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Edited Transcript of OTIC earnings conference call or presentation 4-Mar-19 9:30pm GMT

Q4 2018 Otonomy Inc Earnings Call

SAN DIEGO Mar 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Otonomy Inc earnings conference call or presentation Monday, March 4, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Allen Weber

Otonomy, Inc. - President, CEO & Director

* Paul E. Cayer

Otonomy, Inc. - Chief Financial & Business Officer

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Conference Call Participants

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* Fang-Ke Huang

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Pete George Stavropoulos

Cantor Fitzgerald & Co., Research Division - Associate Analyst

* Stacy Ku

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

* Robert H. Uhl

Westwicke Partners, LLC - MD

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Q4 2018 Otonomy Inc. Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Mr. Robert Uhl with Westwicke. Sir, you may begin.

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

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Thank you, operator. Good afternoon, and welcome to Otonomy's Fourth Quarter and Full Year 2018 Financial Results and Business Update Conference Call. Joining me on the call from Otonomy are Dr. David Weber, President and Chief Executive 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 OTO-413; expectations regarding IND-enabling activities for OTO-510; expectations regarding OTO-6XX development; the activity and timing of launch under and potential benefits of the co-promotion agreement between Otonomy and Mission; the benefits of the loan provided by Oxford Finance and the potential extension of the interest-only period; expectations regarding value-creating milestones; expectations regarding funding of clinical development program advancement and company operations into 2021; and expectations regarding financial guidance, including operating expenses for 2019 and 2020.

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 fourth quarter and full year 2018 financial results and business update.

I am proud of the progress we made in 2018, which positions Otonomy to have 3 major clinical readouts next year and strengthen the financial position of the company.

In my remarks, I'll briefly review the status for each of our programs, including the ongoing Phase III trial of OTIVIDEX in Ménière's disease and upcoming initiation of clinical trials for OTO-313 in tinnitus and OTO-413 in hearing loss. Importantly, we remain on track with our plan to have results from all 3 of these trials in 2020.

We also have ensured that we have the financial resources necessary to conduct these trials and advance our earlier stage programs by carefully managing our expenses, establishing a co-promotion commercial partnership for OTIPRIO and completing a debt financing that extends our cash runway into 2021. Paul will then review the financial results from 2018 and guidance and we will open up the call for any questions.

Beginning now with the OTIVIDEX Phase III trial in Ménière's disease, enrollment is on track for results in the first half of 2020. The conduct and design of this study is based on the successful AVERTS-2 trial, which achieved its primary endpoint as well as a number of secondary endpoints. The AVERTS-2 results were presented at the American Academy of Otolaryngology's Annual Meeting in October. For this additional Phase III trial, we have retained the same primary efficacy endpoint, daily diary vertigo scale, use of a 1-month lead-in period and primary analysis at 3 months after a single treatment. We have also taken additional steps to manage expectation bias on the part of the patient and the placebo response, including refinement of site selection criteria, emphasis on recruitment of well-characterized Ménière's patients and use of a placebo response training program to manage communication between clinical sites and study subjects. 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 metric from the ongoing trial other than timing to top line results.

The next product candidate in our pipeline is OTO-313, the sustained exposure formulation of the NMDA receptor antagonist gacyclidine in development for the treatment of tinnitus. Tinnitus, which is a ringing or buzzing in the ear, affects approximately 10% of U.S. adults, and can severely impact a person's ability to sleep or relax, thus leading to anxiety and depression. We have completed a Phase I trial for gacyclidine in healthy volunteers with no safety concerns observed. While conducting this trial, we identified and improved formulation for gacyclidine that provides several weeks of inner ear drug exposure from a single intratympanic injection. Results from the Phase I trial and the review of the OTO-313 program were presented at the Society for Neuroscience Annual Meeting in November and at the Association for Research in Otolaryngology Annual Meeting last month.

We are now preparing to initiate a Phase I/II proof-of-concept clinical trial in tinnitus patients in the second quarter of 2019. This trial will begin with an assessment of safety and tolerability in an initial patient cohort followed by an exploratory efficacy study in approximately 50 patients with persistent unilateral tinnitus. Following a lead-in period, patients whose tinnitus symptoms exceed a threshold level will be randomized one-to-one to a single IT injection of OTO-313 or placebo. While not powered for statistical significance, we will be evaluating a number of efficacy endpoints in this trial and expect to be able to demonstrate a clinical signal for OTO-313. We're looking forward for advancing gacyclidine for this important unmet medical need. We're also excited to be initiating clinical development for OTO-413 with a Phase I/II trial expected to start in the third quarter of this year.

OTO-413 is a sustained exposure formulation of brain-derived neurotrophic factor or BDNF. As our Chief Scientific Officer, Dr. Kathie Bishop, reviewed during last quarter's call, we're developing OTO-413 for the repair of cochlear synaptopathy. Recent research has identified damage to synaptic connections as the underlying pathology in noise and age-related hearing loss that manifest as speech-in-noise hearing difficulty. Neurotrophic factor, 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. The exciting potential for this program was recognized by the Society for Neuroscience through their selection of an OTO-413 presentation as a hot topic at the annual meeting in November.

The Phase I/II clinical trial of OTO-413 will be an ascending dose safety and exploratory efficacy study, enrolling approximately 40 patients with speech-in-noise hearing difficulty. Each patient will receive a single IT injection of either OTO-413 or placebo and then be followed for several months. We plan to evaluate patients using a number of endpoints, including both electrophysiological measures of synaptic function and other tests that assess speech-in-noise hearing. We are proud of our effort to advance this first-in-class program for the sake of more than 10 million adults in the U.S. with hearing loss related to synaptic damage.

We look forward to initiating the Phase I/II trial in the third quarter of 2019 and expect to have top line results in the second half of 2020.

Completing the pipeline review, I have a few brief comments about our otoprotection and hair cell regeneration programs. OTO-510 is a sustained exposure formulation of an undisclosed small molecule that we're initially developing for hearing protection in pediatric patients undergoing cisplatin chemotherapy. This is an important unmet medical need because of the significant hearing loss that these patients experience and the lack of a therapy that can provide otoprotection without tumor protection. We plan to initiate IND-enabling activities for OTO-510.

OTO-6XX is our program focused on the regeneration of sensory hair cells to treat severe hearing loss. We have demonstrated proof-of-concept in a preclinical model using a class of molecules formulated for sustained exposure local delivery, and have selected a lead compound for development. We'll have more to say about these 2 programs in the future.

Finally, a short reminder regarding our commercial product, OTIPRIO, that is FDA approved for use during ear tube surgery and for the treatment of acute otitis externa, or AOE. We have established a co-promotion partnership with Mission Pharmacal, a well-established privately held pharmaceutical company, who will promote OTIPRIO for AOE to pediatricians, primary care physicians and urgent care centers. This partnership is proceeding as planned and preparations are underway for Mission to launch OTIPRIO in advance of the peak summer season.

Now at this time, I'll turn the call over to Paul Cayer, our Chief Financial and Business Officer, who will provide a summary of our financial results and guidance.

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Paul E. Cayer, Otonomy, Inc. - Chief Financial & Business Officer [4]

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Thank you, Dave, and good afternoon, everyone. In summary, our expenses for 2018 were at the low end of our financial guidance and we strengthened our already strong balance sheet with the debt financing completed in December.

Going forward, we expect only an incremental increase in our spending for 2019 and that spending will decline in 2020 as we complete the 3 clinical trials Dave reviewed.

Now let me briefly recap the financial results from 2018 and guidance that are more fully described in today's earnings release and 10-K filing.

As of December 31, 2018, we held a cash balance, including cash, cash equivalents and short-term investments totaling $97.3 million. This cash balance includes proceeds from a $15 million term loan provided by Oxford Finance. This loan provides for a 24-month interest-only repayment period, which can be extended upon successful results from the ongoing OTIVIDEX Phase III trial. Notably, there are no financial covenants or warrants associated with the loan.

In the fourth quarter of 2018, we reported total GAAP operating expenses of $13.2 million with non-GAAP operating expenses totaling $10.8 million. The primary adjustment for non-GAAP expenses is exclusion of stock-based compensation. So this is the financial metric that best approximates our spending level.

For the full year 2018, total GAAP operating expenses were $51.9 million with non-GAAP operating expenses totaling $39.5 million. Both of these expense levels were at the low end of our financial guidance for the year demonstrating our commitment to carefully manage our spend.

GAAP R&D expenses for the year totaled $31.8 million with SG&A expenses totaling $20 million. We expect that the mix of expenses will continue to shift towards R&D as the proceeds from our commercial partnership with Mission provides the cost offset for SG&A.

Finally, with regard to our financial outlook, we expect the GAAP operating expenses for 2019 will be in the range of $55 million to $60 million, while non-GAAP operating expenses are expected to total $45 million to $50 million. And as mentioned before, we expect that these expense levels will decline in 2020. This spending plan will enable our current cash balance to not only fund operations through the clinical trial completions in 2020, but also extends our cash runway into 2021.

With that, I'll turn the call back over to Dave.

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David Allen Weber, Otonomy, Inc. - President, CEO & Director [5]

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Thank you, Paul.

In summary, our accomplishments in 2018 have positioned the company for significant advancement of the pipeline in 2019 through continued enrollment of the Phase III trial in Ménière's disease and an initiation of clinical trials for both tinnitus and hearing loss. These clinical programs address important unmet medical needs and reinforce our leadership position in the untapped neurotology field. Furthermore, they also provide multiple value-creation catalysts for the company in 2020, which is fully funded by our existing cash balance.

I'm excited about our programs and plans, and look forward to sharing this information and updates more broadly with investors during 2019.

Operator, we're now ready for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Stacy Ku with Cowen and Company.

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Stacy Ku, Cowen and Company, LLC, Research Division - Equity Research Associate [2]

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I have a few questions. First, regarding the current ongoing Phase III for OTIVIDEX. Could you give us some insight into the well-characterized Meniere's patients you described on the call? And I have another one after that.

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

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Okay. Thank you, Stacy. Yes, with regards to the Phase III, what we've done is really tightened the enrollment criteria a bit based on discussions with KOLs and investigators involved in the AVERTS-2 study. And this is really around more of the insurance that we're excluding any patients who may have symptoms similar to Ménière's, but not Ménière's. An example of that would be vestibular migrainous vertigo, which is experienced by patients with extreme migraine episodes. And so there is a number of things that we've tightened up with regards to the enrollment of the Ménière's patients in the diagnosis. The other step that we've taken as another example, is making sure that these patients are well known to the investigators. So in the AVERTS-2 trial enrolling in Europe, these patients were long-standing Ménière's patients that were very well known to the investigators and that's what we want in the ongoing trial that's enrolling now. And so we are really encouraging investigators who have had a long-term standing relationship with these patients or have the ability to talk with their treating physician with regard to the background of their disease to ensure that they meet our criteria and are well-characterized Ménière's patients.

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Stacy Ku, Cowen and Company, LLC, Research Division - Equity Research Associate [4]

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That's really helpful. And then for my second question moving to the pipeline. Regarding 413 for hearing loss, could you give us additional insight into the auditory brainstem response as an endpoint? How is that measured and how does it correlate to hearing recovery?

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David Allen Weber, Otonomy, Inc. - President, CEO & Director [5]

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Yes. Well, auditory brainstem response is a electrophysiological measure that we can use to understand the hearing response. And there's actually a number of ways of looking at that data that actually gets far beyond what I will be able to explain, and I would leave that to a future call with our Chief Scientific Officer, Dr. Kathie Bishop. But ABR, as it's called, or auditory brainstem response, is an ability to actually quantitate electrophysically the responses that an animal or human is having to hearing input. So we can actually look at the electrical signals that are given off. And through those patterns that we see, we can look at different functions of the hearing and the level of that functional hearing. And so it can be used as one of the measures to separate what we call synaptic hearing loss versus hair cell-related hearing loss where you might have lost hair cells. So it's one of many measures that we will be employing to identify these patients as well as separate their response in the course of the treatment. What's nice here is, of course, that these are very objective measures that we can actually look at the data as opposed to a patient-reported outcome as obviously we have to deal with in Ménière's disease and tinnitus.

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Operator [6]

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And our next question comes from Charles Duncan with Cantor.

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Pete George Stavropoulos, Cantor Fitzgerald & Co., Research Division - Associate Analyst [7]

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This is Pete Stavropoulos on for Charles. I have a question about the OTIVIDEX Phase III study. So you said enrollment is going well and the majority of the patients will be enrolled in the EU. Is there a particular ratio that you guys are attempting to achieve with regards to EU to U.S. patients?

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David Allen Weber, Otonomy, Inc. - President, CEO & Director [8]

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No, there is no set ratio. We will continue to enroll across both the U.S. and Europe. So U.S. started first. So obviously, it's ahead in terms of number of patients, but we have no requirement in terms of how many patients from every geography. And that is based on both our review with the agency as well as our experience in enrolling the trials. Enrollment is our primary -- obviously, we're going to keep focused on the time line to results as a measure of are we on track, and we are on track with that, and a major part of the effort has been bringing on the countries in Europe. So U.S. started. With Europe, of course, you've got to go country-by-country. And so that has been the big work being done in the fourth quarter is bringing those other geographies on through the submissions to their regulatory authorities. That has gone very well. We're very excited to have the trial now really working forward to the 2020 first half readout.

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

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Is it possible to give us a sense of how many sites you have up running in the U.S. and EU?

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David Allen Weber, Otonomy, Inc. - President, CEO & Director [10]

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Not in terms of -- again, we tend to focus on the actual time line to the enrollment. We expect there will be anywhere from, basically by the time we're done, 55 to 60 sites will have participated.

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Operator [11]

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And our next question comes from Edward Nash with SunTrust Robinson.

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Fang-Ke Huang, SunTrust Robinson Humphrey, Inc., Research Division - Associate [12]

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This is Fang-Ke for Edward Nash. My first question is on the Ménière's disease. You mentioned that some of the patients misdiagnosed with the disease. Can you just comment on how are you envisioning the future that this is going to be diagnosed differently?

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David Allen Weber, Otonomy, Inc. - President, CEO & Director [13]

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Fang-Ke, thanks for joining. Well, I think it's important to understand we don't have data that -- obviously is difficult to go back and to look at the patients that were treated in the prior Phase III trials and go back through those diagnosis. So I want to be careful here that, it is not that we think that, that was by any means a large number of patients. It was just something that we saw the opportunity to further refine the criteria. So I don't think it's something that we necessarily know or believe was responsible for the AVERTS-1. But it is something that as we looked at, what can we do better based on the learnings that we had, it was an improvement that we saw ourselves capable of making. So I think it's important to understand that. And that really is based on obviously as physicians continue to treat Ménière's, we're learning more and more about how to define the criteria and really understand those patients who have Ménière's because it is a diagnosis of exclusion. And I think that's what people need to understand, it's a difficult road for patients to be diagnosed because of the lack of understanding and education of Ménière's, to the lack of any approved treatment. And that it is a diagnosis of which they exclude other potential causations and so it's really through tightening those types of criteria that we feel very comfortable about the patients that we're enrolling in this trial.

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Fang-Ke Huang, SunTrust Robinson Humphrey, Inc., Research Division - Associate [14]

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Got it. That's very helpful. Our second question is on the 413. Can you mention in your preclinical data, what's the half-life of the BDNF formulation you guys have? And do you think in the future, are you going to use some kind of mini pump to have a constant secretion of that -- of BDNF?

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David Allen Weber, Otonomy, Inc. - President, CEO & Director [15]

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No, it will not be a mini pump. Well, again, this is where our formulation technology comes in. We have, obviously, a very broad understanding now and a very large intellectual property estate around the idea of drug delivery to the ear, something that we have been working on since our beginning. And have, I think, established a very clear expertise here with both our approved products, OTIPRIO, with OTIVIDEX, with 313 and now with 413. So this will be a intratympanically administered liquid formulation just like our other programs that we have in the clinic, OTIPRIO, which is approved, and OTIVIDEX, which is in Phase III, and 313, which will be going in the Phase I/II. So these are known formulations that we've developed, and they will provide a sustained exposure. So that's what 413 will provide sustained exposure. And I think we will be providing additional information on that in the future, we tend to go to -- as we present the preclinical work that we do at these meetings, ARO, and at Neuroscience and other meetings. We will be presenting the PK data. I think, for example, we've recently presented data at the ARO on OTIVIDEX. And so that's something that we will present as we continue to develop the development program and move to the clinic where we'll show more preclinical data there.

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Operator [16]

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(Operator Instructions) And I'm showing no further questions in the queue at this time. I'd like to turn the call back to Dave Weber, CEO, for any closing remarks.

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David Allen Weber, Otonomy, Inc. - President, CEO & Director [17]

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Well, thank you, everyone, for participating in our call today. We will be attending both the Cowen and the Oppenheimer Healthcare conferences during the next couple of weeks and hope to meet with many of you there. Have a good evening, everyone. Thank you.

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Operator [18]

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Ladies and gentlemen, thank you for your participation in today's conference. This does conclude your program, and you may all disconnect. Everyone, have a great day.