Shares of Ocular Therapeutix (OCUL) have lost nearly three-quarters of their value since IPO was priced at $13 in 2014. Over the past year, the stock has lost half its value and is in the red by roughly 15% so far in 2019.
This busted IPO popped up on my radar after a recent cluster of insider buying (Chairman just bought 45,780 shares, Chief Medical Officer with multiple purchases, etc.). After listening to management's presentation at Jefferies, I was able to overcome my initial skepticism to realize there is meaningful innovation taking place here.
Figure 1: OCUL daily advanced chart (Source: Finviz)
Figure 2: OCUL 15-minute chart (Source: Finviz)
When looking at charts, clarity often comes from taking a look at distinct time frames in order to determine important technical levels to get a feel for what's going on. In the first chart (daily advanced), we can see a steady downtrend that accelerated in December with a "sell the news" reaction following FDA approval of Dextenza. A brief bounce took place in late February but the selloff continued with a gap down in late May following news of a failed phase 3 trial for OTX-TP in reducing intraocular pressure in patients with open-angle glaucoma or ocular hypertension. In the second chart (15-minute), we can observe an impressive rebound take place as a result of recent insider buying (remains to be seen if we can get some follow through).
At Jefferies Healthcare Conference, Ocular Therapeutix CEO Amarpreet Sawhney, PH.D., starts by stating that the company's principal focus is on the launch of its first drug (Dextenza) to market. Their intent is to make drop therapy obsolete, using hydrogel-based platform to eventually cover all indications for which drops are currently prescribed. The same goes for conditions that call for an injection to the back of the eye (i.e. current VEGF therapies).
Figure 3: Pipeline (Source: corporate presentation)
The company's invented a new route of administration (intracanicular inserts and intracameral injections) - when I first briefly glanced at the company's offerings, I wasn't interested as I thought the space was too crowded to make an impact. However, looking at the videos on slides 7 and 8 of Jefferies presentation showed how rapid the procedure for inserting Dextenza, while the image of drop administration to an elderly lady brought to mind my own experience trying to care for my grandmother and having to remind her to take her drops (not to mention that I'm not very dexterous when it came to her asking me to administer them). In that light, the burden on patient and caregiver makes clear that this procedure and technology add real value.
The insertion of Dextenza observed in the video replaces 70 steroid drops given over a month (keeping in mind weekly drop requirement varies and that these patients can have issues with memory or dexterity). Dextenza was approved to deliver dexamethasone to treat postoperative ocular pain for up to 30 days with one treatment. Dextenza's C-code goes live in July and J-code could potentially be effective in January 2020. For those unaware, C-code gives full reimbursement at full price (payment within 2 weeks) for all Medicare part B patients (2 million of those in the US). As for expansion efforts, PDUFA date has been set for November 10th for the expanded indication of inflammation. Additionally, there are many investigator-initiated trials ongoing (looking at several other indications where steroids are effective such as dry eye syndrome).
As for supportive data, efficacy is quite convincing and safety shows clear differentiation from steroid drops (very well tolerated).
Figure 4: Efficacy and safety observed in phase 3 data (Source: corporate presentation)
As for launch efforts, there are around 8 to 9 million total prescriptions of steroids and 6 million surgical prescriptions for topical steroids (for the latter, Dextenza is indicated for all of those). 4 million of those scripts are for cataract surgery and half fall under Medicare part B. While Ocular Therapeutix is a small company, keep in mind that 60% of the annual 2 million Medicare Part B surgeries take place in around 900 surgical centers (top doctors do between 2,000 and 3,500 surgeries per year). If the company gets the product of these high performing doctors protocols, that means $2 million to $3 million income per year for one doctor.
Moving on to the glaucoma market, it's stated that 30% to 80% of patients put on drop therapy are not complying as they should be. OTX-TP uses the same intracanicular insert to deliver steady state dose of travopost for 3-month period of time (100% compliance guaranteed therapy). The second approach is the intracameral injection which delivers up to 6 months of sustained release travopost. For OTX-TP, phase 3 endpoint was to hit all 9 base-adjusted LS Means and the company achieved 8 of 9 (technically a failed result as mentioned above). Subgroup analysis is ongoing and it'll be interesting what the result of discussions with the FDA are (likely go for another phase 3 trial).
Figure 5: OTX-TP phase 3 results (Source: corporate presentation)
As for phase 1 OTC-TIC interim findings, mean change in IOP appears promising relative to topical travopost in the non-study eye (better duration than expected as well).
While not spending much time on other pipeline efforts, discussions with Regeneron (NASDAQ:REGN) regarding the company's their VEGF collaboration (OTX-IVT) are ongoing (regarding development of alternative formulation) and the first patient in a phase 1 study has been treated evaluating OTX-TKI (tyrosine kinase inhibitor). Longer term efforts in addressing other areas (non-opioid pain medicines, immunotherapies, joint, ear nose throat, etc.) are intriguing as well.
Select Recent Developments
On January 7th, Purdue Pharma and Ocular Therapeutix announced the initiation of research activities leading to a strategic research collaboration. The objective here is to determine compatibility of Purdue's non-opioid new chemical entities with Ocular's bioresorbable hydrogel-based technology which would then lead to development of new programs for the treatment of pain. This aspect of the investment thesis provides substantial optionality if indeed positive efficacy can be displayed and the two companies choose to move forward.
On February 20th, Ocular Therapeutix announced dosing of the first patient in the phase 1 trial of OTX-TKI in patients with wet age-related Macular Degeneration or wet AMD. The goal of the trial is to not only demonstrate safety but also evaluate biological activity in patients with increased retinal thickness and measure the amount of decrease over time. Considering the large market opportunity of VEGF inhibitors, any success here would imply significant upside.
A couple days later, the company advantageously accessed capital via $37.5 million convertible note offering to an accredited investor (6% interest rate due 2026). Notes are convertible at any time as long as holder owns no more than 19.99% of the company's common stock (initial conversion rate is 153.8462 shares of common stock per $1,000 principal amount of notes, equivalent to initial conversion price of $6.50 per share). Consider that the initial conversion price represented an 80% premium over the last reported sale price of common stock on February 21st.
On May 1st, the company announced that the Centers for Medicare and Medicaid Services included DEXTENZA 0.4mg for intracanalicular use on its list of products that have been preliminarily recommended for a new dedicated Healthcare Common Procedure Coding System J-code (effective January 1, 2020).
For the first quarter of 2019, the company reported cash and equivalents of $76.3 million with management guiding for operational runway into Q2 of 2020. However, keep in mind that in April, Ocular Therapeutix entered into an ATM agreement to sell up to $50 million in common stock (as of May 9th hadn't sold any yet). Net loss for the quarter rose significantly to $17.1 million, while research and development expenses came in at $11.3 million. Selling and marketing expenses rose to $3.3 million due to pre-commercialization activities for Dextenza.
On the conference call, management highlighted data from research studies "indicating 79% of ophthalmologists thought DEXTENZA could become their next standard of care, 93% believe the core value proposition of DEXTENZA is its potential to improve patient compliance and outcomes and 75% surveyed thought DEXTENZA could be used in greater than 90% of cataract surgeries". For the TKI program, it was noted that the first cohort of 6 patients had been dosed, and after DSMC meeting, the company is now moving to a higher dose (get more data and from there move into larger phase 2 study in US next year).
As for future catalysts of note, the major one will simply be continued launch updates and metrics to give Wall Street an idea of how Dextenza commercial progress is faring. Management has stated its intention of finding other non-dilutive sources of financing via business development (selling product rights for a series of territories, royalty financings later on, etc.). Additional trials involving Dextenza will be initiated in allergic conjunctivitis, pediatric cataract surgery, and several investigator-initiated studies as well. PDUFA date of November 10th for inflammation is also an important event.
As for institutional investors of note, Opaleye Management initiated a new 1.9 million share position and then added more shares (5.14% stake currently). Man Group (OTC:MNGPF) recently disclosed a 5.74% stake. As alluded to above previously, recent insider buying inspires confidence especially in regards to initial launch success.
As for market opportunity, peak sales of Dextenza in the post-cataract setting could fall anywhere between $150 million and $250 million. The company will need a swift launch out of the gate to help generate momentum in the share price considering likelihood of further dilution via secondary offering or its ATM to extend the operational runway.
To conclude, I appreciated that management seems to have their eye on the ball in terms of focusing majority of efforts on Dextenza launch as this is where near-term value creation is likely to occur. It seems like salesforce is in place to get on the ground running (been calling accounts since late April) and company will be able to sell under temporary C-code until the J-code kicks in. The value proposition of Dextenza (and the company's hydrogel-based platform) is readily understandable and relatable, and I believe it's likely to resonate with physicians, caregivers, patients, and payers. Also, consider that the current market capitalization represents less than 1-time peak sales potential for Dextenza (valuation appears cheap).
For readers who are interested in the story and have done their due diligence, I suggest initiating a small pilot position in the near term. From there, consider accumulating dips over the next couple of quarters only as the bullish thesis is confirmed via incremental operational updates.
Risks include near-term dilution via another financing, setbacks in launch and initial metrics disappointing Wall Street, competition, setbacks in the clinic with other product candidates, and negative developments with current collaborations.
For our purposes in ROTY, I plan to keep a close eye on this one as launch unfolds. Near term, I'd expect additional financing via secondary offering or ATM, after which I'd be interested in revisiting. If initial metrics for launch in Q3 and Q4 are promising, that'd help provide the element of derisking we look for in ROTY.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Disclaimer: Commentary presented is NOT individualized investment advice. Opinions offered here are NOT personalized recommendations. Readers are expected to do their own due diligence or consult an investment professional if needed prior to making trades. Strategies discussed should not be mistaken for recommendations, and past performance may not be indicative of future results. Although I do my best to present factual research, I do not in any way guarantee the accuracy of the information I post. I reserve the right to make investment decisions on behalf of myself and affiliates regarding any security without notification except where it is required by law. Keep in mind that any opinion or position disclosed on this platform is subject to change at any moment as the thesis evolves. Investing in common stock can result in partial or total loss of capital. In other words, readers are expected to form their own trading plan, do their own research and take responsibility for their own actions. If they are not able or willing to do so, better to buy index funds or find a thoroughly vetted fee-only financial advisor to handle your account.