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Edited Transcript of OTIC earnings conference call or presentation 6-May-19 8:30pm GMT

Q1 2019 Otonomy Inc Earnings Call

SAN DIEGO May 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Otonomy Inc earnings conference call or presentation Monday, May 6, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Allen Weber

Otonomy, Inc. - President, CEO & Director

* Kathie M. Bishop

Otonomy, Inc. - Chief Scientific Officer

* Paul E. Cayer

Otonomy, Inc. - Chief Financial & Business Officer

* Robert H. Uhl

Westwicke Partners, LLC - MD

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Conference Call Participants

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* Pete George Stavropoulos

Cantor Fitzgerald & Co., Research Division - Associate Analyst

* Stacy Ku

Cowen and Company, LLC, Research Division - Equity Research Associate

* Tyler Martin Van Buren

Piper Jaffray Companies, Research Division - Principal & Senior Biotech Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen. This is your conference operator. At this time, I would like to welcome everyone to the Q1 2019 Otonomy, Inc. Earnings Conference Call. (Operator Instructions)

I would now like to turn the call over to Robert. You may begin your conference.

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Robert H. Uhl, Westwicke Partners, LLC - MD [2]

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Thank you. Good afternoon, and welcome to Otonomy's First Quarter 2019 Financial Results and Business Update Conference Call. Joining me on the call from Otonomy are Dr. David Weber, President and Chief Executive Officer; Dr. Kathie Bishop, Chief Scientific Officer; and Paul Cayer, Chief Financial and Business Officer.

Before I turn the call over to Dr. Weber, I would like to remind you that today's call will include forward-looking statements based on current expectations. Such statements represent management's judgment as of today and may involve risks and uncertainties that could cause actual results to differ materially from expected results.

Such statements include but are not limited to timing of results, patient recruitment and enrollment plans for and design and conduct of the Phase III clinical trial for OTIVIDEX; timing of initiation and results, patient recruitment and enrollment plans for and design and conduct of the Phase I/II clinical trial for OTO-313 and Phase I/II clinical trial for OTO-413; expectations regarding the market opportunity and reimbursement potential for OTO-313; the activity under and potential benefits of the co-promotion agreements between Otonomy and Mission Pharmacal and Otonomy and Glenmark Therapeutics; expectations regarding the benefits and value potential of Otonomy's programs; expectations regarding funding of clinical development, program advancement and company operations into 2021; and expectations regarding financial guidance, including operating expenses for 2019.

Please refer to Otonomy's filings with the SEC, which are available from the SEC or on the Otonomy website, for information concerning the risk factors that could affect the company.

I will now turn the call over to Dave Weber, President and CEO of Otonomy.

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David Allen Weber, Otonomy, Inc. - President, CEO & Director [3]

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Thank you, Robert. Good afternoon, everyone, and thank you for joining us on this call to discuss Otonomy's business update and first quarter 2019 financial results.

In my remarks, I'll briefly review the status and upcoming milestones for our clinical-stage programs, discuss the additional OTIPRIO commercial partnership we recently announced and summarize our continued strong financial position. I'll then turn the call over to Kathie and Paul, who will provide a review of the OTO-313 tinnitus program and the large unmet medical need that it addresses. In case you want to follow along, the slides are posted on the Otonomy website on the Events and Presentation section of the Investor page. We will then open up the call for any questions.

Beginning with the OTIVIDEX Phase III trial in Ménière's disease, enrollment is on track. The conduct and design of this study is based on successful AVERTS-2 trial, which achieved its primary endpoint as well as a number of secondary endpoints. We plan to enroll approximately 160 patients in the United States and Europe with results expected in the first half of 2020. As is our practice, we will not be disclosing any metrics from the ongoing trial other than timing to top line results.

The next product candidate in our pipeline is OTO-313, a sustained exposure formulation of the NMDA receptor antagonist, gacyclidine, in development for the treatment of tinnitus.

As you'll hear from Kathie and Paul, tinnitus is a common condition that can severely impact a person's daily activities with no FDA-approved drug treatment available.

In April, we announced the initiation of a Phase I/II trial in tinnitus patients. Enrollment has been completed in the initial safety cohort and we are now initiating the exploratory efficacy part of the study that will enroll approximately 50 patients. We expect results from this trial in the first half of 2020 as well.

The third program is OTO-413, a sustained exposure formulation of brain-derived neurotrophic factor, or BDNF, that we are developing for the repair of cochlear synaptopathy. As Kathie reviewed during our earnings call in November, recent research have identified damage to synaptic connections as the underlying pathology in noise and age-related hearing loss that manifests as speech-in-noise hearing difficulty.

Neurotrophic factors, including BDNF, have therapeutic effects in the cochlea by promoting the survival of spiral ganglion neurons, increasing neurite outgrowth and reconnecting neurons with cochlear hair cells after damage. We are conducting IND-enabling activities for OTO-413 and expect to initiate a Phase I/II clinical trial in the third quarter of 2019. This will be an ascending dose safety and exploratory efficacy study, enrolling approximately 40 patients with speech-in-noise hearing difficulty. Top line results are expected from this trial in the second half of 2020.

Turning now to our commercial product, OTIPRIO. We announced last week the completion of a second co-promotion agreement for acute otitis externa, or AOE. This agreement is with Glenmark Therapeutics, which is a U.S. subsidiary of Glenmark Holdings, a global integrated pharmaceutical company with operations in more than 80 countries.

Glenmark Therapeutics is building a franchise of branded products in the U.S., with an initial focus on respiratory and dermatology. OTIPRIO is a good fit for the respiratory team because they will be calling on ENT physicians who are an important target audience for AOE treatment. This agreement provides Glenmark with an exclusive right to promote OTIPRIO for AOE to ENTs in exchange for an annual co-promotion fee, reimbursement of a proportion of product support expenses and a share of the adjusted gross profit from the sale of OTIPRIO to Glenmark's accounts.

When combined with Mission Pharmacal, our partner promoting OTIPRIO to pediatricians, primary care physicians and urgent care centers, we have established commercial support for OTIPRIO across all the key physician groups involved in treating AOE, and in time for the peak summer season.

We expect that these co-promotion agreements will contribute to our already strong financial position that I'll briefly review now. For full presentation of our financial results for the first quarter, please refer to the press release issued a few minutes ago and the 10-Q filed with the SEC.

We finished the first quarter with $86.9 million in cash and some short-term investments. GAAP operating expenses for the quarter totaled $12.1 million, while non-GAAP expenses totaled $10.6 million. Both amounts are in line with our financial guidance for the year, which includes non-GAAP expenses of $45 million to $50 million. Importantly, our current capital funds operations through Phase III results for OTIVIDEX, Phase I/II results for both OTO-313 and OTO-413 and into 2021.

At this time, I would like to turn the call over to Kathie and Paul, so that they can review the OTO-313 program and tinnitus market opportunity for you. Kathie?

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Kathie M. Bishop, Otonomy, Inc. - Chief Scientific Officer [4]

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Thanks, Dave, and good afternoon, everyone. As mentioned, the slides that we'll be referring to are posted on our website under Events and Presentations on the Investor page.

Beginning on Slide 3. Tinnitus is the perception of noise when there is no sound. It is often described as a ringing in the ear, but it can also sound like roaring, clicking, hissing or buzzing. Approximately 10% of U.S. adults live with the condition and about 8 million people report a moderate-to-severe level of impact on their daily lives. The constant annoyance of tinnitus can disrupt a person's ability to sleep, relax and concentrate in -- at work. In turn, this has been shown to lead to anxiety and depression and sadly even to suicide in severely affected individuals.

Because exposure to loud noise is a major cause of tinnitus, it is the leading service-related disability in the U.S. Military. Unfortunately for these patients, there is no cure for tinnitus and there are no FDA-approved drug treatments.

So what is the underlying pathophysiology of tinnitus and the biological rationale supporting OTO-313 as a potential treatment? Slide 4 provides a set of graphics that address these questions in a simplified manner. The first panel on the left demonstrates signaling between the hair cell and the spiral ganglion neurons in a normal setting. Following stimulation by noise, hair cells release various neurotransmitters, including glutamate, which activates NMDA receptors on spiral ganglion neurons, which then relay the sound information to the brain where it is ultimately perceived.

The middle pathway shows that damage to hair cells by cochlear injury, such as by noise, trauma or ototoxic drugs can produce excessive glutamate release leading to over excitation of the NMDA receptor and the perception of persistent noise or tinnitus. Given this pathophysiology, an attractive treatment approach involves the disruption of signaling using a selective NMDA receptor antagonist such as gacyclidine. By dampening over-excitation in the spiral ganglion neurons, we believe that OTO-313 can reduce the severity of a patient's tinnitus.

Slide 5 provides some background information on the profile of OTO-313, a sustained exposure formulation of gacyclidine. Gacyclidine is a potent and selective NMDA receptor antagonist. In fact, gacyclidine is 50 to 100x more potent than esketamine which is another NMDA receptor antagonist that has been tested as a potential treatment for tinnitus. Published preclinical data demonstrate gacyclidine's inhibition of spontaneous neuronal activity in spiral ganglion neurons. And in vivo studies, nicely show proof-of-concept in the behavioral model of tinnitus in animals. Furthermore, a pilot clinical study conducted with a locally administered gacyclidine by the prior developer demonstrated a clinical response in tinnitus patients.

As the figure on the right of Slide 5 shows, patients who received the higher doses of gacyclidine experienced an improvement in the functional assessment called the tinnitus handicap inventory, while patients receiving the low dose did not. This preliminary clinical data taken together with the preclinical results are supportive for the OTO-313 program. We had previously been developing an initial formulation of gacyclidine called OTO-311.

As Slide 6 summarizes, we successfully completed a Phase I clinical safety trial with OTO-311 in normal volunteers. A single intratympanic injection was safe and well tolerated and no safety concerns were identified. While we were preparing to take OTO-311 forward into Phase II clinical studies, we identified an alternative formulation that had a number of advantages, including most importantly, improved pharmacokinetic properties. And thus we decided to switch to the new formulation for gacyclidine called OTO-313.

After completing the IND-enabling work, we have now initiated a Phase I/II clinical trial for OTO-313 that is outlined on Slide 7. This trial is a randomized, double-blind, placebo-controlled safety and exploratory efficacy study in tinnitus patients. The trial design consists of 2 cohorts. The first cohort includes 8 patients assessed for safety and tolerability following a single intratympanic injection of OTO-313 or placebo. We have completed enrollment of this cohort and are now initiating the second part of the study. This second cohort will enroll approximately 50 patients with persistent tinnitus of cochlear origin, who will be assessed for safety and tolerability as well as assess exploratory efficacy.

Importantly, for entry into cohort 2, patients must have tinnitus severity that exceeds a specified level during the lead-in period, ensuring adequate baseline level of tinnitus. Patients in cohort 2 will receive a single intratympanic injection of OTO-313 or placebo, randomized one-to-one and be followed for 2 months. We expect results in the first half of 2020.

The design of the Phase I/II trial includes the number of exploratory efficacy endpoints as listed on Slide 8. The tinnitus functional index is a validated clinical instrument that assesses tinnitus severity and its impact on patients. The TFI, as it is known, is a 25-item questionnaire that asks the patient about the loudness and the noise of their tinnitus as well as its impact on daily activities such as ability to concentrate, relax, enjoy social activities and sleep. The clinical evaluation of the TFI demonstrated validity for scaling with the overall severity of tinnitus and responsiveness to treatment-related changes.

Other exploratory efficacy endpoints that we're looking at in this trial, including a numerical rating scale for tinnitus loudness and for tinnitus annoyance and the patient global impression of change for assessing the patient's overall status and change following treatment.

We have spent considerable time reviewing prior work in the tinnitus field and discussing details with the trial design with key opinion leaders and believe that this Phase I/II trial provides an excellent opportunity to demonstrate the therapeutic potential of OTO-313 in reducing tinnitus in patients.

Finally Slide 9 summarizes the key takeaways regarding OTO-313 program. Based on the pathophysiology of tinnitus and supported by both preclinical and clinical data, local treatment with NMDA receptor antagonist is a viable approach to reducing the severity of tinnitus. Gacyclidine has an attractive pharmacologic profile because of its potency and selectivity and OTO-313 formulation provides weeks of inner ear exposure from a single intratympanic injection. We are excited to be initiating enrollment for the second cohort of the Phase I/II trial and look forward to announcing results in the first half of 2020.

Now I'll turn the call over to Paul to briefly review the market opportunity for tinnitus.

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Paul E. Cayer, Otonomy, Inc. - Chief Financial & Business Officer [5]

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Thanks, Kathie, and good afternoon, everyone. Slide 10 provides a summary of the OTO-313 market opportunity, which we believe is significant. The graphic on the left summarizes the patient population in the United States. The overall prevalence is more than 30 million people with 8 million experiencing moderate-to-severe tinnitus. Using health claims data, we also estimate the number of new patients who can be treated in each year at more than 1 million, which is initial focus of our clinical program.

As mentioned by Kathie at the beginning of her review, there are no FDA-approved drug treatments. Cognitive behavioral therapy and noise-masking devices are sometimes used. However, these are ways for patients to cope with their tinnitus and do not address the underlying pathology. The lack of any standard-of-care treatment and the level of disruption that a large population of tinnitus patients experience translates into a significant unmet medical need. If approved, OTO-313 will be administrated by a physician in the office setting, providing for reimbursement under the buy-and-bill system. A procedure code already exists for the intratympanic injection. So we would expect OTO-313 to be in reimbursed on a cost-plus basis.

At pricing similar to other products treating debilitating disorders such as the CGRPs for migraine, independent market researchers projected the commercial potential of OTO-313 in more than $1 billion in the U.S. alone. We're excited to be advancing a pipeline program with such importance to patients and then has a significant market opportunity in high potential value for shareholders.

With that, I'll turn the call back to Dave for final comments.

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David Allen Weber, Otonomy, Inc. - President, CEO & Director [6]

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Thank you, Kathie and Paul.

In summary, this quarterly update highlights the continued execution of our business strategy that includes the plan to report clinical results from 3 trials in 2020: The Phase III trial of OTIVIDEX in Ménière's disease in the first half of 2020; the Phase I/II trial of OTO-313 in tinnitus also in the first half of 2020; and the Phase I/II trial of OTO-413 in hearing loss in the second half of 2020. Furthermore, we are pleased to have completed a second co-promotion partnership for OTIPRIO that ensures the products will have broad promotional support for the peak swimmer's ear season this summer. We expect this will contribute to our already strong balance sheet that will fund the company's operations through the 3 clinical trial results next year and into 2021.

I am excited about our programs and plans and look forward to sharing this information and update more broadly with investors throughout this year.

Operator, we are now ready for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Tyler Van Buren from Piper Jaffray.

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Tyler Martin Van Buren, Piper Jaffray Companies, Research Division - Principal & Senior Biotech Analyst [2]

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It's exciting to be speaking about 3 pretty significant readouts here in about a year’s time. I have some questions on the 313 program and discussion. On -- so on one of the slides, obviously you discussed the transition of 311 to 313 and improved pharmacokinetic properties and you, I guess, described it on the later slide as increased inner ear exposure of gacyclidine. So is it just simply a higher magnitude of exposure? And can you define that? Or is there also a quicker onset, any more color on the PK properties would be helpful?

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Kathie M. Bishop, Otonomy, Inc. - Chief Scientific Officer [3]

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Tyler, it's Kathie, and I'll take your question. It's -- we need to switch primarily based on the PK properties, which were improved both in terms of getting higher levels of drug, I'd say, about 3x to 5x at its peak, and then very importantly so longer duration of exposure in the cochlear tissue itself. So now with OTO-313, we'll probably get more than a month's exposure from a single injection. So it's mostly those properties.

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Tyler Martin Van Buren, Piper Jaffray Companies, Research Division - Principal & Senior Biotech Analyst [4]

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Yes. It definitely does sound improved and I'm assuming that with an oral NMDA antagonist you can't get anywhere close to the same level of exposure in the ear?

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Kathie M. Bishop, Otonomy, Inc. - Chief Scientific Officer [5]

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Correct. Yes.

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Tyler Martin Van Buren, Piper Jaffray Companies, Research Division - Principal & Senior Biotech Analyst [6]

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Okay. And you mentioned enrolling patients with a certain level of tinnitus severity. So can you just, I guess, walk through the -- is it based upon the TFI? And can you help understand maybe how that scale is -- or that index is quantified? And at what level of severity you guys think is appropriate based upon the limited data that's out there?

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Kathie M. Bishop, Otonomy, Inc. - Chief Scientific Officer [7]

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Yes. So we -- in this trial, we're enrolling 50 patients randomized one to one, and we really very carefully thought about the inclusion, exclusion criteria for the patients enrolling in the second part of the study because we really wanted to focus on well-defined patients, where we thought we will have the greatest chance of seeing efficacy in this proof-of-concept study. So one of those criteria is that the patients are required to have a minimum baseline level of disease. It is based on TFI scores, which are measured during a lead-in period. So I think that's a second component of the study is we have really well-defined baseline tinnitus characteristics for these patients and we do follow them for a period to get that really good baseline measure before they go into the trial.

We have not publicly said what that TFI scorecard is primarily because I think you can see from the quickness with which we enrolled the first part of the study. There is a huge unmet need for tinnitus patients and some of these patients I think are listening in today. They go to ClinicalTrials.gov. We don't want to say what that score is in order to bias what patients will report during that baseline period to make sure that we're really getting the right patients in the trial. It's been based on the literature in tinnitus and we are requiring sort of a moderate-to-severe level of tinnitus before they can enter the trial.

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Operator [8]

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Your next question comes from the line of Charles Duncan from Cantor Fitzgerald.

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Pete George Stavropoulos, Cantor Fitzgerald & Co., Research Division - Associate Analyst [9]

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This is Pete Stavropoulos for Charles. Congrats on the progress in 1Q '19. And I have a couple of questions. So on the 313 program, have you any thoughts on using something that's a little bit more objective to a select patient such as minimum masking level. So sort of gauge how the patients perceive their tinnitus volume-wise?

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Kathie M. Bishop, Otonomy, Inc. - Chief Scientific Officer [10]

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Pete, this is Kathie, and I'll take that question as well. So we did, as I mentioned when we designed the trial, talk to a lot of people in the field and KOLs and people who have conducted clinical trials in tinnitus, not only to consider the inclusion and exclusion criteria, but what endpoints to include as well. And tinnitus masking was one we talked to a lot of people doing this about and had a lot of conversations.

I personally would not characterize tinnitus masking as more objective because you're still relying on the patient to report the masking level. So I think it's just as subjective as any other report of tinnitus despite what other people might have characterized. It also can be very variable and it doesn't get at some of the key characteristics of patients' tinnitus. Also in our FDA interactions that we've had so far, I think the endpoints that we're including are more along the lines of the ones that the FDA would prefer.

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Pete George Stavropoulos, Cantor Fitzgerald & Co., Research Division - Associate Analyst [11]

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Okay. And again, including criteria, is there going to be any specific length of time the patient has been suffering from tinnitus?

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Kathie M. Bishop, Otonomy, Inc. - Chief Scientific Officer [12]

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Yes. So in order to, again, I think maximize our chances of seeing a therapeutic benefit in this trial, we are focused on patients who have tinnitus of peripheral origin. And in talking to KOLs, we're also focused on patients with -- I call more recent onset of tinnitus rather than patients who have had tinnitus for a very long term like 5 or 10 years. It's a bit controversial in the field how tinnitus of peripheral origin may over time potentially become more centrally modulated. So in order to maximize our chance of success we're focusing well on what I'll call those more recent patients. We again are not giving out the exact criteria on this, so that's about as far as I'll go in that.

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Pete George Stavropoulos, Cantor Fitzgerald & Co., Research Division - Associate Analyst [13]

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Okay. And for the OTIVIDEX Phase III study, for the U.S. sites, are you enrolling from the same centers that you did for AVERTS-1? And if you are -- are you avoiding centers that may have had a higher-than-average placebo effect due to expectation by some other factor?

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Kathie M. Bishop, Otonomy, Inc. - Chief Scientific Officer [14]

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Thanks. I'll take this question as well. The OTIVIDEX Phase III trial is a global trial. So it does include sites here in the U.S. as well as a number of countries in Europe. We've very carefully selected the U.S. sites, so it's just some of the sites we used previously in our Phase III U.S. trial, certainly not all of them. And we did really carefully select those sites focusing more on academic clinicians, who really know Ménière's disease very well and have a good set of Ménière's patients and understand the disease.

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Operator [15]

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Your next question comes from the line of Stacy Ku from Cowen and Co.

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Stacy Ku, Cowen and Company, LLC, Research Division - Equity Research Associate [16]

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Congratulations on the progress. I have 2 questions. First, you might not be able to comment, but I just want to confirm that enrollment for OTIVIDEX is progressing on schedule. And then for my second question, you guys spoke to a lack of FDA-approved drug treatments for tinnitus. Can you help us understand what's currently used off-label as treatment to cope? And could you add additional color for the other competitors in clinical development?

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Kathie M. Bishop, Otonomy, Inc. - Chief Scientific Officer [17]

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Stacy, it's Kathie. I'll take those questions as well. So yes, we confirm that our enrollment for the OTIVIDEX Phase III trial is on track with expectations and we expect data in the first half of 2020. With regards to the OTO-313 trial -- so these patients, as you mentioned, they do take various medications. And I think the way you put it was very good, for coping. So when we look at the medications that they're on, some of them might be on anti-anxiety medications because tinnitus increases anxiety and also depression. So anti-anxiolytics and antidepressants are pretty common in these patients. We allow them during the trial to take those medications, but they have to be on a stable regime of taking it and remain on stable dosage during the trial.

With regard to competitors, there is, as I mentioned, another NMDA receptor antagonist, esketamine, which has been in clinical trials by Auris Medical. It had positive results during Phase II, but then was not positive in Phase III. We have in preclinical animal experiments compared OTO-313 alongside their drug in their formulation. As I mentioned our data and I think, as well, published data indicates that our drug, gacyclidine, is about 50-fold more potent than esketamine, so we think we have an advantage there. And I think more importantly, we also have a drug exposure advantage. They used a formulation called HA or hyaluronic acid. When we test that in animals, we get less than a day exposure in the cochlear compared to OTO-313, which in animals, as I mentioned, we get several weeks exposure and much higher drug levels as well. So we think based on sort of for scientific principles, OTO-313 definitely offers an advantage.

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Operator [18]

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(Operator Instructions) There are no further questions at this time. I will turn the call over to Dr. Weber for closing remarks.

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David Allen Weber, Otonomy, Inc. - President, CEO & Director [19]

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Thank you, everyone, for participating in our call today. We will be at the SunTrust Investor Conference in New York on Wednesday and hope to see many of you there. Have a good evening, everyone. Thank you.

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Operator [20]

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This concludes today's conference call. Thank you, everyone, for your participation. You may now disconnect.