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Summary

  • OTIC, a clinical-stage biopharmaceutical firm seeking to develop and commercialize treatments for ear conditions, plans to raise $80 million in its upcoming IPO.
  • Though OTIC is closing in on FDA approval for AuriPro, there is no guarantee that the firm will be able to successfully gain commercial traction with its products.
  • Competitor Auris Medical IPOed last week, with lukewarm response; investors could be hesitant to buy into another ear treatment company this week.
  • Also given the high executive compensation, given OTIC’s lack of commercial success to date, we suggest investors hold off on this IPO.

Otonomy, Inc. (Pending:OTIC), a clinical-stage biopharmaceutical firm seeking to develop and commercialize treatments for ear conditions through its proprietary drug delivery system, plans to raise $80 million in its upcoming IPO.

The San Diego, California-based firm will offer 5.3 million shares at an expected price range of $14-16 per share. If the IPO prices at the midpoint of that range at $15 per share, OTIC will command a market value of $315 million.

Filing, Underwriting

OTIC filed on July 11, 2014
Lead Underwriters: BofA Merrill Lynch; J.P. Morgan Securities LLC
Underwriters: Piper Jaffray & Co.; Sanford C. Bernstein and Co., Inc

Summary: Treating Ear Conditions
OTIC is a clinical-stage biopharmaceutical firm, attempting to develop and commercialize therapeutics for the treatment of ear conditions. The firm has designed a proprietary drug delivery technology to retain drugs within the ear for an extended period after a single administration.

OTIC's lead product candidate, AuriPro, is an antibiotic designed for the treatment of middle ear effusion at the time of tympanostomy tube placement ((NYSE:TTP)) surgery. The firm has completed a pair of Phase 3 clinical trials for AuriPro, the results of which showed the drug to be well tolerated by patients and effective. OTIC plans to submit a New Drug Application for AuriPro to the FDA in the first half of 2015. OTIC's other product candidates include OTO-104, a steroid for use in patients with Ménière's disease, and OTO-311, a treatment for tinnitus. OTIC expects results from a Phase 2b trial of OTO-104 in the first half of 2015 and plans to initiate safety studies of the steroid by the end of 2014. OTO-311 is currently in pre-clinical development.

(click to enlarge)

(Source: company website)

OTIC is hoping to take advantage of a market opportunity created by the hesitancy of drug developers to target ear disorders; significant complications in effectively delivering drugs to the ear have made treatments of the inner ear less attractive to pharmaceutical developers. OTIC hopes that its delivery mechanism will be able to overcome these complications. The FDA has not as yet approved treatments for the lead indications of any of OTIC's product candidates. The firm retains global commercial rights to all of its candidates, and plans to build a sales force to target ENT doctors in order to sell its products in the future.

Valuation
OTIC offers the following figures in its S-1 balance sheet for the six months ended June 30, 2014:

Revenue: $0.00
Net Loss: ($21,052,000.00)

OTIC's lack of revenues is to be expected of a pre-commercial biopharmaceutical firm, and should not be taken as an indicator of the firm's potential for future success. OTIC will not be able to generate significant revenues or attain profitability until it has commercialized one or more of its products.

Numerous Competitors
If OTIC's products receive approval, they will have to compete with current methods of treating the indications for which they are designed. In the case of AuriPro, the drug would compete with off-label antibiotic ear drops currently used to treat middle ear effusion in patients at the time of TTP surgery. Numerous other firms are currently developing treatments for ear conditions, some of which are established firms with access to far greater marketing, technical, or financial resources than OTIC.

Major potential competitors include Auris Medical Holding AG (NASDAQ:EARS), Kyorin Pharmaceuticals, Autifony Therapeutics, Novartis AG (NYSE:NVS), Merz Pharmaceuticals GmbH, and Synphora AB.

Management Overview: High Compensation Noted
David A. Weber, Ph.D. has served as President and CEO and as a director of OTIC since November 2010. He previously served as CEO of MacuSight, Inc. and as acting Chief Executive Officer and Executive Vice President of Oculex Pharmaceuticals, Inc. Dr. Weber has worked in management positions with Oral-B Laboratories and with Procter & Gamble, Co. Dr. Weber holds his Ph.D. in medical microbiology from Creighton University and his Master's and Bachelor's degrees in biological sciences from Wichita State University.

Despite the OTIC's sizable current losses, Mr. Weber was awarded a total compensation of nearly $1.1 million for 2013.

Conclusion: Hold Off
We are neutral to negative on this IPO.

Though OTIC is closing in on FDA approval for AuriPro, there is no guarantee that the firm will be able to successfully gain commercial traction with its products, especially given the significant competitors developing products for similar indications.

We are also concerned by the firm's continued heavy losses and excessive compensation of its executives.

Auris Medical, another biotech firm developing treatments for ear disorders, made its own initial offering to a lukewarm response from the market last week; investors may be hesitant to buy into another ear treatment company this week.

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Source: Don't Listen Too Closely For Otonomy IPO