Otonomy, Inc.
Q4 2016 Earnings Call Transcript

Published: 3 Mar 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Otonomy Incorporated Q4 2016 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 follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host Mr. Robert Uhl from Westwicke Partners. Sir, you may begin.

[Robert Uhl:]

Good afternoon and welcome to Otonomy’s fourth quarter and full year 2016 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 calls 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 timing of clinical trials and results for OTIPRIO and expansion indications, the timing of the SNDA filing for OTIPRIO in acute otitis externa, 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 OTO-104 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 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 2016 financial results and business updates. I will start by providing a brief overview about our progress in 2016 followed by an update on the OTIPRIO commercial launch and our product development activities. Paul will then review our financials including spending guidance for 2017 and we will finish with questions from call participants. The fourth quarter of 2016 and the year in general were highly productive for Otonomy as we made significant advancements across our product pipeline. During 2016, we successfully completed clinical trials in multiple indications for OTIPRIO including a positive Phase 3 trial in acute otitis externa or AOE that we believe supports approval in this indication and a positive Phase 2 trial in AOMT that supports advancement of Phase 3. In addition, we initiated a Phase 2 trial for OTO 104 in patients at risk for cisplatin-induced hearing loss, which represents an important unmet medical need with no available therapies. And we completed a Phase 1 safety trial for OTO 311 that enables us to initiate a Phase 2 trial in tinnitus patients in the second half of 2017. We also made progress in evaluating potential product candidates for our fourth program targeting sensorineural hearing loss including age-related hearing loss. Most importantly, we continued enrollment in AVERTS-1 and AVERTS-2, the two Phase 3 trials for OTO 104 in Ménière’s disease and we expect to deliver top-line results from both trials in the second half of 2017. Given the large attractive commercial opportunity for OTO 104 and Ménière’s disease, we believe that these trial results represent the single most significant value driver for Otonomy in the near-term. As a result, we look forward to providing more details regarding timing of the results with our first quarter earnings release and business update. I’ll provide a bit more color on these pipeline activities in a moment, but let me first review our OTIPRIO commercial status and plan including the sales force realignment and related personnel changes that we announce today. During 2016, our commercial efforts were focused on establishing patient access to OTIPRIO by building product awareness and advocacy with physicians, gaining formulary approval in target facilities and establishing reimbursements. Our earnings press release provides an update on the metrics we have been reporting regularly against these objectives and I’d like to highlight a few key accomplishments through the end of February in my comments. First I believe that we have done a good job in the last year establishing awareness of OTIPRIO – of Otonomy and OTIPRIO within our target E&T audience. We expect E&T to be accessible and interested in the OTIPRIO product profile and we have found that to be the case. Second, we have conformed in a broad group of physicians who have used OTIPRIO in their ear tube surgeries that the product provides clinical benefit consistent with our clinical trial experience and expectations. It is important to note again the results from a survey of more than 190 physicians who participated in our sample program that greater than 90% indicated a positive overall impression of OTIPRIO after using the sample and greater than 90% indicated a likelihood to use the product in the future. Third, OTIPRIO has received formulary approval or has been purchased by more than 360 facilities, and reviews are in process at approximately 240 additional hospitals. Our success rate in formulary reviews continues to be high at 88%. Fourth, we achieved our objectives during 2016 regarding reimbursement coding for OTIPRIO. We were successful in obtaining a C code that became effective as of July 1, 2016 and also obtained a J code that became the permanent billing code for OTIPRIO as of January 1, 2017. The J code replaces the C code while retaining transitional pass-through payment status. We believe that assignment of the J code will support patient access for use of OTIPRIO during ear tube surgery and will also facilitate billing for the office-based expansion indications, when approved. Furthermore, the third-party reimbursement resource supporting our Otonomy's Answers Program has confirmed reimbursement of OTIPRIO in multiple states by multiple payors covering both Medicaid and commercially insured patients. For 2017, our commercial priority has transitioned to pull-through which we define as the purchase and utilization of OTIPRIO in facilities where the product has received formulary approval. Through the end of February, OTIPRIO has been purchased by more than 200 facilities with over 60% of these account placing repeat orders. However, the overall monthly level of pull-through has not significantly increased in the first two months of 2017, compared to the fourth quarter of 2016. As a result, we have moved quickly to make a number of changes to the commercial organization to increase the focus on OTIPRIO utilization and improve sales performance. I am pleased today to announce that we have hired David Kaplan as Vice President of Sales and he is reporting directly to me. David has a strong pharmaceutical sales background that includes serving as Vice President, Sales at Pacira Pharmaceuticals from April 2013 through March of 2016. During this period, annualized sales of EXPAREL grew significantly from less than $50 million to more than $250 million. I believe that David’s successful track record in leading a sales force to drive utilization of EXPAREL, a product used in the hospital and ambulatory surgery center settings is highly relevant to our goal and driving pull-through of OTIPRIO. We have also realigned our sales territories to optimize coverage of accounts with current or near-term potential for OTIPRIO utilization. This has enabled us to reduce the size of the sales force from 40 to 20 sales representatives. In addition, our Chief Commercial Officer has left the company. Together with David, our commercial team has reassessed our list of target accounts according to the presence of one or more product advocates, approved our pending formulary access and demonstrated reimbursement. Based on this assessment, the reconfigured sales force is expected to initially focus on approximately 400 priority accounts that collectively account for about one-third of the US ear tube market opportunity. We expects that the number of target accounts and sales representatives and the level of market coverage will increase in the future, as we continue to expand market access and secure reimbursement for OTIPRIO. In summary, I believe that we established the basic building blocks for commercial adoption of OTIPRIO during 2016 by generating awareness and advocacy with physicians securing formulary approvals in a significant number of facilities, and successfully obtaining both the C code and J code to support market access. I believe the personnel changes we have made, while difficult; improve our focus on priority accounts that have current or near-term potential for OTIPRIO utilization to enable us to accelerate growth in OTIPRIO revenue. Importantly, we have retained our core commercial capabilities that can be expanded with growth in OTIPRIO utilization for ear tube surgery and expansion indications when approved, as well as for future potential product launches including OTO 104 in Ménière’s disease. I would now like to switch gears and provide a brief update on product development efforts across our pipeline. In January 2017, we announced the successful completion of a Phase 3 clinical trial of OTIPRIO in 262 pediatric and adult patients with acute otitis externa or 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 assessed including Day 4, Day 15 and Day 29 and was well-tolerated. It is important to note that the clinical cure rates demonstrated following a single administration of OTIPRIO are comparable to results with commonly used antibiotic ear drops that requires two or three doses per day for a week. Furthermore, this trial also supports utility of OTIPRIO outside the ENT specialist audience since approximately 70% of patients in the trial were treated by non-ENT physicians. Based on these positive results, we expect to submit a supplemental NDA to the FDA in the first half of 2017. In early October, we announced successful results from a Phase 2 trial for OTIPRIO in patients with Acute Otitis Media with Tube or AOMT, a second potential label expansion indication. This trial evaluated a single administration of OTIPRIO placed on the tympanic membrane on or around the tube in a total of 95 pediatric patients. The trial demonstrated that both OTIPRIO doses evaluated were well-tolerated and achieved higher and statistically significant clinical cure rate over sham with a P value of less than 0.5. We believe that these results support the advancement of OTIPRIO into Phase 3 for this indication, and intend to discuss the requirements for such a program with the FDA in the first half of 2017. Achieving positive trial results in both AOE and AOMT is a significant accomplishment because it advances our strategy of establishing clinical and regulatory support for OTIPRIO across multiple indications covering a broad range of patients and treatment settings. Moreover with the regulatory approval – with the regulatory filing for AOE in the first half of 2017, we are well positioned for commercial launch assuming approval in time for the peak summer season in 2018. In addition, having the J code already assigned, supports this plan that the code would apply to physician administration of OTIPRIO in the answer setting which is the primary side of care for acute otitis externa patients. Turning now to OTO 104, patient enrollment is ongoing in our two parallel Phase 3 trials for Ménière’s disease; AVERTS-1 in the U.S. and AVERTS-2 in the Europe. Each trial is a 16- week prospective randomized double-blind placebo-controlled trial that will enroll approximately 160 patients with unilateral Ménière’s disease. We continue to expect that the results of both Phase 3 trials will be available in the second half of 2017 and look forward to providing more details regarding timing with our first quarter earnings release and business update. In January 2017, we announced enrollment of the first patients in a Phase 2 clinical trial evaluating OTO-104 for the prevention of hearing loss in cancer patients undergoing chemotherapy with platinum-based agents. This multicenter trial is designed to assess the feasibility, safety and exploratory efficacy of OTO-104 given by intratympanic administration in subjects at risk for ototoxicity and hearing loss from cisplatin chemotherapy. We are pleased to have this trial underway given the high unmet medical need of these pediatric and young adult patients undergoing chemotherapy. On to our third program, OTO-311 for tinnitus. We announced today the completion of the Phase 1 clinical safety trial and our plans to initiate a Phase 2 trial in the second half of 2017. OTO-311 is a sustained exposure formulation of the NMDA receptor antagonist gacyclidine that we are developing as a single inter tympanic injection for the treatment of tinnitus. This is an important unmet medical need as a result of the large population, high-level of impact on patients’ lives, and lack of any FDA approved drug treatment. We have completed a Phase 1 clinical safety trial for OTO-311 in normal healthy volunteers and selected the dose for evaluation in Phase 2. We will discuss specifics regarding the Phase 2 trial design including patient selection and endpoints in a future communication. Lastly, a few words about our fourth program which targets sensorineural hearing loss, including age-related hearing loss. There are two technical approaches we are currently pursuing in this program; repair of the ribbon synapses, which connects the cochlear hair cells to the auditory nerve fibers and which can be damaged in the presence of loud noise or other injury and regeneration of the cochlear hair cells following damage or deaf. As we review, during the Investor Day in October, we have demonstrated sustained-exposure otic delivery of multiple product candidates, including small molecules and biologics. We have also demonstrated preclinical proof-of-concept for reversal of damage to the ribbon synapse in a noisy injury model, which also results in functional restoration of hearing. This is an exciting area of scientific investigation with the potential to address, what we believe to be the largest market opportunity in the otology field. We look forward to disclosing more details about this program in the future. In summary, 2016 was a highly productive year for Otonomy’s development team as we made significant progress across our product pipeline including the completion of positive clinical trials in multiple indications for OTIPRIO, advancement of our OTO-104 Phase 3 Ménière’s disease trials and initiation of a Phase 2 trial in chemotherapy induced hearing loss, as well as completion of a Phase 1 clinical safety trial for OTO-311and decision to move into Phase 2 and continued progress in evaluating product candidates for our fourth program. In the first phase of the OTIPRIO launch, we established physician awareness and advocacy, secured formulary approval in a significant number of facilities, and successfully obtained both a C code and J code. However we are not satisfied with the level of utilization in accounts where we have access. As a result, we have implemented changes in personnel in sales territory alignment that I expect will improve sales performance for OTIPRIO. While at the same time retaining core commercial capabilities for our anticipated launch of OTO 104 in Ménière’s disease. In closing, I would like to thank our shareholders for their continued support and look forward to providing additional updates during what we expect will be an exciting year for Otonomy given all of our activities including the upcoming Phase 3 results for OTO 104. 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, we finished 2016 with a strong balance sheet. We closely managed our spending which resulted in total non-GAAP operating expenses for the year below our guidance. In addition, the details in today’s press release, we are reducing our spending guidance for 2017 to reflect the commercial personnel changes discussed earlier. As of December 31, 2016, we held cash, cash equivalents, short-term investments totaling $196.4 million. This compares favorably to the $184.8 million we held at the December 31, 2015 and reflects the public financing we completed in January of 2016. Net sales of OTIPRIO totaled $0.3 million for the fourth quarter of 2016 and $0.7 million for the entire year. The fourth quarter total reflects our recognition of revenue upon selling to our special distributors which is consistent with the methodology used in the third quarter, and is the methodology we expect to use going forward. In the fourth quarter of 2016, we reported total GAAP operating expenses of $26.2 million, compared to $21.1 million for the fourth quarter of 2015. For the full year 2016, GAAP operating expenses were $110.5 million, compared to $62 million for 2015. Non-GAAP operating expenses, which exclude stock-based compensation and rent abatement expense were $97.7 million for 2016 compared to $54.3 million for 2015. Actual non-GAAP operating expenses for 2016 compares favorably to our financial guidance which totals $100 million to $105 million for the year. GAAP research and development expenses for 2016 totaled $60.7 million compared to $38.8 million in 2015. The increase was primarily the result of increased clinical trial activities for both OTIPRIO and OTO 104 in 2016. GAAP selling, general and administrative expenses for 2016 totaled $49.8 million compared to $23.2 million for 2015. The increase was primarily related to higher personnel expense and operating cost associated with the commercial launch of OTIPRIO. Finally, with regard to our financial outlook, we are reducing our guidance for total non-GAAP operating expenses for 2017 from $85 million to $90 million to $80 million to $85 million to reflect the commercial personnel changes noted earlier. In addition, we are providing guidance for GAAP operating expenses in the range of $103 million to $108 million for 2017. 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] Our first question comes from the line of Josh Schimmer from Piper Jaffray. Your line is now open.

[Josh Schimmer:]

Great. Thanks for taking the question. Just want to follow-up on some of the challenges in converting specialists to OTIPRIO users and what is your sense of – as to what is the gating stent there? What is it that’s with high awareness and now good reimbursement in place that’s hanging up the process and how do you expect that the changes that you are putting in place can kind of specifically address those factors at a better rate? Thanks.

[David Weber:]

Thank you, Josh, for that question. The key as we’ve learned is that, it is a multi-step process here both in starting off with developing the awareness of the physician and then the advocacy in order to schedule the formulary review and then obviously working with the multiple stakeholders in that review process which is not only the physician advocate, but also the hospital pharmacy director as well as the financial managers within the hospital that need to understand that the reimbursement task for the product. As a result of that, that means that it requires a coordinated effort between the sales force as well as than the other resources that we provide which is the market access and patient access specialists including the field reimbursement managers that we have in place. To ensure that all the parties have awareness of the reimbursement and the pathway to reimbursement in terms of billing and coding and that requires a very coordinated effort which means that you have to have a very collaborative approach between your sales force and those teams. And it’s got to be very well coordinated in order to work through that quickly, in order to then drive the utilization. So as you can imagine there is a lot of communication hands off that occur because once you satisfy the pharmacy director and the financial managers that there is reimbursement there, typically they want to try their first cases of OTIPRIO, submit them for claims and verify that they have been paid, that then requires that once those claims have been paid, that there is communication back to the physician that indeed those claims were paid for the cases that they conducted and then from there, opening up the use of the products in the facility. So, you can see how there is very coordinated requirements there for the teams to work together. From there, then it is important to expand from that one physician advocate into the other ENTs that are in that facility or doing their surgeries in that facility gaining their use of the product and expanding their utilization and then reaching out obviously then further into the community that surrounds that area. So, in the end, it requires an extensive coordination and communication and collaboration among the entire team. So it really is almost more of an – it’s more of an account management than a typical sales rep’s visit that which normally be seen for pharmaceutical products.

[Josh Schimmer:]

Okay, were there specific parts of that cycle that were not kind of connecting or specifically breaking down and that you had on pretty good leadership on the commercial side of things that’s already, again where do you think that the process wasn’t connecting and how can you make sure that it connects going forward?

[David Weber:]

Well, importantly, this product is being administered at the time of surgery. So it requires comfort with the overall surgical environment being able to do hands-on demonstration of the product, being able to help through all of the different logistical stages that are needed to get these products from the hospital pharmacy to the operating room pharmacy and on to the tray of the physician and working with all of those personnel that are involved. So a lot of comfort both with the operating room and the operating room staff as well as then obviously being familiar and knowledgeable and able to coordinate when to bring in reimbursement specialist to talk about reimbursement with whoever is concerned there. So, it requires much more than what would a typical pharmacy benefit type of drug product and we found that that was a talent and skillset of experience is that we needed to emphasize.

[Josh Schimmer:]

Got it. Thank you.

[Operator:]

Our next question comes from the line of Ken Cacciatore from Cowen & Company. Sir, your line is now open.

[Ken Cacciatore:]

Thanks, Dave. I have a couple of questions. Just following up on Josh’s question, I guess, we are just trying to understand why David is in and the old commercial manager is out and we are lowering the spend, you could go want a two wage, you could want a three wage you could lower it, you could keep at the same as you kind of increase that to make that process that you are describing even more seamless or enhance it. So I guess, just trying to figure out – just again, kind of like Josh was – kind of where the loop is not working. And then, also just pivoting to, I think, clearly what’s most exciting to us OTO 104, just maybe a recap in description of the opportunity and the kind of current treatment, current injections and maybe help size and frame that commercial opportunity for us as we go into the Phase 3 date early. Thanks.

[David Weber:]

All right. Thank you, Ken. Appreciate it. But first of all, let me talk about, David, and what David Kaplan brings us is so exciting here. David has experience that is highly relevant to OTIPRIO. As you look at his experience at Pacira with EXPAREL, it was an OR direction for that product for used in the OR. So obviously, how do you work with surgeons and how do you gain access to those surgeons, but more importantly, address their needs and getting the product into the OR and utilize to the OR and helping them understand the use of a product that is done in - with surgery. So a pharmaceutical product that’s being used during the time of surgery. So that was very key for EXPAREL and obviously that is the direct experience that David has here. And that really is the key as David came in to assess the situation and really take a look, what became very clear and evident was you need a high level of comfort. Your sales people need a high level of comfort of talking with the surgeon and going into the OR environment. But they also need a very high level of comfort of dealing, of coordinating with experts in reimbursement, bringing those resources onboard into those discussions, because obviously there are discussions that the sales force can’t have with regards to reimbursement that has to be turned over to the appropriate resources and market access and patient access. So, as you look at that kind of experience and that type of challenge, it is a different talent set. And it is something that we found we needed to emphasize. The other piece of this is, is that, it also became clear to us and this may address, I think this addresses your point about the spend, this is really not a matter of cost efficiency. They are – all are obviously savings that we are going to encounter here, but that was not the goal. What we found in working with David and the commercial leadership was, that we have one-third of the ear tube surgeries covered currently with a – with formulary approval when access for the product are pending very shortly. And obviously that’s a substantial opportunity right there that represents an ability to recognize utilization of sales. And so, we really need to drive against that and focus on that. And to do that requires that very coordinated effort. And so, by focusing the territories, we are not actually losing anything. I think it’s important to say that as you look at that, it is not like we are reducing the amount of opportunity that we have for even not taking advantage of the access that we’ve gained. It’s not that at all, it’s that we’ve actually learned how to better coordinate and utilize those resources and how to stage them in a way that it’s much more efficient than previous. And the thing I will add to that is obviously ensuring communication coordination and collaboration among 20 people is a lot easier than doing that among 40. And so that is really the key here. So it is not like we are doing this for cost savings, it is not like we are doing it and recognizing that there is some loss of opportunity on a temporary basis. That’s not the case at all. It is actually how do we maximize to drive sales performance. And as we continue to expand market access, as we expand utilization of the products where we actually already have approval or use of the product, and reimbursement demonstrated. We will then look at expanding the resources in the sales force to further grow from there. But those are things that we can do over time and that remains the focus. So, again, given that our focus in 2017 is driving utilization and building revenue, that is why that very hard focus on what we need to do there. And I am very excited about having David and the team of people that we have put in and we know that from our reimbursement experience, we have made great progress there and have a very strong team for which they can work with to drive the product utilization and further expansion of the access. With regards to 104, very exciting to talk about 104, because obviously, we are quickly approaching the second half of 2017. In October 2015 at the Investor Day, we announced that we will be starting the two Phase 3 trials and we at that time announced that we would expect results in the second half of 2017. So I think we have executed on this program very well in terms of the initiating and enrolling those trials. And obviously we will get into more details when we talk about first quarter with regards to timing there. With regards to the opportunity, as we look at this, obviously Ménière’s today is not treated with any approved product in the US. So there is no approved product and physicians and Otology specialists find it difficult to treat these patients, because the treatments are not proven to be effective and safe. They will typically put these patients initially on therapies like low salt diet, diuretics to try to control, but that’s resulting in the patients going further and they will actually utilize high dose oral steroids which obviously have side-effects as well as doing inter- tympanic injections and steroid solutions that are both painful and highly uncomfortable, as well as time consuming as these patients have to remain in the physician office for quite a bit of time in an uncomfortable situation and requires repeat administration. The others could evidence and this was the basis for this program in the literature, clinical literature that steroids can be beneficial here and obviously we have our large Phase 2 b trial which were very encouraging. What OTO 104 represents is the opportunity to treat these patients we believe much more effectively, all around both in terms of effectiveness because of the single sustained exposure, we are able to get higher levels we believe into the ear and maintain a more high standard and well distributed level across the inter-ear of steroids, but also because this much simpler treatment for patients and physicians, single administration at the time of treatment, the patient can get up from the chair and leave immediately. They do not have to remain with that solution held against their ear in a painful situation and they will not have to come back for repeat administration for one course of therapy. And so, it represents a significant change and obviously by gaining FDA approval and marketing of the product, we expect it will be the only product approved for this indication and obviously be able to treat patients on an ongoing basis. In terms of opportunity, it’s important to recognize, now there are about 600,000 Ménière’s disease patients in the US. We believe that number is underestimated for a number of reasons that we can discuss. But also it’s important to recognize that just like with OTIPRIO, there are other indications for this product. And so, we have already demonstrated that we will be aggressive in expanding indications by evidence of our Phase 2 trial in chemotherapy induced hearing loss that is now enrolling. But we also know that steroids are used by physicians in conditions such as sudden hearing loss and other forms of central neuro hearing loss and balance disorders. In fact, they tell us that Ménière’s represents only about 20% of their current uses of steroids today. So those all represent a potential opportunity for us. And I think finally, because we are addressing these highly unmet medical conditions with high unmet needs, such as Ménière’s disease, such as chemotherapy induced hearing loss, we believe the product will represent a tremendous value and obviously have a premium pricing connected with it.

[Ken Cacciatore:]

Thank you.

[Operator:]

Our next question comes from the line of Sumant Kulkarni from Bank of America. Your line is now open.

[Sumant Kulkarni:]

Hi, thanks for taking my questions. I have a bunch. First is a follow-up on some of the commercial plans. How much time does David had to review the old plan and how intimately involved was he in formulating this new plan?

[David Weber:]

So, David came on board in January and worked very quickly. It was – as I discussed with David, it was critical for him to get in very quickly and assess the situation together with the rest of the commercial leadership team and establish a plan going forward and that’s just important to understand this is not a change in the overall corporate strategy or commercial strategy for OTIPRIO. We’ve always planned that the product would be a reimbursement strategy by going to the ENT and getting formulary approval in the target hospital where they do their surgery and securing reimbursement. It really is a matter of execution. So what we are doing is, we have now through this time now that we have had areas where the product is going to approved and on formulary and have achieved reimbursement, we’ve been able to learn what does it take to make a successful account. I think many of you will remember Ann Edmunds at Omaha Children who gave the presentation at our Investor Day and she talked about her experiences and her use of the product. And what we’ve been able to do is, learn from those situations such as with physicians assert how to best go in, get approval of the product and then start the utilization of the product and build from there. And we need to duplicate that across the country and focus on that effort. And so, it is with those learnings that we are applying. The changes we are making and what David brought to that was his experiences and his knowledge about an OR-based product and what type of talents and what kinds of communications are necessary to be successful there.

[Sumant Kulkarni:]

And then, it’s a lot of comfort is required here for doctors to start using the product, how can that level of comfort be addressed by half the sales force now versus what it is to be? And secondly on that – at what point do you think there could be an inflection and at what point can this new plan be qualified, does either a success or a failure?

[David Weber:]

Currently, it’s not comfort, to be clear it’s not comfort about use of the product. So let me say it very clear. This is not a matter of the comfort level with the application of the product in a surgical setting or the performance of the product. In fact, what we hear overall is that they are very excited about the use of the product and it’s very easy for them to utilize. I think the barrier that we must address and address in a coordinated effort is cost and reimbursement. And cost is addressed by showing that the product is reimbursed. And that requires that the facilities have the ability and the knowledge they need of how to bill for the product and get reimbursement and be able to track that in order to make sure that all the stakeholders are aware when the product is reimbursed. So as you know, Sumant, we’ve put in place a hub in the fourth quarter of last year, a reimbursement hub that could track claims and we also put in place field reimbursement managers to help our sales force address any reimbursement questions or needs to help drive utilization. And what we’ve learned is that is, where we have done that and done that well and coordinate it and collaborate it highly effectively, we have seen great results and that’s what we have to now mirror elsewhere. Importantly, the change from 40 to 20 as I said, doesn’t actually change the coverage and the reason for that is, is I am actually not needing as much communication from the sales side I am needing more involvement of the reimbursement side to explain and to help address reimbursement questions and demonstrate that reimbursement occurs, that will then drive utilization. And that’s what we’ve seen the very effective in those areas where we are seeing high utilization of products. And that’s what we are trying to mirror.

[Sumant Kulkarni:]

Right. How about the point where we might be able to see an inflection? Or any kind of progress report, at what point could you consider successful versus not?

[David Weber:]

Well, I mean, clearly, we are going to be tracking very carefully. I think we are announcing these changes today and we – part of the reason that we have been aggressive here and making these changes is we wanted to make these changes and see a change in performance. I can’t sit here and say a specific time point, but clearly we were not happy after the first couple of months of this year and we expect to really focus on this and that’s demonstrated by the fact that this commercial leadership team is now reporting to me directly, so that we can ensure the urgency and focus and collaboration that we need to make this happen.

[Sumant Kulkarni:]

Given that it seems like – sorry, go ahead.

[Paul Cayer:]

Sorry, Sumant, it’s Paul. I was going to jump in here, maybe just touch a little bit about what we think success looks like. I mean ultimately success looks like vial sales and that’s translated into revenue, but, the metrics underneath that that we are going to be looking at very carefully are the following

[Sumant Kulkarni:]

So it sounds like…

[Paul Cayer:]

And in terms of where we go from here as Dave said, 20 is the right number now, but we are clearly going to be looking for those areas where we in fact are getting sort of maxed out in terms of the rep bandwidth because now, the rep has more sites and they could support with access and at that point, we will be looking at sort of bring it back in. But it’s really with the basic building block of physician advocates, access and available reimbursement that’s all in place before we sort of do that.

[Sumant Kulkarni:]

And it seems like reimbursement is a pretty important part of the equation. So in all your planning or the new base of planning, has the use of prices ever been contemplated as a variable?

[David Weber:]

No, because, that is really not the issue. We found payors very willing to pay and reimburse for the product and that is occurring. We have demonstrated reimbursement we have states that have reviewed it on a Medicaid basis and are paying claims. So we have demonstrated claims being paid at that level. It really is the – I think, Sumant, what’s the time learning here and maybe the learning overall is hospitals have become very aware that their ability to control utilization, basically control and restrict the access until they get comfortable with reimbursement is a primary – that causes some time period. Because you got claims and then they get paid and that’s really the – what you have to then drive, because obviously if you can help that – the conduct it quickly by utilizing resources such as what we provide with our FRMs and hubs that we have in place, that is a way to help make that happen quicker and that’s been used to drive as Paul said, the utilization within the facility by the advocate physician and then building from there with the other physician colleagues as well as other practices that are doing their surgeries there. So, that is really the – a key learning here that goes into place.

[Sumant Kulkarni:]

Last couple I have are, assuming OTO 104 does well in the Phase 3, what do you expect if any for learnings from this OTIPRIO process given that’s a completely different kind of commercial – I guess, plan for that product? And what are your latest thoughts on the timing of profitability?

[David Weber:]

Well, I think first of all, what we are talking about here is a rep that is extremely comfortable with talking to both the physician dealing with him and the OR dealing with the discussion and how to bring in reimbursement resources. All of those are things that we are going to actually need for OTO 104 as well as actually the expansion indications for OTIPRIO. And so, it’s again the utilization of all of the resources. I think that’s the key. This is not a product that and this includes the states indication, where it is simply here is the pharmaceutical product and it’s reimbursed on an pharmaceutical and give that benefit. You need to bring in those reimbursement specialist to ease the concerns and address the concerns about reimbursement. So it’s not a cost issue, it’s a reimbursement. As far as they know they are going to get reimbursed, they want to use the product. That’s our learning. And so, with 104, as well as then with the expansion indications of OTIPRIO is that, that knowledge of how to coordinate and utilize those resources are really key. And the reps that obviously we have in place for OTIPRIO will be very knowledgeable by the time that 104 is approved and launch of how to interact with the ENT and address any kinds of questions where they are needing resources on reimbursement. I think the other thing is to remember that we are doing the hard lifting here. The heavy lifting is really right now, because OTIPRIO really represents our first experience with a J code reimbursed product. So whether that’s in the office setting or whether that’s in the surgical setting, we are educating starting today. We’ve always said that OTIPRIO really helps us optimize everything for 104 because we will have already developed the relationship with the ENT physician and have that access and we will have educated them on the processes involved in reimbursement of these types of products. So, we continue to think that this sets us up very well for 104 and importantly, the expansion indication of – for example acute otitis externa is directly relevant to this and would go pending approval, expecting approval for that indication would actually occur before OTO 104 and so provide a very prime opportunity to educate the ENT and further expand those relationships and communications.

[Sumant Kulkarni:]

Thanks.

[Operator:]

Our next question comes from the line of Anupam Rama from J.P. Morgan. Your line is now open.

[Eric Joseph:]

Hey guys, it’s Eric in for Anupam. Thanks for taking the questions. Just a question on institutional orders or reorders. Just wondering how we should think about those institutions that hasn’t yet placed a repeat order? Is this sort of do the institutions kind of fall into the mix of those that are – where reimbursement coordination is a matter? Or I guess, what the expectation that kind of remaining about 40% or would be expected to comfort to repeat orders? And also just on the sales force here, do you believe or should you be thinking that you are adequately sized to support use in the in office setting with the potential label expansion included here? Thanks.

[David Weber:]

Yes, thank you, Eric, and Anupam. I think first of all the – with regards to the reorders, you are correct. That is exactly what we see occurring there is that, the typical orders are test orders and they are testing the reimbursement scenario in their institution, so and with their payors. So, they will typically allow by purchase a certain number of units and then have the physician utilize those on the cases and then submit those for reimbursement and what needs to happen then of course is, submission of those claims and I will say that, it’s not uncommon. If anybody who launch products know that are under reimbursement is not a typical to have initial claims to be rejected not because of the payors’ unwillingness to pay for the product but more because of things like coding error, not properly filling up the form with the necessary information for that particular code. So those are all very classic types of things and that results in basically delay. And what has to happen is that claims come back either paid immediately, if everything was done correctly, which is great or frequently as I said, there is an error and that has to be corrected and that’s where our FRMs can help, because they can identify what was the problem. Was there – was the code is a wrong code and did they not fill something out correctly. And that’s really just training of the staff, the billing staff. From there, then is communication back about okay, claims have been paid, now let’s get going. And as you can imagine, there is not necessarily in a hospital an actual cost that’s in place to alert the physician that the claims were paid. And so, we have to act in that capacity. That’s something that our people need to be actively need to be doing. So as you can see a very coordinated effort is required. So we believe that with that coordinated effort between the sales and the reimbursement resources that we have given to this product, that is something that will then drive that utilization and more importantly, what you are just saying is, driving those institutions where we have formulary approval and we already have one order, but we need to see repeats and just routine orders coming in is getting into that process. I am sorry, your last question. What was the last part of that question?

[Eric Joseph:]

Sorry, the second part of the question was on sales force sizing with a potential label expansion to maybe next year, do you - should we anticipate sort of growth from current levels to kind of service the in office setting? How should we be thinking about whether – how the sales force is sized longer-term? Thanks.

[David Weber:]

Yes, Eric, I think the way you should sort of look at it going forward is, the nice thing about actually all of our products is that, the ENT is the primary call point for us. So whether it’s ear tube surgery, Ménière’s disease ultimately, it’s the same ENT office that we are going to. So we get good coverage across each of the indication. And I think conceptually, what you will see from us is that, we are going to add capacity as we needed. We are not going to add capacity before it’s necessary. So, we will sort of gauge whether or not the 20 reps that we have out there assuming approval of OTIPRIO for the expansion indication provide adequate coverage or not, and if not then we will scale up from there and David certainly has the experience and be able to do that. So, I think we are going to really scale up based upon the justification according to revenue at this point.

[Eric Joseph:]

Got it. Thanks for taking the questions.

[Paul Cayer:]

Thank you.

[David Weber:]

Welcome.

[Operator:]

Our next question comes from the line of Edward Nash from SunTrust. Sir your line is now open.

[Mike Guo:]

Hi, thanks for taking the question. This is Mike on for Edward. So winter is the peak season for TTP surgeries – have you seen a very low TTP surgeries this year?

[David Weber:]

I don’t – you are correct that winter. I haven’t yet seen data in terms of the actual number of surgeries versus past years, historically, winter, but obviously this has been a much more warmer winter than most, particularly in the west and east, Midwest and east a warmer winter than typical. So I think there will probably be some adjustment of numbers there. But I think importantly, the key here is, as we’ve said, we have access to one-third of the total annual ear tube surgery procedures with what we currently have on formulary approval with our priority target accounts and as well as those that are near-term. And we feel that, if we can effectively penetrate and build utilization where we already have as we’ve said, now we have the strong physician advocate that have secured formulary approval and also demonstrated reimbursement, we can build utilization and therefore sales performance and revenue and that’s really the key. So what we are really doing is, focusing our efforts and making sure we drive what’s ultimately important which is sales. Gaining access and just working to gain more and more access doesn’t help me if I am not actually converting that into utilization among both that advocating physician ENT as well as then expanding from there with the other ENTs in that practice and the surrounding community and that’s what we are going to focus on. And so I think the important part there is execution of that and in future years, the seasonal events will obviously play an important role, but I think right now, what we have available to us represents a substantial opportunity that we need to go and grab.

[Mike Guo:]

Got it. Also for the fourth quarter, I guess, in general you are mentioning that the end-user demand, I guess, the number is slightly higher in the fourth quarter as compared to the third quarter. So what’s the reason that the revenue number is slightly lower in the fourth quarter?

[David Weber:]

Yes, Mike, I think the reason was because we switched from – we switched revenue methodology between sort of Q2 and Q3. So that sort of inflated the Q3 number a little bit, but on a demand basis, which is the way that we ultimately sort of measure the progress and essentially the – what we sell into the distributors is tracking what we sell through to the end-customer. Q3 was higher than Q2. Q4 was higher than Q3 and Q1 is trending higher than Q4. Just as Dave said not as – not accelerating as quickly as we’d like.

[Mike Guo:]

Got it. Thanks for taking the questions.

[David Weber:]

Thank you.

[Operator:]

This does conclude our Q&A session. I would now like to turn the call back to you Mr. David Weber, President and Chief Executive Officer for any closing remarks.

[David Weber:]

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

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.