Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 6, 2023. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties and should be read together with the “Risk Factors” section of this Quarterly Report on Form 10-Q for a discussion of important factors that could cause actual results to differ materially from the results described in, or implied by, the forward-looking statements contained in the following discussion and analysis.
Overview
We are a biopharmaceutical company focused on the formulation, development, and commercialization of innovative therapies for diseases and conditions of the eye using our proprietary bioresorbable hydrogel-based formulation technology which we refer to as ELUTYX. Our mission is to build an ophthalmology-focused biopharmaceutical company that capitalizes on the gaps that we believe increasingly exist in the ophthalmology sector between single-product companies and large, multi-product pharmaceutical companies.
Our current products and product candidates in clinical development generally incorporate therapeutic agents that have previously received regulatory approval from the U.S. Food and Drug Administration, or FDA, including small molecules, into our proprietary bioresorbable hydrogel-based formulation technology ELUTYX, with the goal of providing local programmed release to tailor the duration and amount of the therapeutic agent to be delivered to the eye. We believe that our local programmed-release drug delivery technology has the potential to enable the treatment of conditions and diseases of both the front and the back of the eye and can be administered through a range of different modalities including intravitreal implants, intracameral implants and intracanalicular inserts. We are also developing alternative formulations of certain of our products and product candidates that may include the same FDA-approved therapeutic agents or a different form thereof, or a different form of the bioresorbable hydrogel-based formulation technology.
The hydrogel technology that underpins ELUTYX has been used in the human body since 1992 and has demonstrated its safety and effectiveness in over 5 million patients across five FDA-approved devices since that time. Our own approved product, DEXTENZA, has been used in nearly 300,000 eyes since launch with reported adverse events in less than 1 in 10,000 patients. As a result, we believe that the ELUTYX technology is well tolerated and enables the ideal polymer for a product candidate like OTX-TKI. The only factors that regulate the bioresorption of our ELUTYX polymer are temperature and pH of the aqueous environment. As human body temperature and pH of the human aqueous environment are within a typical range for each human, and since water levels in essentially all retinas are generally sufficient to saturate our polymer matrix, we believe we can program the time to bioresorption so the polymer will be intact long-enough to deliver the active pharmaceutical ingredient and then be fully bio-resorbed when re-dosing is required. The added benefits of not creating an acidic micro-environment, its easy elimination from the vitreous leaving behind no harmful byproducts, and its soft gel properties give added comfort to the safety profile. This technology would potentially provide solutions not only for the durable therapies for wet age-related macular
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degeneration, or wet AMD, to decrease the injection burden, but also for the other retinal indications which need frequent injections, like geographic atrophy.
We are currently commercializing DEXTENZA, an intracanalicular insert for the treatment of both post-surgical ocular inflammation and pain and ocular itching associated with allergic conjunctivitis, in the United States. We also have product candidates in clinical and preclinical development:
● OTX-TKI, an axitinib intravitreal implant being developed for the treatment of wet age-related macular degeneration, or wet AMD, non-proliferative diabetic retinopathy, or NPDR, and other retinal diseases;
● OTX-TIC, a travoprost intracameral implant being developed for the reduction of intraocular pressure, or IOP, in patients with primary open-angle glaucoma, or OAG, or ocular hypertension, or OHT;
● OTX-DED, a dexamethasone intracanalicular insert being developed for the short-term treatment of the signs and symptoms of dry eye disease;
● OTX-CSI, a cyclosporine intracanalicular insert being developed for the chronic treatment of dry eye disease;
● A complement inhibitor program in preclinical development for the treatment of dry age-related macular degeneration, or dry AMD; and
● A gene delivery program in preclinical development using our proprietary bioresorbable hydrogel technology ELUTYX to control the release of vectors such as adeno-associated virus to ocular tissues for the treatment of inherited and acquired ocular diseases, including dry or wet AMD.
Clinical Portfolio
Retinal Diseases
OTX-TKI (axitinib intravitreal implant)
Our product candidate OTX-TKI is a preformed, bioresorbable hydrogel fiber implant based on our ELUTYX technology incorporating axitinib, a small molecule TKI with anti-angiogenic properties delivered by intravitreal injection and designed for a duration of six months or longer. We are conducting a Phase 1 clinical trial in Australia and a Phase 1 clinical trial in the United States to evaluate OTX-TKI for the treatment of wet AMD. Our implants have delivered anti-VEGF compounds in vitro over a targeted nine to twelve month period. We are delivering the implant through a 25 gauge or narrower needle and designed OTX-TKI to create a re-treatment window when an effective dose of axitinib is still getting to the target tissues after full bioresorption of the initial implant. This would ensure that the vitreous would never have more than one implant at any one time and that the patient would have some leeway in scheduling an appointment to be re-dosed. We are also conducting a Phase 1 clinical trial in the United States to evaluate OTX-TKI for the treatment of NPDR, which we refer to as the HELIOS clinical trial.
We are conducting our two Phase 1 trials of OTX-TKI for the treatment of wet AMD with different formulations of axitinib. We currently intend to move forward into pivotal trials with our single 600 µg axitinib implant formulation of OTX-TKI for both the treatment of wet AMD and the treatment of NPDR. We are also developing a second formulation of OTX-TKI that could be used in future trials of retinal indications.
Wet Age-Related Macular Degeneration (wet AMD)
In February 2023, we announced interim 10-month data from the ongoing Phase 1 clinical trial of OTX-TKI in the United States at the Angiogenesis, Exudation, and Degeneration 2023 Annual Meeting. The trial enrolled a total of 21 subjects at six clinical sites, comprising two arms consisting of subjects previously treated with, and responsive to, standard of care anti-VEGF therapy: a 16-subject arm receiving OTX-TKI in combination with a single anti-VEGF injection at month one and a five-subject arm receiving on-label aflibercept at eight-week intervals. The trial is designed to assess the safety, durability and tolerability of OTX-TKI as well as to assess preliminary biological activity in subjects by measuring anatomical and functional changes. As of the December 12, 2022 cut-off date, the interim data showed that
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the single 600 µg OTX-TKI implant was generally well tolerated with no drug-related ocular or systemic serious adverse events, or SAEs, observed through 10 months. One SAE of endophthalmitis was observed in the OTX-TKI arm which occurred following the aflibercept injection required by the clinical trial protocol at month one and was assessed by the investigator as related to the injection procedure. There were no instances of elevated IOP, retinal detachment, retinal vasculitis, or implant migration into the anterior chamber observed in the OTX-TKI arm, and no subjects had dropped out of either arm as of the data cutoff.
The interim results showed subjects treated with a single OTX-TKI implant demonstrated stable and sustained best corrected visual acuity, or BCVA, (mean change from baseline of -0.3 letters) and central subfield thickness, or CSFT, (mean change from baseline of -1.3 µm) in the OTX-TKI arm at 10 months, which was comparable with the aflibercept arm (mean change from BCVA baseline of -0.8 letters; mean change from CSFT baseline of -4.5 µm). Up to Month 10, 73% of subjects remained rescue-free. One subject, the subject who experienced endophthalmitis, was rescued twice. Overall, a 92% reduction in treatment burden (average percent decrease in monthly injections over the period compared to the subjects’ historical injection regimen) was observed in OTX-TKI treated subjects for up to 10 months. Four subjects were rescued in the OTX-TKI arm up to Month 10. One additional subject was rescued at that subject’s Month 10 visit.
In April 2023, we presented an update on OTX-TKI at the 2023 Association for Research in Vision and Ophthalmology (ARVO) Annual Meeting that covered preclinical pharmacokinetics, or PK, and a review of the 10-month interim data from the ongoing Phase 1 clinical trial of OTX-TKI in the United States, including OTX-TKI implant resorption data to date. We augmented the results from our ongoing clinical trial with PK data in two animal models showing the uptake of axitinib from our hydrogel implant in the choroid and retinal pigment epithelium, or RPE, cells, where axitinib acts intra-cellularly to exert its VEGF receptor inhibiting effect. That data showed that clinically representative formulations of OTX-TKI delivered sustained axitinib concentrations through 12 months that were well above the IC50 for VEGFR-2 (vascular endothelial growth factor receptor) in cynomolgus monkey retina tissue and choroid/RPE tissues. This preclinical PK data aligns with the pharmacodynamics data we have observed to date in our ongoing U.S. clinical trial, namely the high proportion of rescue-free subjects up to Month 10 and suggests that OTX-TKI may provide continuous VEGF receptor inhibition, which, in turn, may support this new treatment paradigm, Treat to Maintain, in wet AMD care.
In June 2023, we presented 12-month data from the ongoing Phase 1 clinical trial of OTX-TKI in the United States at the Clinical Trials at the Summit 2023 conference sponsored by the American Society of Retina Specialists. As of the April 14, 2023 cut-off date, there were no drug-related ocular or systemic SAEs observed in the OTX-TKI arm except for the one SAE of endophthalmitis that we announced at the 10-month data readout February 2023 that was observed in the OTK-TKI arm and was assessed by the investigator as related to the injection procedure. There were no retinal detachment, retinal vasculitis, or implant migration into the anterior chamber adverse events observed in the OTX-TKI arm, and no subjects had dropped out of either arm as of the data cut-off. The results showed subjects treated with a single OTX-TKI implant continued to demonstrate sustained BCVA (mean change from baseline of -1.0 letters) and CSFT (mean change from baseline of +20.2 μm) in the OTX-TKI arm at 12 months, which was comparable with the aflibercept arm (mean change from BCVA baseline of +2.0 letters; mean change from CSFT baseline of -2.2 μm). Sixty percent of OTX-TKI subjects were rescue-free up to Month 12. At the Month 12 visit, an additional four of the subjects were rescued. Overall, an 89% reduction in treatment burden was observed in OTX-TKI treated subjects at 12 months. These results align with our expectation that we would see a reactivation of disease in some patients, which we believe indicates that OTX-TKI continues to function as designed with axitinib concentrations beginning to fall below therapeutic levels after the implant bioresorbs.
We intend to initiate our first of two planned pivotal trials in wet AMD in the third quarter of 2023. This pivotal clinical trial will be a prospective, multi-center, randomized, parallel-group trial that will be run primarily at sites in the United States. The pivotal clinical trial will be a superiority trial that is designed after extensive discussions with the key opinion leaders and is within the FDA’s current wet AMD draft guidelines. We plan to enroll approximately 300 wet AMD subjects who are treatment naïve in the study eye in this clinical trial. It will compare a single implant of OTX-TKI to a single injection of aflibercept and assess the safety and efficacy of OTX-TKI in subjects with wet AMD by measuring BCVA and CSFT.
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Non-Proliferative Diabetic Retinopathy (NPDR)
Given our belief in the potential applicability of OTX-TKI to other retinal diseases, we initiated the HELIOS clinical trial to evaluate OTX-TKI for the treatment of NPDR in the fourth quarter of 2022 and dosed our first patient in February 2023. In June 2023, we announced completion of enrollment in the HELIOS clinical trial. We are conducting the HELIOS Phase 1 clinical trial initially under an exploratory Investigational New Drug Application, or eIND. In the HELIOS clinical trial, we have enrolled 22 subjects with diabetic retinopathy secondary to type 1 or type 2 diabetes who had not had an anti-VEGF injection in the prior 12 months or diabetic macular edema, or DME, in the prior six months, randomized 2:1 to either a single 600 µg implant of OTX-TKI or sham control across approximately 10 sites. We anticipate disclosing interim 6-month data from the HELIOS clinical trial in the first quarter of 2024.
We have been in discussions with the FDA for the clinical development of OTX-TKI for the treatment of NPDR and have a potential pivotal clinical trial design that is consistent with guidance from the FDA. Subject to favorable interim data from the ongoing HELIOS clinical trial and obtaining the necessary financing to fund the trial, we expect to be prepared to initiate a pivotal clinical trial for NPDR as early as the first quarter of 2024.
Glaucoma Program
OTX-TIC (travoprost intracameral implant)
Our product candidate OTX-TIC is a bioresorbable hydrogel implant based on our ELUTYX technology incorporating travoprost, an FDA-approved prostaglandin analog designed to lower elevated IOP, that is designed to be administered by a physician as an intracameral injection with an initial target duration of drug release of four to six months with a single treatment.
In February 2022, we presented interim data from a Phase 1 clinical trial evaluating OTX-TIC for the treatment of OAG or OHT. The clinical trial is designed to evaluate the safety, biological activity, durability and tolerability of OTX-TIC in subjects with controlled OAG or OHT. The clinical trial consisted of four patient cohorts: cohort 1 included five subjects who received a 15 μg dose, cohort 2 included four subjects who received a 26 μg dose, cohort 3 included five subjects who received a 15 μg dose with a fast-degrading implant, and cohort 4 included five subjects who received a 5 μg dose with a fast-degrading implant.
In the Phase 1 clinical trial, at least one subject in each of the four cohorts receiving OTX-TIC were observed to experience a mean change in IOP from baseline as measured at 8:00 am, 10:00 a.m. and 4:00 p.m. as early as two days following injection. We believe these results were comparable to the decrease in IOP achieved with topical travoprost administered via daily eye drops, the current standard of care. IOP lowering effects lasted more than six months in most of the subjects in cohorts 1 and 2 and approximately three to six months in subjects in cohorts 3 and 4. We believe, based on these results, that OTX-TIC shows potential as a sustained-release therapy with a long duration of action.
We initiated a Phase 2 clinical trial evaluating the safety, tolerability and efficacy of OTX-TIC for the treatment of patients with primary OAG or OHT in the fourth quarter of 2021 and dosed the first subject in the first quarter of 2022. The Phase 2 clinical trial was designed to include approximately 105 subjects at 15 to 20 sites between three arms of approximately 35 subjects each to evaluate two formulations of OTX-TIC for the treatment of OAG or OHT in subjects compared to DURYSTA. The non-study eye of each subject will receive a topical prostaglandin daily. The primary efficacy endpoint is measured by diurnal IOP mean change from baseline (8 a.m., 10 a.m. and 4 p.m.) at two, six and 12 weeks. One arm in the Phase 2 clinical trial is receiving the same formulation used in cohort 2 of the Phase 1 clinical trial, containing a 26 µg dose of drug and utilizing a standard implant. The second arm was receiving the same formulation used in cohort 4 of the Phase 1 clinical trial, containing a 5 µg dose of drug and utilizing a fast-degrading implant. The active comparator control arm will receive one injection of DURYSTA in one eye and a topical prostaglandin daily in the non-study eye. Due to elevations in IOP observed in six subjects in the OTX-TIC 5 µg arm of the trial approximately 12 weeks after enrollment, we terminated enrollment in the 5 µg arm of the trial in the fourth quarter of 2022 and are continuing forward with the OTX-TIC 26 µg and DURYSTA arms of the trial. We expect that the Phase 2 clinical trial will consist of approximately 86 patients: approximately 35 patients in the OTX-TIC 26 µg treatment arm, 35 patients in the DURYSTA arm and approximately 16 patients that were previously enrolled in the OTX-TIC 5 µg treatment arm. Enrollment of the Phase 2 clinical trial was completed in July 2023. We have started a pilot repeat-dose sub-study in the Phase 2 clinical trial that to evaluate the safety of a repeat, sustained release dose of OTX-TIC 26 μg, in a small subset of subjects with OAG or OHT. These subjects will be followed for at least 6 months
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after their enrollment in the sub-study to monitor and evaluate their endothelial cell health. We plan to provide topline data from the single-dose portion of the Phase 2 clinical trial, assessing the efficacy and durability of OTX-TIC and the preservation of endothelial cell health that could make the drug suitable for chronic dosing, in the first quarter of 2024.
If our Phase 2 clinical trial is successful and subject to obtaining the necessary financing, we would then plan to conduct two well-controlled pivotal clinical trials under an Investigational New Drug Application, or IND.
In April 2023, we presented a poster on OTX-TIC at the 2023 Association for Research in Vision and Ophthalmology (ARVO) Annual Meeting that covered data around the preclinical safety and tolerability of repeated intracameral travoprost implant (OTX-TIC) administrations.
Ocular Surface Disease Programs
Dry Eye Disease
OTX-DED (dexamethasone intracanalicular insert)
Our product candidate OTX-DED incorporates the FDA-approved corticosteroid dexamethasone as a preservative-free active pharmaceutical ingredient in a hydrogel, drug-eluting intracanalicular insert based on our ELUTYX technology. OTX-DED incorporates the same active drug as DEXTENZA but includes a lower dose of the drug, is administered in the office setting as a smaller insert and is designed to release dexamethasone over a period of two to three weeks, compared with up to thirty days in the case of DEXTENZA.
We announced the topline clinical results from a Phase 2 clinical trial evaluating two different-strength formulations of OTX-DED (0.2 mg and 0.3 mg of dexamethasone) versus a hydrogel implant in a total of 166 subjects with dry eye disease, with more than 50 subjects per arm, in December 2021. The subjects were followed for approximately two months after randomization. This trial was designed to assess the safety and efficacy of these two formulations of OTX-DED for the short-term treatment of signs and symptoms of dry eye disease. The clinical trial achieved its pre-specified primary endpoint. Although the clinical trial was not powered to show statistical significance, the topline results demonstrated a statistically significant change of bulbar conjunctival hyperemia from baseline to day 15 compared to the vehicle hydrogel using a central reading photographic assessment in the modified ITT population. Both formulations of OTX-DED were generally observed to have a favorable safety profile and be well tolerated.
Based on the data from the Phase 2 clinical trial, we initiated a small trial in connection with our efforts to develop an appropriate placebo comparator that may be used in both the OTX-DED and OTX-CSI programs in the second quarter of 2023. This trial evaluates the performance of OTX-DED versus placebo inserts, namely fast-dissolving, biodegradable collagen plugs, and no inserts at all, to explain the placebo performance seen in the Phase 2 clinical trials evaluating both OTX-DED and OTX-CSI in which the vehicle hydrogel placebo insert or placebo comparator vehicle remained in the canaliculus longer than anticipated, performing more like an active comparator than a placebo. We plan to use the results of this trial to inform the next steps for both the OTX-DED and OTX-CSI programs.
OTX-CSI (cyclosporine intracanalicular insert)
OTX-CSI incorporates the FDA-approved immunomodulator cyclosporine as a preservative-free active pharmaceutical ingredient into a hydrogel, drug-eluting, intracanalicular insert based on our ELUTYX technology. The product candidate is designed for subjects suffering from moderate to severe dry eye and to be administered by a physician as a bioresorbable intracanalicular insert. OTX-CSI is designed to release cyclosporine to the ocular surface for approximately three to four months in order to increase tear production for the chronic treatment of dry eye disease.
In October 2021, we announced topline results from a Phase 2 clinical trial designed to assess the safety, tolerability and durability and to evaluate the efficacy of OTX-CSI in the chronic treatment of dry eye disease. The Phase 2 clinical trial evaluated two different formulations of OTX-CSI compared with a hydrogel vehicle insert in approximately 140 subjects who were followed for a period of 16 weeks (12-week study period, with an additional 4-week safety follow-up). The study did not show separation between the subjects receiving OTX-CSI (two formulations) and the subjects receiving the vehicle (both formulations) for the primary endpoint of increased tear production at 12 weeks as measured by the Schirmer’s Test. Overall, the OTX-CSI insert (both formulations) was generally observed to have a favorable safety profile and be well tolerated.
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We are continuing formulation work to extend the durability of the OTX-CSI insert and select the most appropriate formulations to move forward. If we determine to advance the program, we believe we could advance the program to pivotal trials subject to discussions with the FDA.
Commercial Portfolio
Post-Surgical Ocular Inflammation and Pain
Ocular Itching Associated with Allergic Conjunctivitis
DEXTENZA (dexamethasone intracanalicular insert)
DEXTENZA incorporates the FDA-approved corticosteroid dexamethasone as a preservative-free active pharmaceutical ingredient into a hydrogel, drug-eluting intracanalicular insert based on our ELUTYX technology. Following FDA approval, we commercially launched DEXTENZA for the treatment of post-surgical ocular inflammation and pain in July 2019. DEXTENZA is the first FDA-approved intracanalicular insert delivering dexamethasone to treat post-surgical ocular inflammation and pain for up to 30 days with a single administration.
In October 2021, the FDA approved our supplemental New Drug Application, or sNDA, for DEXTENZA to include the treatment of ocular itching associated with allergic conjunctivitis as an additional indication. We commercially launched DEXTENZA for the treatment of ocular itching associated with allergic conjunctivitis in the first quarter of 2022 utilizing a small, dedicated and highly focused sales force. In the fourth quarter of 2022, we redeployed this small sales force to join the DEXTENZA sales force focused on the ophthalmic surgery market, specifically cataract surgery, in ambulatory surgery centers, or ASCs, and hospital outpatient departments, or HOPDs, as we believe that DEXTENZA is currently used in less than 5% of cataract procedures. We believe that cataract surgeries represent a larger, near-term market opportunity and a faster return-on investment.
In September 2020, we announced that we had dosed the first pediatric subjects in a U.S.-based, randomized, multicenter Phase 3 clinical trial evaluating DEXTENZA for the treatment of post-surgical ocular inflammation and pain in children following cataract surgery. This clinical trial is a post-approval requirement of the FDA in accordance with the Pediatric Research Equity Act of 2003, in connection with the FDA’s prior approval of DEXTENZA for the treatment of inflammation and pain following ophthalmic surgery in adults.
AffaMed License Agreement
In October 2020, we entered into a license agreement and collaboration with AffaMed Therapeutics Limited, or AffaMed, for the development and commercialization of DEXTENZA and OTX-TIC in mainland China, Taiwan, Hong Kong, Macau, South Korea, and the countries of the Association of Southeast Asian Nations. Under the terms of the agreement, we received an upfront payment of $12 million and became eligible to receive development, regulatory and commercial milestone payments and clinical development support payments of up to $91 million in the aggregate, as well as royalties from future product sales. In the fourth quarter of 2021, we received a $1 million milestone payment upon the approval by the FDA of an sNDA for DEXTENZA to include the treatment of ocular itching associated with allergic conjunctivitis as an additional indication; and in the second quarter of 2022, we received a $2 million clinical support payment in connection with dosing the first subject in a Phase 2 clinical trial evaluating OTX-TIC for the treatment of OAG or OHT. In April 2023, AffaMed announced that China’s National Medical Products Administration, or NMPA, had approved AffaMed’s Clinical Trial Application to initiate a Phase 3 registrational study in China to investigate the efficacy and safety of DEXTENZA in subjects following ophthalmic surgery. The approval triggered a $1 million milestone payment that we received in June 2023. Royalties are tiered and will range from the low teens to low twenty percent range. In return, we agreed to grant AffaMed exclusive rights to develop and commercialize DEXTENZA for the treatment of postsurgical inflammation and pain following ophthalmic surgery and ocular itching in patients with allergic conjunctivitis, and OTX-TIC for the reduction of elevated IOP in patients with primary OAG or OHT in specified Asian markets. We retain the right to develop and commercialize DEXTENZA and OTX-TIC in all other global markets.
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Financial Position
Our ability to generate product revenues sufficient to achieve profitability will depend heavily on our continued commercialization of DEXTENZA for the treatment of ocular inflammation and pain following ophthalmic surgery and for the treatment of ocular itching associated with allergic conjunctivitis, and our development and commercialization of other products with significant market potential, including OTX-TKI for the treatment of wet AMD, NPDR, and other retinal diseases, OTX-TIC for the treatment of OAG or OHT, OTX-DED for the short-term treatment of the signs and symptoms of dry eye disease, and OTX-CSI for the chronic treatment of dry eye disease. Our net loss was $20.7 million and $51.0 million for the three and six months ended June 30, 2023, respectively. Our net loss was $18.8 million and $31.3 million for the three and six months ended June 30, 2022, respectively. As of June 30, 2023, we had an accumulated deficit of $667.8 million.
Our total costs and operating expenses were $35.8 million and $71.7 million for the three and six months ended June 30, 2023 including $5.1 million and $10.1 million in non-cash stock-based compensation expense and depreciation and amortization expense, respectively. Our total costs and operating expenses were $32.2 million and $63.2 million for the three and six months ended June 30, 2022 including $4.8 million and $9.6 million in non-cash stock-based compensation expense and depreciation and amortization expense, respectively. Our operating expenses have grown as we continue to commercialize DEXTENZA; pursue the clinical development of OTX-TKI, OTX-TIC, OTX-DED, and OTX-CSI; and research and develop other product candidates. We expect to incur substantial sales and marketing expenses in connection with the ongoing commercialization of DEXTENZA and any commercialization efforts for any other product candidate for which we may receive approval. We expect to incur substantial research and development expenses in connection with our planned pivotal clinical trial for OTX-TKI for the treatment of wet AMD and any other planned clinical trials that we may initiate for OTX-TKI or other product candidates.
Although we expect to continue to generate revenue from sales of DEXTENZA, we will need to obtain substantial additional funding to support our continuing operations, including the commercialization of DEXTENZA and the clinical development of our product candidates. If we are unable to raise capital or access our borrowing capacity when needed or on attractive terms, we could be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts or to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us.
All of our product candidates are designed to be medical-benefit “buy-and-bill” products with associated procedure codes. Products with these characteristics are designed to be attractive not only to physicians, optometrists, and patients but also to the sites of care that participate in utilization. We primarily derive our product revenues from the sale of DEXTENZA in the United States to a network of specialty distributors, who then sell DEXTENZA to ambulatory surgery centers, or ASCs, hospital out-patient departments, or HOPDs, and physicians’ offices. In addition to distribution agreements with specialty distributors, we enter into arrangements with government payors that provide for government-mandated rebates and chargebacks with respect to the purchase of DEXTENZA. During 2022, we adjusted our discounting strategy to meet the demands of the market. In the third quarter of 2022, we implemented an off-invoice discount program whereby providers receive the discounted price immediately upon purchase, rather than having to wait until the end of the quarter for a rebate payment. We renewed our focus on sales to ASCs and specifically strategic accounts that own and control multiple ASCs. In the first quarter of 2023, we launched a Commercial Assurance Program to provide assistance with patients’ out of pocket costs, supporting the expansion of DEXTENZA for commercially insured patients not covered by government payors.
In-market unit sales figures—unit sales from specialty distributors to ASCs and HOPDs—in the second quarter of 2023 were in excess of 36,000 billable units, compared to more than 25,000 billable units in the second quarter of 2022, representing an increase of approximately 40%, and compared to more than 34,000 billable units in the first quarter of 2023, representing an increase of approximately 6%. As of June 30, 2023, we have achieved market access coverage of 100% coverage in Medicare Part B, over 90% coverage in Medicare Advantage, and over 70% coverage on the commercial payor side. In-market unit sales for July 2023 were approximately 10,800 billable units. Differences between the growth in DEXTENZA’s product revenue, net as recognized in our unaudited condensed consolidated financial statements and the in-market unit sales figures are attributable to distributor stocking patterns. In November 2022, as part of the annual CMS rule-making cycle, the CY 2023 OPPS rule was finalized and provided that DEXTENZA would qualify under the criteria established for non-opioid pain management drugs as a surgical supply provision. This provision allows for continued separate payment of DEXTENZA in the ASC setting for 2023 but does not require separate payment for DEXTENZA in the HOPD setting. The changes resulting from this provision have
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resulted in an increase in the relative share of sales of DEXTENZA to ASCs as a percentage of our total product revenue, net. In its draft recommendation for the CY 2024 OPPS rule published in July 2023, CMS recommended to continue separate payment of DEXTENZA in the ASC setting for 2024.
Currently, the billing code that describes the insertion procedure for DEXTENZA does not provide for a separate facility payment to the provider for the actual procedure to insert DEXTENZA. We, as well as large ophthalmic societies, surgeons, ASC administrators and other parties, have requested that CMS assign a status indicator to the billing code that would provide a separate facility payment in the ASC, so that the facilities are compensated for the additional time and resources required to administer DEXTENZA. We expect that CMS will issue a final ruling late in 2023.
In August 2021, we and Jefferies LLC, or Jefferies, entered into an Open Market Sale Agreement, or the 2021 Sales Agreement, under which we may offer and sell shares of our common stock having an aggregate offering price of up to $100.0 million from time to time through Jefferies, acting as agent. During the three and six months ended June 30, 2023, we sold 1,370,208 shares of common stock under the 2021 Sales Agreement, resulting in gross proceeds to us of $9.2 million, and net proceeds, after accounting for issuance costs, of $8.8 million.
On August 2, 2023, or the Closing Date, we entered into a credit and security agreement, or the Barings Credit Agreement, with Barings Finance LLC, or Barings, as administrative agent, and the lenders party thereto, providing for a secured term loan facility for us, or the Barings Credit Facility, in the aggregate principal amount of $82.5 million, or the Total Credit Facility Amount. We borrowed the full amount of $82.5 million at closing and received proceeds of $77.8 million, after the application of a discount and fees. Indebtedness under the Barings Credit Facility matures on the earlier to occur of (i) the six-year anniversary of the Closing Date and (ii) the date that is 91 days prior to the maturity date for our Convertible Notes.
Indebtedness under the Barings Credit Facility incurs interest at a SOFR-based rate, subject to a minimum 1.50% floor, plus 6.75%. We are obligated to make interest payments on our indebtedness under the Barings Credit Facility on a monthly basis, commencing on the Closing Date; to pay annual administration fees; and to pay, on the maturity date, any principal and accrued interest that remains outstanding as of such date. In addition, we are obligated to pay a fee, which we refer to as the Royalty Fee, in an amount equal to the Total Credit Facility Amount, which amount shall be reduced by the total amount of interest and principal prepayment fees paid under the Barings Credit Agreement. We are required to pay the Royalty Fee in installments to Barings, for the benefit of the lenders, on a quarterly basis in an amount equal to three and one-half percent (3.5%) of the net sales of DEXTENZA occurring during such quarter, subject to the terms, conditions and limitations specified in the Barings Credit Agreement, until the Royalty Fee is paid in full. The Royalty Fee is due and payable upon a change of control of the company. In the event we complete a change of control transaction on or prior to the twelve-month anniversary of the Closing Date, the Royalty Fee is subject to a reduction to an amount that is equal to (i) 20% of the Total Credit Facility Amount, in the event that a signed letter of intent evidencing such change of control transaction was entered into by us on or prior to the date that is six months after the Closing Date and (ii) 30% of the Total Credit Facility Amount, in the event that a signed letter of intent evidencing such change of control transaction was entered into by us after the date that is six months, but before the date that is twelve months, after the Closing Date. We may, at our option, prepay any or all of the Royalty Fee at any time without penalty. In connection with the Barings Credit Agreement, we have granted the lenders a first-priority security interest in all of our assets, including our intellectual property, subject to certain agreed-upon exceptions. The Barings Credit Agreement includes negative covenants restricting us from making payments to the holders of the Convertible Notes, as defined below, except in connection with a proposed conversion to equity and with respect to certain permitted expenses and requiring us to maintain a minimum liquidity amount of $20.0 million. The Barings Credit Agreement also includes customary affirmative and negative covenants.
In March 2019, we issued $37.5 million of unsecured senior subordinated convertible notes, or the Convertible Notes. The Convertible Notes accrue interest at an annual rate of 6% of the outstanding principal amount, payable in cash at maturity, on March 1, 2026, unless earlier converted, repurchased or redeemed. Concurrently with entering into the Barings Credit Agreement, on August 2, 2023, we and the holders of the Convertible Notes extended the maturity of the Convertible Notes, which would otherwise have matured on March 1, 2026, to a date 91 days following the maturity of the indebtedness under the Barings Credit Facility.
On June 4, 2021, we entered into the Fourth Amended and Restated Credit and Security Agreement with MidCap Financial Trust, or MidCap, as administrative agent, and the lenders party thereto, which we refer to as the MidCap
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Credit Agreement, to increase the aggregate principal amount borrowed under our credit facility, which we refer to as the MidCap Credit Facility, to $25.0 million, extend the interest-only payment period to May 1, 2024, and extend the maturity date to November 2025. In connection with entering the Barings Credit Facility, we paid MidCap and our other lenders $26.2 million in satisfaction of our obligations under the MidCap Credit Facility in August 2023.
We believe that our existing cash and cash equivalents of $ 66.6 million as of June 30, 2023, plus the net cash received from the borrowing under the Barings Credit Facility after the repayment of the MidCap Credit Facility and reflecting the $20.0 million minimum cash covenant in the Barings Credit Agreement, will enable us to fund our planned operating expenses, debt service obligations and capital expenditure requirements into 2025. This estimate is based on our current operating plan which includes estimates of anticipated cash inflows from DEXTENZA product sales, and cash outflows from operating expenses, including clinical trials. With these resources, we have the funding to initiate the first of two planned pivotal clinical trials for OTX-TKI for the treatment of wet AMD. Our planned operating expenses do not include the expenses necessary to complete the first of two planned pivotal clinical trials for OTX-TKI for the treatment of wet AMD or to initiate the second of our two planned pivotal clinical trials for OTX-TKI for the treatment of wet AMD or any other pivotal trials for our other product candidates, including OTX-TKI for the treatment of NPDR, which we do not intend to commence unless we obtain additional financing. T hese estimates are subject to various assumptions including assumptions as to the revenues and expenses associated with the commercialization of DEXTENZA, the pace of our research and clinical development programs, and other aspects of our business. These and other assumptions upon which we have based our estimates may prove to be wrong, and we could use our capital resources sooner than we currently expect and would therefore need to raise additional capital to support our ongoing operations or adjust our plans accordingly. See “—Liquidity and Capital Resources”.
Financial Operations Overview
Revenue
In June 2019, we began to recognize revenue from the sales of DEXTENZA. Following the FDA’s October 2021 approval of our sNDA, we launched DEXTENZA for the treatment of ocular itching associated with allergic conjunctivitis, our first in-office indication, in the first quarter of 2022.
Operating Expenses
Cost of Product Revenue
Cost of product revenue consists primarily of costs of DEXTENZA product revenue, which include:
● Direct materials costs;
● Royalties;
● Direct labor, which includes employee-related expenses, including salaries, related benefits and payroll taxes, and stock-based compensation expense for employees engaged in the production process;
● Manufacturing overhead costs, which includes rent, depreciation, and indirect labor costs associated with the production process;
● Transportation costs; and
● Cost of scrap material.
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Research and Development Expenses
Research and development expenses consist primarily of costs incurred for the development of our product candidates, which include:
● employee-related expenses, including salaries, related benefits and payroll taxes, travel and stock-based compensation expense for employees engaged in research and development, clinical and regulatory and other related functions;
● expenses incurred in connection with the clinical trials of our product candidates, including with the investigative sites that conduct our clinical trials and under agreements with contract research organizations, or CROs;
● expenses relating to regulatory activities, including filing fees paid to the FDA for our submissions for product approvals;
● expenses associated with developing our pre-commercial manufacturing capabilities and manufacturing clinical study materials;
● ongoing research and development activities relating to our core bioresorbable hydrogel technology and improvements to this technology;
● facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and supplies;
● costs relating to the supply and manufacturing of product inventory, prior to approval by the FDA or other regulatory agencies of our products; and
● expenses associated with preclinical development activities.
We expense research and development costs as incurred. We recognize external development costs based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors and our clinical investigative sites.
Our direct research and development expenses are tracked on a program-by-program basis and consist primarily of external costs, such as fees paid to investigators, consultants, central laboratories and CROs in connection with our clinical trials and regulatory fees. We do not allocate employee and contractor-related costs, costs associated with our proprietary bioresorbable hydrogel technology ELUTYX, costs related to manufacturing or purchasing clinical trial materials, and facility expenses, including depreciation or other indirect costs, to specific product development programs because these costs are deployed across multiple product development programs and, as such, are not separately classified. We use internal resources in combination with third-party CROs, including clinical monitors and clinical research associates, to manage our clinical trials, monitor subject enrollment and perform data analysis for many of our clinical trials. These employees work across multiple development programs and, therefore, we do not track their costs by program.
The successful development and commercialization of our products or product candidates is highly uncertain. This is due to the numerous risks and uncertainties associated with product development and commercialization, including the uncertainty of:
● the scope, progress, outcome and costs of our clinical trials and other research and development activities;
● the timing, receipt and terms of any marketing approvals;
● the efficacy and potential advantages of our products or product candidates compared to alternative treatments, including any standard of care;
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● the market acceptance of our products or product candidates; and
● significant and changing government regulation.
Any changes in the outcome of any of these variables with respect to the development of our product candidates in clinical and preclinical development could mean a significant change in the costs and timing associated with the development of these product candidates. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials or other testing beyond those that we currently expect or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development of that product candidate. We anticipate that our research and development expenses will increase in the future as we support our continued development of our product candidates.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and related costs, including stock-based compensation, for personnel in executive, finance, information technology, human resources and administrative functions. General and administrative expenses also include insurance, facility-related costs and professional fees for legal, patent, consulting and accounting and audit services.
We anticipate that our general and administrative expenses will increase in the future as we support our continued development and commercialization of our product candidates. We also anticipate that we will continue to incur increased accounting, audit, legal, intellectual property, regulatory, compliance, director and officer insurance costs as well as investor and public relations expenses associated with being a public company.
Selling and Marketing Expenses
Selling and marketing expenses consist primarily of salaries and related costs for personnel in selling and marketing functions as well as consulting, advertising and promotion costs. We anticipate that our selling and marketing expenses associated with DEXTENZA will continue to increase, particularly as we support the ongoing commercialization of DEXTENZA in 2023 and beyond.
Other Income (Expense)
Interest Expense . Interest expense is incurred on our debt. As of and for the three and six months ended June 30, 2023, our interest-bearing debt included the Convertible Notes ($37.5 million outstanding principal) and the notes payable under the MidCap Credit Facility ($25.0 million outstanding principal). The MidCap Credit Facility was paid off in full in August 2023. Since August 2, 2023, our interest-bearing debt includes the amounts borrowed under the Barings Credit Facility ($82.5 million outstanding principal).
Change in Fair Value of Derivative Liability. In 2019, in connection with the issuance of our Convertible Notes, we identified an embedded derivative liability, which we are required to measure at fair value at inception and then at the end of each reporting period until the embedded derivative is settled. The changes in fair value are recorded through the condensed consolidated statement of operations and comprehensive loss and are presented under the caption change in fair value of derivative liability.
Critical Accounting Policies and Significant Judgments and Estimates
Our unaudited condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America.
We define our critical accounting policies as those accounting policies that require us to make subjective estimates and judgments about matters that are uncertain and have had or are likely to have a material impact on our financial condition and results of operations, as well as the specific manner in which we apply those policies. Our critical accounting policies, which relate to revenue recognition and our derivative liability, are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Significant Judgments and Estimates” in our Annual Report on Form 10-K for the year ended December 31,
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2022, filed with the SEC on March 6, 2023. There have been no significant changes to our critical accounting policies since the beginning of this fiscal year.
The preparation of our unaudited condensed consolidated financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and the disclosure of contingent assets and liabilities in our condensed consolidated financial statements. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Results of Operations
Comparison of the Three Months Ended June 30, 2023 and 2022
The following table summarizes our results of operations for the three months ended June 30, 2023 and 2022:
Three Months Ended
June 30,
Increase
2023
2022
(Decrease)
(in thousands)
Revenue:
Product revenue, net
$
15,029
$
12,144
$
2,885
Collaboration revenue
157
122
35
Total revenue, net
15,186
12,266
2,920
Costs and operating expenses:
Cost of product revenue
1,304
1,155
149
Research and development
15,094
13,100
1,994
Selling and marketing
11,153
10,140
1,013
General and administrative
8,205
7,787
418
Total costs and operating expenses
35,756
32,182
3,574
Loss from operations
(20,570)
(19,916)
(654)
Other income:
Interest income
748
73
675
Interest expense
(1,991)
(1,696)
(295)
Change in fair value of derivative liability
1,131
2,773
(1,642)
Other income (expense), net
—
—
—
Total other income, net
(112)
1,150
(1,262)
Net loss
$
(20,682)
$
(18,766)
$
(1,916)
Gross-to-Net Deductions
We record DEXTENZA product sales net of estimated chargebacks, rebates, distribution fees and product returns. These deductions are generally referred to as gross-to-net deductions. Our total gross-to-net provisions for the three months ended June 30, 2023 and 2022 were 29.7 % and 23.1%, respectively, of gross DEXTENZA product sales.
Net Revenue
We generated $15.0 million of net product revenue during the three months ended June 30, 2023 from sales of our products, all of which was attributable to sales of DEXTENZA. We generated $12.1 million of net product revenue during the three months ended June 30, 2022 from sales of DEXTENZA.
We recognized $0.2 million of collaboration revenue related to the performance obligation under our license agreement with AffaMed to conduct a Phase 2 clinical trial of OTX-TIC during the three months ended June 30, 2023 compared to $0.1 million in the three months ended June 30, 2022. We recognize collaboration revenue based on a cost-to-cost method.
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Research and Development Expenses
Three Months Ended
June 30,
Increase
2023
2022
(Decrease)
(in thousands)
Direct research and development expenses by program:
OTX-TKI for diabetic retinopathy
$
810
$
—
$
810
OTX-TKI for wet AMD
1,036
1,335
(299)
OTX-TIC for glaucoma or ocular hypertension
1,491
644
847
OTX-CSI for treatment of dry eye disease
32
—
32
OTX-DED for the short-term treatment of the signs and symptoms of dry eye disease
211
41
170
DEXTENZA for post-surgical ocular inflammation and pain
557
489
68
DEXTENZA for ocular itching associated with allergic conjunctivitis
—
3
(3)
Preclinical programs
(24)
617
(641)
Unallocated expenses:
Personnel costs
6,867
6,321
546
All other costs
4,114
3,650
464
Total research and development expenses
$
15,094
$
13,100
$
1,994
Research and development expenses were $15.1 million for the three months ended June 30, 2023, compared to $13.1 million for the three months ended June 30, 2022. Within research and development expenses, expenses for clinical programs increased $1.6 million, unallocated expenses increased $1.0 million, and expenses for preclinical programs decreased $0.6 million. For the three months ended June 30, 2023, we incurred $4.1 million in direct research and development expenses for our products and product candidates compared to $2.5 million for the three months ended June 30, 2022. The increase of $1.6 million is related to timing and conduct of our various clinical trials for our product candidates and development activities related to our preclinical programs.
We expect that clinical trial expenses will remain at approximately the same level in the remainder of 2023 for our product candidates, reflecting the anticipated completion of our ongoing U.S. based Phase 1 clinical trial for OTX-TKI for wet AMD, the planned initiation of our pivotal clinical for OTX-TKI for wet AMD, and the continuation of our ongoing Phase 1 clinical trial in NPDR and our ongoing Phase 2 clinical trial for OTX-TIC.
Selling and Marketing Expenses
Three Months Ended
June 30,
Increase
2023
2022
(Decrease)
(in thousands)
Personnel related (including stock-based compensation)
$
7,250
$
6,244
$
1,006
Professional fees
2,423
2,771
(348)
Facility related and other
1,480
1,125
355
Total selling and marketing expenses
$
11,153
$
10,140
$
1,013
Selling and marketing expenses were $11.2 million for the three months ended June 30, 2023, compared to $10.1 million for the three months ended June 30, 2022. The increase of $1.1 million was primarily due to an increase of $1.0 million in personnel costs as we expanded our field-based team to support the commercialization of DEXTENZA.
We expect our selling and marketing expenses to continue to increase in the remainder of 2023 and beyond as we continue to support the commercialization of DEXTENZA.
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General and Administrative Expenses
Three Months Ended
June 30,
Increase
2023
2022
(Decrease)
(in thousands)
Personnel related (including stock-based compensation)
$
5,304
$
4,520
$
784
Professional fees
2,762
2,596
166
Facility related and other
139
671
(532)
Total general and administrative expenses
$
8,205
$
7,787
$
418
General and administrative expenses were $8.2 million for the three months ended June 30, 2023, compared to $7.8 million for the three months ended June 30, 2022, primarily due to an increase of $0.8 million in personnel related costs, including stock-based compensation, and a decrease of $0.5 million in facility related and other cost.
Other Income (Expense), Net
Other expense, net was $0.1 million for the three months ended June 30, 2023, compared to other income, net of $1.2 million for the three months ended June 30, 2022. The change of $1.3 million was due primarily to a decrease in the recognized income related to the fair value measurement of the derivative liability related to the Convertible Notes of $1.6 million, partially offset by an increase in interest income of $0.7 million.
Comparison of the Six Months Ended June 30, 2023 and 2022
The following table summarizes our results of operations for the six months ended June 30, 2023 and 2022:
Six Months Ended
June 30,
Increase
2023
2022
(Decrease)
(in thousands)
Revenue:
Product revenue, net
$
28,243
$
24,642
$
3,601
Collaboration revenue
318
811
(493)
Total revenue, net
28,561
25,453
3,108
Costs and operating expenses:
Cost of product revenue
2,517
2,454
63
Research and development
29,842
26,200
3,642
Selling and marketing
21,989
19,203
2,786
General and administrative
17,332
15,344
1,988
Total costs and operating expenses
71,680
63,201
8,479
Loss from operations
(43,119)
(37,748)
(5,371)
Other income (expense):
Interest income
1,312
89
1,223
Interest expense
(3,760)
(3,378)
(382)
Change in fair value of derivative liability
(5,432)
9,731
(15,163)
Other income (expense), net
(1)
(2)
1
Total other income (expense), net
(7,881)
6,440
(14,321)
Net loss
$
(51,000)
$
(31,308)
$
(19,692)
Gross-to-Net Deductions
We record DEXTENZA product sales net of estimated chargebacks, rebates, distribution fees and product returns. These deductions are generally referred to as gross-to-net deductions. Our total gross-to-net provisions for the six months ended June 30, 2022 and 2021 were 28.9 % and 22.5%, respectively, of gross DEXTENZA product sales.
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Net Revenue
We generated $28.2 million of net product revenue during the six months ended June 30, 2023, all of which was attributable to sales of DEXTENZA. We generated $24.6 million of net product revenue during the six months ended June 30, 2022, all of which was attributable to sales of DEXTENZA. We believe the growth in revenue for DEXTENZA was primarily due to increased market acceptance and our ongoing commercialization efforts.
We recognized $0.3 million of collaboration revenue related to the performance obligation under our license agreement with AffaMed to conduct a Phase 2 clinical trial of OTX-TIC during the six months ended June 30, 2023, compared to $0.8 million in the six months ended June 30, 2022. We recognize collaboration revenue based on a cost-to-cost method.
Research and Development Expenses
Six Months Ended
June 30,
Increase
2023
2022
(Decrease)
(in thousands)
Direct research and development expenses by program:
OTX-TKI for diabetic retinopathy
$
1,411
$
—
$
1,411
OTX-TKI for wet AMD
2,822
2,544
278
OTX-TIC for glaucoma or ocular hypertension
2,145
1,190
955
OTX-CSI for treatment of dry eye disease
134
161
(27)
OTX-DED for the short-term treatment of the signs and symptoms of dry eye disease
265
307
(42)
DEXTENZA for post-surgical ocular inflammation and pain
1,005
798
207
DEXTENZA for ocular itching associated with allergic conjunctivitis
—
21
(21)
Preclinical programs
950
716
234
Unallocated expenses:
Personnel costs
14,208
12,864
1,344
All other costs
6,902
7,599
(697)
Total research and development expenses
$
29,842
$
26,200
$
3,642
Research and development expenses were $29.8 million for the six months ended June 30, 2023, compared to $26.2 million for the six months ended June 30, 2022. The increase of $3.6 million was primarily due to an increase of $2.8 million in clinical programs, and increase of $0.6 million in unallocated expenses, and an increase of $0.2 million in preclinical related programs. For the six months ended June 30, 2023, we incurred $7.8 million in direct research and development expenses for our products and product candidates compared to $5.0 million for the six months ended June 30, 2022. The increase of $2.8 million is related to timing and start of our various clinical trials for our product candidates.
Selling and Marketing Expenses
Six Months Ended
June 30,
Increase
2023
2022
(Decrease)
(in thousands)
Personnel related (including stock-based compensation)
$
14,811
$
12,579
$
2,232
Professional fees
4,501
4,705
(204)
Facility related and other
2,677
1,919
758
Total selling and marketing expenses
$
21,989
$
19,203
$
2,786
Selling and marketing expenses were $22.0 million for the six months ended June 30, 2023, compared to $19.2 million for the six months ended June 30, 2022. The increase of $2.8 million was primarily due to increases of $2.2 million in personnel costs with the expansion of the commercial workforce to support DEXTENZA and $0.8 million in facility related and other costs.
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General and Administrative Expenses
Six Months Ended
June 30,
Increase
2023
2022
(Decrease)
(in thousands)
Personnel related (including stock-based compensation)
$
11,144
$
9,117
$
2,027
Professional fees
5,643
5,554
89
Facility related and other
545
673
(128)
Total general and administrative expenses
$
17,332
$
15,344
$
1,988
General and administrative expenses were $17.3 million for the six months ended June 30, 2023, compared to $15.3 million for the six months ended June 30, 2022. The increase of $2.0 million was primarily due to an increase of $2.0 million in personnel related costs, including stock-based compensation.
Other Income (Expense), Net
Other expense, net was $7.9 million for the six months ended June 30, 2023, compared to other income, net of $6.4 million for the six months ended June 30, 2022. The change of $14.3 million was due primarily to a decrease in the recognized income (expense) related to the fair value measurement of the derivative liability related to the Convertible Notes of $15.2 million, partially offset by an increase in interest income of $1.2 million.
Liquidity and Capital Resources
We have a history of incurring significant operating losses. Our net losses were $20.7 million and $51.0 million for the three and six months ended June 30, 2023, and $71.0 million and $6.6 million for the years ended December 31, 2022 and 2021, respectively. As of June 30, 2023, we had an accumulated deficit of $667.8 million.
As of June 30, 2023, we had cash and cash equivalents of $66.6 million; notes payable of $25.0 million face value and senior convertible notes of $37.5 million par value, plus accrued interest of $9.8 million. On August 2, 2023, we entered into the Barings Credit Agreement which established the $82.5 million Barings Credit Facility. We borrowed the full amount of $82.5 million at closing and received proceeds of $77.8 million, after the application of a discount and fees. Concurrently with entering into the Barings Credit Agreement, we and the holders of the Convertible Notes extended the maturity of the Convertible Notes, which would otherwise have matured on March 1, 2026, to a date 91 days following the maturity of the indebtedness under the Barings Credit Facility. In connection with our entering into the Barings Credit Facility, we paid an aggregate of $26.2 million to MidCap Financial Trust and the other lenders party to the MidCap Credit Facility, comprised of $25.0 million in principal and interest accrued thereunder and $1.2 million in exit and prepayment fees in satisfaction of our obligations under the MidCap Credit Facility. Upon the payment, all liens and security interests securing the indebtedness under the MidCap Credit Facility were released. See “—Financial Position”.
Cash Flows
The following table summarizes our sources and uses of cash for each of the periods presented:
Six Months Ended
June 30,
2023
2022
Cash used in operating activities
$
(40,048)
$
(29,476)
Cash used in investing activities
(5,369)
(771)
Cash provided by financing activities
9,723
622
Net decrease in cash and cash equivalents
$
(35,694)
$
(29,625)
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Operating activities . Net cash used in operating activities was $40.0 million for the six months ended June 30, 2023, primarily resulting from our net loss of $51.0 million, net unfavorable changes in our operating assets and liabilities of $7.1 million, offset by the increase in the fair value of our derivative liability of $5.4 million and $12.6 million of other non-cash items. Our net loss was primarily attributed to research and development activities, selling and marketing expenses, and our general and administrative expenses, which significantly offset any contributions from our revenues to date. Our non-cash charges during the six months ended June 30, 2023 consisted primarily of $9.0 million of stock-based compensation expense, $2.5 million in non-cash interest expense, and $1.1 million in depreciation and amortization expense, including amortization of operating lease assets. Net cash used by unfavorable changes in our operating assets and liabilities during the six months ended June 30, 2023 consisted primarily of net increases in accounts receivable of $6.0 million, decreases in accrued expenses and other current liabilities, excluding accrued non-cash interest, of $0.6 million, net decreases of accounts payable, excluding accounts payable related to additions to property and equipment, of $0.3 million, and net increases of prepaid expenses and other current assets of $0.6 million, partially offset by increases of deferred revenue of $0.7 million.
Net cash used in operating activities was $29.5 million for the six months ended June 30, 2022, primarily resulting from our net loss of $31.3 million, the change in the fair value of our derivative liability of $9.7 million, net changes in our operating assets and liabilities of $0.4 million, partially offset by $12.0 million of other non-cash items. Our net loss was primarily attributed to research and development activities, selling and marketing expenses, and our general and administrative expenses, which significantly offset any contributions from our revenues to date. Our non-cash charges during the six months ended June 30, 2022 consisted primarily of $8.5 million of stock-based compensation expense, $2.4 million in non-cash interest expense, and $1.1 million in depreciation and amortization expense, including amortization of operating lease assets. Net cash used by changes in our operating assets and liabilities during the six months ended June 30, 2022 consisted primarily of net decreases in accounts receivable, prepaid expenses and other operating assets, and net decreases in accrued expenses and other operating liabilities.
Investing activities . Net cash used in investing activities for the six months ended June 30, 2023 and 2022 totaled $5.4 million and $0.8 million, respectively. For the six months ended June 30, 2023, the investing activities were primarily related to leasehold improvements and purchases of equipment. For the six months ended June 30, 2022, the investing activities were purchases of equipment.
Financing activities . Net cash provided by financing activities was $9.7 million for the six months ended June 30, 2023 and $0.6 million for the six months ended June 30, 2022. Net cash provided by financing activities for the six months ended June 30, 2023 consisted of $8.8 million from the sale of shares of our common stock under the 2021 Sales Agreement, and $0.9 million from the exercises of stock options and purchases of shares of our common stock under the ESPP. In March 2023, the Company requested a protective advance of $2.0 million under the MidCap Credit Agreement in response to the closure of Silicon Valley Bank by the California Department of Financial Protection and Innovation, and the Federal Deposit Insurance Corporation was appointed as receiver, which was deemed a credit extension. The Company repaid the full principal amount of $2.0 million in March 2023. Net cash provided by financing activities for the six months ended June 30, 2022 consisted of proceeds from the exercise of stock options and purchases of shares of our common stock under the ESPP.
Funding Requirements
We expect to continue to incur losses in connection with our ongoing activities, particularly as we advance the clinical trials of our product candidates in development and increase our sales and marketing resources to support the commercialization of DEXTENZA and the potential launch of our product candidates, subject to receiving FDA approval.
We anticipate we will incur substantial expenses if and as we:
● continue to commercialize DEXTENZA in the United States;
● continue to develop and expand our sales, marketing and distribution capabilities for DEXTENZA and any other products or product candidates we intend to commercialize;
● continue ongoing clinical trials for OTX-TKI for the treatment of wet AMD (in both Australia and the United States) and the treatment of NPDR (United States), OTX-TIC for the treatment of OAG or
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OHT, OTX-DED for the short-term treatment of the signs and symptoms of dry eye diseases, and DEXTENZA in pediatric subjects following cataract surgeries;
● initiate our planned clinical trials, including the first of two planned pivotal clinical trials for OTX-TKI for the treatment of wet AMD;
● determine to initiate new clinical trials to evaluate our product candidates;
● conduct research and development activities on, and seek regulatory approvals for, DEXTENZA and OTX-TIC in specified Asian markets pursuant to our license agreement and collaboration with AffaMed;
● continue the research and development of our other product candidates;
● seek to identify and develop additional product candidates;
● seek marketing approvals for any of our product candidates that successfully complete clinical development;
● scale up our manufacturing processes and capabilities to support sales of commercial products, clinical trials of our product candidates and commercialization of any of our product candidates for which we obtain marketing approval, and expand our facilities to accommodate this scale up and any corresponding growth in personnel;
● renovate our existing facilities including research and development laboratories, manufacturing space and office space;
● maintain, expand and protect our intellectual property portfolio;
● expand our operational, financial, administrative and management systems and personnel, including personnel to support our clinical development, manufacturing and commercialization efforts;
● defend ourselves against legal proceedings;
● make investments to improve our defenses against cybersecurity and establish and maintain cybersecurity insurance;
● increase our product liability and clinical trial insurance coverage as we expand our clinical trials and commercialization efforts; and
● continue to operate as a public company.
We believe that our existing cash and cash equivalents as of June 30, 2023, plus the net cash received from the borrowing under the Barings Credit Facility after the repayment of the MidCap Credit Facility and reflecting the $20.0 million minimum cash covenant in the Barings Credit Agreement, will enable us to fund our planned operating expenses, debt service obligations and capital expenditure requirements into 2025. This estimate is based on our current operating plan which includes estimates of anticipated cash inflows from DEXTENZA product sales, and cash outflows from operating expenses, including clinical trials. With these resources, we have the funding to initiate the first of two planned pivotal clinical trials for OTX-TKI for the treatment of wet AMD. Our planned operating expenses do not include the expenses necessary to complete the first of two planned pivotal clinical trials for OTX-TKI for the treatment of wet AMD or to initiate the second of our two planned pivotal clinical trials for OTX-TKI for the treatment of wet AMD or any other pivotal trials for our other product candidates, including OTX-TKI for the treatment of NPDR, which we do not intend to commence unless we obtain additional financing. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently expect.
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Our future capital requirements will depend on many factors, including:
● the level of product sales from DEXTENZA and any additional products for which we obtain marketing approval in the future and the level of third-party reimbursement of such products;
● the costs of sales, marketing, distribution and other commercialization efforts with respect to DEXTENZA and any additional products for which we obtain marketing approval in the future, including cost increases due to inflation;
● the progress, costs and outcome of our ongoing and planned clinical trials of our product candidates, in particular OTX-TKI for the treatment of wet AMD and NPDR and OTX-TIC for the treatment of OAG or OHT;
● the scope, progress, costs and outcome of preclinical development and clinical trials of any other product candidates;
● the costs, timing and outcome of regulatory review of our product candidates by the FDA, the EMA or other regulatory authorities;
● the costs of scaling up our manufacturing processes and capabilities to support sales of commercial products, clinical trials of our product candidates and commercialization of any of our product candidates for which we obtain marketing approval and of expanding our facilities to accommodate this scale up and any corresponding growth in personnel;
● the extent of our debt service obligations and our ability, if desired, to refinance any of our existing debt on terms that are more favorable to us;
● the amounts we are entitled to receive, if any, as reimbursements for clinical trial expenditures, development, regulatory, and sales milestone payments, and royalty payments under our license agreement with AffaMed;
● the extent to which we choose to establish additional collaboration, distribution or other marketing arrangements for our products and product candidates;
● the costs and outcomes of legal actions and proceedings;
● the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims; and
● the extent to which we acquire or invest in other businesses, products and technologies.
Until such time, if ever, as we can generate product revenues sufficient to achieve profitability, we expect to finance our cash needs through equity offerings, debt financings, government or other third-party funding, collaborations, strategic alliances, licensing arrangements, royalty agreements, and marketing and distribution arrangements. We do not have any committed external source of funds, development, regulatory and sales milestone payments, or royalty payments although our license agreement with AffaMed provides for AffaMed’s reimbursement of certain clinical expenses incurred by us in connection with our collaboration and for our potential receipt of development and sales milestone payments as well as royalty payments. To the extent that we raise additional capital through the sale of equity or convertible debt securities, each security holder’s ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect each security holder’s rights as a common stockholder. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. The covenants under our existing Barings Credit Facility and the pledge of our assets as collateral limit our ability to obtain additional debt financing. If we raise additional funds through government or other third-party funding, collaborations, strategic alliances, licensing arrangements, royalty agreements, or marketing and distribution arrangements, we may have to relinquish valuable rights to our technologies, future revenue streams,
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research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market products or product candidates that we would otherwise prefer to develop and market ourselves.
Contractual Obligations and Commitments
We enter into contracts in the normal course of business to assist in the performance of our research and development activities and other services and products for operating purposes. These contracts generally provide for termination on notice, and therefore are cancelable contracts which are not included in contractual obligations and commitments.
On March 31, 2023, we entered into Amendment No. 1 to the MidCap Credit Agreement, or Amendment No. 1, to replace the LIBOR-based interest rate provisions of the MidCap Credit Agreement with interest rate provisions based on the Secured Overnight Financing Rate, or SOFR, establish a benchmark replacement mechanism and make additional administrative updates. On May 4, 2023, we entered into Amendment No. 2 to the MidCap Credit Agreement, or Amendment No. 2. Amendment No. 2 provided that we may maintain up to 50% of our consolidated cash and cash equivalents with banks or financial institutions other than Silicon Valley Bank and made additional administrative updates. During the three and six months ended June 30, 2023, there were no significant changes to our contractual obligations and commitments as described under Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2022 other than Amendments No. 1 and 2 to the MidCap Credit Agreement. In connection with entering the Barings Credit Facility, we paid MidCap and our other lenders $26.2 million in satisfaction of our obligations under the MidCap Credit Facility in August 2023.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the Securities and Exchange Commission, such relationships with unconsolidated entities or financial partnerships, which are often referred to as structured finance or special purpose entities, established for the purpose of facilitating financing transactions that are not required to be reflected on our balance sheets.
Recently Issued Accounting Pronouncements
Information regarding new accounting pronouncements is included in Note 2 – Summary of Significant Accounting Policies to the current period’s unaudited condensed consolidated financial statements.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.