Earnings Call Transcript - OPTN Q1 2024

Operator, Operator

Good day, and thank you for standing by. Welcome to the OptiNose's Q1 2024 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jonathan Neely, VP of Investor Relations. Please go ahead.

Jonathan Neely, VP of Investor Relations

Good morning, and thank you for joining us today as we review OptiNose's first quarter 2024 performance and our plans for the year ahead. I'm joined today by our CEO, Dr. Ramy Mahmoud. The slides that will be presented on this call can be viewed on our website, optinose.com, in the Investors section. Before we start, I would like to remind you that our discussions during this conference call will include forward-looking statements. All statements that are not historical facts are hereby identified as forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those indicated by such statements. Additional information regarding these factors and forward-looking statements is discussed under the cautionary note on Forward-looking Statements section of the earnings release that we issued today as well as under the Risk Factors section and elsewhere in OptiNose's most recent Form 10-K and 10-Q that are filed with the SEC and available at their website, sec.gov, and on our website at optinose.com. You are cautioned not to place undue reliance on forward-looking statements. Forward-looking statements during this conference call speak only as of the original date of this call or any earlier date indicated in such a statement, and we undertake no obligation to update or revise any of these statements. We will now make prepared remarks, and then we will move to a question-and-answer session. With that, I will now turn the call over to Ramy.

Ramy Mahmoud, CEO

Thank you, Jonathan, and thank you to everyone listening for joining us this morning. We appreciate you joining us for our first quarter 2024 update. Starting on Slide 3. I'll start with a brief outline of what we'll cover during our call today. To start off, I'll review 3 key takeaways from today's call and discuss our initial plans to reach out to our ENT and allergy specialist physician audience with XHANCE's new clinical profile, including communication of data showing strong efficacy in chronic sinusitis, which our market research indicates a leading driver of prescribing behavior. Next, Jonathan Neely, our VP of Investor Relations and Business Development, will review our first quarter 2024 performance and our financial guidance for the full year 2024. Finally, I'll return to review information about our peak net revenue estimates for XHANCE and the profitability targets that we described on our XHANCE chronic sinusitis launch call in April. Then we'll wrap up the call and take your questions. Turning to Slide 4. We'll go into more detail in a moment, but I'd like to highlight 3 key takeaways from today's presentation. First, I'd like to reiterate the significance of the opportunity in front of us, which we believe has potential to reshape this business in the last 3 quarters of 2024 and for years into the future. Claims data suggests that chronic sinusitis is currently being diagnosed by health care providers at least 10 times more frequently than nasal polyps. Following our national launch meeting, the week of April 8, we have now fully engaged our sales team in our chronic sinusitis launch with training and a full set of materials. As a reminder, our plan is to launch with our current sales force structure armed with a new suite of chronic sinusitis promotional materials, accompanied by digital and non-personal promotion efforts based on the new label and with the objective of attaining peak year sales of at least $300 million and producing positive income from operations for the full year 2025. Second, thanks to the efforts of our team, we have a significantly stronger base to build on than we did at the start of 2023. When I started as CEO, we implemented an initiative to greatly increase our operating efficiency and to stabilize XHANCE revenue while preparing our organization to seize the greatly expanded opportunity in chronic sinusitis. We successfully met or exceeded the financial expectations we set for the last 5 consecutive quarters of revenue achievement, aggressive operating expense reductions, and improvements in our average net revenue per prescription. Third, the combination of expanded market opportunity and improved base business fundamentals has set up the opportunity for OptiNose to return to strong growth in 2024. We've now announced our initial guidance for full year 2024 net revenues and total operating expenses. Mindful that the full launch of the ES indication started in mid-April, we expect XHANCE's net revenues to increase by 20% to 34% for full year 2024 compared to full year 2023. We also believe that XHANCE's net revenue growth can be achieved with modest incremental operating expense increases to support promotional efforts while leveraging our existing commercial infrastructure. Turning to Slide 5. Last week, we announced a $55 million registered direct financing, which was led by Nantahala and D.E. Shaw and had participation from both new and existing health care-focused investors. As a result of this funding, OptiNose now has cash and cash equivalents of approximately $100 million. Following on top of the recent approval of the chronic sinusitis indication, this financing is transformative for our company because in the context of our base business plan, we now have sufficient cash runway to operate our business while servicing our debt through 2025, which is when we expect to produce income from operations for the full year. As part of the funding, we also favorably amended the terms of our debt agreement with a waiver of the going concern covenant until the filing of our December 31, 2025 financial statements, which is expected to occur in March of 2026. Additionally, the minimum liquidity covenant will be reduced from $30 million to $20 million following the date of the first quarterly payment to principal, which is due on September 30, 2025. We also extinguished $4.7 million of outstanding amendment and waiver fees, which have now been converted to equity. As a result of this financing and our revised debt agreement, OptiNose is in a greatly strengthened financial position to consider multiple future opportunities for value creation with our initial focus remaining squarely on our XHANCE launch plan. Turning to Slide 7 and our launch plan. In the second quarter of this year, we are leveraging 4 major tactics to launch XHANCE into this major new market opportunity. These include our sales force, non-personal promotion, peer-to-peer education, and presence at medical meetings. Let's begin with our 75-person sales organization. In the second quarter, our team plans to reach approximately 7,500 target health care providers and make over 35,000 total sales calls. We're also supplying the field with 50% more XHANCE samples to stimulate additional physician and patient trial. In a highly symptomatic condition like chronic sinusitis, samples can be effective in facilitating new product adoption. It's still very early days for us in the field, but initial feedback has been quite positive. Execution has been strong, and we expect the momentum in XHANCE prescribing to build over time with continued sales force engagement. We are supplementing the field force with non-personal promotion targeting a total of 22,000 of the highest potential largely specialty prescribers. These tactics include digital media, search engine marketing, and social media. In the second quarter, we plan to generate 1.5 million health care provider impressions and over 50,000 customer engagements using this approach. We're also deploying a peer-to-peer speaker program with approximately 80 specialist prescribers familiar with both the product and the clinical trial data who are available to host educational events for their peers. During the second quarter, we plan to reach over 1,000 health care providers to highlight the new XHANCE clinical profile and discuss unmet need and diagnostic criteria, which are important considerations for facilitating appropriate patient identification in the clinic. Lastly, we're planning a strong presence at medical meetings during the second quarter, including 10 national and 20 regional events for ENTs and allergists. We have a booth where our team can interface with prescribers and are also planning to host promotional events such as product theaters with speakers. These events are aimed at disseminating our message about the recent approval and new clinical trial data, reinforcing the clinical benefits of XHANCE and reinforcing our leadership and visibility in the chronic sinusitis space. Taken together, these 4 tactical pillars are essential elements of our launch plan. I'll also remind you that we recently implemented hub services intended to increase the service level for prescribers and patients while also resulting in overall improvement in the rate of written prescriptions that are ultimately filled and the rate at which insurance coverage and co-pay support are correctly applied to each prescription. Our generous co-pay support program will continue to facilitate patient starts with many patients being offered $0 co-pays in their first month. Although many of these new initiations are not captured by IQVIA, they can help patients and providers gain personal experience with the benefits of XHANCE even if insurance coverage is still pending. We're also aware that it can often require 5 to 7 calls on new physicians before initiation of product trials and that successful product trials are a precursor for consistent adoption over time. We believe our planned efforts will get the ball rolling and result in gradually accelerating product uptake. All these activities in the context of our preexisting payer access, which includes broad commercial coverage and which we expect to typically adapt to include our new indication over the first few months following approval, are expected to drive an uptick in XHANCE growth this year and ultimately deliver at least $300 million in peak sales in peak year.

Jonathan Neely, VP of Investor Relations

Thank you, Ramy. Turning to Slide 9. We are encouraged by our first quarter 2024 financial results. Regarding revenue, OptiNose recognized $14.9 million of XHANCE net revenue in the first quarter of 2024, a 26% increase compared to first quarter 2023 net revenues of $11.8 million. As discussed on our last earnings call, strength in demand afforded us the opportunity to make gradual changes that have had a positive influence on profitability. In late 2023 and early 2024, we made gradual revisions to our co-pay assistance program and implemented new hub services. These changes have prioritized growth and profitable prescriptions and have reduced both the number and proportion of unprofitable prescriptions. And the result is evident in XHANCE net revenue per prescription. Based on clinical prescription and inventory data purchased from third parties and the data we received directly from our hub in the preferred pharmacy network, the estimated XHANCE average net revenue per prescription for the first quarter of 2024 was $227 per prescription. This is a 63% increase compared to $139 of estimated average net revenue per prescription in the first quarter of 2023. In addition to the changes in co-pay assistance and the implementation of hub services, we believe the disruption in services that Change Healthcare claims processor for our vendors that administers the XHANCE co-pay support program hinted access to our co-pay benefit for uncovered patients. We believe this disruption had a favorable effect on XHANCE net revenue per prescription and expect it to be isolated to the first quarter of 2024. Finally, as we reported earlier, OptiNose recognized $21.7 million of SG&A plus R&D expenses in the first quarter of 2024. This is approximately a $3 million or 11% decrease compared to first quarter 2023 expenses of $24.5 million. Last week, we announced our initial financial guidance for full year 2024 XHANCE net revenue and full year 2024 operating expenses. In addition, given the stronger-than-expected performance in the first quarter of 2024, we increased our expectation for full year 2024 XHANCE net revenue per prescription. First, for the full year of 2024, we expect total operating expenses to be between $95 million to $101 million, of which approximately $6 million is expected to be stock-based compensation. Second, we anticipate strong growth for XHANCE net revenues given the expanded market opportunity available in chronic sinusitis. Our expectation for XHANCE net revenue for full year 2024 is between $85 million to $95 million. Finally, we now expect XHANCE net revenues per prescription to exceed $230 for the full year of 2024. Previously, we expected XHANCE net revenues per prescription to be approximately $220 for the full year 2024.

Ramy Mahmoud, CEO

Thank you, Jonathan. Turning to Slide 13. In April, we provided a financial outlook for XHANCE in chronic sinusitis that we believe we can meet or exceed within our base business. It is important to note that in the context of our base business objectives, although we're treating this as a product launch, in the short term, we're not planning significantly increased investments in our commercial infrastructure. For the time being, we plan to engage a largely specialty physician audience with our current 75 territory size sales team, although we may consider future expansion of our sales organization to further accelerate our launch. Although the size of our sales team is remaining steady, what will be dramatically different is the message we can convey to doctors as we promote XHANCE for a significantly larger population of approximately 3 million patients cared for in our specialty segment. Importantly, we believe that a much broader range of physicians commonly make the diagnosis of chronic sinusitis than the diagnosis of nasal polyps. This includes prescribers who are not equipped to routinely perform nasal endoscopy in the office, a procedure which is often relied on to confirm a diagnosis of nasal polyps. With this in mind, we believe we can realistically achieve peak net revenues of at least $300 million and produce positive income from operations for the full year 2025. Turning to Slide 14. In addition to the potential within our base business, we believe there's meaningful future potential value to unlock outside of our base business plan, and I'll focus on that topic to wrap up today's call. The first thing I'll highlight is the potential to expand the size of our sales organization by adding up to 40 additional sales territories. Increasing our sales reach to a larger population of specialty prescribers could push our peak year net revenue potential above our initial guidance of at least $300 million, and we will carefully consider if and when this incremental investment is appropriate. Next, we believe our product is well suited to support outreach to a primary care prescribing audience. We could pursue this opportunity, either by adopting alternative selling models like digital promotion or through direct selling partnerships to access an additional 7 million actively diagnosed and treated patients with chronic sinusitis. In the future, we could also invest in capital-efficient approaches to activating the 20 million additional patients with chronic sinusitis who are symptomatic but not actively seeking care each year. Based on direct-to-consumer pilot data that we have, we believe the XHANCE product profile is well suited to support strong patient activation. Third, I'd like to note that to date, we have not invested significant energy in establishing international partnerships for XHANCE, but we have maintained patents in select major markets. These represent another potential incremental source of value. Lastly, we aim to leverage our existing infrastructure, particularly our commercial infrastructure to generate synergies by working on additional products. OptiNose is establishing strong infrastructure experience and competencies in what we consider the comparatively blue ocean ENT and allergy specialty space. As we generate income from operations, which we expect for the full year '25 and continue to strengthen the organization, OptiNose has the potential to become the commercialization or development partner of choice for companies in the specialty space. Collectively, we believe there are significant opportunities ahead to create shareholder value. And when the time is right, we will carefully consider our options and the potential to return to our successful development routes and build a pipeline of new and innovative treatments to address unmet needs in our specialty arena. Turning to Slide 15. Before moving to take any questions, I'd like to reiterate the significance of the opportunity in front of us, which we believe has the potential to reshape our business starting in the second quarter of this year and for years into the future. We're pleased with our success in executing our prelaunch operating strategy through 2023 in the first quarter of 2024. We achieved greatly increased operating efficiency while stabilizing revenue in the comparatively niche nasal polyp indication, while preserving capital and focusing our organization on preparations to seize the opportunity created by approval of XHANCE as the first prescription treatment for one of the most common diseases diagnosed in adult outpatient medicine. We believe the launch opportunity we are just getting off of the ground, coupled with our recent financing, positions us well to build a profitable ENT and allergy-focused business by accessing greatly expanded net revenue potential through an efficient existing base of commercial capabilities. In addition, we believe the chronic sinusitis indication will facilitate commercial partnerships or other approaches to accessing incremental value in the primary care space that is in addition to what we can access on our own in the specialty segment. With that, I'd like to thank you for your attention and open up the call for Q&A.

Operator, Operator

And our first question comes from Thomas Flaten with Lake Street Capital Markets.

Thomas Flaten, Analyst

I'm trying to understand the significant increase in average revenue per prescription, especially considering the comment made in the Q about the potential one-time boost from Change Healthcare. Could you clarify how you expect the average revenue per prescription to trend throughout the year? Previously, there have been substantial increases in the second quarter, but I'm uncertain if we should expect the same this year. Any insights would be greatly appreciated.

Jonathan Neely, VP of Investor Relations

Do you want to pick up the parts about Change Healthcare and I'll talk about the cadence?

Ramy Mahmoud, CEO

So we do believe Change Healthcare had an effect. But as we pointed out in our comments, Tom, it's not the only reason that we had a higher average net revenue per prescription in the first quarter of 2024 than we did in prior years. So we do think there's still a seasonal trend, if you will, where the first quarter will generally be lower than subsequent quarters. However, what we've done is we provided full year guidance for our expected average net revenue per prescription to help give a sense of how we think that will pan out over the remainder of the year.

Jonathan Neely, VP of Investor Relations

Yes. And so in terms of thinking about the cadence within the year relative to years prior, I don't think what we're projecting is a really significant increase in revenue per prescription moving from Q1 into the rest of the year. But we do believe that the changes that we put into the business proactively are going to have a positive influence on revenue per prescription on a year-over-year basis as we move through the year. But we've moved our estimate now up from approximately $220 to at least or to exceed $230 per prescription. So we still do think that there's going to be improvement within the year.

Thomas Flaten, Analyst

I noticed in the Q that the number of covered lives with access to XHANCE dropped from 80% to 70%. Could you provide some insight on that?

Ramy Mahmoud, CEO

I believe that the change in the percentage of covered lives is more related to how we're measuring it rather than any real change in coverage. I apologize for any misunderstanding. Our expectation has always been that the number of covered lives would not significantly change with the new indication. What we anticipate is an easier process for obtaining coverage for those lives because we expect that people who are subject to utilization management, such as prior authorizations, will no longer need to have only a nasal polyp indication— which is a more difficult diagnosis to make and is less frequently coded. They will now also be able to have a chronic sinusitis indication, which is much more commonly coded in outpatient visits.

Jonathan Neely, VP of Investor Relations

I believe that in the past we have primarily focused on the percentage of lives covered by commercial plans when discussing XHANCE. However, we have shifted to providing a measure that includes all types of insurance plans, whether commercial or government.

Thomas Flaten, Analyst

Makes sense. And then one final quick one. The samples that you're handing out, is that a full 30-day dose? Or are there 30 days of doses available now? Or is there a smaller quantity of drug in the samples?

Ramy Mahmoud, CEO

No, the samples we are distributing are not a full 30-day supply. They are just enough to get you started and hopefully allow you some time to receive your prescription from the pharmacy of your choice, including mail order options.

Operator, Operator

Our next question comes from David Amsellem with Piper Sandler.

Schuyler van den Broek, Analyst

This is Schuyler, on for David. Can you speak anecdotally to what you've been seeing on the payer landscape front since the expanded label? Have there been any roadblocks to getting coverage for patients without nasal polyp? And then for net revenue for Rx in the long term, how do you think that is going to evolve in the context of the water label?

Ramy Mahmoud, CEO

Thank you for your questions, Schuyler. I'll address your second inquiry first. Regarding the average net revenue per prescription, we don't see it as tied to the label change. It's been more influenced by alterations we made to our co-pay support program and other business strategies, rather than the indication for which the drug is prescribed. As for insights on insurance coverage, I can only provide limited anecdotal information since it is too early to establish significant trends following our launch. There simply hasn't been enough time, and there are numerous insurance plans to consider. However, we have received specific anecdotal feedback indicating that the new indication is being included in prior authorization forms, as we anticipated would occur over the months post-approval. I'm not aware of any negative impacts arising from the new indication, and we do expect to see the new indication gradually incorporated into the current prior authorization criteria.

Schuyler van den Broek, Analyst

Got it. That's helpful. And then one more. On the sales force, I think you mentioned potential expansions in the future. Can you talk about what factors would inform that?

Ramy Mahmoud, CEO

Yes. I think we're looking to see the results of our initial promotional activities, and we're following it closely with fairly intense analytics. And as we get a better sense of the uplift that we're generating and the drivers that are producing the best ROI, then we'll use that information to inform the magnitude and the timing of any changes we make in our promotional activities.

Operator, Operator

Our next question comes from Glen Santangelo with Jefferies.

Glen Santangelo, Analyst

Ramy, I wanted to follow up on what you're observing regarding payer coverage. It seems you mentioned that the new indication is being gradually added. Can you provide an estimate of how long this process might take? I anticipated it would be relatively swift, considering the payer's familiarity with the product. I'm trying to relate this to the full year fiscal '24 guidance and the decision to maintain the current commercial infrastructure. Essentially, we're trying to understand the timeline for amending payer contracts and when we might see an increase in revenue.

Ramy Mahmoud, CEO

Thank you for the question, Glen. While it may seem obvious, we don’t have direct control over how quickly these changes are implemented across different insurance plans. There are only a few major pharmacy benefit managers and insurers, but the number of insurance plans is vast. I can provide specific examples where changes have been made and others where they have not. We estimate that some plans may take a few weeks and others a few months to implement these changes. We have been transparent with insurers about the new indication and have done everything possible to support their ability to make adjustments. However, we cannot directly control the timeline. Regarding when we might see a change in revenue, we anticipate an increase this quarter. Specifically, for the second quarter, we expect revenue to begin increasing, continuing to rise throughout the year, ultimately reaching between $85 million and $95 million for calendar year 2024, which is significantly higher than 2023.

Jonathan Neely, VP of Investor Relations

Glen, you asked about the timing of amendments to our agreements. It's not really about the timing of those amendments but rather about how the payers are responding. This situation reflects contracts that primarily consider the expanded label. These contracts include rebates when the product is reimbursed for FDA-approved indications that are included in the label. Therefore, it's not really a matter of renegotiation. It's more about ensuring that the insurers' processes align with the current status of the label and the product.

Glen Santangelo, Analyst

Maybe just 2 other quick ones for me, and then I'll hop off. The total scripts in this quarter, it looked like they were down a fair amount based on that average rev per script. I was wondering if you can sort of comment on that. And then secondly, on your $300 million peak sales number, could you maybe, Ramy or John, you put a little bit more meat behind that number and how you sort of came to that number and how we should think about that from a script and an average rev per script perspective?

Jonathan Neely, VP of Investor Relations

Sure. So I mean in terms of the prescriptions on a quarterly basis, I think as we described, we've made some changes to our co-pay assistance program late in 2023 and again, in early 2024, we believe has kind of focused us on growing the profitable portion of our business and has reduced the number and proportion of unprofitable prescriptions. So the year-over-year result, if you look at prescriptions, you're down, I think, almost 23% on a year-over-year basis. But importantly, there are prescriptions leaving the business that on net improve our revenue performance by them no longer being filled. So again, coming back to what we're here for in terms of financial performance, revenues were up 26% on a year-over-year basis.

Ramy Mahmoud, CEO

Just to add a bit more to that, you may have missed it in the earlier comments, but we are reducing the number of unprofitable or negative revenue prescriptions. We have also focused on growth for profitable prescriptions. In managing the business, our goal is not to grow total prescriptions but to grow profitable ones. Another point to mention is that tracking prescriptions by external third-party providers is imperfect. It has always been imperfect, and it varies over time in how closely it reflects our actual numbers. One thing I highlighted earlier is that new initiations, especially those with a $0 co-pay that we are trying to drive, may not be captured at all by third-party data providers, making them invisible to you.

Jonathan Neely, VP of Investor Relations

So I'll give you one last comment on the guide for the year and the implications for prescription growth and revenue per prescription growth. I think given that we've provided a range for revenues and a floor, if you will, for revenue per prescription, I think if you reverse into the math, you can derive that we are expecting both prescriptions to grow on a year-over-year basis as well as revenues to grow on a year-over-year basis and along with kind of the revenue per prescription.

Ramy Mahmoud, CEO

And Glen, the last thing I'll add is you asked about the $300 million. My view is that the growth to get us from 2024 out to peak year is growth in use of the product. It's not really meaningful incremental growth in the average net revenue per prescription. There were a lot of levers to pull there in the last, I don't know, say, 9 months or so. But in the future, primarily the growth will come from increased uptake of the product.

Operator, Operator

Our next question comes from Matthew Caufield with H.C. Wainwright.

Matthew Caufield, Analyst

And congrats on the successful launch so far. So appreciating the specialist-focused efforts targeted towards allergists and ENTs, do you plan to share any granularity around, say, the number of prescriptions that could be coming from the primary care segment in the coming quarters? And then maybe how that could inform any future sales efforts, presumably, primary care could be prescribing just not being kind of the current focus?

Ramy Mahmoud, CEO

Yes. So Matt, we haven't made a decision yet on how we will report indicators for future growth. Our current focus is primarily on the specialty audience. We do have some primary care physicians in our outreach, but they are not a significant number. We also have a larger audience for our non-personal promotional efforts, and we will be gathering data on promotional responsiveness and how the product is being used in different segments to inform our future actions. However, I don't want to set an expectation that we will be reporting any specific information about prescribing for specialty in the near future. Great. I'd like to thank you all for joining us this morning. I appreciate your attention, and I hope you share our excitement at what a different place the company is in today compared to a year or more ago. With the new approval and the new financing that we've accomplished in the last few months, and we feel like we're in a much better position to really create shareholder value and to help millions of people with the disease that previously had no treatment alternatives. And we look forward to getting back with you again in August to share our second quarter results.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.