Earnings Call Transcript - OPTN Q1 2022

Operator, Operator

Good day, and thank you for standing by. Welcome to the OptiNose First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host, Jonathan Neely, Investor Relations. Please go ahead.

Jonathan Neely, Investor Relations

Good morning, and thank you for joining us today as we review OptiNose's first quarter 2021 performance and our plans for the remainder of the year. I'm joined today by our CEO, Peter Miller; President and Chief Operating Officer, Ramy Mahmoud; our Chief Commercial Officer, Vic Clavelli; and our CFO, Keith Goldan. The slides that we’ll 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 Form 10-Q that is 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 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 Miller, CEO

Thanks, Jonathan. And good morning, everybody. We appreciate you joining us today. We continue to be very encouraged by our progress and are excited about the upcoming data readout of our second pivotal trial for chronic sinusitis, a label expansion that we believe has the potential to be transformative for our business. Starting on Slide 4, we'll go into more detail in a moment. But I would like to highlight four key takeaways from today's presentation. First, we reported strong financial performance in the first quarter, with 35% year-over-year growth in quarterly revenue. An important driver of this revenue growth has been a favorable shift in the mix of our business resulting from modest changes in our Co-Pay Assistance Program at the start of the year. Specifically, a greater percentage of our prescription fills are profitable, with a smaller percentage having negative profitability. After making these changes to our Co-Pay Assistance Program, we've continued to see prescription volume growth in the large profitable segment of our business, while also seeing a desirable reduction in volume in a smaller segment of our business which is unprofitable. This first quarter dynamic has dampened apparent near term growth and volume for both total prescriptions and new prescriptions. But we expect this change to have enduring benefits to the business, as already reflected in the strong 1Q year-over-year growth of 21% in average net revenue per prescription. As I noted, we believe this is a desirable shift in business mix that will yield continuing benefits throughout this year and beyond. Keith will provide some additional details later in the call. Second, our first quarter 2022 revenue growth was aligned with our full year 2022 guidance. Our guidance of at least $90 million implies year-over-year growth of at least 22%. As I mentioned, we're off to a good start with 35% year-over-year growth in Q1, which will enable continued strong focus on our two core business objectives: driving enhanced revenue growth and successfully completing the chronic sinusitis pivotal trials. Third, as promised, we reported top-line results from ReOpen1 in the first quarter, and we're pleased with the positive results. ReOpen1 is a landmark trial in chronic sinusitis, and we believe is the first Phase 3 study of a nasal treatment for this common disease to show improvement inside the sinuses. Briefly, in a population where all patients had proven disease inside the sinus cavities at baseline, ReOpen1 found that treatment with XHANCE produced a statistically significant improvement relative to EDS placebo on both a combined symptom score and on a CT scan measure of the amount of disease inside the sinuses. We view this as an important development for the approximately 30 million adults in the United States who suffer from symptoms of chronic sinus disease. Fourth, we continue to expect top-line results from ReOpen2 to before the end of this quarter. The last patient in the trial recently completed their final study visits, and our clinical team is working diligently on the audits and data cleaning necessary to enable database lock and production of top-line results. XHANCE has achieved an important place in standard of care for Nasal Polyp disease by helping patients with these serious symptoms, and we're producing nice, enhanced revenue growth with the current indication, which we expect to continue. Nevertheless, we are very enthusiastic about the incremental opportunities for growth that successful chronic sinusitis trials could create. We believe this data has the potential to increase product differentiation, improve the prescribing environment for XHANCE, create new partnerships, improve ex-U.S. opportunities, and drive significant incremental enterprise value. As we highlighted in our fourth quarter earnings call in March, an approval could roughly triple the number of target patients for whom we can promote XHANCE from approximately 1 million diagnosed Nasal Polyp patients to 3 million diagnosed chronic sinusitis patients. It's also important to consider how the indication will impact the insurance and promotional environment for XHANCE. As we have previously described, insurance coverage for XHANCE is very good, with approximately 80% of commercial lives in a plan that covers XHANCE. However, approximately half of those lives are in a plan that constrains prescribing by requiring physicians to attest that they are prescribing XHANCE for the approved indication, which is currently nasal polyps. This is important because we found that many physicians who routinely diagnose chronic sinusitis do not often make the diagnosis of nasal polyps. Approval of the additional indication would also enhance potential for a partnering opportunity to reach out to primary care physicians who treat roughly 7 million additional patients, with an average value per patient of approximately $1,000 per year. Each of these opportunities has the potential to be substantial. Turning to Slide 5, we had strong performance in the first quarter of 2022. And I will briefly touch on year-over-year growth highlights on this slide and the next. In the first quarter 2022, there were approximately 28,200 new prescriptions for XHANCE, a 9% increase compared to the first quarter of 2021. The total number of enhanced prescriptions in the first quarter of 2022 was approximately 80,600, which represents 11% growth over the first quarter of 2021 in a market environment that increased 8% over the same period. As I noted a moment ago, we made intentional changes to our Co-Pay Assistance Program at the start of the year. By reducing the segment of loss-generating prescriptions, these changes dampened near-term growth and overall volume of new and total prescriptions that are already increasing revenue growth and short-term and long-term profitability potential. Regarding our environment, I would also like to note that our territory managers continue to work through challenges to the ability to meet in person as frequently with, and as broad an audience of physicians as they did pre-COVID. We've seen improvement in this regard, and we believe the market environment has the potential to continue to improve. Importantly, and as reflected in our first quarter results, our territory managers are currently driving trial and adoption that is consistent with our stated financial objectives for 2022. Turning to Slide 6, XHANCE market share increased from 5% in the first quarter of 2021 to 5.4% in the first quarter of 2022. It is worth noting that we updated the definition of our target physician universe to track progress in the audience to which we promote. Previously, we tracked share against an audience of approximately 18,000 physicians, including physicians detailed in person by our former co-promotion partner. Moving forward, we're including 21,000 physicians, primarily ENT and allergy specialists that sit with our targets for in-person and/or digital promotion. Share under this new definition is consistent with past performance, and we remain excited about the headroom for future growth as more physicians incorporate XHANCE into their practice and medicine. The breadth and depth of physician prescribing is measured by the total number of physicians who have patients filling exams prescriptions increased from the first quarter of 2021 to the first quarter of 2022 as well. Regarding breadth, first quarter 2022 approximately 7,690 physicians had a patient fill at least one prescription for XHANCE, an increase of 11% compared to the first quarter of 2021. Regarding depth, the number of physicians who had more than 15 XHANCE prescriptions filled by their patients in a quarter increased slightly faster, with that number increasing by 14% from the first quarter of 2021 to the first quarter of 2022 with nearly 1,500 physicians now in the segment. In a few moments I'll provide some closing remarks, but I'll first turn the call over to our CFO, Keith Goldan, for comments regarding first quarter 2022 results and perspectives regarding our corporate guidance.

Keith Goldan, CFO

Thanks, Peter. And thanks, everyone for joining us this morning. Turning to Slide 8. As we reported, OptiNose recognized $14.8 million of net revenue this first quarter, an increase of 35% compared to the first quarter of 2021. Based on available prescription data purchased from third parties, and also on data we receive directly from our preferred pharmacy network, XHANCE average net revenue per prescription for the first quarter of 2022 was $183, an increase of 21% compared to $151 of revenue per prescription in the first quarter of 2021. As Peter described earlier, we made a change to our Co-Pay Assistance Program that balances the needs of our business while ensuring we retain an affordable option for patients who want treatment with XHANCE. Specifically, the subset of patients in high deductible insurance plans now have an out-of-pocket copay of $25 for the first prescription, which is comparable to the cost of over-the-counter nasal steroids, instead of the previous zero dollars out of pocket. This change for the Co-Pay Assistance Program is important going forward, as it was intended to increase ongoing revenue and average net revenue per prescription by reducing the rate of growth in prescriptions filled by commercially insured patients in plans that have a high deductible while sustaining the rate of growth in covered plans, where prescriptions are profitable. Patients who are covered in a high deductible plan can end up costing us more as a group than what we receive for providing XHANCE. As intended, this change has already reduced unprofitable fills. We expect the benefits to average net revenue per prescription to continue moving forward. Turning to Slide 9, our first quarter 2022 financial performance was in line with our prior guidance. As a result, our guidance for full year and the remainder of 2022 is unchanged. First, we expect XHANCE net revenue to exceed $90 million for the full year 2022. Second, with respect to XHANCE average net revenue per prescription, we expect to see improvement over the remaining three quarters of 2022 and to exceed $220 for the full year of 2022. That's an increase compared to our prior expectation for net revenue per prescription to exceed $210. Finally, for the full year of 2022, we continue to expect total operating expenses to be in the range from $135 million to $140 million, of which approximately $10 million is stock-based compensation. Total operating expenses, excluding stock-based compensation, are therefore expected to be in the range from $125 million to $130 million. Turning to Slide 10. Regarding our chronic sinusitis trials, as Peter discussed earlier, we announced positive top-line results from ReOpen1 in March. For a more in-depth review of those results, our webcasts from the announcement are still available on our website in the investor section. With respect to ReOpen2, we expect those results to be available in June. Our plan for announcing is similar to how we announced top-line results for ReOpen1, in a press release followed by a conference call and presentation. Now I’ll turn the call back over to Peter for closing remarks.

Peter Miller, CEO

Thanks very much, Keith. Before moving to Q&A, I'll take a moment to reiterate that we believe 2022 has the potential to be transformative for our business. We have two very clear objectives: drive revenue growth for XHANCE and successfully complete our pivotal trials in chronic sinusitis. I look forward to providing updates on our progress throughout 2022. Thank you. And now I'd like to open up the call for Q&A.

Operator, Operator

Our first question comes from Stacey Ku of Cowen. Your line is open.

Stacey Ku, Analyst

Hi, good morning. Thanks for taking our questions. We have a few. The first is can you just talk about the broad market as you're seeing offices reopen, we're coming at the pandemic lows. Just the broad chronic sinusitis writing and how XHANCE is doing in relation to that. And we have a few follow-ups.

Peter Miller, CEO

I'll take that. And Vic Clavelli, our Chief Commercial Officer can add any additional comments. But I think what we're seeing is from a patient perspective, there are obviously two factors we look at. The first is our patients returning to offices. And I think it's fair to say on that dimension, we're seeing pretty much a return to pre-COVID. The doctors we're talking to, what we hear from our territory managers is that offices are busy, so on that dimension, I think we're seeing a reasonable return to normal. The second dimension we look at is the accessibility of our reps to be able to promote in offices. And on that dimension, we're still seeing a slower reopening, which is probably the best way to describe it. Vic can comment more than a third thing that actually does impact us a little bit more than we originally expected: there's been pretty significant turnover in office staff in physician offices, and that just creates a little bit more work for our territory managers on the back end of making sure that the prescribing process is managed in the offices. But Vic, I don’t know if you have anything to add.

Vic Clavelli, Chief Commercial Officer

No. That’s a good summary.

Stacey Ku, Analyst

Okay, great. And so we have a few more follow-ups to that. As we think about the XHANCE rating, we see strong kind of repeat prescribing. So how should we think about with your guidance? How it might evolve over the course of the year?

Peter Miller, CEO

I believe it will continue as it has been. We are seeing very strong growth in both breadth and depth. Regarding cadence, Stacey, could you clarify if you are referring to the timing of the writing or something else? I want to ensure I fully address your question.

Stacey Ku, Analyst

Yes. As we think about that revenue guidance of at least $90 million for the year, we obviously have our Q1 sales. So as we think about how it might progress through the year, this is going to be as we think about this more face-to-face interactions with, especially with these repeat prescribers. Are we thinking about kind of a second half where we're really going to see that inflection?

Peter Miller, CEO

Our focus, Stacey, is entirely on driving new scripts. Our model, we really have pretty much consistency that for when we get a new script, we generate roughly four prescriptions per patient per year. So that's sort of improvement over the last couple of years. So, our focus is entirely on generating new prescriptions. As we see continued growth or even acceleration of that, which is caused by multiple factors. The first being the market environment, which I already described. I think there could be more favorability in the back half of the year. We're not necessarily counting on that in our guidance, though, so to be clear. But I think there could be favorability there. What we're seeing, Stacey, is that with a 6% share roughly of the market, we still have so much upside, both in terms of the doctors who are writing more and as well as doctors who aren't writing to be to write. So I think what you can see, is that as our business has been over the past couple of years, very steadily growing new prescriptions, which is driving refills, which drive total TRx.

Keith Goldan, CFO

And Stacey, this is Keith Goldan. If I could just add to Peter's comments, I think you were looking into how we are achieving the $90 million. I want to mention that we posted an average net revenue per script of $183 in this first quarter, representing over 20% growth from last year. We expect that figure to continue growing. Based on what we have seen in previous years, we anticipate a similar trend going forward. Therefore, we expect ongoing growth in that average net revenue per script, which we use as an indicator of the profitability of XHANCE, prompting us to increase our guidance. Initially, we expected the average net revenue per script to be at least $210, but we have now raised that to $220, establishing that as our new expectation.

Peter Miller, CEO

And Stacey, just to add to that. I mean, I'm going to reiterate something we've said in the call about the changes to our Co-Pay Program effective on a day dampening prescriptions. We actually are able to track written prescriptions. And then we're also able to track prescriptions that are filled. The dynamic we have gone on here is that we still have good writing, but we have patients choosing some patients choosing not to fill in the high deductible segment. So I, we feel very good about the achievement of at least $90 million in revenue. We feel very good about our ability to continue to drive new prescription growth.

Stacey Ku, Analyst

Okay, that's very helpful. Thank you very much.

Operator, Operator

Thank you. Our next question comes from Dave Amsellem of Piper Sandler. Your line is open.

Dave Amsellem, Analyst

Thanks. So I just have a couple. First, can you talk about the rate of abandonment, if you will, regarding prescriptions? In other words, with the pair landscaping, what it is? Do you have a sense of the portion of scripts regarding that? That's number one. And then number two, is that metric of about four TRXs per year, that's helpful. Just sort of wondering, though, what the attrition rate is, or if you have a sense of that, what is the extent to which you've got patients that are just falling off over time? Thanks.

Peter Miller, CEO

David, I honestly broke up a little bit on your first question. And I think you were asking about abandonment in the portion of scripts in which there's a backup of my patients. Can you just clarify that question?

Dave Amsellem, Analyst

Yeah, sorry about that. That's correct. Yes. The portion of abandonment scripts that go unfilled.

Peter Miller, CEO

Yeah. So what we're seeing, David, is no change in abandonment among the profitable script portion of our business. What we did see in the first quarter was more abandonment in the high deductible segment that has not yet met a Co-Pay. As we referenced in the call, these are costly scripts for us, because we, in essence through the Co-Pay Assistance Program, in essence fund those scripts through the insurance plans. So that is where we did see a significantly higher level of abandonment than we've seen historically, purposely driven by the changes that we made in the Co-Pay Program. Hopefully, we were clear on that. Regarding four TRXs per year, that's been very consistent, David. Now, I will say the changes in the high deductible plan, we're not going to get as many fills on high deductible patients, which is good because those are unprofitable scripts for us. But relative to the fills in the profitable segment of our business, looking at our data, which we have very granular data, it's been very consistent across the past couple of years.

Dave Amsellem, Analyst

Do you have an attrition rate or an approximate range for attrition?

Peter Miller, CEO

I will say, David, we're very sticky. I mean, we have a significantly high number of patients who, once they get into the product, will remain with the product. They obviously don't fill 12 scripts per year, but they sort of come in and out, if you will, we think based on symptoms. We don't know that, but based on their use more when they're highly symptomatic. But it's hard for us to really calculate patient true abandonment from the beginning of time. But the data we look at, David, says that we're sticky. The thing I'll reiterate about the product, David, and you know this from the last four years you've been covering us, this product works. It doesn't work a little bit better than other products in the area. It works a lot better, as evidenced by the data that we have, and the feedback we get from patients. So it's a sticky product with not significant abandonment.

Dave Amsellem, Analyst

Okay, thanks, Peter.

Peter Miller, CEO

Thank you, David.

Operator, Operator

Thank you. Our next question comes from Gary Nachman of BMO Capital Markets. Your line is open.

Gary Nachman, Analyst

Hey, good morning, guys. So ReOpen1, are there any incremental data points you can share following further analysis of the data such as subgroup analysis between CFS patients with or without nasal polyps? When can we expect to see more data from that study? And then, based on ReOpen1, anything you plan on doing differently with the analysis of ReOpen2, anything you're modifying? And ReOpen2 too, I think that was maybe a consideration. And also, any changes in utilization since the ReOpen1 data? Are you hearing physicians using XHANCE any differently in CFS patients whether with or without nasal polyps?

Peter Miller, CEO

Why don’t you take the first couple, Vic? And then I can probably add other comments on XHANCE.

Vic Clavelli, Chief Commercial Officer

Sure. Happy to. Gary, thanks for the questions. First, with regard to new analysis, we have done a wide range of additional exploratory analyses to better understand the results of ReOpen1. As a result of that, we have not determined that it was desirable to change anything about our planned analysis for ReOpen2, which I think was one of your questions also. With regard to when the data will be released, we have shared data with our scientific steering committee, and with a number of advisors. We expect to release overtime incremental results from the trial in normal scientific settings, at scientific congresses, and in peer-reviewed publications over the course of the latter part of this year. With regard to changes in utilization, I'll just start by saying that we've gotten what we view as very positive feedback from the groups of scientific consultants and advisors that we have shared the results with. They're excited to see the nature of the results that we got in ReOpen1 and very much looking forward to the results of ReOpen2.

Peter Miller, CEO

And I'll add to that, and Vic, you can add anything that you feel could be incremental. What I'm going to say is that we've not broadly shared the information from that trial, Gary. So it's not, most physicians are potentially aware of the data because of press releases or things that they may have seen. But as we've not published the data we plan to this year, the information is probably not broadly well understood by the broader prescribing community.

Gary Nachman, Analyst

Yeah, kind of healing.

Peter Miller, CEO

Yeah, I think Ramy made the most important point in there in saying that most physicians are going to wait until there's some availability of data and the scientific process in order to really incorporate it into their practice. They already have a lot of competence and experience with XHANCE. They're really waiting for formal presentation of that data, and frankly, also FDA review of that data, and will expand their use.

Gary Nachman, Analyst

Okay, great. And then, on those changes in the Co-Pay Program, you've gone back and forth with that in the past. So why do you think now is the right time to do it? And your confidence, it won't dampen Rx’s too much? And I'm curious, are there more patients overall in the high deductible plans now? Is that just a bigger portion of volume than it was maybe a couple of years ago?

Ramy Mahmoud, President and COO

Look, I would say, I don’t know that we've gone back and forth, honestly. I mean, I would say we made an initial change a bunch of years ago right around the launch of the product. And everything since then has been very evolutionary, very sort of modest, if you will. So, you know, as Keith said in his remarks, this is a really modest change from no out-of-pocket expense to $25; that's still a very reasonable cost. And, obviously, what we're balancing, Gary, is, we don't want any changes to sort of have an unintended consequence of dampening physician prescribing because doctors start to hear that, hey, your product is too expensive from an out-of-pocket standpoint. That's why we talked about $25 being the cost of OTC products. It is still a very, very reasonable price. Now, what that has done, though, is it does cause a number of patients to decide not to fill in the high deductible segment to be clear, which we think is a good thing. Relative to the percentage of patients in that high deductible segment, it's really been pretty stable for the past couple of years. I mean, I think it's fair to say it's not dramatically going up or down. Our decision to do this was we really believe we're not going to influence pen to paper, if you will. So physicians' interest in writing it. We will reduce some people filling in the high deductible segment, but because we lose money on those prescriptions, that's going to be a good thing ultimately for the business.

Gary Nachman, Analyst

Okay, that's fair enough. Yeah, that’s fair. I don’t think you want to add.

Peter Miller, CEO

Yeah. The only thing I'll add to that is we do a fair amount of research before any of these tweaks get implemented into the market. So we have a pretty good sense of what the impact on patients and physicians will be. And largely, it's just a function of decrease fills from that high deductible segment. Keith?

Keith Goldan, CFO

Gary, you'll remember that we made a change last year. This change resulted in a positive impact on our average net revenue per prescription throughout the year. From what we can tell, it did not significantly affect physicians' intent to prescribe.

Gary Nachman, Analyst

Okay. And then just lastly, it's related to that, but what you with the specialty pharmacy network? How much volume is going through that? Is it still expanding and helping drive Rx growth? And I guess with some of these changes, like, does that impact how you're thinking about the specialty pharmacy network at all? How does that play into it?

Peter Miller, CEO

Yeah. Well, we think the specialty pharmacy, for example, is really a strong sort of a portion of that new component of how we go to market. But I’ll let you talk and answer Gary's questions.

Keith Goldan, CFO

Yeah. It’s clearly been a competitive advantage for the business to have the preferred pharmacy network operating behind XHANCE. They do a great job, and the vast majority of our prescription volume continues to go through it. We've seen it really be a stable part of our mix since launch.

Peter Miller, CEO

These are things, Gary, we get two benefits there. One is we tend to get more refills for patients through the network, because the pharmacies do a really good job and follow up with patients. The second is, if there are prior authorizations involved, the pharmacies can actually help office staff, instead of making sure that it's as easy as possible on the prescribing side.

Ramy Mahmoud, President and COO

Just a quick note, Keith, just to get a little more granular: over 85% of our gross sales in the first quarter went through a preferred pharmacy network.

Keith Goldan, CFO

We have a very stable network area with several national and regional players. We continuously assess the network based on pharmacy performance and profitability. The team effectively manages this network.

Gary Nachman, Analyst

Okay, that's helpful. Thank you.

Operator, Operator

Thank you. Our next question comes from Brandon Folkes of Cantor Fitzgerald. Your question, please.

Brandon Folkes, Analyst

Hi, thanks for taking my questions. Just two from me. Just following on from your question: Have you seen any change in prescribing other times without nasal polyps since ReOpen1 data one way or the other? And then secondly, as we get past ReOpen2 and the subsequent reduction in R&D, I know you’re catching up its guidance for the year. But going forward, are you expecting to route that reduction in spend back into the business? Or should we think about that dropping to the bottom line? Thank you.

Peter Miller, CEO

I will address the first question, and Keith can handle the second. It's still too early to draw conclusions, Brandon, as the ReOpen1 data is not widely recognized in the market. Therefore, we haven't observed any significant changes in writing beyond specific qualifications. Keith, I will allow you to respond to the second question.

Keith Goldan, CFO

Sure. I think I understood your question even though there were some interruptions. If I miss anything, feel free to ask again. Regarding our R&D expenses, as we wrap up the chronic sinusitis program, we anticipate that next year, our R&D expenditures within operating expenses will significantly reduce. We mentioned in the fourth-quarter call back in March that $23 million of our total R&D spending last year was associated with the chronic sinusitis program. Just to clarify, we currently do not have an R&D program related to that. Therefore, we expect those cost savings to positively impact our bottom line.

Brandon Folkes, Analyst

Sorry, I am here just jumping between two calls.

Keith Goldan, CFO

Hopefully that answered your question.

Brandon Folkes, Analyst

It did. And thank you very much.

Keith Goldan, CFO

Sure, Brandon.

Operator, Operator

Thank you. And at this time, I'd like to turn the call back over to Peter Miller for closing remarks.

Peter Miller, CEO

Well, I just want to thank everyone again for joining the call this morning. Stay tuned. We have some exciting news on the horizon relative to our ReOpen2 trial. So we look forward to following up when that date is available. Thanks very much.

Operator, Operator

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