Earnings Call Transcript - OPTN Q4 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to the OptiNose’s Q4 2020 Earnings Call. At this time, all participants are in a listen-only mode. I would now like to hand the call over to Jonathan Neely, Vice President of Investor Relations. Please go ahead.

Jonathan Neely, Vice President of Investor Relations

Good morning, and thank you for joining us today as we review OptiNose’s fourth quarter and full-year 2020 performance, and our plans for the remainder of the year ahead. I’m joined today by our CEO, Peter Miller; our President and Chief Operating Officer, Ramy Mahmoud; our Chief Commercial Officer, Vic Clavelli; our CFO, Keith Goldan. 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 and the Risk Factors section and elsewhere in OptiNose’s Form 10-K that was filed today 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. The forward-looking statements during this conference call speak only as of the original date of this call or any earlier date indicated in such 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 Peter Miller. Peter?

Peter Miller, CEO

Thanks, Jonathan, and good morning, everybody. We appreciate you joining us this morning. Starting on Slide 3, I’d like to begin by reviewing our 2020 full-year results. Not sure any of us would have predicted the pandemic at the start of the year. In the face of significant pandemic-related headwinds, I’m very proud of the strong growth our team delivered. Though our results were not as strong as we expected when 2020 began, they reflect continued progress towards our commercial and clinical development objectives. For the full year 2020 versus 2019, XHANCE net revenues increased 59% to $48.4 million, XHANCE total prescriptions increased by 70%, and XHANCE new prescriptions increased by 31%. It’s useful to have some context for each of these results. The pandemic environment had two adverse impacts on our ability to grow the business. First, patient visits to physician offices were suppressed due to stay-at-home orders and patient discomfort with going into medical offices. And second, the ability of our territory managers to interact with our targeted physicians was constrained due to offices not allowing any sales representatives to meet in-person due to the pandemic. Thus, our growth in total prescriptions of 70% was against a category decline of 7%, and new prescription growth of 31% was achieved in a category that declined 13%. Also note that our revenue growth lacked prescription volume growth largely due to a temporary patient assistance program that was put in place early in the pandemic. This program has since been retired and we expect revenue per prescription in 2021 to be more consistent with levels in 2019. In addition, we were disciplined with respect to our expenses. For the full year 2020, we had $129 million of operating expenses, inclusive of chronic sinusitis clinical trial costs. This has aligned with our last guidance range and represents just a 3% increase compared to full year 2019. Turning to Slide 4, we’ll go into more detail in a moment, but I would like to highlight five key takeaways from today’s presentation. First, new prescriptions of XHANCE achieved another all-time high in the fourth quarter, despite the continuation of the pandemic-related market challenges I already alluded to. New prescriptions increased 7% over the third quarter of 2020 and are up 16% compared to the fourth quarter of 2019. It’s worth noting that market NRx decreased 21% from the fourth quarter of 2019 to the fourth quarter of 2020. Second, after making certain adjustments for the effects of the COVID-19 pandemic, our full-year 2020 financial performance was aligned with our company guidance. Third, we are providing some initial company guidance related to the first quarter and full year 2021 performance. We hope that our ability to drive performance in 2020 lends confidence in our projections for the year ahead. Fourth, and I’ll take a moment to dive in here. We believe there are multiple opportunities that will continue to drive revenue growth in 2021. I will highlight five important factors supporting revenue growth in 2021: The first begins with the market environment, as summarized in third-party data reports that the pandemic reduced the number of diagnostic visits by patients to physician offices and limited the ability of sales representatives to meet in-person with physicians. Importantly, these effects were not limited to the second quarter of 2020. Broadly speaking, the effects on the business environment followed the course of the pandemic. There was an initial shock in the second quarter, improvement in the third quarter, and then softening late in the year and into early 2021 as the wave of infections and deaths attributable to the coronavirus surged again. The fact that we were able to continue to grow new prescriptions in this environment fuels our confidence that XHANCE new prescription growth will further strengthen in 2021, as we expect both our access to healthcare offices and patient volumes in those offices to improve throughout 2021. We think these two factors alone provide strong support for the growth in XHANCE prescriptions in 2021. Third, we believe there’s an opportunity to get more benefit from our partnership with Kaleo as the pandemic environment improves. Since launch in the fourth quarter of 2020, Kaleo’s impact on our business has not been significant, as the pandemic has limited their ability to reach many of their XHANCE targets. Early signs of success in places where Kaleo has been able to reach our customers leaves us optimistic about the potential for this partnership as vaccination progresses, which serves to both ease physician access and make patients more comfortable resuming office visits. Fourthly, and very encouragingly, there is increasing recognition by thought leaders and specialty societies that XHANCE plays a distinct and important role in the treatment of patients with chronic rhinosinusitis with nasal polyps, after they try and fail conventional nasal steroid sprays. For example, a recent peer-reviewed publication in the journal of the American Rhinologic Society, the International Forum of Allergy and Rhinology from the lead author, Dr. Brent Senior, Chief of Rhinology at the University of North Carolina at Chapel Hill encourages healthcare providers to consider prescribing XHANCE in chronic rhinosinusitis patients with nasal polyps, who remain inadequately controlled by conventional nasal steroid sprays. Additionally, several medical societies, including the American College of Allergy, Asthma, and Immunology and the American Rhinologic Society have made available patient-centric materials also illustrating the growing recognition of the differentiated role XHANCE plays in treatment. We think that this kind of expert specialty recognition of XHANCE reflects a growing appreciation for the role of the product in treating the inflammation of chronic sinusitis with nasal polyps and offers potential to support broader adoption by making it clear that XHANCE is an important option for maximizing medical therapy for patients with inadequate responses to standard nasal sprays. Lastly, as I alluded to earlier, we also expect 2021 revenue to benefit from stronger XHANCE average net revenue per prescription compared to the full year 2020, because we expect not to have the patient assistance program this year compared to last year’s program. Finally, our last major takeaway for today’s presentation is that we expect top-line data from at least one of our two pivotal clinical trials evaluating XHANCE for the treatment of patients with chronic sinusitis by the end of 2021. Note that pandemic-related issues, including temporary research site closures and decreased patient flows in many countries during 2020 slowed enrollment in our trials. This is the reason we now expect top-line results from one of our two trials to be delayed into the first half of 2022 instead of being available by the end of 2021 as previously guided. As you are aware, XHANCE could be the first drug ever approved and promoted for the treatment of the 30 million U.S. patients who suffer from chronic sinusitis. We believe this data could lead to a multifold expansion of our target patient population, driving significant additional value for the company, potential primary care partnerships, and opportunities for approval of XHANCE ex-U.S.

Keith Goldan, CFO

Thank you, Peter, and thanks to everybody for joining us this morning. Turning to Slide 11. As we reported, OptiNose recognized $15.6 million of XHANCE net revenue in the fourth quarter of 2020. One of the metrics that we track is XHANCE average net revenue per prescription, which is calculated by dividing net revenue for the quarter by the estimated number of XHANCE prescriptions dispensed in that quarter. We continue to believe this is a useful metric to evaluate the net revenues generated per prescription. However, we remind you that this metric is subject to variability that does not necessarily reflect a change in the price that is paid for an individual unit of XHANCE. Based on available prescription data purchased from third parties and also on data that we receive from our preferred pharmacy network, XHANCE average net revenue per prescription for the fourth quarter of 2020 was $211. For the full year of 2020, XHANCE average net revenue per prescription was $185. This is a decrease of 6% compared to the full year 2019 average of $198, that year-over-year decrease can largely be attributed to the assistance co-pay program that was an important initiative in the second quarter of 2020, and is helping patients during the early stages of the pandemic. While this initiative did support new prescription share growth amid unprecedented disruption in our customer’s practices, the termination of the assist program is one factor supporting a projection of higher XHANCE net revenue per prescription in 2021. Moving to Slide 12, our full year operating expenses, defined as sales, general and administrative expenses plus research and development, increased by just 3% from $125 million in 2019 to $129 million in 2020. In the same period, XHANCE net revenue increased nearly 60%. The disparity between these two growth rates illustrates that as XHANCE net revenues increase, we can generate operating leverage, in particular from our commercial infrastructure and corporate overhead. Full-year 2020 research and development expenses increased $2.6 million or 12% compared to full-year 2019 and drove most of the 2020 total operating expense increase. The increase in R&D was primarily driven by the ongoing conduct of our chronic sinusitis clinical trials. Full-year 2020 sales, general and administrative expenses increased $1.3 million or 1% compared to full-year 2019. The increase in SG&A was driven primarily by increased fees paid to preferred pharmacy networks as a result of increased XHANCE volumes and by increased expenses associated with the annualization of the April 2019 expansion of our sales force. These increased expenses were largely offset by expense reductions and delays in response to the COVID-19 pandemic.

Ramy Mahmoud, President and COO

Great. Thank you, Keith. Turning to Slide 15. We believe our chronic sinusitis program is a potential driver of significant growth for three reasons. First, chronic sinusitis is a high prevalence, high morbidity disease affecting over 10% of the U.S. adult population and for which there are no approved drug treatments. Second, the limitations of current treatments have left high levels of patients suffering as measured by loss of quality of life despite society investing up to $13 billion in direct healthcare costs and suffering over $20 billion in lost work productivity, according to a 2017 study of healthcare economics and chronic rhinosinusitis. Third, we believe chronic sinusitis affects not only many more patients than nasal polyps alone, but CS is also recognized and treated by a much larger universe of physicians, creating greatly expanded potential for promotion to people who may benefit from the product. Within our current specialty physician target audience, this new indication could triple the number of patients for whom we can ask for business promotionally from approximately 1.2 million to 3.5 million patients. In addition, physicians outside our current specialty audience treat an incremental 6 million to 7 million patients further increasing the potential patient pool, such that it goes from approximately 1.2 million to as much as approximately 10 million. Furthermore, evidence suggests that an additional 20 million people suffering from symptoms of chronic sinusitis have lapsed and no longer seek regular care for their disease. We believe this is often due to a belief that there are no new options or that physicians can offer a little beyond what has already been tried for those patients. Our research suggests that many of these 20 million sufferers can be activated via consumer-directed promotion if and when we are able to offer a prescription option that is approved for treatment of chronic sinusitis. Lastly, regarding the business potential for this new indication, we believe that successful development in CS can create significant leverage of our existing commercial infrastructure and access to non-dilutive capital through a primary care partnership. We look forward to providing more updates regarding this program and the increased market potential it would facilitate as we close in on top-line data.

Peter Miller, CEO

Thanks, Ramy. Turning to Slide 19. Before moving to Q&A, I’ll take a moment to reiterate that I am incredibly proud of the effort and results the team produced in 2020. The global pandemic presented challenges that are unique compared to what most of us have faced in our lifetime. In our outlook for 2021, we have tried to present a balanced view. We assume that business conditions, while improving, will not immediately return to pre-pandemic norms with the availability of vaccines. At the same time, we are optimistic that 2021 has potential to include a substantial improvement in business conditions, and there are several factors that can increase the growth of our business. We are laser-focused on two very clear objectives: revenue growth for XHANCE and completion of our trials in chronic sinusitis. We look forward to providing updates on our progress in 2021. And with that, we’ll now open the call up for Q&A.

Operator, Operator

Thank you. Our first question comes from Randall Stanicky from RBC Capital Markets. Your line is open.

Steve Daddeo, Analyst

Great guys, how are you? This is Steve on behalf of Randall. Thanks for taking our questions here. I have two from me, one on guidance and one on the CS trials. I realize you’ve provided a floor at $80 million, and that’s still pretty substantial growth over 2020, but it’s a little bit less than what the street was modeling for 2021. I’m curious if you can add some color as to what gave you confidence they’re going to be able to achieve at least $80 million and maybe some of the tailwinds you’re looking at that can provide upside there. And then just secondly, regarding the CS trials, any updates on where you guys are on an enrollment status and when you’re expecting to have that fully enrolled? Appreciate the questions.

Peter Miller, CEO

Yes. Steve, thanks very much for the question. I’ll take the first one, and then Ramy, I’ll let you or Keith handle the second one. We decided to approach our revenue guidance with the concept of a floor, and the reason for that is just because of some of the uncertainty that still remains relevant to the pandemic. So, that was the approach relative to the concept of a floor. What’s assumed in that $80 million is our understanding of the current impact of the market environment. We expect some improvement through Q2 and then for the back half of the year, we expect the market to return to pre-pandemic norms in terms of what is normally seen relative to patient volumes. The impact of the market environment affects patient volumes and physician offices, and our ability to access those offices. Our optimism for 2021 comes from several drivers that could create acceleration in prescription growth. The first is Kaleo, and the second is increasing recognition in the medical community of what we’re calling a step care paradigm, and importantly, recognizing XHANCE as playing an important role in that step care treatment paradigm. We anticipate the continued improvement in market conditions will enhance our growth potential significantly for XHANCE in this period.

Keith Goldan, CFO

I don’t have anything to add relative to the $80 million guidance. As for the second part of Steve’s question regarding the timing of CS, if we’re announcing top-line data from one of the pivotal trials by year-end, you can expect us to be enrolling the last patient first visit around the middle of the year. So, we can report out once we have that last patient first visit to set a more definitive expectation of when we expect that to have that top-line data.

Peter Miller, CEO

Steve, just so it’s helpful, we’ve gone to great lengths to add additional trial sites and have focused on predicting which countries will be able to engage in patient enrollment. As the resources that were diverted to COVID care are beginning to return, we expect an increase in enrollment as the first half of the year goes on. As Keith outlined, we project to be able to complete the top-line report as guided.

Gary Nachman, Analyst

Hi, guys. Good morning. First, just your share gains in the face of a declining category, where has most of that been coming from, and what do you think is a reasonable target off the 5.1% of your target physicians that you’re currently at in the fourth quarter? And then for Ramy, what portion of Rx are currently off-label, being used for CS and any concerns with the quality of the data coming out of the clinical trial sites now that you’ve been adapting through the pandemic? And then I had one other follow-up.

Vic Clavelli, Chief Commercial Officer

Thanks, Peter. Gary, I appreciate the question. The key point is that we saw our share gain come from two areas: increasing usage from our existing prescribers, and that reflects the difficulty of the marketing getting in front of new potential customers during the pandemic. The second area is breadth, where we continue to grow and bring new people into the franchise. We expect to be able to reach even more prescribers as the pandemic lifts. With success, we believe we can build on the share gain we’ve seen this last year. As for the proportion of prescriptions for nasal polyps, that would be about a third of our business overall, while many prescriptions come from patients with chronic rhinosinusitis and allergic rhinitis indications, which isn’t the segment we’re proactively pursuing but we’re still benefiting from those diagnoses.

Ramy Mahmoud, President and COO

Regarding the quality of data in clinical trials, we’ve been focused on implementing changes due to the pandemic and have measures in place to ensure data quality. We acknowledge the ongoing recruitment risk due to the COVID-19 influence on trial sites worldwide but are focused on producing top-line data from at least one trial by the end of this year, which we believe is achievable.

Gary Nachman, Analyst

Okay, that’s helpful. And then just one quick follow-up, the increase in the target physician audience to 18,000 from 10,000, that’s all ENT allergy. Just how much of that is coming from Kaleo versus your own sales reps, and just remind us how many reps you have and how many Kaleo have going after that target audience? Thanks.

Vic Clavelli, Chief Commercial Officer

Kaleo is calling on up to about another 3,000 targets, which is included in that revised number. The rest of the number comes from the expansion of our targets to the rest of the ENT and allergy universe that is using intranasal steroid sprays. We have about 100 reps in the OptiNose sales team and the Kaleo team also has about 100 reps targeting the same audience.

Brandon Folkes, Analyst

Hi, thanks for taking my questions, and appreciate the guidance as well in this current environment. Can you talk about what you envision in terms of exiting the year and ensuring that we think of 2021 as a ramp? There’s a strong growth implied in the second half of the year, and I would also like to get some clarity on net price per script. It seems to come down from Q3 to Q4. Can you provide insights into any inventory in the channel that we should consider for Q1, and how you see the dynamics with Kaleo impacting net price per script in 2021? Thank you.

Keith Goldan, CFO

Regarding the guidance, our assumptions for patient volumes and access to physician offices assume an uptick in velocity as we move throughout the year. This does reflect our expectations of gradual improvement throughout 2021, having seen adverse effects at the start of the year due to the pandemic. For average net revenue per prescription, we expect it to begin at a lower average and to accelerate over the year due to factors like deductible resets. Average net revenue per prescription for Q1 is expected to be between $120 and $140. For Kaleo, we have two segments of physicians. For those physicians they do not currently call on, Kaleo receives a fee for each prescription generated. For segment two, which overlaps with our reps, we have a CSO model where we pay for activity, but we remain confident that the impact on our average net revenue per prescription will not be significant.

David Amsellem, Analyst

I wanted to ask a hypothetical regarding the CS data. If you show benefit versus placebo on symptoms, but not on the objective measure, do you still envision significant expansion of the overall XHANCE opportunity? Lastly, if you decide against bringing in a co-promotion partner and proceed with a go-it-alone strategy, how should we think about the extent of that sales force expansion in terms of headcount? Thanks.

Peter Miller, CEO

I’ll start, and Ramy can add more color. We feel good about our ability to show improvement in symptoms in our large population of patients with chronic rhinosinusitis. In the hypothetical scenario that we only see symptom improvement, we still believe this will be valuable for the expansion of our business, especially since there are currently no approved products in that market. If the product is not partnered, we would not expand to all 60,000 primary care physicians at once, but would target a feasible part of that segment first. Even without expansion, we are confident in the substantial market that exists based on our ongoing research.

Gary Nachman, Analyst

Lastly, can you talk about the current patient assistance program and how it has changed? Where do you stand with managed care coverage for XHANCE? What is the average out-of-pocket cost to patients, and can you describe the step requirements?

Vic Clavelli, Chief Commercial Officer

Certainly, Gary. Coverage for our product is about 77% commercial at this time. Changes to our patient assistance program now require uncovered patients to pay $25 for their first prescription instead of $0, and $50 for any subsequent prescriptions. Nationally, close to 80% of patients pay $0 out of pocket for XHANCE. For most, a history of using inhaled nasal steroids is required to obtain a prescription, as payers want to confirm that treatment is warranted before approving XHANCE.

David Steinberg, Analyst

Thanks, and good morning. You showed us some slides with target universe of prescribers and breakdown of how many prescriptions by doctors who wrote. The first question is if all 10,000 target physicians have actually been called on at least once or are some still waiting? Secondly, how many calls have data shown to be necessary before a physician actually writes a script? Lastly, half of the doctors you called on have not yet written a single script. After three years, what are the reasons behind that?

Vic Clavelli, Chief Commercial Officer

All target physicians have been called on at least once, and typically, our data show we need to reach them between seven to ten times to impact their prescribing behavior meaningfully. Importantly, a physician needs to recognize that treating chronic sinusitis with XHANCE demands rethinking their current treatment protocol, and we continue to work to ensure our presence and efficacy are communicated clearly even amidst challenges posed during the pandemic.

Peter Miller, CEO

While XHANCE has been on the market for three years, the pandemic has restricted our ability to effectively reach dabbler doctors who need those messages. We have excellent data suggesting that our prescribers who understand the efficacy of the product are writing more scripts, thus we are optimistic as we won't be restricted in the same way once the pandemic eases and access improves. Thank you all for joining us. We understand that we are in an environment where we need to continue to produce strong results, and that’s our focus, both in terms of growing XHANCE revenue and completing clinical trials. We are focused on those objectives and look forward to providing updates in 2021.

Operator, Operator

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation, and you may now disconnect. Everyone, have a wonderful day.