Earnings Call Transcript - OPTN Q2 2022

Operator, Operator

Good day, and thank you for standing by. Welcome to OptiNose's Second Quarter 2022 Earnings Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker for today, Mr. 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 Second Quarter 2022 performance and our plans for the remainder of the year. I am joined today by our CEO, Peter Miller; our President and Chief Operating Officer, Ramy Mahmoud; and our Chief Commercial Officer, Vic Clavelli. 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 the 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 of OptiNose's most recent Form 10-K and Form 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 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. 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 top-line results from ReOpen2 in the second quarter, and we're pleased with the positive results. We believe the ReOpen program is a landmark in chronic sinusitis, as it is to our knowledge the first Phase III program for nasal treatment and shown improvement on both symptoms and measures of inflammation inside the sinuses. We view this as an important development for the approximately 30 million adults in the United States who suffer from the symptoms of chronic sinus disease, one of the most common chronic diseases among adults in the United States, which is reported to drive 10 million outpatient visits per year. Second, our clinical and regulatory teams are seizing the opportunity created by the ReOpen program to pursue a supplemental approval for XHANCE as a treatment for chronic sinusitis. We are very excited by the potential that a new indication would create, and I will discuss that briefly on the next slide. Third, we implemented a change to our Co-Pay Assistance Program at the start of 2022 to reduce the co-pay assistance we provide for unprofitable prescriptions filled by patients with high deductibles. That change is having the intended effect of reducing the number and proportion of that type of unprofitable prescription, which is driving the 12% increase in average net revenue per prescription for the first six months of 2022 compared to the same period in 2021. Fourth, we revised our guidance for full year 2022 XHANCE net revenues and operating expenses. XHANCE net revenues increased 21% in the first six months of 2022 compared to the same period a year ago. That is strong growth and within reach of our prior guidance, which was at least $90 million in net revenues, which implies at least 22% growth for the full year. We're still working to deliver more than $90 million, but for reasons that I will discuss in a moment, we believe that $85 million to $92 million is the right guidance to provide for full year 2022 at this time. We've also reduced our full year 2022 operating expense guidance by $6 million to offset the reduced expectation for net revenues. Overall, we're taking an approach of smart growth with XHANCE with its current nasal polyp indication while preparing for the much larger opportunity we see with the chronic sinusitis indication. Turning to Slide 5. Our excitement for the ReOpen program centers around the potential that a first-ever indication for the treatment of chronic sinusitis has to significantly increase our target patient population. We anticipate increasing our current diagnosed patient population from up to 1 million patients with nasal polyps, the current indication for XHANCE, to a much bigger patient audience of approximately 10 million by adding those who are already diagnosed with chronic sinusitis. With our current commercial infrastructure, we call on a physician universe focused on ENT and allergy specialists, who treat most of the up to 1 million diagnosed nasal polyp patients. While this is a sizable market that we believe represents a total market opportunity of approximately $1 billion at our current value per patient, a new chronic sinusitis indication would triple the promotionally accessible patient population treated by our current target group of physicians to 3 million, increasing the market opportunity to approximately $3 billion, all of which could be accessed without significant incremental investment in our commercial infrastructure. On top of that, there is an opportunity for a potential partner with the primary care infrastructure. In addition to the 3 million patients currently treated in our specialty physician target audience, there are an estimated 7 million additional patients currently diagnosed and treated by roughly 50,000 to 60,000 additional physicians in primary care. This incremental physician audience and patient population represent an additional market opportunity of approximately $7 billion. For a partner in primary care, there are an additional estimated 20 million patients who suffer from symptoms of the disease, many of whom are likely aware of their diagnosis but have given up on regular physician visits, feeling forced to rely on over-the-counter remedies because they do not believe what their physician has historically been able to offer them for prescription medical treatment, surgery, or repeat surgery will meet their needs. In summary, we believe this dramatic potential expansion of our target audience can be a true game changer for our company in the near term. I'll now turn the call over to Ramy to discuss the results of the ReOpen program and next steps.

Ramy Mahmoud, President and COO

Thank you, Peter. I would like to begin by expressing my gratitude to the clinical research team at OptiNose for their dedication to the ReOpen program. Their hard work, especially during the challenging times of the pandemic, made it possible to complete these trials. The ReOpen1 and ReOpen2 trials have delivered significant results in treating patients with chronic sinusitis. In this and the subsequent slides, I will outline some key efficacy findings from both trials. The first major endpoint we looked at in each of the ReOpen trials was the average change in combined symptom score at week 4. We believe this is crucial because symptom relief is a primary goal in treating chronic sinusitis and helps to clarify the clinical importance of the treatment. Patients began the trials with moderate-to-severe symptoms. In both trials and for both treatment groups, patients using XHANCE showed statistically significant improvement in symptoms compared to those using the placebo. The degree of this improvement aligns with results from the earlier clinical program that led to the FDA's initial approval of the product. Moving to the second endpoint, we assessed the amount of inflammation in the ethmoid and maxillary sinuses using advanced imaging techniques to objectively quantify changes in sinus cavity opacification after 24 weeks of treatment. While imaging changes are not typically used as treatment objectives or for tracking a patient’s response, we consider this second endpoint significant as it indicates whether a treatment effect occurs within the sinuses, separate from effects observed in the nasal cavity in previous reports on nasal polyps. All patients entering ReOpen1 and ReOpen2 were required to show a minimum level of sinus opacification to confirm the presence of disease in the sinuses. In both trials and for both treatment groups, those treated with XHANCE showed statistically significant improvement in sinus opacification compared to the placebo group. We have previously shared images highlighting the clear mean change observed on standard two-dimensional scans. Moreover, our analyses indicate that this mean change was linked to a meaningful improvement in disease perception by the patients, as measured by the patient global impression of change. As mentioned earlier, we believe these results from the ReOpen program represent the first time a Phase III program has demonstrated improvement in both symptoms and sinus inflammation for a nasal therapy targeting chronic sinusitis. Additionally, ReOpen marks the first Phase III program we know of that has demonstrated nasal therapy's effectiveness in significantly reducing the number of acute exacerbations of chronic sinusitis. Like other respiratory conditions, such as asthma and COPD, acute exacerbations are common and can significantly impact patients' lives. Data show that there are over 10 million physician visits for chronic sinusitis each year, with about 70% of those patients receiving antibiotics, making it a leading cause of antibiotic use in outpatient care in the U.S. Frequent use of antibiotics has been shown to negatively affect the quality of life for patients with chronic sinusitis and presents risks to both individuals and the healthcare system. We evaluated the mean frequency of acute exacerbations as a key secondary endpoint using pooled data from ReOpen1 and ReOpen2, tracking acute care escalations during the 24-week treatment period. These escalations typically involved prescribing antibiotics but also included other interventions. We found that patients receiving XHANCE had a statistically significant 66% reduction in the incidence of exacerbations compared to those receiving placebo while using two sprays twice daily. In exploratory analyses, we also found similar reductions ranging from 53% to 80% in patients using one spray per nostril twice daily and in subgroups with or without nasal polyps. This notable reduction in acute exacerbations and associated antibiotic usage could be significant from a regulatory viewpoint and may influence future treatment guidelines. Notably, we observed up to an 80% improvement in chronic sinusitis patients with nasal polyps in the ReOpen2 trial. As for our roadmap for the remainder of 2022, we have scheduled a pre-NDA meeting with the FDA for late September. Our clinical and regulatory teams are actively preparing the sNDA with the goal of submission by the end of 2022, aiming for XHANCE to become the first approved medication for this common condition. I want to remind you that the typical FDA review period for this type of application is 10 months. For more details about the ReOpen program, including baseline characteristics and safety information, I encourage you to watch the replays of the Top Line Results webcast for both ReOpen1 and ReOpen2 available in the Investors section of our website and review our SEC filings. I will now turn the call back over to Peter to discuss our second quarter commercial performance.

Peter Miller, CEO

Thanks, Ramy. Turning to Slide 12. We are pleased with the performance in the second quarter of 2022. As I review the next three slides, there are two things that we believe are important to keep in mind as they frame our year-to-date performance and expectations for the full year of 2022. First is that we implemented a change to our Co-Pay Assistance Program in January 2022, intended to prioritize growth in our more profitable customers and to reduce the number and proportion of unprofitable prescriptions. We believe the year-over-year increase in revenue per prescription is evidence that the co-pay program changes are performing as intended and that the growth rate of profitable prescriptions is greater than the overall growth rates. This is desirable and reflected in our increasing average net revenue per prescription. However, as our business mix has intentionally changed, year-over-year comparisons of total prescription numbers will also be more difficult to interpret correctly until we have moved a year past the co-pay program shift. Second is that we experienced a greater than originally expected level of vacancies within our sales territories and softer-than-expected prescription volumes in June and July. We believe the softer volumes may be the impact of these vacancies and what may have been greater than expected summer seasonal volume declines, but collectively, these factors drove our decision to revise our expectations for full year 2022 XHANCE net revenues. We're optimistic that new hires that are already beginning to fill vacant sales territories over the summer, combined with the return of a normal fall seasonal volume increases for the market versus the suppressed fall season experienced in 2021 due to the Delta variant, will support volume growth. We're also very excited by the novel finding in our ReOpen program that XHANCE treatment resulted in reduced acute exacerbations in nasal polyp patients. As Ramy alluded to, we plan to start actively reaching out to inform physicians about this new data in September. That said, let me now review the results. In the second quarter of 2022, there were approximately 29,200 new prescriptions for XHANCE, a 1% increase compared to the second quarter of 2021, while the market, which includes INS prescriptions written by any physician for any condition, a large component of which are prescriptions for allergic rhinitis, increased 8% over the same period. For the first six months of 2022, there were approximately 57,400 new prescriptions, a 5% increase compared to the first six months of 2021, while the market increased 11% over the same period. Turning to Slide 13. In the second quarter of 2022, there were approximately 87,600 total prescriptions for XHANCE, a 6% increase compared to the second quarter of 2021, while the market increased 4% over the same period. For the first six months of 2022, there were approximately 168,000 total prescriptions, an 8% increase compared to the first six months of 2021, while the market increased 6% over the same period. Turning to Slide 14. XHANCE market share increased from 5.2% in the second quarter of 2021 to 5.6% in the second quarter of 2022. We remain excited about the headroom for future growth as more physicians incorporate XHANCE into their practice of medicine. The breadth and depth of physician prescribing, as measured by the total number of physicians who have patients filling XHANCE prescriptions, continue to increase from the second quarter of 2021 to the second quarter of 2022 as well. Regarding breadth, in the second quarter of 2022, 7,851 physicians had a patient fill at least one prescription of XHANCE, an increase of 9% compared to the second quarter of 2021. Regarding depth, the number of physicians who had more than 15 XHANCE prescriptions filled by their patients in a quarter grew as well, with that number increasing by 6% from the second quarter of 2021 to the second quarter of 2022, with 1,500 physicians now in this segment. I'll now turn the call over to Jonathan to discuss second quarter financial performance.

Jonathan Neely, Vice President of Investor Relations

Thanks, Peter. Turning to Slide 16. As we reported, OptiNose recognized $20.6 million of XHANCE net revenue in the second quarter of 2022, an increase of 12% compared to the second quarter of 2021. Year-to-date, 2022 XHANCE net revenue stands at $35.3 million, an increase of 21% compared to the six months ended June 30, 2021. Turning to Slide 17. As we discussed on our first quarter call, we made a change to our Co-Pay Assistance Program at the start of 2022 that was intended to increase net revenue and average net revenue per prescription by reducing the number of prescription bills by commercially-insured patients and plans that have a high deductible while sustaining the growth rate in covered plans where prescriptions are profitable. Patients who are covered but in a high-deductible plan can end up costing us substantially more as a group than what we received for providing XHANCE. We see good evidence that this change is reducing unprofitable bills in our average net revenue per prescription results. Based on available prescription data purchased from third parties and also on data we received directly from our preferred pharmacy network, XHANCE average net revenue per prescription for the second quarter of 2022 was $235, an increase of 6% compared to the $221 of revenue per prescription in the second quarter of 2021. Year-to-date, 2022 average net revenue per prescription stands at $210, an increase of 12% compared to $188 for the six months ended June 30, 2021. Turning to Slide 18. We have revised our financial guidance for full year 2022 for both net revenues and operating expenses. First, as Peter just discussed, we now expect XHANCE net revenue to be between $85 million to $92 million for the full year 2022. Second, our guidance for XHANCE's average net revenue per prescription is unchanged. We expect to see improvement in the second half of 2022 compared to the first half of 2022 and expect to exceed $220 for the full year of 2022. Third, for the full year of 2022, we now expect operating expenses to be in the range from $129 million to $134 million, of which approximately $9 million is stock-based compensation. Total operating expenses, excluding stock-based compensation, are therefore expected to be in the range from $120 million to $125 million. Previously, we expected operating expenses to be in the range from $135 million to $140 million, and so the improvement of $6 million. Finally, we amended our agreement with Pharmakon to lower the December 31, 2022, trailing 12-month revenue covenant from $90 million to $85 million. We believe this is important to address now, given the change to full year 2022 XHANCE net revenue guidance. I will now turn the call back over to Peter for closing remarks.

Peter Miller, CEO

Thanks, Jonathan. Before moving to Q&A, I'll take a moment to reiterate that overall, we are pleased with the progress we made in the second quarter of 2022 and are laser-focused on completing the necessary work to support an sNDA submission by the end of 2022, and continue to grow XHANCE where we aim for the major potential that we look forward to unlocking with the future CS indication. Now I'd like to open the call up for Q&A.

Operator, Operator

Your first question comes from the line of Brandon Folkes from Cantor.

Brandon Folkes, Analyst

Congratulations on the quarter. Since your Q2 bases have been released, have you noticed an increase in CS usage? I appreciate the update on the guidance range. Can you share any changes in market dynamics regarding volume for the second half of the year that contributed to this? Any insights about CS would be helpful.

Peter Miller, CEO

I’ll address both points and keep Ramy in mind regarding the physician response to the data. First, thank you for your questions, Brandon. We don’t anticipate a significant physician response to chronic sinusitis for a while. We do plan to publish the data from what we consider a landmark trial later this fall. This publication will give our sales representatives an opportunity to inform physicians about the findings. Currently, while our investigators are aware of the data, most physicians are not. In terms of market dynamics, we're quite optimistic about the second half of the year for two reasons. Last year, patient visits were suppressed during the fall allergy season due to the Delta variant, and we have exciting new data regarding acute exacerbations. This leads to the question of why we revised our guidance. As mentioned earlier, we experienced unexpected softness in June and July. However, we believe that as we fill vacant sales territories and return to a normal season, we will see a significant volume correction in the latter half of the year.

Operator, Operator

Your next question is from the line of Gary Nachman from BMO Capital Markets.

Gary Nachman, Analyst

When you file for the expanded indication, what will you be looking for on the label? How broad of an indication? And Peter, if you're in the middle of partnership discussions, would a potential partner want to be part of the filing process or it would strictly be a commercial arrangement for primary care?

Ramy Mahmoud, President and COO

So Gary, thanks for the question. I'll take the first part of that. Our understanding of the FDA's current stance on this is that there are sort of two segments of the total chronic rhinosinusitis space. And with our new filing for the sNDA, we would expect to be indicated for the full range across both of those segments.

Peter Miller, CEO

I'll take the second, Gary, and thanks for the question. I'm not going to comment, Gary, on any discussions we're having with partners. What I can tell you, though, is that if you look normally, typically, deals of our type are done in between data, all the way up through approval. Therefore, there are instances where a partner would be involved in the label discussions. There are also instances where the partner would not be involved in the label discussions. So as I said, I'm not going to comment on where we are in our partnering discussions, but we continue to feel good about getting a partner.

Gary Nachman, Analyst

Okay. And then maybe just talk a little bit more about the vacancy rates in the sales territories you see now. What do you think caused that? How much turnover was there? How many reps have you lost? And how quickly will you be able to fill them? And then the exacerbation data for nasal polyps, how much of an impact do you think that will have once the reps start promoting that?

Peter Miller, CEO

I'll address the vacancy issue. First, I want to mention that we're experiencing turnover in our sales team, but our overall turnover rates are consistent with the pharmaceutical industry averages. This situation isn't out of the ordinary. We just happen to have seen a slight increase during the second quarter. However, I can confirm that we have already hired for nearly all the territories, and I'm genuinely excited about the new representatives joining us. We are attracting a lot of high-quality talent to the company, which I consider completely normal. It just coincidently occurred all at once in Q2. As I mentioned, we've addressed the hiring issue. Regarding the exacerbation data, we will observe the impact, but we're enthusiastic about the initial interactions we're having with physicians. Vic and his team have conducted extensive research to gauge potential responses, and while we need to validate it in the market, we are very optimistic. This is significant news, as Ramy highlighted earlier. The use of antibiotics within this patient population is substantial, and our data indicates a promising potential to reduce that usage. As I said, we are excited and ready to take action to ensure this potential is realized.

Gary Nachman, Analyst

Okay. And can you just remind us how many reps do you think you need to effectively target the ENT and allergists, and then on the primary care side, just rough ballpark, how big of an effort do you think you would need there in terms of size of the sales force to really tap into it?

Peter Miller, CEO

Yes. So Gary, we’re between 90 and 100 is where we’ve been in terms of the territories for the ENT allergy specialty market, and we think that’s the right size. As we – some of what we think is so interesting about the CS indication is that to take advantage of that in the ENT allergy opportunity, we don’t need any expansion of the sales force. We’ve got a terrific sales team, they’re calling on all the doctors who are high prescribers of nasal polyps, but who will also be the high prescribers of chronic sinusitis. So we’re feeling very good. Relative to primary care, it really depends on the breadth you want to go to, Gary. And I want to be clear, we’re not going to build a primary care sales force. We are going to work to partner with someone who has a sales force in the primary care space. If you want to go all the way to the 7 million patients in primary care being treated by physicians, it’s 50,000 to 60,000 primary care doctors. So that’s a sales force of, what, Vic? 600 to 800 territory managers. But obviously, there are ways to go after that, that you don’t necessarily go to the full breadth, but you go after the top deciles. We think a lot of volume in primary care can be captured with 300, 400 territory managers.

Operator, Operator

Your next question is from the line of David Amsellem from Piper Sandler.

Unidentified Analyst, Analyst

This is Isaac on for David. Just two from us. Trying to get a better handle on what patient attrition or conversely persistence looks like. Do you have a sense of what that is, how it's evolving, if at all? And as we move away from the pandemic, could we see persistence rates improve to the extent that more patients are consistently seeing their doctors in person? And then assuming a label expansion in 2023, how do you guys think about the gross to net spreads for XHANCE and payer contracting overall?

Peter Miller, CEO

We are very encouraged by patient persistence. We have a lot of de-identified patient data from our pharmacies, showing a consistent persistence rate. Once a patient starts using the product, we observe a steady number of fills each year and patients tend to stay with it. This is a key factor in building a strong business. I often emphasize that the product truly works; when patients use it, they see improvement, and the data supports this. As more patients return to in-person doctor visits and receive care outside of the pandemic, we see this as a chance for ongoing growth. Now, I'll let Vic address the second question.

Vic Clavelli, Chief Commercial Officer

Yes. I mean, the reason we're excited about a lot of that growth is because it brings new patients in that actually allows us to introduce more patients to XHANCE. And of course, our pharmacy network is particularly good at keeping patients on therapy over time. Your second question is really about the opportunity that chronic sinusitis creates with payers. We’re really enthusiastic about what that's going to mean for the business. In nasal polyps today, there are a number of other products that are indicated for. In chronic sinusitis, there are no other indicated products. The other advantage in chronic sinusitis is both the patients and the physicians readily diagnose chronic sinusitis. They know what it is, and the availability of a treatment is an advantage for those physicians and also for the payers.

Peter Miller, CEO

And by the way, Isaac, the thing I’ll add, Vic, I would agree with everything you said. This acute exacerbation data combined with already a very strong pharmacoeconomic story that we have. And the cost of our medication relative to other options, we think is very attractive for payers. So we’re very confident we’re going to be able to get good coverage with the new indication for the payer universe.

Operator, Operator

Your next question is from Stacy Ku from Cowen.

Stacy Ku, Analyst

Congratulations on the quarter and the progress. We have a few. First on the chronic sinusitis opportunity. So would you first provide an update following the September meeting with the FDA? That's the first question. And then the second is, for that updated sales force leveraging in September, can you discuss if there are any reimbursement issues for patients about nasal polyps? Do they require a few more steps to get approval? We ask because the recent chronic sinusitis results, is that something that they're able to socialize or would that cause friction with reimbursement? And then the third question is on XHANCE. Thanks for all the details on the metrics for Q2. But can you discuss in more detail what you're seeing in Q3 so far? Specifically, are we still expecting some growth quarter-over-quarter?

Peter Miller, CEO

Stacy, thanks very much for the questions. I think it's probably unlikely we're going to provide an update following the FDA meeting. We'll talk about it, I would imagine as part of our normal call in Q3, in the November time frame. Jonathan, I don't know if you have anything to add there?

Jonathan Neely, Vice President of Investor Relations

Yes. I mean, so the timing of our Q3 call would be typically the first or second week of November. I'm not certain that the meeting minutes will come back in time for us to provide an update then. But then certainly, there will be opportunities to update investors subsequent to that.

Peter Miller, CEO

And Stacy, I want to ensure I understand your second question regarding the information we're releasing in the marketplace. I don't believe it will impact reimbursement in any significant way, if that was your question, because we currently have a nasal polyp indication that requires prior authorizations for some of our prescriptions. These prescriptions usually require the physician to confirm a nasal polyp diagnosis. I don't think any of the new data we have will necessarily alter that situation. So Vic, I think you probably agree with that, right?

Vic Clavelli, Chief Commercial Officer

Yes, I do agree with it. So the exacerbations are relevant in the nasal polyp population. They’re very used to thinking about exacerbations in asthma or in COPD and the fact that now there’ll be an opportunity to talk about the chance to improve the rate of exacerbations in chronic sinusitis with nasal polyps as a big advantage for us, so...

Peter Miller, CEO

Yes. And I think you're clear on this, Stacy. The data we have is from our ReOpen1 program, but the data is specific to nasal polyp patients. So it's within our promotional labeling. It just is another good reason to tell us to give the physician for patients they believe are appropriate for our product. It's another good reason to prescribe the product. And finally, on Q3, Jonathan, I don't know if you want to comment on that?

Jonathan Neely, Vice President of Investor Relations

Yes. I mean, I think we really don't have much in terms of complete data for Q3. We're sitting here in August. We have a little bit of information about July. I think what we acknowledge is that the softness in volumes that we saw that drove us to shift the net revenue range to $85 million to $92 million was based on some softness in the June and July time frame, but there's really not too much to the data set for Q3 today.

Operator, Operator

There are no further questions at this time. I would now like to turn the conference back to our presenters for the closing.

Peter Miller, CEO

Well, I just like to thank everybody for joining. As I said in my remarks, we're very excited about the back half of the year, continuing to grow the XHANCE business with our current indication, but most importantly, doing all the work necessary to get the product filed by the end of the year with an indication we think really would be very, very important to patients and also a game-changer for our company. So thanks for joining.

Operator, Operator

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