an OTO-413 presentation as a hot topic at the Annual Meeting in November. The Phase 1/2 clinical trial of OTO-413 will be an ascending drug safety and exploratory efficacy study, enrolling approximately 40 patients with speech and noise hearing difficulty. Each patient will receive a single IT injection of either OTO-413 or placebo, and then being followed for several months. We plan to evaluate patients using a number of endpoints including both electrophysiological measures of synaptic function and other tests that access speech and noise hearing. We are proud of our effort to advance this first-in-class program for the sake of more than 10 million adults in the U.S. with hearing loss related to synaptic damage. We look forward to initiating the Phase 1/2 trial in the third quarter of 2019 and expect to have top line results in the second half of 2020. Completing the pipeline review, I’ve a few brief comments about our otoprotection and hair cell regeneration programs. OTO-510 is a sustained exposure formulation of an undisclosed small molecule, that we are initially developing for hearing protection in pediatric patients undergoing cisplatin chemotherapy. This is an important unmet medical need because of the significant hearing loss that these patients experience and the lack of a therapy that can provide otoprotection without tumor protection. We plan to initiate IND enabling activities for OTO-510. OTO-6XX is our program focused on the regeneration of sensory hair cells to treat severe hearing loss. We have demonstrated proof-of-concept in a preclinical model using a class of molecules formulated for sustained exposure local delivery and have selected a lead compound for development. We will have more to say about these two programs in the future. Finally, a short reminder regarding our commercial product OTIPRIO that is FDA approved for use during ear tube surgery and for the treatment of acute otitis externa or AOE. We’ve established a co-promotion partnership with Mission Pharmacal, a well-established privately held pharmaceutical company, who will promote OTIPRIO for AOE to pediatricians, primary care physicians and urgent care centers. This partnership is proceeding as planned and preparations are underway for Mission to launch OTIPRIO in advance of the peak summer season. Now, at this time, I'll turn the call over to Paul Cayer, our Chief Financial and Business Officer, who will provide a summary of our financial results and guidance.

[Paul E. Cayer:]

Thank you, Dave, and good afternoon, everyone. In summary, our expenses for 2018 were at the low end of our financial guidance and we’ve strengthened our already strong balance sheet with the debt financing completed in December. Going forward, we expect only an incremental increase in our spending for 2019 and that spending will decline in 2020 as we complete the three clinical trials Dave reviewed. Now, let me briefly recap the financial results from 2018 and guidance that are more fully described in today's earnings release and 10-K filing. As of December 31, 2018, we held a cash balance including cash, cash equivalents, and short-term investments totaling $97.3 million. This cash balance includes proceeds from a $15 million term-loan provided by Oxford Finance. This loan provides for a 24-month interest-only repayment period, which can be extended upon successful results from the ongoing OTIVIDEX Phase 3 trial. Notably, there are no financial covenants or warrants associated with the loan. In the fourth quarter of 2018, we reported total GAAP operating expenses of $13.2 million, with non-GAAP operating expenses totaling $10.8 million. The primary adjustment for non-GAAP expenses is exclusion of stock-based compensation. So this is a financial metric that best approximates our spending level. For the full-year 2018, total GAAP operating expenses were $51.9 million with non-GAAP operating expenses totaling $39.5 million. Both of these expense levels were at the low end of our financial guidance for the year, demonstrating our commitment to carefully manage our spend. GAAP R&D expenses for the year totaled $31.8 million, with SG&A expenses totaling $20 million. We expect that the mix of expenses will continue to shift towards R&D as the proceeds from our commercial partnership with Mission provides a cost offset for SG&A. Finally, with regard to our financial outlook, we expect the GAAP operating expenses for 2019 will be in the range of $55 million to $60 million, while non-GAAP operating expenses are expected to total $45 million to $50 million. And as mentioned before, we expect that these expense levels would decline in 2020. This spending plan will enable our current cash balance to not only fund operations through the clinical trial completions in 2020, but also extends our cash runway into 2021. With that, I will turn the call back over to Dave.

[David Weber:]

Thank you, Paul. In summary, our accomplishments in 2018 have positioned the company for significant advancement of the pipeline in 2019, through continued enrollment of the Phase 3 trial in Ménière’s disease, and initiation of clinical trials for both tinnitus and hearing loss. These clinical programs address important unmet medical needs and reinforce our leadership position in the untapped neurotology field. Furthermore, they also provide multiple value creation catalysts for the company in 2020, which is fully funded by our existing cash balance. I’m excited about our programs and plans and look forward to sharing this information and update more broadly with investors during 2019. Operator, we are now ready for questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Stacy Ku with Cowen and Company. Your line is now open.

[Stacy Ku:]

Hello. Thanks for taking my questions and congratulations on the progress in 2018. I’ve a few questions. First, regarding the current ongoing Phase 3 for OTIVIDEX. Could you give us some insight into the well characterized Ménière’s patients you described on the call? And I’ve another one after that.

[David Weber:]

Okay. Thank you, Stacy. Yes, with regards to the Phase 3, what we’ve done has really tightened the enrollment criteria a bit based on discussions with KOLs and investigators involved in the AVERTS-2 study. And this was really around more of the insurance that we are excluding any patients who may have symptoms similar to Ménière’s, but not Ménière’s. An example of that would be vestibular migrainous vertigo, which is experienced by patients with extreme migraine episodes. And so there's a number of things that we’ve tightened up with regard to the enrollment of the Ménière’s patients and the diagnosis. The other step that we’ve taken as another example, is making sure that these patients are well-known to the investigators. So in AVERTS-2 trial, enrolling in Europe these patients were longstanding Ménière’s patients that were very well known to the investigators and that’s what we want in the ongoing trial that’s enrolling now. And so, we’re really encouraging investigators to have had a long-term standing relationship with these patients or have the ability to talk with their treating physician with regard to the background of their disease to ensure that they meet our criteria and are well characterized Ménière’s patients.

[Stacy Ku:]

That’s really helpful. And then for my second question, moving to the pipeline, regarding 413 for hearing loss, could you give us additional insight into the auditory brainstem response as an endpoint? How is that measured and how does it correlate to hearing recovery?

[David Weber:]

Yes, well, auditory brainstem response is a electrophysiological measure that we can use to understand the hearing response. And there's actually a number of ways of looking at data that actually get far beyond what I'll be able to explain, and I'd leave that to our future call with our Chief Scientific Officer Dr. Kathy Bishop. But ABR, as it's called or auditory brainstem response is an ability to actually quantitate electrophysically the responses that an animal or human is having to hearing input. So we can actually look at the electrical signals that are given off. And through those patterns that we see, we can look at different functions of the hearing and the level of that functional hearing. And so, it can be used as one of the measures to separate what we call synaptic hearing loss versus hair cell related hearing loss where you might have lost hair cells. So it's one of many measures that we'll be employing to identify these patients as well as separate their response in the course of the treatment. What’s nice here is of course that these are very objective measures that we can actually look at the data as opposed to a patient reported outcome as obviously we’ve to deal within Ménière’s disease and tinnitus.

[Stacy Ku:]

Thank you.

[David Weber:]

Thank you.

[Operator:]

Thank you. And our next question comes from Charles Duncan with Cantor. Your line is now open.

[Pete Stavropoulos:]

Hi. This is Pete Stavropoulos on for Charles. How are you? And congrats on the …

[David Weber:]

Hi, Pete.

[Pete Stavropoulos:]

… congrats on the progress in 2018. I have a question about the OTIVIDEX Phase 3 study. So you said enrollment is going well and the majority of patients will be enrolled in the EU. Is there a particular ratio that you guys are attempting to achieve with regards to EU to U.S patients?

[David Weber:]

No, there's no set ratio. We will continue to enroll across both the U.S and Europe. So, U.S started first. So obviously it's ahead in terms of number of patients, but we’ve no requirement in terms of how many patients from every geography, and that’s based on both our review with the agency as well as our experience in enrolling the trials. Enrollment is our primary -- obviously, we are going to keep focused on the timeline to results as a measure of are we on track, and we are on track with that. And a major part of the effort has been bringing on the countries in Europe. So U.S started, with Europe, of course, you've got to go country-by-country. And so that has been the big work being done in the fourth quarter is bringing those other geographies on through the submissions to the regulatory authorities. That has gone very well. We are very excited to have the trial now, really working forward to the 2020 first half readout.

[Pete Stavropoulos:]

Is it possible to give us a sense of how many sites you have up running in the U.S and in the EU?

[David Weber:]

Not in terms of -- again we tend to focus on the actual timeline to the enrollment. We expect there will be anywhere from -- basically by the time we are done, 55 to 60 sites will have participated.

[Pete Stavropoulos:]

All right. Thank you very much, and congrats again on the other progress.

[David Weber:]

Thank you, Pete.

[Operator:]

Thank you. And our next question comes from Edward Nash with SunTrust Robinson. Your line is now open.

[Fang-Ke Huang:]

Hey, congratulations to the team. This is Fang-Ke for Edward Nash. My first question is on the Ménière’s disease. You mentioned that some of the patients are misdiagnosed with the disease. Can you just comment on how you are envisioning the future that this is going to be diagnosed differently?

[David Weber:]

Hi, Fang-Ke. Thanks for joining. Well, I think, it's important to understand we don't have data that's -- obviously, it's difficult to go back and to look at the patients that were treated in the prior Phase 3 trials and go back through those diagnosis. So I want to be careful here that it is not that we think that was by any means a large number of patients. It was just something that we saw the opportunity to further refine the criteria. So I don't think it's something that we necessarily know or believe was responsible for the AVERTS-1, but it is something that as we looked at what can we do better based on the learnings that we had. It was an improvement that we saw ourselves capable of making. So I think it's important to understand that. And that really is based on obviously as physicians continued to treat Ménière’s, we are learning more and more about how to define the criteria and really understand those patients who have Ménière’s, because it is a diagnosis of exclusion. And I think that’s what people need to understand. It's a difficult road for patients to be diagnosed because of the lack of understanding and education of Ménière to the lack of any approved treatment and that -- it is the diagnosis of which they exclude other potential causation. And so it's really through tightening those types of criteria that we feel very comfortable about the patients that we are enrolling in this trial.

[Fang-Ke Huang:]

Got it. That was very helpful. All right. Second question is on the 413. Can you mention in your preclinical data, what’s the half life of the BDNF formulation you guys have? And did you think in the future are you going to use some kind of mini pump to have a constant secretion of the BDNF?

[David Weber:]

No. It will not be a mini pump. Well, again this is where our formulation technology comes in. We’ve obviously a very broad understanding now and a very large intellectual property of state around the idea of drug delivery to the ear, something that we’ve been working on since our beginning. And have, I think, established a very clear expertise here with both our approved product OTIPRIO, with OTIVIDEX, with 313, and now with 413. So this will be a intratympanically administered liquid formulation just like our other programs that we’ve in the clinic, OTIPRIO which is approved, and OTIVIDEX which is in Phase 3 and 313 which will be going into Phase 1/2. So these are known formulations that we’ve developed and they will provide a sustained exposure. So that’s what 413 will provide sustained exposure and I think we'll be providing additional information on that. In the future, we tend to go to as we present the preclinical work that we do at these meetings ARO and at Neuroscience and other meeting, we will be presenting the PK data. I think, for example, we’ve recently presented data at the ARO on OTIVIDEX, and so that’s something that we will present as we continue to develop the development program and move to the clinic where we will show more preclinical data there.

[Fang-Ke Huang:]

Great. Thank you so much and congrats again.

[David Weber:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] And I’m showing no further questions in the queue at this time. I would like to turn the call back to Dave Weber, CEO, for any closing remarks.

[David Weber:]

Well, thank you everyone, for participating in our call today. We will be attending both the Cowen and Oppenheimer Healthcare Conferences during the next couple of weeks, and hope to meet with many of you there. Have a good evening everyone. Thank you.

[Operator:]

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude your program and you may all disconnect. Everyone have a great day.