Otonomy, Inc.
Q1 2017 Earnings Call Transcript

Published: 7 May 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the First Quarter 2017 Otonomy, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a Q&A session and instructions will be given at that time. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the call over to Mr. Robert Uhl with Westwicke Partners. Please go ahead sir.

[Robert Uhl:]

Thank you, operator, and good afternoon, and welcome to Otonomy's first quarter 2017 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 and Business Officer. Before I turn the call over to Dr. Weber, I would 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 Otonomy's expectations regarding the commercial success of OTIPRIO, the success of the organizational changes and the commercial team, potential coverage and reimbursement relating to OTIPRIO for current and future expansion indications, the approval of OTIPRIO for acute otitis externa, the timing of the launch of OTIPRIO for acute otitis externa if approved, the timing of the OTIVIDEX Phase 3 clinical trials in Ménière's disease, the timing of the OTO-311 Phase 2 clinical trial and the financial guidance for 2017. Please refer to Otonomy's filings with the SEC, which are available from the SEC or on the Otonomy website for information concerning the risk factors that could affect the company. I will now turn the call over to Dr. 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 first quarter 2017 financial results and business updates. I will start by reviewing the status of our product development activities, including several important milestones we announced today, followed by a brief update on the OTIPRIO commercial launch. Paul will then review our financials and we will finish with questions from call participants. As we announced today, we have completed enrollment in AVERTS-1, which is a U.S. Phase 3 trial in Ménière's disease for OTIVIDEX, our pending brand name for OTO-104. A second identical Phase 3 trial called AVERTS-2 continues to enroll patients in Europe. Each trial is a 16-week, prospective, randomized, double-blind, placebo-controlled trial designed to enroll approximately 160 patients. AVERTS-1 enrolled a total of 165 patients, slightly above this target. Regarding timing to data, we expect to announce topline results from AVERTS-1 in the third quarter of 2017, with results from AVERTS-2 following by the end of this year. Needless to say, we are very pleased that we completed enrollment in AVERTS-1 on-schedule and the achievement of this milestone keeps us on track with the timing of topline results that we discussed during our Investor Day event back in October of 2015. At this point, I would like to take a moment to announce our plan to host a KOL Breakfast Meeting on June 27 in New York. Similar to our Investor Day, this meeting will be an opportunity to update the investor community on the significant disease burden associated with Ménière's disease, the lack of any effective therapies today and the potential role that OTIVIDEX can play in the treatment of Ménière's patients. We expect that there will be growing investor interest now that the timing to results is better defined and looked forward to active engagement throughout the summer. More details on this breakfast event will be forthcoming in the next few weeks. A second important milestone that we announced today is the submission of the supplemental new drug application to the FDA for OTIPRIO in acute otitis externa, or AOE. In January 2017, we announced a successful completion of a Phase 3 clinical trial of OTIPRIO in 262 pediatric and adult patients with AOE. This single administration trial of OTIPRIO achieved its primary endpoint by showing a statistically significant increase in clinical cure rate compared to sham at day 8 with a p value of less than 0.001. OTIPRIO also demonstrated a statistically significant superiority to sham in clinical cure rate at all other time points including day 4, day 15 and day 29 and was well-tolerated. This trial result and FDA submission are important for several reasons. First, the clinical cure rates demonstrated following a single administration of OTIPRIO on comparable to results with commonly used antibody ear drops requiring two or three doses per day for a week. Second, this trial supports the utility of OTIPRIO outside the ENT specialist audience, which represents the majority of the AOE market opportunity. Third, this indication provides an entry to the physician office setting, where the existing OTIPRIO J-Code will support patient access. And finally, our submission of the sNDA keeps us on track for commercial launch, assuming approval for the peak summer season of 2018. With regard to other product development activities, here is a quick recap of our recent updates and plans. In parallel with the OTIVIDEX Phase 3 trials in Ménière's disease, we are conducting a Phase 2 trial in pediatric patients at risk for hearing loss due to cisplatin chemotherapy. Patient enrollment in this trial is ongoing. For OTIPRIO, we have an end of Phase 2 meeting scheduled with the FDA to discuss requirements for a Phase 3 program in acute otitis media with tubes, or AOMT. We expect to complete this meeting by the end of this quarter. OTO-311 is our third program and is in development as a potential treatment for tinnitus. We successfully completed a Phase 1 safety trial on healthy volunteers and expect to initiate a Phase 2 trial in tinnitus patients in the second half of this year. We are looking forward to evaluating gacyclidine in our sustained exposure formulation in this patient population that has a significant unmet medical need. Finally we are very excited about our fourth program targeting sensorineural hearing loss including age-related hearing loss. As you may recall, we shared initial proof-of-concept data during our Investor Day last October. Our new Chief Scientific Officer, Dr. Kathie Bishop, has come up to speed very quickly since joining Otonomy at the beginning of this year. With her background as a neurobiologist and experience leading in the SPINRAZA program at Ionis Pharmaceuticals, Kathie is already making strong contributions across our entire product pipeline, including this important program. In summary, I am very pleased with the advancements we have made across all of our development programs. We are particularly excited to have completed the AVERTS-1 enrollment and are now focused on providing topline results during the third quarter. Now I'll provide a brief update on our OTIPRIO commercial activities. We have made good progress implementing the changes to our commercial organization that we announced with our annual earnings release in March. This includes focusing and realigning the sales force to 20 sales territories, providing coverage of 400 priority accounts that collectively comprise about one-third of the ear tube market in the U.S. The personnel changes we are making reflect an increased focus on preexisting relationships with ENTs, direct experience in the hospital OR setting and a commitment to integrating reimbursement and market access resources into a team-based approach to managing an account. David Kaplan, our New Vice President of Sales is drawing from his experience in leading the sales team at Pacira Pharmaceuticals in making these changes. In parallel with the personnel changes, we have concentrated our commercial efforts on driving OTIPRIO utilization in facilities where we have a physician advocate, formulary access and reimbursement. While we will continue to pursue formulary approvals in additional facilities over time, the highest priority for David and his sales team is growth in OTIPRIO usage within facilities where we are already have access. The starting base for this effort is a more than 220 facilities which have purchased OTIPRIO since the launch. This includes many priority accounts such as children's hospitals, 340B facilities and other high volume institutions. Of the 220 facilities, over 60% have placed repeat orders and a growing number are ordering routinely. The near-term commercial objectives are very clear. First, increase the number of facilities with repeat orders. Second, work with each facility's pharmacy department and OR support staff, so that OTIPRIO is available for use by our physician advocates on a routine basis. And third, expand the use of OTIPRIO within a facility to other ENTs by leveraging support of our physician and OR staff advocates. The key barriers that need to be overcome in achieving these objectives are changing practice in the operating room setting and concern about reimbursement. We are addressing inertianic [ph] OR by hiring sales personnel who are comfortable working in that setting and who have hands-on experience training OR support staff on the use of new products. Regarding reimbursements, we are using both internal and external resources to support our sales representatives and customers. Our internal resources include an in-house reimbursement expert and field based market access team, experienced and able to handle reimbursement questions. This team works closely with our third-party reimbursement vendor that supports the Otonomy Answers program. This program offers in-person or phone-based assistance to facilities regarding billing, coding and reimbursement of OTIPRIO, and it is through this group's work with facilities that we have confirmed reimbursement of OTIPRIO by multiple commercial and Medicaid payers. I am pleased to say that David and our entire commercial team embrace the importance of integrating these reimbursement resources and to successful management of our priority accounts. One final note on the commercial update. We announced in today's release that end-user demand for OTIPRIO grew by 14% in the first quarter from the fourth quarter. I believe the changes we are making to the commercial organization and concentrated focus on utilization should enable us to demonstrate accelerating growth in OTIPRIO revenue over the course of the year. In closing, I've describe 2017 as a year of Ménière's for Otonomy and the timely completion of enrollment in AVERTS-1 keeps us on track with that commitment. We believe that a positive result in the Phase 3 Ménière's trial will be a major catalyst for the company, and so we will be increasing our discussion of this program over the next few months to address the growing interest of investors as we approach results. An important element of this effort will be the KOL Breakfast event in New York on June 27. This will include presentations by two international experts on Ménière's disease, who will discuss the significant disease burden, lack of effective therapies and potential role that OTIVIDEX can play as a new treatment option. In addition, we will review the Phase 2b clinical trial results and explain why we believe these give us confidence for a positive Phase 3 outcome. I hope that you will consider joining us for this event. With that said, I'll turn the call over to Paul Cayer, our Chief Financial and Business Officer, who will give you a brief update on our financials.

[Paul Cayer:]

Thank you, David, and good afternoon, everyone. In summary, our balance sheet remains strong and our first quarter expenses are consistent with the spending guidance for 2017 that we provided with our annual earnings release in March. Now let me quickly run you through the financial highlights from the quarter. As of March 31, 2017, we held cash, cash equivalents and short-term investments totaling $168.1 million, compared to $196.4 million held as at December 31, 2016. Net sales for OTIPRIO totaled $0.4 million for the first quarter of 2017, compared to $0.3 million for the fourth quarter of 2016. As a reminder, we recognize revenue upon sell-in to our specialty distributors. In the first quarter 2017, we reported total GAAP operating expenses of $27.3 million, compared to $26.9 million for the first quarter of 2016. Non-GAAP operating expenses, which exclude stock-based compensation and rent abatement expense, were $22.9 million for the first quarter of 2017, compared to $24.1 million for the first quarter of 2016. GAAP research and development expenses for the first quarter of 2017 were $13.2 million, compared to $13.9 million in 2016. The decrease was primarily a result of decreased clinical trial activities for OTIPRIO versus the prior year period. GAAP selling, general and administrative expenses for the first quarter of 2017 totaled $14.1 million, compared to $13 million for 2016. The increase was primarily result of one-time expenses related to the commercial organization changes initiated during the first quarter of 2017. Finally with regard to our financial outlook, we are reaffirming our guidance to GAAP operating expenses for 2017 will be in the range of $103 million to $108 million, while non-GAAP operating expenses are expected to total $80 million to $85 million. From a timing perspective, we expect that expenses will be higher in the first half of the year than the second, given the expense we recently incurred with the OTIPRIO sNDA submission and the timing for completion of the Phase 3 Ménière's trials. With that, I'll turn the call back over to Dave.

[David Weber:]

Thank you, Paul. Operator, we are now ready for questions.

[Operator:]

[Operator Instructions]. And our first question comes from the line of Ken Cacciatore with Cowen and Company. Your line is now open.

[Ken Cacciatore:]

Great. Thanks guys. Just a couple of questions. Don't want to jump ahead to the breakfast. But maybe just laying a little bit of a foundation about the current treatment paradigm and maybe patient population at Ménière's would be helpful as we think about that opportunity coming up in Q3 when you disclose the Phase 3. And then also nice commentary around David's addition and some of the benefits, but can you be a little more nuanced at what we're seeing that him and the team are still relatively new and coming together but as we sit here in May maybe different than we're looking at the reported results in March, are we seeing an acceleration of the benefits of these changes? And you mentioned we should see some level of accelerating growth but maybe up to the moment, what we're seeing with OTIRPIO right now? Thanks a lot.

[David Weber:]

Yes, thank you, Ken. First with regards to Ménière's disease and the current treatment paradigm, physicians are very limited in what they can offer to their patients today. There are no approved therapies in the United States for Ménière's disease. Typically what they will try to do is, first, manage the patients with a low salt diet and diuretics and then move the patients towards off-label use of steroids. Typically that will be either oral, high dose oral steroids, with consequent effects in terms of side-effects, as well as potentially intratympanic injection of steroid solutions. But as we've talked in the past, that requires repeat administration for a course of therapy. So there really is not, first of all, any proven effective therapy by clinical trials. Obviously there is a lot of data to support the potential for steroids, which is why we are in this space. But we do believe that OTIVIDEX will offer a change in treatment paradigm for these patients with successful Phase 3 results and approval. The patient population today, based on data in terms of visits to their physician, is about 500,000 patients in the U.S. We believe that that is probably not fully representing the population that it truly exist in Ménière's disease both on a combination of the fact that many of these patients have not been able to receive effective therapy, and what we would, call silent sufferers and also the fact that as we look at other geographies, we actually do see higher numbers on a population basis. So we think that with more awareness brought upon by a successful product being introduced into the market, that we would see an increase in the number of those patients that are actually out there either suffering silently today or trying to find an effective therapy. With regards to your questions about I'm very happy with the way that David have come on board. We knew that David with his successful background in coming into Pacira and moving that program forward rapidly in terms of the commercial launch. We felt very comfortable that he would be able to learn quickly and really start transitioning us to what we need to do and in fact that has been the case. I like him as to this idea that the challenge that I gave David was to rebuild an airplane while he is still flying it, and he is working that very hard. So as we look at the current focus David has brought on and the sales leadership team is now in place, that team is focused on both developing the training and retraining our sales team that exist for the 20 sales territories in terms of utilizing the hallmark, if you will, and I'll talk about that but perfect accounted David likes to call about or describe that for you in terms of how he sees that. But also in terms of while we went, we had 40 territories that went down to 20, I should say that we did transition more than 20 sales reps, so we are actually also in the process of hiring additional representatives to fill out those 20 realigned territories. And the focus there that David and his managers have is to identify individuals who have existing strong existing ENT relationships, comfortable in that OR setting and working with both doctors and OR staff in changing the habits and introducing new products into that environment. And importantly they are also very knowledgeable in regard to medical benefit reimbursement, and this is important because, as we've said, OTIPRIO is reimbursed under a medical benefit not a pharmacy benefit, and understanding the differences in that and understanding the importance of bringing in those internal and external resources we provided in a team effort is really critical to success as we look at what makes it successful account. And so as David quickly came in and identified the situation, what he identified and really focused on was identifying what makes a perfect account and this was based both on our learnings and where we were truly seeing good utilization and penetration, so if you will, our success stories that we had examples of. And now it's really based on, in terms of a perfect account, that we had a strong physician advocate, that we had that access and that we had reimbursement. And if we can provide those - all of three of those, we are seeing the ability then to drive that utilization and further penetration. And so what we're really working to do now is start to expand the examples of that with our sales effort, as well as then building in the accounts where we are seeing limited use to build that to more utilization and penetration.

[Ken Cacciatore:]

Great. Thank you.

[Operator:]

[Operator Instructions]. Our next question comes from the line of Anupam Rama with J.P. Morgan. Your line is now open.

[Anupam Rama:]

Hi guys. Thanks so much for taking the question. For the AOE indication for OTIPRIO, can you remind us of the regulatory review timelines here? And maybe, Dave, expanding on some of your earlier comments, the type of market expansion this could bring to OTIPRIO long-term? Thanks so much.

[David Weber:]

Thank you, Anupam. So with regards to the regulatory timeline, even for an sNDA, the FDA has a 10-month review. What we will be looking for now with submission of sNDA is they do have a two-month review for acceptance of filing. And once they have that acceptance of filing, we will be notified of the PDUFA date, which we clearly will share with the market. I think from a historical standpoint, as I've said, they have 10 months under regulatory timelines. It is not uncommon to see sNDA be sometimes a little quicker than that but I think what we have to - what will determine that is the load that the division is currently under and other reviews that are ongoing from other sponsors. So I think what we would expect is a 10-month review, and once we see the PDUFA date, we will be able to identify whether we may be able to have some additional time savings there. I think importantly even with the 10-month review however, is that it puts us in very good standing for a summer of 2018 launch, which is the timeframe what we've originally planned to and is obviously peak for acute otitis externa because that's the swimming time at summer, swimming period when we see a lot more AOEs. So that's - I think we're very happy with the submission and that keeps us on our original timeline to that launch time. In regards to the market expansion, I think there is a couple of important things that I want to point out and make remind people of with regards to AOE and this indication in our clinical trial. First of all, it's the first indication that takes us directly to the doctor's office and that means that we will no longer, with AOE, have a formulary review and approval process there. It will actually be used in the physician office. And remember that we already have an existing J-Code. So those are very important factors for you that will very much be a difference in the launch that David is considering. It's a very different launch pattern there. The other is that this gets us into adult patients, so obviously the ear tube is primarily pediatric patients under the age of five. With AOE, this involves adult patients as well. Now clearly our focus is on the ENT at least initially. The ENT typically will see more chronic and more severe type of acute otitis externa, which justifies the use of the product. But importantly in our trial, we validated that the product has opportunity outside of our ENT core audience and in fact had individuals who were not ENT physicians using the product. So that is something that we are factoring in as we're starting to consider with the submission of the sNDA, our pre-commercialization strategies and tactics.

[Anupam Rama:]

Great. Thanks so much for taking my question.

[David Weber:]

Thank you, Anupam.

[Operator:]

And I'm showing no further questions at this time. So with that said, I'd like to hand the call back over to Dr. Dave Weber for closing remarks.

[David Weber:]

Thank you, everyone, for participating in our call today and for your continued support. If you have any additional questions, please feel free to contact us. Have a good evening everyone.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone enjoy the rest of your day.