Ocular Therapeutix, Inc Q4 FY2020 Earnings Call

Good afternoon, ladies and gentlemen. Thank you for standing by. And welcome to the Ocular Therapeutix Fourth Quarter and Year End 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. It is now my pleasure to turn the call over to Donald Notman, Chief Financial Officer of Ocular Therapeutix. Please go ahead, sir.

Thank you, Valerie. Good afternoon, everyone, and thank you for joining us on our fourth quarter and year-end 2020 financial results and business update conference call. This afternoon, after the close, we issued a press release providing an update on the company's product development programs and details of the company's financial results for the quarter and year ended December 31, 2020. The press release can be accessed on the Investors portion of our website at investors.ocutx.com. Leading the call today will be Antony Mattessich, our Chief Executive Officer, who will provide a summary of our corporate developments and an update on the commercial progress of DEXTENZA. Also speaking on the call will be Dr. Michael Goldstein, our President, Ophthalmology, and Chief Medical Officer, who will give an update on our clinical developments and pipeline. Following Michael's remarks, I will provide an overview of the financial highlights for the fourth quarter before turning the call back over to Antony for a summary and questions. For Q&A, we will also be joined by Patricia Kitchen, our Chief Operating Officer, and Scott Corning, our Senior Vice President, Commercial. As a reminder, on today's call, certain statements we will be making may be considered forward-looking for the purposes of the Private Securities Litigation Reform Act of 1995. In particular, any statements regarding our regulatory and product development plans as well as our research activities are forward-looking statements. These statements are subject to a variety of risks and uncertainties that may cause actual results to differ from those forecasted, including those risks described in our most recent annual report on Form 10-K filed this afternoon with the SEC. I will now turn the call over to Antony.

Thank you, Donald, and welcome everyone to Ocular Therapeutix's fourth quarter and year-end earnings report. On all counts, it was a great quarter capping a notable year for Ocular. Despite the challenges due to the global pandemic, Ocular made tremendous progress with the commercial uptake of DEXTENZA, as well as advancing our pipeline of product candidates being developed to target several of the largest market opportunities in ophthalmology. For all of our success this past year, I would like to thank our dedicated employees, our patients, and clinical investigators, as well as the hundreds of individuals involved in our clinical trials and our investors. Thank you all. Regarding DEXTENZA, this past quarter we saw net sales rise to $6.9 million for the fourth quarter of 2020, representing more than 25% growth over the previous quarter and more than a 330% increase year-over-year comparison. Going forward, we expect DEXTENZA to be an increasingly significant net contributor to the company's cash position. While we have no hard data to determine cataract volumes in the U.S., we are aware of a number of closures and slowdowns in key ASCs and particularly HOPDs in response to the recent spike in COVID cases. The bulk of these actions took place in January and February of this year. Fortunately, DEXTENZA in-market sales, that is sales from distributors to ASCs and HOPDs, were brisk. Billable units neared 9,500 for the first two months of the year, representing over a 10% increase over the first two months of the fourth quarter and nearly a 230% increase over the prior year. Clearly, despite the pandemic, DEXTENZA's increasing share of cataract volume continues to drive impressive growth. In the final three quarters of the year, we expect what was a headwind in cataract volumes to become a tailwind as the backlog of delayed procedures is scheduled into the market, in addition to the normal flow of procedures. Contributing to the growth of DEXTENZA are two key factors. First and most importantly, DEXTENZA is a highly differentiated specialty ophthalmology product that relieves the daily steroid drop burden in the treatment of inflammation and pain following ophthalmic surgery. The awareness and appreciation of the product's benefits continue to grow both in the physician and patient communities. The product is simply performing as we had hoped. Secondly, DEXTENZA is also becoming easier to use for ASCs and HOPDs. We've had tremendous success partnering with administrators and working through issues related to reimbursement of both the product DEXTENZA and the associated procedure code 0356T. In particular, we've been able to work with the MACs in standardizing payment for 0356T. I am now pleased to let you know that we now have coverage in all seven MACs representing 100% of the country. Additionally, in November we announced receipt of a permanent Category 1 CPT code for the placement of drug-eluting inserts in the nasolacrimal canaliculus. It is scheduled to become effective in January of 2022. This new code is expected to replace the existing code 0356T and facilitate the coding and payment across all sites of service. Longer-term, the Category 1 status for the procedure of inserting a drug-eluting insert into the nasolacrimal canaliculus delivers immediate potential benefits for DEXTENZA but also for our two dry eye programs, if approved, which use the same route of administration and any other programs we may develop which use an intracanalicular route of delivery. I should also note that beginning in the second quarter of this year, we plan to continue reporting our quarterly net sales to distributors for DEXTENZA but expect to no longer report on our monthly in-market sales and billable units to ASCs and HOPDs. We realize during the launch period, we needed to provide an extraordinary level of detail to our investors, so we included this monthly in-market figure and billable units to give a better sense of performance while distributors adjusted inventories to ensure product availability. Now that our sales volume has reached its current level, sales from Ocular to its specialty distributors and sales from specialty distributors to the end customers closely parallel each other. To avoid confusion and protect our competitively sensitive data, we plan to return to the industry standard of reporting only on net sales to our specialty distributors. Beyond DEXTENZA, we continue to make excellent progress advancing our pipeline. At the start of the year, we presented Angiogenesis and Glaucoma 360 reporting promising interim Phase 1 data for both OTX-TKI for the treatment of wet age-related macular degeneration and other retinal diseases and OTX-TIC for the reduction of intraocular pressure in patients with primary open-angle glaucoma or ocular hypertension. On the dry eye front, we announced Phase I results in OTX-CSI for the treatment of dry eye disease in September. We subsequently dosed the first patient in a Phase 2 trial in September. For OTX-DED, we designed it for short-term treatment of signs and symptoms of dry eye disease. We successfully filed the Phase 2 enabling IND at the end of December and have just announced dosing of the first patient at the end of February. Each of our four clinical programs represent highly differentiated ophthalmology specialty product candidates that address key unmet needs in their respective disease states, targeting key segments of global markets that in aggregate are estimated at over $20 billion in annual sales. Financially, the company is in a strong financial position. We completed an oversubscribed public offering in December, which raised approximately $86 million in net proceeds. More recently, we received the initial upfront payment of $12 million related to the collaboration we entered into with AffaMed in the fourth quarter of 2020. Beyond the $12 million in upfront payments, we also have the potential to receive $91 million in future aggregate milestones and payments, as well as tiered double-digit royalties on future sales. All of this strengthens our balance sheet. Our cash and cash equivalents, along with our forecasted revenues from net sales of DEXTENZA and ReSure Sealant, are projected to provide sufficient cash to fund our planned operations, debt service, and capital expenditures through 2023. Most importantly, we believe our balance sheet is now sufficient to fund each of our four clinical programs to and through key Phase 2 clinical trials, which we believe could mark an inflection point for us. Clearly, we're thrilled with our progress on all fronts, and we look forward to another productive year. With an update on where we are on these product candidates, I will hand it over to our president of ophthalmology, and Chief Medical Officer, Dr. Michael Goldstein.

Thanks, Anthony. Let me begin with an update on our back-of-the-eye program, OTX-TKI. We continue to dose subjects in a multicenter open-label dose escalation Phase 1 clinical trial being conducted in Australia that is designed to assess the safety and tolerability of OTX-TKI, as well as to assess preliminary biological activity in subjects by measuring anatomical and functional changes. Last month, we presented interim data from the study at the Angiogenesis, Exudation and Degeneration 2021 virtual meeting, highlighting data from all three cohorts. The first three cohorts: Cohort 1 at 200 micrograms, Cohort 2 at 400 micrograms, and Cohort 3a at 600 micrograms, have now been fully enrolled, while Cohort 3b, with 400 micrograms of OTX-TKI used in combination with anti-VEGF induction therapy, continues to enroll. We are seeing early signs of biological activity, including decreases in retinal fluid in some subjects as early as two months following insertion in Cohort 2 and 3a. Additionally, we are seeing encouraging durability of six months or longer in all cohorts, and durability up to 13.5 months in one subject in Cohort 2. OTX-TKI has generally been well tolerated with a favorable safety profile, with no ocular serious adverse events and no subjects with elevated intraocular pressure, and no subjects needing steroids to treat ocular inflammation have been observed or reported to date. While the drug product profile is still emerging, we are pleased with the interim data and OTX-TKI's potential to reduce intraretinal and/or subretinal fluid. Moving to our glaucoma program OTX-TIC. In January, we presented interim top-line data from the Phase 1 clinical trial at the Glaucoma 360 New Horizons Forum. This study is a Phase 1 prospective multicenter open-label clinical trial enrolling subjects in the United States with primary open-angle glaucoma or ocular hypertension to evaluate the safety, biological activity, durability, and tolerability of OTX-TIC. Interim data from all four fully enrolled cohorts generally showed a mean reduction in intraocular pressure (IOP) from baseline of 7 to 11 millimeters, which is comparable to the current standard of care, topical travoprost placed in the non-study eye. Onset of action is as early as two days after insertion. Interim results suggest durability of response consistent with a decrease in eye pressure out to six to nine months in many subjects, with one subject's eye pressure controlled for over 21 months for the single implant. OTX-TIC has generally been well tolerated and has been observed to have a favorable safety profile to date. We have not seen the implant move, and it has been observed to bioresorb in five to seven months in Cohorts 1 and 2, and in three to five months in Cohorts 3 and 4. We have seen no clinically meaningful changes in corneal pachymetry or corneal endothelial cell counts over time. But with the Phase 1 study now fully enrolled, our attention turns to our planned Phase 2 clinical trial, which we expect to initiate in the middle of 2021. We are also making significant progress in our ocular surface disease programs, which include product candidates for dry eye disease and allergic conjunctivitis. In dry eye, we have two programs: OTX-CSI, which is designed to increase tear production for the chronic treatment of patients with dry eye disease, and OTX-DED, which is designed to target the short-term treatment of the signs and symptoms of dry eye disease. OTX-CSI is an intracanalicular insert that combines two modalities to treat dry eye patients. Local programs release cyclosporine for approximately three to four months to the ocular surface, along with punctal occlusion over the same time period by releasing low doses of preservative-free cyclosporine over an extended duration time. OTX-CSI has the potential to minimize what we believe are some of the biggest patient complaints about commercially available products for the chronic treatment of dry eye disease, namely stinging and burning. We are very excited about the potential for this physician-administered, hands-free, and preservative-free option, and to help dry eye patients receive the benefits of cyclosporine with greater tolerability and desired rapid onset of action compared to therapies currently available on the market. Following the successful completion of a Phase 1 clinical study, which we announced last quarter, we initiated a U.S.-based randomized masked Phase 2 multicenter clinical trial evaluating two different formulations of OTX-CSI compared with a hydrogel vehicle insert in approximately 140 subjects, who will be followed for a period of 16 weeks. Endpoints in this study include tear production as measured by the Schirmer test, signs of dry eye disease as measured by corneal fluorescein staining, and symptoms of dry eye disease as measured by the visual analog scale, eye dryness severity score, and frequency score. Dosing enrollment has been going well, and we were pleased to report that this study is progressing ahead of the initially planned schedule. We now expect top-line data in the fourth quarter of 2021, ahead of the previous guidance of the first half of 2022. Our second product candidate for dry eye, OTX-DED, is a low-dose intracanalicular insert, a preservative-free dexamethasone, while it incorporates the same active drug as DEXTENZA. This is a new product candidate with a lower dose of dexamethasone and a smaller insert size. Many dry eye patients experience episodic flares of their signs and symptoms, which we believe are likely related to inflammation. Topical steroids have long been used off-label for dry eye flares. All commercially available topical steroids have preservatives that can result in ocular surface toxicity. Chronic misuse of steroids may also lead to adverse events such as elevated eye pressure or cataracts. OTX-DED potentially offers these patients the opportunity to be treated with a physician-administered, preservative-free, and hands-free steroid therapy. We recently announced that we have dosed our first patients in a U.S.-based randomized double-masked vehicle-controlled Phase 2 multicenter clinical trial, evaluating two different formulations of OTX-DED, compared with a hydrogel vehicle insert in approximately 150 subjects for dry eye disease. This trial is designed to assess the safety and efficacy of OTX-DED for the short-term treatment of signs and symptoms of dry eye disease by evaluating bulbar conjunctival hyperemia, eye dryness score, and frequency using a visual analog scale, and total corneal fluorescein staining. We expect top-line data in the first half of 2022. Lastly, for DEXTENZA for the treatment of ocular itching associated with allergic conjunctivitis, we submitted a supplementary NDA at the end of 2020 and have received the PDUFA target action date of October 18, 2021. Overall, we believe that the data package highlights a compelling product profile targeting an unmet need that can potentially change the current standard of care for the physician-administered preservative-free, hands-free therapy for these patients. I would now like to turn the call back over to Donald to review our fourth quarter and year-end financial results.

Thanks, Mike. Gross product revenue net of discounts, rebates, and returns, which the company refers to as total net product revenue was approximately $7.4 million for the three months ended December 31, 2020, reflecting a roughly 25% sequential increase over the third quarter of 2020 and a 226% increase over the fourth quarter of 2019. Net product revenue of DEXTENZA in the fourth quarter of 2020 was $6.9 million versus $5.4 million in the third quarter, reflecting an approximate 28% sequential increase. Total net product revenue for the fourth quarter of 2020 also includes net product revenue of $0.5 million for ReSure Sealant. Overall net product revenue for the year was $17.4 million versus $4.2 million for 2019 and primarily reflects a strong uptake in DEXTENZA sales during the second half of 2020. Research and development expenses for the fourth quarter were $7.6 million versus $10.1 million for the comparable period in 2019 and primarily reflect the decrease in allocated costs driven largely by the reduction in force executed in the fourth quarter of 2019, and reduced clinical trial costs associated with the Phase 3 DEXTENZA allergic conjunctivitis trial and the Phase 3 OTX-TP trial, offset by increases in costs associated with the Phase 1 clinical trials of OTX-PKI, OTX-TIC, and OTX-CSI, as well as the commencement of the Phase 2 clinical trial of OTX-CSI. Overall R&D expenses for the full year decreased $12.4 million to $28.7 million from $41.1 million in 2019, reflecting the decrease in unallocated costs and the trends in clinical trial expenses mentioned above. Selling and marketing expenses for the fourth quarter were $6.8 million as compared to $7.1 million for the same quarter in 2019. The modest decrease relates to reduced consulting fees and travel-related costs offset by increased personnel costs. Overall selling and marketing expenses for the full year increased to $26.6 million from $24.5 million in 2019, driven primarily by increased personnel costs, offset by reduced spending on consulting and related expenses. Finally, general and administrative expenses were $6.6 million for the fourth quarter versus $5.6 million in the comparable quarter of 2019. The increase in expenses stem primarily from increased personnel costs and consulting fees. Overall G&A expenses for the full year increased $0.8 million to $22.9 million from $22.1 million in 2019. Again, reflecting primarily increased personnel and consultant fees. With respective financial results for the fourth quarter, the company reported a net loss of $85.6 million or a loss of $1.21 per share on a basic and diluted basis. This compares to a net loss of $26 million or a loss of $0.54 per share on a basic and diluted basis for the same period in 2019. As operating expenses were modestly down quarter-over-quarter, the significant increase in loss was driven almost exclusively by a non-cash charge of $69.5 million related to the change in the fair value of the derivative liability associated with the company's convertible notes. This change in fair value was due primarily to a 172% increase in the company's common stock price during the fourth quarter of 2020. The net loss for the fourth quarter also includes $2.8 million in non-cash charges for stock-based compensation and depreciation compared to $2.6 million for the same quarter in 2019. Overall, the company reported a net loss of $155.6 million or a loss of $2.56 per share on a basic and diluted basis for the full year ended December 31, 2020 versus a net loss of $86.4 million or a loss of $1.91 per share on a basic and diluted basis in 2019. As of March 2, 2021, the company had 76.1 million shares outstanding. As of the full year ended December 31, 2020, we had $228.1 million in cash and cash equivalents versus $54.4 million at the end of 2019. These cash amounts exclude restricted cash of $1.8 million. The cash balance benefited during the fourth quarter from $161.7 million in net proceeds from two secondary equity offerings: one in October for $75.4 million of net proceeds and one in December for $86.3 million of net proceeds. Fourth-quarter cash also benefited from proceeds of $12 million in upfront payments from the recently announced licensing agreement with AffaMed. For the full year ended December 31, 2020, cash balance has benefited from total net proceeds from financing activities of $228 million, including $48.3 million in net proceeds from a secondary offering in May and $14.4 million in net proceeds from sales of common stock under our 2019 sales agreement, or ATM, earlier in the year. The May, October, and December equity offerings were executed at share prices of $5.50, $9.75, and $21.50 respectively. Based on our current plans and related estimates of anticipated cash inflows from DEXTENZA and ReSure product sales and cash outflows from operating expenses, we believe that existing cash and cash equivalents as of December 31, 2020 will enable the company to fund planned operating expenses, debt service obligations, and capital expenditure requirements through 2023. This cash guidance is, of course, subject to a number of assumptions, including those related to the severity and duration of the COVID-19 pandemic, the revenues, and expenses associated with the commercialization of DEXTENZA, and the pace of research and clinical development programs, and other aspects of our business. This concludes my comments on the fourth quarter and year-end financial results. I would like to turn the call back to Antony for summary thoughts.

Thanks, Donald. So before opening up the call for questions, let me do a quick summary. With successful capital raises, a new licensing agreement, and momentum in DEXTENZA sales, we believe we have the resources to fully fund our four clinical stage pipeline assets through completion of their planned Phase 2 programs in disease states within large ophthalmology markets, estimated to account for over $20 billion in aggregate annual global sales. In wet AMD, the performance of OTX-TKI and our Phase 1 trial continues to support a product profile that could potentially set a new standard of care for durability. We plan to initiate a prospective randomized U.S.-based trial by the middle of 2021. In glaucoma, OTX-TIC continues to support a product that could potentially set the standard of care for patient compliance. We plan to advance that program into a Phase 2 clinical trial in the middle of 2021. In dry eye disease, we initiated two Phase 2 clinical trials, one for OTX-CSI and one for OTX-DED. For OTX-CSI, we now expect top-line data in the fourth quarter of this year. For OTX-DED, we expect top-line data in the first half of 2022. Beyond dry eye disease, we submitted our sNDA for DEXTENZA and allergic conjunctivitis in December 2020 and have a PDUFA target action date of October 18, 2021. We look forward to a busy and productive 2021. And with that, I'll turn the call over for questions.

Thank you. Our first question comes from Dane Leone with RJF. Your line is open.

Hi. Congratulations on 2020 and the updates today. Thank you for taking the questions. So, I guess, the first one for me would be going back to Michael's comments around the study for OTX-TKI in the U.S. That's expected that would start next year. Maybe you guys can just elaborate a little bit on the study design. Just in terms of how you're thinking about what you want to get out of that first U.S. study. And how does that set the stage for later stage studies? Obviously, another company in this space earlier this week just had data with a product that didn't seem to be a peer of yours or a competitor. That data looks horrendous. And I think the general consensus is it might not be a viable product for very specific reasons to them. But that said, does that inform anything in terms of how you guys are thinking about later-stage development? Or just kind of any thoughts around that would be appreciated. Thanks.

Hi, Dane. Thanks for the question. This is Michael Goldstein. So, the study that you're referring to for the OTX-TKI study is the U.S. study that we're planning on starting mid-year this year. It's being conducted under the exploratory IND pathway. So we're looking to enroll 20 subjects with a three-to-one randomization. Patients will be randomized to receive the OTX-TKI drug at a single implant of 600 micrograms along with an anti-VEGF drug for induction. And that will be compared to an aflibercept group that will receive aflibercept every eight weeks. We will follow those patients out and will be looking for changes in vision. We'll be looking at retinal anatomy using the OCT. Patients enrolling in that trial will have been previously treated. So there'll be wet AMD patients who start in a dry state. We'll be looking to see if we can maintain them in that dry state with the single implant of 600 micrograms. Obviously, we're looking at safety, but we're also interested in the durability of effect. You had mentioned the other company; we believe that the data that you saw from that other company was really related to a different delivery system. We believe that with our delivery system, where the drug is delivered with a single implant into the vitreous, there really is not the opportunity to see the migration that was recorded in that study. But obviously, we'll be looking at safety in our study as well.

Great. And sorry, what's the duration of the study?

So, we'll be following patients out for a year.

Okay. And just in terms of thinking about study design in later stages, you have actually not a direct comp, but some of the gene therapy companies are starting to do later stage pivotal studies. Do you see any parallel in terms of how you would approach your study at a later stage, or is it still kind of CPT to see what the result is from this exploratory study?

Yes. I mean, I would say we haven't made final decisions for later stage studies. But there are a number of options on the table.

Okay, great. I'll get back in the queue. Thank you.

Thanks, Dane.

Thank you. Our next question comes from David Steinberg with Jefferies. Your line is now open.

Okay, thanks. I had a couple of questions. First, on your October PDUFA for allergic conjunctivitis, I know your reps aren't really calling on? And the doctor also said. But just curious, is there any off-label use you think right now in that indication? Secondly, do you have a sense of what percent of the business for DEXTENZA is from Medicare patients versus commercial insurance? And then I have a couple of other follow-ups. Thanks.

Yes. I think we can answer both questions from the same response, which is that we have launched with an extraordinary focus on Medicare Part D patients in ASCs. That being said, we expect very little off-label use for allergic conjunctivitis. Clearly, when we get the indication, we will start moving into the ophthalmology office environment, both in the surgical sphere and for ocular surface disease. But given our approach and the idea that we really are advising the people that we go to see not to venture outside the lines, we want to ensure they don't have bad experiences with the product from a reimbursement standpoint. The vast majority of our usage is in hospitals and with Medicare Part D.

Got it. And then just a couple of financial questions. So, you received the $12 million upfront, but didn't book it on the P&L? What's the accounting treatment you're going to use for this upfront? And then there are about 90 million plus in future aggregate milestones. Are you running the programs? Are they being run by AffaMed? And when would the next tranche of payments from them hit the P&L?

Hey, David, it's Donald. Thanks for the question. So with regard to the accounting around it, you'll see the $12 million recorded as deferred revenue on the balance sheet. We will begin to ratchet that down and recognize the revenue in the future when we begin to deliver either clinical and/or commercial product. Maybe I'll turn it back over to Anthony for the AffaMed question.

Yes. They will be handling the clinical trials while we manage the regulatory matters within China. I'm sorry, Patricia, you're on the line. Do you have any additional insights from a regulatory perspective about how that operates in China?

No. As they say, I think you've hit the nail on the head. Ocular Therapeutix will actually be the holder for the MAH in China. So once we perform the submission and get positive feedback from the Chinese authorities, additional milestones will take place after then.

Okay. Thanks a lot.

Thank you. Our next question comes from Joe Catanzaro with Piper Sandler. Your line is open.

Hey, guys. Thanks so much for taking my questions. And congrats on all the progress here. I'm wondering if I could follow up on the exploratory IND for TKI. I think you guys have previously spoken about the opportunity for that trial to potentially expand beyond the initial 20 patients. At what point do you think you could have that conversation with the FDA? And what triggers that? Is it just additional data from the ongoing Phase 1? Or will you need some data from patients actually treated within the U.S. trial?

So Joe, this is Patricia. Thank you for the question. We do intend to have a meeting with the FDA to talk about the plans for transition from an exploratory IND to a traditional IND. There is data that we need to compile in order to be able to do this. So we're hoping to have additional information and a plan set later this year.

Okay. Got it. And I'm wondering when we should expect the next update out of the Phase 1 trial for OTX-TKI. And what we should expect to see there versus what we saw back in February?

Hi, Joe. It's Mike again. So, we've been pretty consistent that we would give data updates when we have something meaningful to say. The cadence has been about every three or four months. That said, look for something around the ARVO meeting, which is in early May.

Okay. Got it. But if I could just squeeze one last one in on OTX-CSI, are there any expectations there that that Phase 2 trial could potentially serve as one of the registrational studies? And is it powered like a Phase 3?

So, great question. It is not powered like a Phase 3. It's powered like a Phase 2 study. We are planning on enrolling approximately 140 subjects. If it was a Phase 3, the general size of that study is more like 500 patients. With that said, the primary endpoint here is looking at tear production. In order to get regulatory approval, generally you need to show improvement in signs and symptoms in adequate and well-controlled trials. One of the exceptions is that you can show an increase in tear production of 10 millimeters in a certain percentage of subjects greater than the vehicle control. In such a case, you don't need to also show symptomatic data. So to answer your question, it's possible that you could see a statistically significant improvement, but it's not powered to show that in this trial.

Okay. Got it. That's really helpful. Thanks for taking my question.

Thank you.

Thank you. Our next question comes from Jon Wolleben with JMP Securities. Your line is open.

Hey, good afternoon. Congrats on all the progress. Piggybacking on some of the OTX-TKI questions. You mentioned that you're going to be moving to a single 600-milligram insert in the next study. I was hoping you could kind of walk us through your thoughts on how that might change the observations you saw with three 200-milligram inserts in the current study?

Yes. It's a great question. Thanks for asking, Jon. So, in the current trial design, we have a 600-microgram group, which is Cohort 3. To do that, we actually used three 200-microgram implants that were all essentially administered at a similar time. But moving forward, including the U.S. trial, we're going to a single implant 600-microgram dose, which—one of the primary drivers for that was that we think that's a better commercial product. Obviously, having one implant is better than three. But it turns out, there's a secondary benefit, which is that by having a higher concentration of drugs in the implant, there's a larger concentration gradient for the drug to diffuse out of. That means that the release rate of the drug per day is actually higher. So going from the three 200-microgram implants to the single 600-microgram implant from a dose delivery per day perspective is a dose escalation, and I think that represents a lot of potential upside for us.

It's interesting. And then I was hoping you could discuss the opportunity in allergic conjunctivitis and how you're thinking about it. Obviously, you're going to be changing the paradigm of treatment with DEXTENZA available. So I was hoping you can talk about how you think about the opportunity, any incremental investment to realize that? And then as far as big picture, what it means for Ocular Therapeutix to move into the office setting.

I'll talk about the business side of it first, and then Mike, I guess, can talk about the medical aspects for it. Clearly, there's a massive population, both those conducted by us and an even larger slice of that who seek secondary medical attention for their allergic conjunctivitis. So, there's a large bolus of patients out there. But we have to expect that there will be some reticence among payers to have widespread use of a product like DEXTENZA for treating allergic conjunctivitis. The way we're planning to go about it at first is to target the areas where we are already seeing physicians with a greater than 90% overlap for anterior segment surgeons and ophthalmologists who treat allergic conjunctivitis or refractory allergic conjunctivitis. So, in that overlap, we will be in both the office and in the ASC in the hospital environment with a portion of those physicians. That won't require immediate increases in our promotional expenses. But what we will do in that environment is start building out platforms with payers so that allergic conjunctivitis will be reimbursed. The good news is that we've had discussions with payers. It's important to note that the type or part of the bureaucracy that pays for medical benefits is different from the part that pays for Part D type products or pharmacy benefit products. The approvers or the payers who approve medical benefits actually see very, very expensive drugs, sometimes upwards of $10,000 to $15,000 per dose. So, we haven't faced pushback on the price, which we expect to be the same in the allergic conjunctivitis sector as it is in the hospital sector. But they do expect us to filter out patients, so that appropriate patients with appropriate physicians are getting treated for allergic conjunctivitis. Once we establish a foothold, we'll build out our presence. As we build out, we probably will need to add to our promotional resources to reach the office environment more broadly. But initially, we'll be looking at that Venn diagram confluence where we have both our surgical targets and the AC targets in the same practice. So, I don't know, Mike, do you want to add something to that?

A lot there. I'll just say clinically, we do use steroids for allergic conjunctivitis in the office; it does work exceedingly well. We don't use it more commonly because of the risk of abuse, meaning that a patient gets it, it works well, and they take it home. They keep using it, which then leads to some adverse events related to chronic use of steroids. Most of the current ocular allergy therapies, antihistamine/mast cell stabilizers, have now gone over the counter. So, we think patients would try those over the counter, and if they weren't adequate, they come into the office. Ordinarily, we'd give them topical steroids. That's where DEXTENZA could fit in with the physician-administered approach, so that the patient couldn't reuse it. It also has the extra advantage of being preservative-free, and there are no preservative-free commercially available steroids. So, we think there's a pretty significant value proposition potentially here.

It’s very helpful. Thanks again for taking the questions.

Thanks, Jon.

Thank you. Our next question comes from Georgi Yordanov with Cowen & Company. Your line is now open.

Thank you so much for taking the questions and congratulations on all the progress. So, I guess, starting with a broader question, even with the next generation anti-VEGFs such as Roche's faricimab and Kodiak's KSI 301, up to 10%, 15%, even 20% of patients require very frequent injections once every month or once every other month. Do you anticipate that OTX-TKI could actually be used in combination, or I guess, in the background of such therapies? And then I have a couple more specific questions?

Yes. It's a great question. We've seen a very strong safety profile to date. If that holds up as we enroll more and more subjects and learn more about this drug, it gives us a lot of flexibility. One of the really nice things about OTX-TKI is that it is administered in the office, using the same techniques we use with anti-VEGF therapy, and does not displace much volume in the vitreous. All that means, to your question, is that if you get a great response without OTX-TKI, that's great. If you need to use anti-VEGF for some breakthrough, that wouldn't be a problem.

Got it. That's helpful. And then it goes on a question that on the Cohort 2 subject, which you mentioned, has demonstrated durability up to 13 months. Do you know what is driving this response? Are you worried that the implant has not been fully degraded? And could this be an issue regarding re-dosing?

Another great question. With a single implant, we see durability of about nine to ten and a half months. When we put in more than one implant, one of the effects I mentioned earlier applies, which is that one implant does have an effect on the other implant in its degradation. We are seeing the implant last a little bit longer in some patients. That could potentially explain this. It could also be that, once you've got the patient to a dry state, you've eliminated the need for additional therapy for a period of time. So we need to see more patients and how that plays out. But again, as we go to a single implant, we really expect their durability to be about nine to ten and a half months.

Got it. It is helpful. Lastly, regarding the glaucoma program, what led you to choose a head-to-head comparison against the risks instead of eye drops? The significant commercial challenge for Duresta was that it was indicated for reducing, based on your discussions with the FDA. What would you need to demonstrate for the label to permit re-dosing? Is this something you plan to include in the initial NDA submission, assuming everything goes well, or will it be added later?

Yes. Great question. There are actually two active competitors in the Phase 2 trial. Subjects are randomized, as you said, to one of the two doses of OTX-TIC or Duresta in one eye. The other eye will receive a topical prostaglandin. You'll have both eye drop comparators as well as the Duresta comparator in the trial. As you also noted, their label is limited to a single implant. We believe that's related to effects on the corneal epithelium. To date, with our single implant, we have not seen any meaningful changes in corneal epithelium as measured by direct cell counts, functional measurements like pachymetry or direct observation with a slit lamp. We will not be including repeat dosing in the Phase 2, but we will have additional discussions with the FDA just to see what we need to show in order to get repeat dosing.

Thank you so much, Dr. Goldstein. You've been super helpful. Thank you.

Thanks for your questions.

Thank you. Our next question comes from Anita Dushyanth with Berenberg Capital Market. Your line is open.

Hi, good afternoon. Congrats on the progress. And thank you for taking my questions. I have a few here regarding the dry eye disease candidate, both CSI and DED. Just wanted to know in terms of the design, I know CSI is probably designed to last for 12 weeks. Could you just remind us how the DED candidate is designed for the acute condition? And also in terms of the population size? Do we sort of expect the acute conditions patients to be sort of the same size as the chronic conditions? And also one more regarding the acute dry eye condition patients? Do you think there might be pushback in terms of patients being happy with the eyedrops and not having to have an implant?

Okay. Lots of questions there. So, as you know, we have two dry eye programs. OTX-CSI is designed for the chronic treatment of dry eye disease with a cyclosporine product that lasts three to four months. OTX-DED, however, is a low-dose dexamethasone designed to release the dexamethasone for two to three weeks for the acute treatment of dry eye. I will say that we sort of think about dry eyes as a chronic disease. But we also know that there are acute flares, which are pretty common, happening anywhere from one to three times a year for many dry eye patients. For years, we've treated these patients with topical low-dose steroids off-label. There's now an approved product that has gone through the regulatory path, and it'll be interesting to see how that product plays out in this space. We believe the opportunity for OTX-DED is that, as I mentioned with DEXTENZA, some of the same issues apply here. The risk of steroids is not that they won't work; they do work. The real risk is with abuse and chronic therapy. By having a physician-administered product, it’s then in the physician's hands, and the patient can't misuse it. Additionally, both products are being delivered in a preservative-free format. We have two different formulations of OTX-DED; one is designed to last for two weeks, and the other for three weeks. There may be some pushback from patients who are accustomed to eyedroppers, but many of them will have experience with punctal occlusion as part of their dry eye therapy. Therefore, I think that those patients will be quite accepting.

Thank you. That was helpful. And just one more question. Just regarding the milestone payments that you will receive from AffaMed. Sorry, if I missed that. Is there a breakdown between milestones that would be received as part of the development versus the launch milestone? Is there something you can discuss?

Yes. We laid that out in detail. You want to go ahead.

No. I think that was Patricia. Patricia, you can fill that one.

Sure. For the milestone payments, there are several milestone payments that have to do with regulatory approvals in the different markets. Then there are further milestones for clinical development and the success in executing the clinical programs. So that's really where the milestones come into play, both regulatory and clinical milestones.

All in all, there are in excess of $90 million in milestone payments and royalties, which are significant.

Great. Thank you. That'll be all from me.

Thank you. Our next question comes from Yi Chen with H.C. Wainwright. Your line is now open.

Thank you for taking my questions. My first question is with respect to the 40% sequential growth in DEXTENZA head up by units. How much of it was driven by recovery of surgical volume? And how much of there was driven by new accounts?

I think none of it was driven by recovery in surgical volume. The surgeries are still down. The latest data we've seen is that in 2020, there were probably about 3.2 million cataract surgeries performed. That's against an average of about 4.1 million. The data we've seen now is projecting that in 2021, there will probably be about 5 million cataract surgeries performed. The rebound is yet to happen. Clearly, we've seen in January and February of this year, a number of ASCs either slowing down or closing. Even so, we are still experiencing double-digit growth in the market. So, the share gain has been accelerating, even though the total number of cataracts is still experiencing malaise, although we're starting to see the country wake up and starting to get some of those surgeries back now, but only really in March.

Okay. At what point would you consider providing some revenue guidance?

We're in consideration. I mean, the concept should be that after the second quarter, we will probably run out of excuses not to provide guidance going forward. But we always reserve the right to refrain. Clearly, in this first quarter, I think is where we will remain unless something unforeseen occurs with COVID. We expect normalization going forward. Then we should be in a position to provide some guidance on our quarterly net sales.

Got it. So regarding OTX-DED, is the trial enrolling patients as fast as the OTX-CSI trial, and do we expect to report data for the DED trial by the end of 2021?

Hi, Yi. This is Mike. The OTX-CSI trial started enrolling patients in September, and the cadence has been faster than we expected. That's why we're able to change guidance. OTX-DED started enrolling patients last week. So far, things are going well, but it's too early for us to change our guidance on that. We are currently saying the first half of 2022. Obviously, if things enroll quickly as OTX-CSI did, there is the opportunity to move that earlier. To remind you, the CSI trial is four months; we follow patients for four months after they've been randomized. In the DED trial, it's a shorter trial. The primary endpoint is two weeks, and we follow patients for two months after randomization. So it is a shorter trial, and we will know much more over the next four to six weeks.

Got it. And my last question is with respect to OTX-TKI. For that to become a commercially successful product, in your view, what's the lowest percentage of patients that remain rescue-free for at least six months?

Yes. It’s a simple question with a lot of nuance to it. What I would say is our target, and we believe what would be a really exciting drug is if half the patients show evidence of biological activity and can be sustained for six months or longer. I think that's the target. I think there's a product that could be shorter. But I think if we can show half the patients out to six months or longer, that becomes a really big product.

Got it. Thank you.

Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.