Earnings Call Transcript - OPTN Q3 2020

Operator, Operator

Ladies and gentlemen, thank you for joining us for OptiNose's Q3 2020 Earnings Call. All participants are currently in listen-only mode. There will be a question-and-answer session following the speaker's presentation. Now, I would like to turn the conference over to Jonathan Neely, VP of Investor Relations. Thank you. Please proceed.

Jonathan Neely, VP Investor Relations

Good morning, and thank you for joining us today as we review OptiNose's third quarter 2020 performance and our plans for the remainder of the year. I'm joined today by our CEO, Peter Miller; our President and Chief Operating Officer, Ramy Mahmoud; our Chief Commercial Officer, Vic Clavelli; and 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 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-Q and Form 10-K 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 very much, Jonathan, and good morning everybody. We appreciate you joining us for our third quarter update. To start, I'd like to commend and thank everybody on the OptiNose team for a strong quarter in which we continued to grow our business in the face of challenges presented by the coronavirus pandemic. While there will likely be continued challenges related to COVID-19, our performance this quarter reinforces my strong belief that with XHANCE, we have a great product and the right team to deliver on its potential to become part of standard of care treatment for a large underserved market. Starting on Slide 3. We'll go into more detail in a moment, but I'd like to start by providing five key takeaways from today's presentation. First, new prescriptions of XHANCE achieved an all-time high in the third quarter after experiencing a challenging environment in the second quarter due to a significant decline in patient volumes in ENT and allergy offices caused by the global pandemic. With increasing patient volumes and in-person promotional activity in the third quarter, new prescriptions increased 23% over the second quarter 2020 and are up 29% compared to the third quarter 2019. Second, our co-promotion with kaleo was underway. Kaleo sales representatives completed XHANCE training in the third quarter and commenced in-person detailing on October 1 leveraging the strong pre-existing relationships that they have with physicians. As a reminder, kaleo is promoting XHANCE to a large audience of office-based healthcare professionals of up to 6,000 prescribers, about half of whom are incremental to the current OptiNose called-on universe. As a result, kaleo sales representatives are both increasing promotional reach and frequency for XHANCE, which historically has correlated with new prescription demand. Having attended a launch meeting alongside Spencer Williamson, the CEO of kaleo, I'm excited by the energy and product enthusiasm that kaleo brings to our partnership and look forward to a productive relationship. Third, we are lowering our financial guidance for operating expenses, and we continue to expect initial results from chronic sinusitis clinical development programs in the second half of 2021. We believe the opportunity for growth that would come from successful development of the CS indication continues to be under-appreciated. Given this perspective, expansion of our label with an indication that has never been achieved by any other drug product could triple the potential on-label patient population for the product and potentially open up the door to reach the substantial number of CS patients that are not seeking treatment by our physicians today due to frustration with the largely ineffective treatments that were available historically. Fourth, we continue to believe that XHANCE has enormous headroom for additional growth. Both our partnership with kaleo and the potential to add the CS indication represent potential new growth drivers. In addition, while our business is performing solidly in the current environment, market conditions have yet to recover. At a high level, total INS market prescription volumes are still below historical levels. At a granular level, the number of face-to-face details our reps are completing with physicians are still below pre-pandemic norms. As face-to-face interactions increase, we believe that will support future growth acceleration. We're also encouraged by the publication of new peer-reviewed data by lead author, Dr. Brent Senior, Chief of Rhinology at the University of North Carolina at Chapel Hill, encouraging healthcare providers to consider nasal polyps and prescribe XHANCE in patients who remain inadequately controlled by conventional inhaled nasal steroids. This population of patients falls squarely in our target. Concurrently, there is increasing public recognition by thought leaders and specialty societies of XHANCE as a distinct and important step in treatment for patients with chronic rhinosinusitis with nasal polyps after they try conventional nasal steroids. And fifth, we have a strong balance sheet with $143 million of cash as of September 30. In addition, we now have the option to draw an additional $20 million from our debt facility as a result of exceeding the $14.5 million XHANCE net sales threshold for the third quarter 2020. Turning to Slide 5. In the third quarter 2020, there were 23,000 new prescriptions for XHANCE, a 23% increase in new prescriptions compared to the second quarter 2020 and a 29% increase compared to the third quarter of 2019, marking the best quarter for XHANCE since launch. After a strong start for XHANCE in the first quarter of 2020, the COVID-19 related collapse of patient flow through our target physician offices negatively affected new treatment initiations in the early part of the second quarter. Following that reset, new prescriptions returned to a strong growth trend which continued in the third quarter. We are encouraged by this performance because new prescriptions drive refills, which currently make up approximately two-thirds of the XHANCE business. As kaleo details begin to have impact and the volume of in-person interactions between our own sales team and physicians continues to increase, we remain confident in our ability to drive growth in new prescriptions. In summary, our overall outlook remains positive as we continue to navigate through these challenging times.

Keith Goldan, CFO

Thank you, Peter, and thank you to everybody joining today. Turning to Slide 10. As we reported, OptiNose recognized $15.4 million of XHANCE net revenue in the third quarter of 2020. As noted on prior calls, 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 during the 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 variability is a result of factors that do not necessarily reflect a change in the price paid for an individual unit of XHANCE, including ordering patterns, inventory levels for our wholesale customers and pharmacies that we sell to directly, utilization rates of patient affordability programs, the proportion of patients acquiring XHANCE through an insurance benefit and other factors. Based on available prescription data purchased from third parties and also on data we received directly from our preferred pharmacy network, XHANCE's average net revenue per prescription for the third quarter of 2020 was $224, a $60 increase compared to $164 in the second quarter of 2020 and consistent with the expectations we communicated previously. For the nine months ended September 30, XHANCE's average net revenue per prescription is $175. Moving to Slide 11. This morning, we are lowering previous guidance for operating expenses and maintaining previous guidance regarding clinical trial timing. First, for the full-year 2020, we are lowering our guidance for operating expenses. We now expect those to be in a range from $127 million to $132 million, of which approximately $10 million is expected to be non-cash stock-based compensation. Total operating expenses, excluding stock-based compensation are therefore expected to be in a range from $117 million to $122 million. Previously, operating expenses were expected to be in the range of $131 million to $136 million, of which approximately $11 million was expected to be non-cash stock-based compensation. Second, regarding our clinical trials with XHANCE in pursuit of a new potential indication for the treatment of chronic sinusitis, while we acknowledge that the worldwide COVID-19 related challenges to trial conduct remain fluid and add some uncertainty, we continue to expect top line results from both trials in the second half of 2021. Third, and this is new, third quarter 2020 XHANCE net revenue exceeded the $14.5 million threshold in our debt facility. As a result, we are now eligible to draw an additional $20 million at our discretion between now and February 15 of next year. We expect to draw the $20 million by early 2021, subject to meeting continuing eligibility requirements. In addition, as a reminder, there is a final $20 million tranche from the debt facility that is available subject to the achievement of XHANCE net revenue of at least $26 million in the second quarter of 2021.

Peter Miller, CEO

Thanks, Keith. Before I make some closing remarks about XHANCE, I want to discuss the OPN-019 program that we announced at the end of June. We have launched this new program to meet a significant need during this pandemic by utilizing our proprietary nasal exhalation delivery system for targeted delivery of a proven antiviral antiseptic deep within the nasal cavity, where the coronavirus can infect. The active ingredient in the broad spectrum antiseptic formulation we are developing has already been shown in peer-reviewed studies to kill the SARS-CoV-2 virus in vitro along with several other pathogens. As we know, COVID is caused by a respiratory virus that often infects individuals through the upper airways, which is why we use masks and practice physical distancing to limit transmission. We believe that by effectively coating the entire surface area of the nasal cavity, particularly areas highly impacted by this virus, we can address a significant barrier to using otherwise promising ingredients to kill the virus. Our EDS may provide a solution in a way that standard approaches like nasal sprays do not. Our earlier research suggested that EDS technology is well suited for distributing medication throughout the deep parts of the nasal cavity, including hard-to-reach areas where the coronavirus seems to be multiplying. We believe the combination of a potent antiseptic with this unique delivery technology could be a successful approach in battling the coronavirus. We envision a safe and effective product that is easy to use at home, aimed at early treatment for people who test positive or for high-risk prophylaxis, serving as a valuable addition to anti-COVID measures both before and after possible vaccines become available. The planned components of this drug-device combination candidate include both an active drug and delivery device currently available commercially in the US, with ample prior data supporting both. Given the urgent need for an intervention like OPN-019, we foresee a streamlined and accelerated development process. Following a pre-IND submission, we have been in discussions with the FDA about the IND and clinical development pathway. Additionally, we have conducted in vitro testing against SARS-CoV-2 with a candidate formulation that achieved a four-log reduction in virus count, which aligns with our expectations. We are also conducting tests against other pathogens and anticipate results in November. We are dedicated to supporting the initial phases of development within our current operating budget and are seeking grants, partnerships, or other capital sources to further support development. While we are excited about the potential of this new drug-device combination to address both the current pandemic and future public health challenges, our primary focus remains on growing XHANCE and establishing a leading ENT and allergy company. As we look ahead to 2021, I am optimistic about our potential. We have just initiated a co-promotion with kaleo to enhance our outreach to physicians, targeting nearly 6,000 prescribers, half of whom are outside our current network. We look forward to providing updates on their progress next year. Additionally, we expect to receive top-line data from our chronic sinusitis trials in 2021 and we are confident we are building a solid business with the nasal polyp indication and can further strengthen our business with the CS indication. CS opens up opportunities for partnerships and expanded commercial efforts. In the near term, we believe there is growing consensus among clinical experts that a stepwise care pathway for patients with chronic rhinosinusitis and nasal polyps can optimize medical treatment. In this pathway, conventional nasal steroids are often the first option, but XHANCE should be considered for patients who do not find conventional treatments sufficient. Given the number of patients receiving treatment and dissatisfaction with current nasal steroids, a wider acceptance of this emerging consensus could significantly benefit XHANCE growth in 2021. Thank you. Now, I would like to open the call for Q&A.

Operator, Operator

First question comes from Stacy Ku with Cowen. Your line is open.

Stacy Ku, Analyst

Hi, thanks for taking my questions and congratulations on a strong quarter. I have a few questions. Could you share your expectations for Q4 regarding the price per script? We saw a significant 30% increase for Q3, so we would appreciate a range you feel comfortable sharing for Q4. My second question is about revenue guidance. While we haven't discussed this, it seems consensus estimates are slightly over $50 million for the year, which appears attainable. Could you share your thoughts on how the current quarter is progressing?

Keith Goldan, CFO

Stacy, good morning, thanks for the question. So with respect to your question on average net revenue per script for the fourth quarter, thanks for the comment on our 3Q performance. I'd just say that the performance was as expected and as we've guided. Going back to 2018, when we launched XHANCE, we've seen gradual increases as the years progressed and for the reasons that we've noted, the underlying market access that we have has remained pretty consistent around 75% and the way we have our co-pay assistance program structured, as you know, what we call the 0-30-50 program, as patients continue to meet either out of pocket maximums or deductibles throughout the year, the amount of money that we contribute to the co-pay assistance decreases thereby increasing our average net revenue per prescription. This year, I would say the one thing that's been different is in reaction to the pandemic, we did put in place what we've talked about publicly as the assist program, which provided up to three prescriptions at no cost to new commercial patients. Again, that was put in place in response to the pandemic. It really helped us achieve record market share in the second and third quarter, and was very well received. We expect that the benefits of getting those patients on board to continue, but it did cost us some average net revenue per prescription in the second quarter. For the fourth quarter, I'll just say, we're not going to give specific guidance, but I'll comment that if you look historically, we've been above $200 per average net revenue per prescription every third quarter and fourth quarter from launch. And, our guidance remains the same that we continue to expect the yearly average net revenue per prescription to increase throughout the year because of the reasons I mentioned earlier. With respect to revenue, we had, if you recall, we had revenue guidance out pre-COVID. We did withdraw that guidance as many companies did in response to the pandemic when we had our 2Q call, I believe, in May. At this point, we're not comfortable putting new guidance out there for the full year. I will point though to the prescription growth that we've continued to see in spite of the pandemic, I think 11% Q2 to Q3 in TRx growth and the continued strength of the average net revenue per script, which I just talked about. So, would keep both of those in mind as you're thinking about what Q4 would look like.

David Steinberg, Analyst

Thanks and good morning. I have three questions. First, can you provide more details on the kaleo collaboration? Are they starting to help generate scripts, or will that begin next year? Regarding refills, what is your current perspective on the average patient refills per year? Lastly, looking a few years ahead, what is your latest estimate on the revenues needed for XHANCE to reach breakeven? Thank you.

Peter Miller, CEO

Thanks, David. I appreciate the questions. As I said in my remarks, David, I'm really excited about kaleo. Their team has built a very strong business with our acute product. So they know how to build a business, they have pre-existing relationships already with roughly 3,000 prescribers they are going to call incrementally in addition to the other audience if it's going to be overlapped with our territory managers. So I'm very excited about it. I think it's going to take some time, David, to really see the impact of kaleo. We're hearing it anecdotally already, for sure, we trained them literally, they really went out on their first calls in early October. So I think as the fourth quarter progresses, I think you'll start to see impact and I think when you will really see impact is across 2021, is my expectation. Regarding refills, again, I'm really encouraged, David, that as a reminder, typical refills in the intranasal steroid category are about two per year. So with typical INS, it's about two refills per year. We came in believing that four was a reasonable target for the product and we have in fact gotten to four, and we're still growing in refills. We're currently between four and 4.5 on a monthly basis and I expect at some point that's going to start to top out David because there just aren’t only so many months in a year, candidly, but it's a really good indication that patients are very satisfied with the product and understand the importance of using it every day, and that's part of the messaging that we work on trying to deliver to patients about proper use of the product. In terms of revenue, looking forward, and to breakeven, it's probably better if I pass that to Keith. So Keith, I'll let you sort of address that.

Keith Goldan, CFO

Yes, David, I want to mention that we have a strong infrastructure in place. Last year, our operating expenses were $125 million, and our updated guidance for this year is between $127 million and $132 million. This means we've maintained basically flat operating expenses for two years. Meanwhile, we expect to grow our revenue significantly. Our infrastructure will continue to provide leverage as we expand XHANCE. We have strong gross profit margins that have historically been in the mid-'80s, and while our expense base will grow modestly, it won’t increase dramatically. We have a lot of leverage on our fixed costs. Considering this, you can estimate what XHANCE needs to achieve to reach a turning point. I'm also pleased you asked about refills because, as we continue to increase new prescriptions, we see a significant number of downstream refills. The combination of growing new prescriptions and a high refill rate, which is anticipated to keep increasing, makes us confident about the business right now.

Peter Miller, CEO

And the last thing I'll add, David, is that we have a pretty heavy investment in R&D, really on the D side this year and next year as we're kind of all-in on the two Phase 3 trials exploring XHANCE for the treatment of chronic sinusitis. Per our guidance, we expect top line data in both of those trials next year. After that, we have R&D optionality, I'll say, so we can either choose to invest in new programs or the expectation should be that our development costs in the R&D line should decrease in '22 and beyond as those trials complete.

Brandon Folkes, Analyst

Hi, thanks for taking my questions and congratulations on the results in the quarter. Maybe just drilling down on the results in the quarter, can you just comment in terms of, do you think there is any benefit from a bolus of patients in terms of return to in-person visits in the ENT space? Just commentary in terms of what you're seeing in that in-person ENT space versus telemedicine post the end of the quarter and how we should think about that going forward? And secondly, maybe, can you revisit that intranasal steroid market? It continues to decline; is that just COVID or are there other factors we should consider? Lastly, on CS, there is a competitor running a trial quite a ways behind you. Do you see that advantage is going to be significant in that space? Do you think in terms of which products get used first is all going to come down to comparative data when they're both on the market?

Peter Miller, CEO

I'll take most of this, and then Keith can add if he wants to. In response to your question about a sudden influx of patients in Q3, I don't believe that happened, Brandon. On the surgical side, there was a healthy return in ENT surgery cases, but overall, there wasn't a significant influx of patients showing up in Q3. We’re encouraged by feedback from physicians indicating that we benefit when patients are seen on clinical days, rather than surgical days, which is why I made that distinction. From what physicians tell us, patient volume on clinical days is not quite back to pre-pandemic levels but is likely around 90%. I had dinner last night with some leading physicians, and they believe there will be a reasonable return of patients, but it was not a sudden influx and did not have a significant impact. As for your question about telemedicine versus in-person visits, in the ENT field, telemedicine isn't widely used because a lot of the value comes from physical examinations, such as endoscopic evaluations of the nasal cavity. So, I don't anticipate much growth in telemedicine for that specialty. In terms of allergy-related telemedicine, there is more utilization, but since allergists often need to administer shots and perform tasks that require office visits, this specialty hasn't fully adopted telemedicine either. The good news is that patients seem to be returning to levels close to historical trends.

Vic Clavelli, Chief Commercial Officer

Peter, I think you summarized that really nicely. I think the nice thing about XHANCE is that there are both clinical reasons why you would choose XHANCE and why you would diagnose nasal polyps. We've certainly been focused on helping physicians understand how they could do that through telemedicine or how they can do that in an office visit. And that's sort of our approach.

Peter Miller, CEO

Regarding the CS, I mean, I think we have two huge advantages in the CS area, Brandon. I think it's based on current timelines assuming that things go well in our trials, we are going to be first, and we will be the first product that we're aware of to ever get that indication. As a reminder, the physician audience that we're calling on treats only about 2.5 million to 3 million of the CRS patients being cared for; there are roughly 7 million patients being treated in a broader physician audience. We believe the CS indication will enable a broadening to that audience. We think ideally via partnership, it also presents an opportunity to get back into the market with roughly 20 million people who are lapsed from physician care. So we think the opportunity for CS just generally is a very big opportunity. I think if things progress the way they are progressing, we will be first and, candidly, Brandon, I just think we are a really optimal treatment for that population. We've established how well we work in chronic rhinosinusitis with nasal polyps is being recognized by physicians more and more and more. The very simple idea is we have an inflammatory condition that is very difficult to reach behind the nasal cavity, and we're reaching it really effectively with our device; it's a very simple, compelling story. So I think we have the advantage of being first and, in my view, obviously a more compelling message.

Rafay Sardar, Analyst

Hi, good morning. It's Rafay on for Gary. I was hoping you could provide an update on XHANCE payer coverage and whether you anticipate any changes heading into 2021?

Peter Miller, CEO

Thanks for the question. I always like to remind people, we really have good payer coverage as we sit here today. As I've made this several times, Vic Clavelli has joined us from Pfizer, where Vic was running a very big business at Pfizer, and one of the things that impressed him was the coverage that we've achieved on the product. So, as a reminder, we have 75% to 80% of commercial lives with XHANCE as a covered benefit. Having said that, we see wins on the horizon to actually increase that. I think I can discuss some wins we had just recently, right, Keith? So, Blue Cross Blue Shield of Florida, we just picked up coverage in October of this year. Florida is a very significant market for our business. So that's a great win that the team just recently achieved, and in some of the conversations that we're having with payers, as I mentioned in the call, we're really encouraged by the thought leader community in Rhinology, really recognizing how XHANCE fits in the treatment paradigm for this disease more and more and more. As that more and more gets recognized, there have been publicly some of the societies that have talked about a consensus algorithm in their meetings, and we believe if that becomes more and more public, that gives us really good ammunition to go talk to the payers because it's recognition by the thought leaders in the community of how to treat this disease, and we have line of sight to continue to grow that 75% to 80% commercial coverage and continue to expand coverage in Medicare and Medicaid. So, we do see improvement in that across next year. It's been really effective. We had two waves of it. Unfortunately, it got interrupted by the pandemic. So we had a couple of hundred physicians that we got into the program in the first quarter of this year, and we now have several hundred more that we enrolled in the program in the third quarter of this year as we sort of got back post-pandemic, and I'm really encouraged by, in terms of its impact. It's a little bit too early to read the real impact, but as a reminder of that program, we specifically targeted physicians we call dabblers. So, these are physicians who are writing the product; they're just not writing it in the group that we want to get people into—that 15 or more XHANCE prescriptions in a quarter. So the goal is to move physicians from dabbling—not being committed users—to being committed users, and the real sort of ammunition we have on that is that we have an opt-in on the patient side on a survey of how they're doing post-treatment of XHANCE. That data is data that we are able to share with physicians obviously HIPAA-protected and confidential, and we're hoping that may have a real impact on physicians seeing the efficacy and the results in their own patients in addition to all the efficacy data that we share from our pivotal trials. So, it's a little bit too early to honestly read it, because the way we're reading it is not how many prescriptions were written during the timeframe; we're looking at does it increase prescribing once the explorer patients have completed the roughly three to six months. Early indications in the several hundred they've started running in the third quarter, it looks like it's having an impact. But it's a little bit too early to tell.

Unidentified Analyst, Analyst

Hi, this is Zack on for David. Thank you for taking my questions. Just a couple of quick ones from me. First, could you provide an update on the current split between prescriptions written for patients with nasal polyps and those with chronic sinusitis? And then also just following up on the reimbursement front, could you just remind us of where you are on the Medicare Part D side? I think I remember you mentioned previously that you were working the asset update on that front would be helpful. Thank you.

Peter Miller, CEO

We haven't seen any significant changes in the share of business between nasal polyps and other conditions over the past year and a half. About a third of the business is related to nasal polyps according to our dataset, although it's worth noting that this dataset may not be completely accurate since physicians may not always specify whether a patient has nasal polyps, chronic rhinosinusitis, or allergic rhinitis. Thus, a patient diagnosed with chronic rhinosinusitis might actually have nasal polyps. In the dataset, roughly a third of prescriptions are for nasal polyps, while about two-thirds are for other conditions. Regarding Medicare Part D, we have decent coverage, with more than half of prescriptions being covered, but we hope to improve that further. However, I don't expect to see significant improvements in Medicare Part D in the early part of 2021; I believe we'll see a real impact in 2022. It's important to note that Medicare Part D is not a major segment of our overall business for intranasal steroids; our primary focus is on the commercial side. Okay. With that, I want to thank everybody for joining us on the call. As I said, we're really excited about sort of what lies ahead for the Company and we look forward to talking to you next year.

Operator, Operator

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