Otonomy, Inc.
Q3 2017 Earnings Call Transcript

Published: 10 Nov 2017

[Operator:]

Good day, ladies and gentlemen. And welcome to the Otonomy Incorporated Third Quarter 2017 Financial Results and Corporate Update Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time [Operator Instructions]. As a reminder, this conference call maybe recorded. I would now like to introduce your host for today's conference, Mr. Robert Uhl with Westwicke Partners. Sir, you may begin.

[Robert Uhl:]

Thank you, Operator. And good afternoon and welcome to Otonomy's third 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; Dr. Kathie Bishop, Chief Scientific 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, plans to meet with the FDA regarding the clinical development requirements for OTIVIDEX and the timing of any such meeting. Timing of future pipeline updates from Otonomy, achievement of value creation milestones for Otonomy, market opportunity for acute otitis externa with OTIPRIO 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 Web site for information concerning 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 third quarter 2017 financial results and business updates. The key update we will review on this call is our important announcement this afternoon in a separate release and Slide-deck of the positive results in the AVERTS-2 Phase 3 trial of OTIVIDEX for patients with Meniere’s disease. This trial achieved its primary endpoint with a P value of 0.029, and clearly demonstrates the treatment benefit that OTIVIDEX provides by significantly reducing the number of definitive vertigo days experienced by Ménière's patients. We plan to meet with the FDA in the first quarter of 2018 to review these results and discuss clinical requirements for registering OTIVIDEX for this indication. I'd like to now ask Dr. Kathie Bishop, our Chief Scientific Officer to review the results for you.

[Kathie Bishop:]

Thank you, Dave and good afternoon everyone. I'm pleased to be able to share the top line results of AVERTS-2 with you. My comments will follow the slide deck issued earlier this afternoon, and posted on the events and presentations page of the investors section of our company Web site. I will begin with slide three, which provides a summary of the results of AVERTS-2 trial. This Phase 3 trial enrolled a total of 174 patients from six countries in Europe. Following an initial one month lead-in period eligible subjects were randomized one-to-one to a single intratympanic injection of OTIVIDEX for placebo, and continued in the trial for up to an additional three months of observation. Of the 174 patients enrolled in AVERTS-2, there were 105 patients who completed their daily diaries through months three at the time the study was terminated on August 31, 2017. As you may remember, we suspended all OTIVIDEX related development activity and terminated ongoing clinical trials, following the negative results from the AVERTS-1 trial conducted here in the United States. It is important to note that we collected the data from AVERTS-2 according to the protocol and we analyzed the results according to the statistical analysis plan previously reviewed by the FDA. As Dave mentioned, the trial achieved its primary endpoint with the reduction in the count of definitive vertigo days or DVD by possion regression and analysis in month three with the P value 0.029. This analysis is based on all 174 patients enrolled in the trial. The reduction in the mean monthly DVD and percent reduction from base line for OTIVIDEX were clinically significant and consistent with our expectations based on the Phase 2 B trial. Finally, there were no safety concerns identified in this trial. OTIVIDEX was generally well followed by patients, and there were no drug related serious adverse events reported. Moving on to slide four. It shows that mean monthly DVD for all patients reporting their daily vertigo symptoms through each of the time points trial. Overall, the OTIVIDEX and placebo group has similar baseline vertigo levels of approximately nine days during the 28 days base line period. This reflects a significant disease burden at study entry since a definitive vertigo day or DVD requires that the patients experience at least one vertigo episode that day, which last at least 20 minutes. These episodes can be accompanied be by nausea and vomiting. Following the base line period, patients were treated with a single intratympanic administration of either OTIVIDEX or placebo. On this slide, you can see that the mean DVD for both periods declined in month one with some separation between the groups that widened for months two. The mean DVD for the OTIVIDEX group continued to improve in month three, while the placebo group remain the same. There are several takeaways from these results. First, the OTIVIDEX group experienced a month-over-month improvement in the number of DVD following treatment through month three. Second, the level of improvement for the OTIVIDEX group is clearly significant, declining by approximately six days during the trial from their base line level of nine days to less than three days for month three following treatment. And third, the difference from placebo is also clinically meaningful with OTIVIDEX group having a lower mean monthly DVD for each month, following treatment and a 2.5 day difference between OTIVIDEX and placebo in month three. We believe that these results clearly demonstrate the clinical benefit of OTIVIDEX for patient with Meniere's disease. Furthermore, as slide five shows, these results are consistent with what we expected based on our Phase 2B trial. I presented this slide during our Meniere's KOL in June, and discussed the information with investors throughout the summer. In this analysis, we provided the mean monthly DVD from patients from the phase 2B trial who met the entry criteria used in the phase 3 program, i. e. patients were required to report between four and 22 days with a definitive vertigo episode during the 28 day base line period. Overall, the mean monthly DVD for the OTIVIDEX group in this phase 2B trial declined by roughly six days from base line to month three and the difference from placebo totaled more than two days for month three. These changes in mean monthly DVD for both the OTIVIDEX and placebo groups are in line with the results we observed in the first two trials. Slide six provides a comparison of the percent reduction in vertigo frequency across OTIVIDEX trial. In AVERTS-2, we observed 68% reduction in vertigo frequency from baseline to month three in the OTIVIDEX group, compared to 40% for placebo. These reductions are comparable to what we observed in the Phase 1b and Phase 2b trials, but different than AVERTS-1. Although, we are clearly disappointed with AVERTS-1 we are very pleased to see the consistency between AVERTS-2 and our previous trials. In conclusion, as summarized on slide seven, the top line AVERTS-2 results clearly demonstrate the treatment benefit of OTIVIDEX in patients with Meniere's disease. Furthermore, we believe that these results support continued development of OTIVIDEX for this indication. Finally, expected next tests for the program are outlined on slide eight. We are continuing to analyze the AVERTS-2 trial results and we'll further assess the AVERTS-1 trial to identify possible factors that might explain its failure. An important next step is to meet with the FDA to review these results and discuss clinical requirements for registering OTIVIDEX in Meniere's disease. We expect to provide an update on these discussions in the first quarter of 2018 and this will include an outline of our plan to complete the clinical development of OTIVIDEX to file the NDA. With that, I'll turn it back to you Dave.

[David Weber:]

Thank you, Kathie. Achieving [indiscernible] results for OTIVIDEX in AVERTS-2 is an important milestone for the company, and renews our excitement and commitment to continuing the registration program for OTIVIDEX in Meniere's disease. This continuation plus the advancement of our other programs are getting important unmet medical needs, including hearing loss and tinnitus, providing attractive path forward for us. To support this effort, we announced during the third quarter, a set of actions to preserve capital and extend our cash runway. These actions included reductions of our non-commercial workforce by one-third, deferring initiation of clinical trials and reviewing and prioritizing our products pipeline. We intend to use our strong balance sheet to achieve value creation milestones for our multiple clinical and preclinical assets, and we'll outline these plans in the first quarter of 2018. One area to highlight now that we remain very excited about is our work in sensorineural hearing loss. We have preclinical developments underway for multiple programs that target repair of ribbon synapses, protection of hair cells from other ototoxicity and regeneration of hair cells. These programs address hearing loss conditions that comprise a largest patient populations and market opportunities in the otology field. In fact, a review that recently appeared in Lampit highlights the growing epidemic of hearing loss worldwide. Research estimate that 1.3 billion people or 18% of the world's population has mild to complete hearing loss, including 0.5 billion who suffer from disabling hearing loss. These figures indicate a sharp growth and prevalence that is increasingly driven by noise damage in the young adult population. Clearly, these statistics underscore the important unmet medical need to prevent and treat hearing loss, and the extensive burden on affected patients and society as a whole. We look forward to providing more information about our multiple hearing loss programs in the future investor update. Finally, let me provide a brief update on OTIPRIO. We completed the commercial reorganization in the second quarter and the new sales team was in place at the beginning of the third quarter. End user demand for the quarter declined 9% from the second quarter of 2017. It should be noted that the third quarter is the slowest time of the year for ear tube surgeries, but the historic average volume of the procedure declining 34% from the second quarter. The OTRIPRIO sNDA for acute otitis externa is under reviewed by the FDA with a PDUFA action date of March 02, 2018. AOE represents a large market opportunity for OTRIPRIO with approximately 4 million episodes each year in the U.S. Most of which are treated by primary care physicians, including pediatricians. A leading market research firm has recently completed an assessment of OTRIPRIO’s commercial opportunity in AOE. But it's important for products attractiveness in this indication. We are currently evaluating potential partnering opportunities and strategic alternatives for OTRIPRIO. At this time, 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, Dave and good afternoon everyone. In summary, our balance sheet remained strong and our third quarter expenses are consistent with the spending guidance for 2017 that we reaffirm today. Now, let me quickly run you through the financial highlights from the quarter. As of September 30, 2017, we hold a cash balance, including cash, cash equivalents and short-term investments, totaling $134.3 million compared to $150.5 million as of June 30, 2017. Net sales of OTIPRIO totaled $0.3 million for the third quarter and approximately $1 million for the first nine months of 2017. In the third quarter of 2017, we reported total GAAP operating expenses of $21.3 million compared to $27.8 million for the third quarter of 2016. Non-GAAP operating expenses, which exclude stock-based compensation and rents abatement expense, were $17.4 million for the third quarter of 2017 compared to $24.5 million for the third quarter of 2016. Operating expenses for the third quarter were also lower than in the second quarter of 2017, which totaled $23.5 million on a GAAP basis and $19.3 million non-GAAP. GAAP research and development expenses for the third quarter of 2017 were $10.8 million compared to $15.9 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 third quarter of 2017 totaled $10.5 million compared to $11.9 million for 2016. The decrease was primarily related to reduced personnel costs, resulting from the sales team reorganization. Finally, with regard to our financial outlook. We are reaffirming our guidance that GAAP operating expenses for 2017 will be in the range of $95 million to $100 million, while non-GAAP operating expenses are expected to total $73 million to $78 million. We also expect our cash balance to total to $120 million to $125 million at the end of 2017. We are not providing any financial guidance for 2018 at this time. With that, I'll turn the call back over to Dave.

[David Weber:]

Thank you, Paul. In summary, we are very pleased to announce the positive AVERTS-2 results today. These results clearly demonstrate the treatment benefit of OTIVIDEX and patients with Meniere's disease, and also provide reassurance that this benefit can't be distinguished from placebo using the trial design employed throughout this clinical development program. We appreciate that you will have a number of questions as a result of this announcement, including one additional clinical development will be required for NDA filing, what is the time line and expense for this effort, what explains the different result in the AVERTS-1 trial and so on. We intent to address these questions, and will provide an update on the OTIVIDEX program, including clinical development plan following our discussions with the FDA that we expect to occur in the first quarter of 2018. Operator, we are now ready for questions.

[Operator:]

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

[Ken Cacciatore:]

Always interesting. Just question on, if you have to do another phase 3 study, may be timing that it took to enroll and complete and cost, if you have to run another one in the U.S. And there may be, I know you said you’re going to address this little later, and you didn’t do it on the last call. Can you give us a little bit of an autopsy on AVERTS-1 that you have to have some theories as to what happened here? So hoping now that you that this AVERTS-2 data, you’re willing to play a little bit of [indiscernible] game for us as investors try to understand, may be the pathway forward. Thank you.

[David Weber:]

I think, first of all in terms of timing and cost, I think it's important that we will, obviously, be looking at the AVERTS-2 trial and using that information now to look at and discussing this with the FDA, to look at what additional clinical work is necessary and what that might look like in terms of trial size. I think we know the trial design work is based on the AVERTS-2. But clearly, we need to look at what that would imply for sizing and where that might then lead in terms of cost and timing. So I think that is more of what we will lay out in the future. But I think, historically, we've shown that we can run these trials on time in a very timely fashion. So I think we have high confidence in our ability to do that. With regards to autopsy and AVERTS-1 trial, I think it's important to understand that we just received the AVERTS-2 results. Clearly, we’re going to want to utilize those results to evaluate AVERTS-1. But let me, I think, that’s a good question, and it is definitely something we want to come back to investors with. So let me have Dr. Cathy Bishop address that a little bit for you.

[Kathie Bishop:]

So I think it's important to note out, as showed on the slide that compares the different trials. Obviously, AVERTS-1 is different, not only from AVERTS-2 but the Phase 2 trial and the Phase 1 trial, all of which I think consistently show positive results. So we have absolutely started to look at factors in AVERTS-1 that might explain its difference. So I think now having AVERTS-2 trial data, which Dave explained, we just obtained that’s an additional comparison that we can make to try and determine what's different about AVERTS-1 and what we need to do moving forward to have a successful program leading us to registration. I think one clearly is when you look at that graph you will see that the placebo response was higher in AVERTS-1 compared to all the other trials where it was very consistently around 40%. So I think one factor that we’ll be looking at is once you have that placebo response and what we can do to control it in the future. But obviously, we're looking through the data very carefully to look for other factors to help drive the decision how to move forward.

[Ken Cacciatore:]

And the baseline characteristics, nothing that you see -- I know you discussed the data. But there was nothing different in the baseline characteristics between AVERTS-1 and AVERTS-2 as far as you can tell?

[Kathie Bishop:]

We just got the data, so we’re pouring through that exact question right now. So we'll look forward to update in the future once we have [chance] to do a full analysis there.

[Operator:]

Thank you. And our next question comes from the line of Anupam Rama with JPMorgan. Your line is now open.

[Anupam Rama:]

This is Tessa showing in for Anupam this evening. Thanks for the results and taking our questions. We look to, as I guess firstly, if you had done -- if you’ve been thinking about the appropriate mix of doing integrated analyses across the key trials. And I guess, it sounds like you haven't quite yet done those analyses. But is that something that you plan to do in order -- before you go to the FDA? And then I guess my second question and maybe it’s still too early to know, but beyond the primary endpoint. I am wondering if you can provide us with any other color on the direction or magnitude as a benefit in some of the secondary endpoints, including vertigo severity and quality of life, and efforts too. Thank you.

[David Weber:]

I think these are obviously what we understand are important questions and things that we do want to address. Why don’t I let Dr. Bishop respond to that?

[Kathie Bishop:]

So as noted, we did receipts of our two results, so we'll be looking at those results in conjunction with AVERTS-1. I do want to point out I think what you were asking about is combining the results of the two trials together. But I do want to make a distinction that AVERTS-2 trial is conducted in accordance with its protocol, and it was analyzed exactly in accordance with the statistical analysis plan that we have previously discussed with the FDA. So it's our belief and we will be discussing it with the FDA. But it is our belief that this is a standalone registration enabling study on itself, so just want to make that point. As far as secondary endpoints, we're right now analyzing that data and we'll provide update in the future along with providing that data to the FDA when we go ahead and talk to them expected in the first quarter.

[David Weber:]

And I think integrated summary is analysis is also pretty typical thing to do, it is something that we will clearly look at. But again, I think it's important to understand we just received this information recently and we need to obviously do a full analysis and that will include looking at the entire clinical data set.

[Operator:]

Thank you [Operator Instructions]. And our next question comes from the line of Bruce Rogovin with Wells Fargo. Your line is now open.

[Bruce Rogovin:]

I'd like to ask couple of questions. One, I'm a Meniere’s sufferer. What the progress is also on your tinnitus drugs that is a tremendous side effect of Meniere’s?

[David Weber:]

As part of our review of our product pipeline, we continue to review that pipeline. Obviously, with the results that we're announcing today that will be an important part of prioritizing our product development pipeline. We continue with 311 to be in a position to initiate Phase 2 clinical work. We have not yet talked about timing for that. It is something that we expect to come back and talk more with investors in future meeting with regards to our overall product pipeline and the relevant timing for each of those programs.

[Operator:]

And I am not showing any further questions, at this time. I would now like to turn the call back over to David Weber, President and CEO for any further 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. Thank you.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone, have a wonderful day.