Otonomy (OTCPK:OTIC) Q4 2017 Earnings Conference Call March 8, 2018 4:30 PM ET
Laurence Watts - IR
David Weber - President and CEO
Paul Cayer - CFO and CBO
Kathie Bishop - CSO
Charles Duncan - Piper Jaffray
Good day, ladies and gentlemen and thank you for standing by. Welcome to the Otonomy Incorporated Fourth Quarter 2017 Earnings Conference. At this time, all participants are in a listen-only mode to prevent background noise. [Operator Instructions]
And now I would like to welcome and turn the call to Laurence Watts with Westwicke Partners.
Good afternoon and welcome to Otonomy's fourth quarter and full year 2017 financial results and business update conference call. Joining me on the call from Otonomy are Dr. David Weber, President and Chief Executive Officer; Paul Cayer, Chief Financial and Business Officer and Dr. Kathie Bishop, Chief Scientific 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, the acute otitis externa market opportunity for OTIPRIO, timing of Phase 3 clinical trial for OTIVIDEX in Ménière’s Disease, expectations regarding OTIVIDEX clinical trial design, timing of a Phase 1/2 clinical trial for OTO-413, timing of candidate selection for OTO-5XX and OTO-6XX programs, timing of a phase 1/2 clinical trial for OTO-313, the company’s expectations regarding its commercial partnering options for OTIPRIO, including divestiture, expected cost savings from discontinuation of OTIPRIO promotional support, expectations regarding value creating milestones, having resources to advance our product pipeline and the financial guidance for 2018.
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 would now turn the call over to Dave Weber, President and CEO of Otonomy.
Thank you, Laurence. Good afternoon, everyone and thank you for joining us on this call to discuss Otonomy’s fourth quarter and full year 2017 financial results and business updates. Before I review our results for 2017, let me highlight our recent positive regulatory updates for both OTIPRIO and OTIVIDEX. As we announced last week, we received FDA approval of OTIPRIO for acute otitis externa. This is an important milestone because this significantly expands a product’s commercial potential to include approximately 4 million episodes of AOE per year in the United States.
This approval also broadens the target physician population beyond EMTs to pediatricians and primary care physicians who treat most AOE cases and provides an entry point for OTIPRIO use in the office setting. OTIPRIO is the first single dose topical antibiotic available for the treatment of AOE. It is also the first product administered by a physician or health care professional in the office that is billable using a J-Code which has already been assigned to the product. We look forward to incorporating AOE into our ongoing commercial partnering and divestiture discussions that I’ll discuss again later in my update.
Secondly, as announced today, we recently completed a Type C meeting with the FDA for OTIVIDEX. Based on FDA’s feedback and consistent with our prior guidance, we believe that one additional successful pivotal trial is sufficient to support the US registration of OTIVIDEX in Ménière’s disease. We are pleased to have clarity on our path forward for registration and to expect to initiate this trial in mid-2018. I’ll provide an overview of our plan in a couple of minutes.
Now, turning to 2017, the fourth quarter was a transformational period for Otonomy as we repositioned the company to focus on advancing our broad pipeline of development programs, including OTIVIDEX for Ménière’s disease, OTO-313 for tinnitus and multiple programs for hearing loss. I’ll provide a brief recap of each of these development programs for you, which is consistent with our pipeline update in January.
Most important event in the fourth quarter of 2017 was our announcement in November of positive result in the AVERTS-2 Phase 3 trial of OTIVIDEX for patients with Ménière’s disease. This trial achieved its primary endpoint with a p value of 0.029 based on all 174 patients enrolled. The reduction in the mean monthly number of definitive vertigo days and percent reduction from baseline for OTIVIDEX were clinically significant and consistent with our expectations based on the Phase 2B trial.
In January, we reported that a number of additional efficacy endpoints were also statistically significant for the 111 patients who were enrolled in the AVERTS-2 trial through month three at the time of study termination. These included the primary efficacy endpoint, count of definitive vertigo days by Poisson Regression analysis which had a p value of 0.014. Other endpoints with p values less than 0.05 included mean vertigo severity score, change in vertigo frequency from baseline and effective vertigo on days sick at home or bedridden.
Based on a now complete review of the Phase 3 trial data, we believe that the AVERTS-1 trial failure was due to a significantly higher placebo response that was not attributable to a difference in patient demographics or baseline characteristics compared to AVERTS-2. Rather we believe that this higher placebo response was primarily due to increased patient expectation bias in the US based trial. This was likely a result of the positive prior clinical trial experience many AVERTS-1 investigators have with OTIVIDEX that was reflected in their communication with trial subjects.
As I mentioned in my opening comments, we have recently completed a Type C meeting with the FDA and believe that a single additional pivotal trial is sufficient to support a US registration filing for OTIVIDEX in Ménière’s disease. This was our expectation going into the meeting and is consistent with the guidance we have provided to investors. Given this expectation, we have been making preparations to initiate the trial in mid-2018. I’ll provide an overview of the trial plan for you now and then will outline additional details in our future investor communications.
Fundamentally, we believe that the positive AVERTS-2 results which were consistent with our expectations based on the Phase 2b trial supports that the basic study design works. Therefore, the trial will retain the same primary efficacy endpoint, daily diary vertigo scale, use of the one month lead in period and primary analysis at three months after a single IT treatment. Our approach going into this trial is, don't think what's not broken.
On the other hand, there are some changes that we intend to make to the study implementation in order to manage patient expectation bias and the placebo response. First, we will refine our site selection criteria and plan to include sites with no prior OTIVIDEX experience. The trial will be conducted in the US as well as a number of European countries. We will also emphasize recruitment of patients known to the investigators. Finally, we will closely manage how investigators communicate with study subjects to minimize the potential for patient expectation bias.
These changes leverage our own lessons learned as well as draw from discussions with experts from other therapeutic areas like pain and depression that utilize patient reported outcomes and are subject to a significant placebo response. With regard to sizing, I expect it will be similar to the AVERTS trials, which each targeted 160 patients. We are pleased to now have clarity on the path to registration for OTIVIDEX and look forward to initiating the trial in mid-2018.
In addition to Ménière’s, we are also focusing our development efforts on Tinnitus and various hearing loss conditions, which are important unmet medical needs affecting large patient populations. For the treatment of Tinnitus, we are developing a single dose formulation of the NMDA receptor antagonist, Gacyclidine. The use of an NMDA receptor antagonists is supported by both non-clinical and clinical studies, including pilot human studies with Gacyclidine. The molecule has an attractive profile because it is highly potent and selective for the NMDA receptor and our formulation will provide sustained inner ear exposure from a single entrance in panic injection.
We have successfully completed a Phase 1 clinical safety trial in healthy normal volunteers using OTO-311, a poloxamer-based formulation of gacyclidine with no safety concerns observed. As we announced in January, we shifted development to OTO-313, an alternative formulation of gacyclidine that has improved properties compared to OTO-311. We are conducting preclinical activities with OTO-313 and expect to initiate a Phase 1/2 clinical trial in Tinnitus patients in the first half of 2019.
We also recently announced the advancement of three distinct programs for hearing loss that addressed different pathologies and broad patient populations. Hearing loss is a large and growing unmet need with estimates by the World Health Organization that more than 360 million people worldwide have disabling levels of loss. This leads to social isolation, lower quality of life and higher rates of dementia and depression. Common causes include aging, noise, exposure to ototoxic drugs and genetics, with increased noise exposure from use of recreational music devices accelerating the onset.
The pathology of this hearing loss typically involve damage to ear cells and or spiral ganglion neurons in the inner ear. As I'll briefly describe, we're advancing three distinct hearing loss programs that target different pathology. OTO-413 is a neurotrophic factor for the treatment of speech and noise hearing difficulty. OTO-5XX is an otoprotectant for the prevention of cisplatin-induced hearing loss. And OTO-6XX is a potential treatment for severe hearing loss that acts by regenerating sensory hair cells. Our first program for hearing loss is OTO-413, which is a sustained exposure formulation of brain derived neurotrophic.
BDNF is a naturally occurring protein active in promoting spiral ganglion neuron survival, neurite growth, and synapse repair. Non-clinical studies recently presented by our scientists at the Annual Association for Research in otolaryngology meeting demonstrated that local administration of BDNF repairs ribbon synapses damaged due to noise trauma or exposure to other toxic chemicals and restores hearing function. We have initiated non-clinical testing and manufacturing for OTO-413 to support an IND application with a Phase 1/2 clinical trial expected to begin in hearing loss patients in the first half of 2019. The initial indication for OTO-413 will be patients with speech and noise hearing difficulty, a condition that affects at least 3% of the US population.
Our second hearing loss program, OTO-5XX, is an otoprotectant in development for the prevention of cisplatin-induced hearing loss, or CIHL. A number of drug classes cause ototoxicity, including platinum based chemotherapeutic agents and aminoglycosides. We established the feasibility of conducting clinical trials in pediatric patients undergoing cisplatin chemotherapy through a small Phase 2 trial with OTIVIDEX but have decided to switch to a different therapeutic target that we believe offers a higher level of oto protection based on nonclinical studies. Selection of a candidate for clinical development in CIHL is expected to occur in the second half of 2018.
OTO-6XX is our third hearing loss program and one that is focused on the regeneration of sensory hair cells to treat severe hearing loss. The regeneration of hair cells has been a topic of considerable interest to the otology research community for the past several decades, especially because this occurs naturally in non-mammalian species such as [indiscernible] targeting one of the pathways for therapeutic intervention identified from this research, we have demonstrated regeneration of hair cells in a non-clinical proof of concept model using a class of small molecules. Selection of a candidate for clinical development is expected to occur in the second half of 2018.
Taken together, our pipeline addressing the Ménière’s disease, Tinnitus and hearing loss firmly positions Otonomy at the forefront of the otology drug development field. We are now fully focused on disorders with high unmet medical need and limited or no treatment options. These programs also enable us to fully leverage our deep expertise in drug delivery and long term experience in development.
We expect that this pipeline will provide multiple value creating milestones and fortunately have a strong balance sheet to fund these efforts. It is for this reason that we made the difficult decision to terminate our promotional support of OTIPRIO in the fourth quarter of 2017. While we still believe that OTIPRIO will achieve commercial success, it was essential to reduce our commercial cash burn in order to focus these existing resources on OTIVIDEX and our other development programs.
As Paul will review in the financial update, we have minimized spending for OTIPRIO and reduced our overall operating costs significantly. Despite the lack of promotional support, the product continues to generate revenue. OTIPRIO net sales for the fourth quarter were comparable to the third quarter and has continued at approximately the same level, monthly level through February.
Minimizing the OTIPRIO burn gives us time to evaluate commercial partnering options for the product. With the recent approval of AOE, the commercial reach required for OTIPRIO extends from ENTs using the product during ear tube surgery in the hospital setting to much broader use in the office setting by ENTs as well as pediatricians and other primary care physicians who actually treat the majority of AOE patients.
We are still open to an outright divestiture of OTIPRIO to a single party, but are also considering commercial partnering with one or more companies to support promotion of OTIPRIO across multiple physician call points and sites of care. Our goal in this process continues to be realizing value from OTIPRIO, however, that might be structured while allowing us to focus our resources on advancing our product pipeline.
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.
Thank you, Dave and good afternoon, everyone. In summary, our balance sheet remains strong, our expenses for 2017 were at the low end of our financial guidance and we expect a significant reduction in spending for 2018.
Now, let me quickly run you through the financial highlights for the quarter and full year. As of December 31, 2017, we held cash balance, including cash, cash equivalents and short term investments totaling 120 million. This compares to 196.4 million as of December 31, 2016. Net sales for OTIPRIO totaled 0.3 million for the fourth quarter and 1.2 million for the full year 2017. As Dave mentioned, we're also seeing continued monthly sales at approximately the same level as Q3 and Q4 through the first two months of this year, even without promotional support.
In the fourth quarter of 2017, we reported total GAAP operating expenses of 17.5 million compared to 26.2 million for the fourth quarter of 2016. For the full year 2017, total GAAP operating expenses were 89.5 million, which was a significant reduction from 110.5 million for the prior year. Non-GAAP operating expenses, which exclude stock based compensation and rent abatement expense, were 14.3 million for the fourth quarter of 2017 compared to 22.7 million for the fourth quarter of 2016.
For the full year, non-GAAP operating expenses totaled 73.8 million for 2017. This was significantly below the 97.7 million total for 2016 and at the lower end of our financial guidance that we provided. GAAP research and development expenses for the fourth quarter totaled 6 million in 2017 compared to 14.2 million in 2016, reflecting a decrease in clinical trial activities for both OTIVIDEX and OTIPRIO from the prior year. R&D spending for the full year was also lower, totaling 42.7 million for 2017 versus 60.7 million for 2016.
GAAP selling, general and administrative expenses for the fourth quarter of 2017 totaled 11.5 million compared to 12 million for 2016. For the full year, SG&A expenses totaled 46.8 million, which was a slight reduction from 49.8 million for 2016. As a reminder, we discontinued promotional support for OTIPRIO midway through the fourth quarter, but the cost savings from these changes will not be reflected until this quarter because of termination expenses and program wind down costs.
Finally, with regard to our financial outlook, we are reaffirming our guidance, the GAAP operating expenses for 2018 will be in the range of 52 million to 57 million while non-GAAP operating expenses are expected to total 40 million to 45 million. This reduction reflects lower spending for both R&D and SG&A, but is primarily a result of our minimal spending for OTIPRIO that we expect will provide cash savings of more than $20 million this year.
With that, I will turn the call back over to Dave.
Thank you, Paul. In summary, our recent positive regulatory updates position us for a very productive year ahead. Approval of OTIPRIO for AOE is an important accomplishment that will support our ongoing commercial partnering discussions. Furthermore, the recent FDA feedback on OTIVIDEX provides clarity on our path forward for registration in Ménière’s disease and supports the clinical plan we had already begun to pursue. We have completed the necessary steps to reduce our costs and extend our cash runway so that we have the resources to advance our product pipeline. I am excited about our broad set of programs addressing important unmet medical needs in otology and look forward to reporting updates on our progress in the coming quarter.
Operator, we are now ready for questions.
[Operator Instructions] And our first question is from the line of Charles Duncan with Piper Jaffray.
First of all, thanks for taking my question and secondly congrats on the progress with the agency recently. I did have a couple of questions on OTIVIDEX, so I just want a little bit more color. When you talk about that expectation bias and it being partially a function of the communication between investigators and patients, that's not a big surprise to us, but I guess I'm wondering what it is, what elements of that that you've identified really that you can control for going forward?
Thanks, Charles for that question and why don’t I turn this over to Kathie Bishop who has obviously led as our Chief Scientific Officer -- led the full evaluation of the data, not only for AVERTS-2 but all of the clinical program as well as talking with experts in the field.
Hi, Charles and thanks for the question. As Dave mentioned, we did do a full investigation comparing both our own data looking at AVERTS-1 and AVERTS-2, not only the patient and demographic characteristics, but the types of sites that were included in the trial and how the trial was conducted. We compared those trials, I think as we mentioned previously, the main difference we see is in the placebo response across the board in our Phase 1, Phase 2. In AVERTS-2 trial, we saw placebo response of about 40% to 42% whereas in AVERTS-1 here in the US, we had a placebo response of 55%. So we also shared this information with a number of experts, both experts in sort of on the CRO side and conducting trials and experts on the clinical execution side who are clinical trials and got their input.
And I think as you mentioned, not surprising because this type of placebo response issue has been seen in other indications such as pain and depression, so we're able to take advantage of what they have learned from controlling placebo responses in those indications. And so the types of things that we're going to be executing is programs to educate the sites on how to communicate with the patients about the trial in order to dampen or control that expectation bias. So that will be done through careful training and also some communications that will be directly to the patients about the purpose of the clinical trial and the expectations that they might have going into it.
And when you think about the trauma sizing, could we assume this to be a one to one randomization or will it be a little bit more biased towards or not biased, but something like a two to one or something like that?
So the size of the trial will be approximately the same as each of AVERTS-1 and AVERTS-2 trials which is about 160 patients and we will continue with our one to one randomization. I think also what we know from the experts and also from the published literature is that if you skew the randomization more towards more patients getting placebo compared to treatment, then you will also get larger placebo responses. So we think the path forward here is the one to one randomization.
Yeah. I agree 100%. And last question is when you think about getting that trial up and running, when would you anticipate being able to read it out and between now and then, could you -- do you anticipate being able to give at least qualitative enrolment updates or site initiation updates or something along those lines.
So, as Dave mentioned, we plan on starting the trial mid this year and we actually, in anticipation of the response we got from the FDA saying that we should conduct one more trial. We've already started to work on initiating that trial, so I think we feel comfortable about starting it in the middle of the year. This time, we’re not providing updates on completion and we’ll do that at the update closer to the summertime.
I think we could add to that Charles that the AVERTS-2 trial and AVERTS-1 took about 18 months. So we would, at this time, we're looking at probably similar timing, but obviously let's come back and be more specific about them.
And it sounds like your enrolment criteria plans and site selection plans won't really change that timeline meaningfully, if it should?
[Operator Instructions] And our next question is from the line of Anupam Rama with J.P. Morgan.
Hey, guys. It’s Eric in for Anupam this evening. Thanks for taking the question. I just wanted to follow-up on Charles’ questions related to the OTIVIDEX upcoming trial here. I'm just wondering sort of given the placebo response, the expectation bias I guess in AVERTS-1 and plans to similarly recruit at least a portion of the upcoming trial in the US and also there now doing some ex-US experience, I’m just trying to better understand sort of why you don't see the need to accrue a larger study here maybe to increase the power of the trial or perhaps sort of expand the lead in period?
So, as Dave mentioned, the trails we conducted both in the US and in Europe, we have very careful site selection and patient enrolment plans to conduct the trial. Based on what we've learned, as I mentioned both via thorough analysis of the AVERTS trial and consultation with experts, we feel comfortable we have a solid plan in place to control that placebo response through the types of study execution implementation that I mentioned. And our goal is to keep that placebo response down around 40%, which is what we saw in the Phase 1 trial, the Phase 2 trial and the AVERTS-2 trial.
Having a longer lead in period really would not help with that placebo response. We felt comfortable with the one month lead in and also through our examination of the Phase 2 trial and AVERTS-2 trial, we feel very comfortable with having our primary endpoint at month three.
And am I correct in assuming that this would be sort of both a US and European, you will be recruiting from both the US and Europe and are there any kind of potential advantages from dual -- incorporating both geographies here compared to sort of the 18 month timeline that you experienced in AVERTS-1 and AVERTS-2?
So that is correct. We will be including sites both in the US and countries in Europe and as Dave mentioned, additional countries in Europe as well and additional sites that don’t have OTIVIDEX previous experience. Right now, as Dave mentioned, the AVERTS-1 and AVERTS-2 talk about 18 eighteen months and we’ll come back as we get going with this on further guidance on the timeline.
And I don’t see any other questions in the queue. I would like to turn the call back to Mr. David Weber for his final remarks.
Well, thank you for participating on 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.
And ladies and gentlemen, thank you for participating in today’s conference. This concludes the program and you may all disconnect. Have a wonderful evening.