Description

Commercial Products:  Dextenza; Delayed release steroid inserted in the tear ducts to reduce post-surgical ocular inflammation and pain (often used post cataract surgery) and as a treatment for eye itching due to allergies.  2023 Revenue Guidance: “high end of original $55-60m guidance” vs $51.5m in 2022 (~15% growth).

Highlighted Pipeline Products: 

• OTX-TKI for wAMD: hydrogel implant into the eye that slowly eludes axitinib (an approved TKI) to maintain vision in patients with stabilized Wet Age-Related Macular Degeneration (wAMD).  Completed two Phase 1 trials in wAMD.  Planning to move directly to Phase 3 in wAMD before year-end 2023.  The wAMD market is massive with Regeneron and Roche generating over $10 billion annually.  Management expects OTX-TKI to generate in excess of $1 billion annually should it come to market.
• OTX-TKI for Diabetic Retinopathy (DR):  Currently running a Phase 1 trial in DR expected to read-out Q1 2024.  OCUL could advance directly to pivotal Phase 3 trials.  While Anti-VEGFs are approved for DR, they are rarely used in this patient population given their relatively young age, the slow deterioration of vision, and treat burden of expensive monthly injections.
• OTX-TIC: hydrogel implant into the eye that slowly eludes travoprost (an approved prostaglandin analog) to reduced elevated pressure in the eye due to Glaucoma.  Currently running a Phase 2 trial expected to read out in Q1 2024.

Cash Runway extends “into 2025”.

Catalysts:

Overview:

Ocular Therapeutix (OCUL) is a drug delivery biopharmaceutical company with a beaten down stock and multiple catalysts reading out over the next several months which we believe will rerate the company.  Ocular has one commercial product, DEXTENZA, and multiple mid-stage clinical drug candidates addressing diseases of the eye.

OCUL recently reported positive Phase 1 results for OTX-TKI, its lead candidate, in wet AMD and is planning to begin enrolling the first of two Phase 3 wAMD trials by YE2023. The Company is also in process of a Phase 1 study of OTX-TKI in diabetic retinopathy (DR) and a Phase 2 study of OTX-TIC in glaucoma—both reading out in Q1 2024.

In July 2023, OCUL entered into a credit facility and royalty deal with Barings to fund the first of OTX-TKI’s two pivotal trials necessary for approval (and refinance existing loans).  Over the spring and early summer 2023 Ocular had run an unsuccessful process to potentially bring in a strategic partner to fund a larger, more traditional non-inferiority (to Regeneron’s Eylea) Phase 3 trial (estimated to cost ~$300 million) but did not find acceptable interest.  Rather, now, partially funded by the new Barings term loan/royalty financing Ocular plans to conduct two smaller novel superiority (to Eylea) pivotal trials (costing an estimated $50 million each). Ocular is taking the somewhat uncommon approach of getting commitment from the FDA for its trial design via a Special Protocol Assessment to derisk its OTX-TKI regulatory strategy and gain investor and strategic partner confidence.

The Company’s market cap is ~$265M and TEV is ~$330M—including $37.5M converts ($6.50 strike, November 2029 maturity), a $82.5M credit facility due August 2029, and $66.6M in cash. Beyond the ~12% going interest rate (SOFR+675), the credit facility includes a 3.5% royalty on DEXTENZA sales (and a minimum of $82.5m in combined  payments from interest, DEXTENZA royalties, and pre-payment penalties).

OCUL “conservatively estimates its cash runway extends into 2025”, allowing the Company to:

(1) Report Phase 1 data on OTX-TKI in DR

(2) Report Phase 2 data on OTX-TIC in Glaucoma

(3) Initiate the first Phase 3 study of OTX-TKI in wet AMD. 

(4) Complete a small trial to enable further study of a third drug candidate, OTC-DED, for dry eye disease; a positive outcome of which would position Ocular to initiate a pivotal trial for OTX-DED.

This cash runway does not contemplate a ~$50M second pivotal trial for OTX-TKI in wet AMD which would require either a strategic partner, a capital raise, or success obtaining a facility fee reimbursement for DEXTENZA from CMS this November.

Ideally, Ocular would be able to self-fund its clinical programs which management believes is possible should CMS approve an approximate $500 facility fee for DEXTENZA at Ambulatory Surgery Centers.  DEXTENZA is a single-administration eye insert for the treatment of post-surgical ocular inflammation and pain used largely post cataract surgery which is expected to generate revenues at the upper end of $55M - $60M guidance in 2023. DEXTENZA currently penetrates less than 3% of U.S. cataract procedures, primarily due to an unfavorable reimbursement profile from CMS.  Ambulatory surgery centers (ASCs) do not receive a separate facility payment for DEXTENZA insertion post cataract surgery, making allocating the time to do so uneconomic. Currently, CMS payment rules instruct that all procedures at DEXTENZA’s payment level should generate a separate facility payment, except for DEXTENZA. Ocular has lobbied for the past couple years to change this, succeeding last year in the hospital setting, which would be great except that’s not where these procedures typically are done.  In November 2023, OCUL will learn if their campaign this year to change the reimbursement at ASCs prevails. Ocular expects that should they succeed, use of DEXTENZA at ASCs will increase exponentially. In August 2023, CMS’s Advisory Panel on Hospital Outpatient Payment recommended that DEXTENZA should generate a separate facility payment for the second consecutive year. This year, roughly 70% of comments on CMS’s final rule have been in relation to DEXTENZA. Ocular’s management is optimistic that they will receive the reimbursement change but sets only 50/50 odds of success.  Absent success with facility fee change, Ocular could also choose to sell the DEXTENZA product, which at 4-6x sales could generate $240-$360 million.  Management cites precedent transactions occurring at 10-15x sales, but we do not feel the need to underwrite such optimistic plan Bs.

Alternatively, OCUL may dispel investors’ and potential partners’ concerns around design for OTX-TKI’s pivotal trial by late November – early December 2023 enabling a reasonable capital raise or fair/attractive strategic partnership deal. Interestingly, the $82.5 million royalty fee liability in the Barings term loan agreement is reduced by 80% if Ocular enters into an LOI that results in a “change of control” by February 2, 2024; 70% if Ocular enters into an LOI that results in a “change of control” by August 2, 2024 suggesting that Ocular was mindful to protect the optionality of a sale of the company in the near term should strategic interest in OTX-TKI firm up. 

Investors, burned by the lack of a strategic partnership, are currently skeptical of a trial design that 1) compares a single dose of OTX-TKI against a single dose of Eylea to establish superiority and that 2) allows sick trial participants’ deteriorating vision to go untreated (20/20 to 20/40), albeit only to the visual acuity at which they entered the trial (20/40).  Would the FDA accept the superiority design despite Eylea being used off label?  How would the FDA treat recues in the statistical analysis? Would clinical trial sites agree to join the study given the ethical concerns (allowing the patients’ vision to deteriorate) and if so would they be successful in recruiting patients?  In effort to allay the primary concern of approvability, OCUL submitted a request for a Special Protocol Assessment (SPA) to the FDA on 9/12/2023.  A SPA effectively is a contract between a drug developer and the FDA that an approved trial design is supportive of marketing approval. Under the proscribed SPA process, the FDA has 45 days to respond to the Company, after which the Company may be required to have a Type A meeting, which would imply another 30 days to a potential verbal agreement. The Company believes there is a high probability that FDA approves the SPA based on interaction with the FDA to date with the need only to clarify how the FDA would want rescues[1] treated in the primary endpoint statistical analysis.  Agreement with the FDA on a SPA would de-risk Ocular’s pivotal Phase 3 trial design in the eyes of investors and potential strategic partners. OCUL plans to begin enrollment in the OTX-TKI Phase 3 upon approval of the SPA, with an early December 2023 target.  Quick enrollment would also allay investor concerns about funding and time to market.  Management is optimistic regarding both trial site and patient enrollment given interactions with leading ocular clinical trial site operators and is eager to demonstrate demand in the market for alternatives to expensive anti-VEGF injections.

As further sources of opportunity for Ocular, to fund the business near term and create long term commercial sales, OCUL has four programs in addition to OTX-TKI for wAMD in the clinic:

1. OTX-TKI for Diabetic Retinopathy
2. OTX-TIC program in Glaucoma. 
3. OTX-DED for Dry Eye Disease

Both the DR and Glaucoma programs are set to release top-line data by Q1 2024: Phase 1 data in DR and Phase 2 data in Glaucoma. Positive Phase 1 data for OTX-TKI in DR is expected, as positive results were seen in wet AMD, but confirmation could increase comfort for strategic partners in OTX-TKI’s overall prospects and set up an alternative pathway to FDA approval for OTX-TKI. OCUL expects to be prepared to initiate a Phase 3 pivotal trial for OTX-TKI in DR as early as Q1 2024. Separately, positive Phase 2 data indicating that OTX-TIC does not damage endothelial cells in patients with glaucoma could ignite strategic interest—OCUL has already indicated a willingness to partner-out OTX-TIC to fund a second pivotal trial for OTX-TKI. 

Ocular is also conducting a small trial to establish an appropriate placebo with which to potentially launch Phase 3 trials in OTX-DED in Dry Eye Disease.  Ocular’s ran a Phase 2 trial for OTX-DED in Dry Eye Disease that while it showed strong activity in the drug arm, it did not show statistically significant separation between the results of the drug arm and the placebo arm.  Ocular now believes that the placebo on its own increases tear production thus confounding the results.  Should Ocular develop an appropriate placebo management believes they could proceed directly to pivotal studies subject to funding.  

In summary OCUL represents an attractive package of significant upside opportunities with meaningful downside protection.  Either the OTX-TKI opportunity in wAMD or the DEXTENZA facility payment should result in significant appreciation in the stock, with downside protection available from a sale of DEXTENZA to a third party.  OTX-TKI in Diabetic Retinopathy, OTX-TIC in Glaucoma, and OTX-DED in Dry Eye Disease also offer attractive paths forward for the company.  It is not inconceivable that Ocular, in 2025, could have a multi-hundred-million-dollar commercial asset in DEXTENZA as well as four Phase 3 trials running simultaneously.

Catalyst

Commercial Products:  Dextenza; Delayed release steroid inserted in the tear ducts to reduce post-surgical ocular inflammation and pain (often used post cataract surgery) and as a treatment for eye itching due to allergies.  2023 Revenue Guidance: “high end of original $55-60m guidance” vs $51.5m in 2022 (~15% growth).

Highlighted Pipeline Products: 

• OTX-TKI for wAMD: hydrogel implant into the eye that slowly eludes axitinib (an approved TKI) to maintain vision in patients with stabilized Wet Age-Related Macular Degeneration (wAMD).  Completed two Phase 1 trials in wAMD.  Planning to move directly to Phase 3 in wAMD before year-end 2023.  The wAMD market is massive with Regeneron and Roche generating over $10 billion annually.  Management expects OTX-TKI to generate in excess of $1 billion annually should it come to market.
• OTX-TKI for Diabetic Retinopathy (DR):  Currently running a Phase 1 trial in DR expected to read-out Q1 2024.  OCUL could advance directly to pivotal Phase 3 trials.  While Anti-VEGFs are approved for DR, they are rarely used in this patient population given their relatively young age, the slow deterioration of vision, and treat burden of expensive monthly injections.
• OTX-TIC: hydrogel implant into the eye that slowly eludes travoprost (an approved prostaglandin analog) to reduced elevated pressure in the eye due to Glaucoma.  Currently running a Phase 2 trial expected to read out in Q1 2024.

Cash Runway extends “into 2025”.

Catalysts:

Overview:

Ocular Therapeutix (OCUL) is a drug delivery biopharmaceutical company with a beaten down stock and multiple catalysts reading out over the next several months which we believe will rerate the company.  Ocular has one commercial product, DEXTENZA, and multiple mid-stage clinical drug candidates addressing diseases of the eye.

OCUL recently reported positive Phase 1 results for OTX-TKI, its lead candidate, in wet AMD and is planning to begin enrolling the first of two Phase 3 wAMD trials by YE2023. The Company is also in process of a Phase 1 study of OTX-TKI in diabetic retinopathy (DR) and a Phase 2 study of OTX-TIC in glaucoma—both reading out in Q1 2024.

In July 2023, OCUL entered into a credit facility and royalty deal with Barings to fund the first of OTX-TKI’s two pivotal trials necessary for approval (and refinance existing loans).  Over the spring and early summer 2023 Ocular had run an unsuccessful process to potentially bring in a strategic partner to fund a larger, more traditional non-inferiority (to Regeneron’s Eylea) Phase 3 trial (estimated to cost ~$300 million) but did not find acceptable interest.  Rather, now, partially funded by the new Barings term loan/royalty financing Ocular plans to conduct two smaller novel superiority (to Eylea) pivotal trials (costing an estimated $50 million each). Ocular is taking the somewhat uncommon approach of getting commitment from the FDA for its trial design via a Special Protocol Assessment to derisk its OTX-TKI regulatory strategy and gain investor and strategic partner confidence.

The Company’s market cap is ~$265M and TEV is ~$330M—including $37.5M converts ($6.50 strike, November 2029 maturity), a $82.5M credit facility due August 2029, and $66.6M in cash. Beyond the ~12% going interest rate (SOFR+675), the credit facility includes a 3.5% royalty on DEXTENZA sales (and a minimum of $82.5m in combined  payments from interest, DEXTENZA royalties, and pre-payment penalties).

OCUL “conservatively estimates its cash runway extends into 2025”, allowing the Company to:

(1) Report Phase 1 data on OTX-TKI in DR

(2) Report Phase 2 data on OTX-TIC in Glaucoma

(3) Initiate the first Phase 3 study of OTX-TKI in wet AMD. 

(4) Complete a small trial to enable further study of a third drug candidate, OTC-DED, for dry eye disease; a positive outcome of which would position Ocular to initiate a pivotal trial for OTX-DED.

This cash runway does not contemplate a ~$50M second pivotal trial for OTX-TKI in wet AMD which would require either a strategic partner, a capital raise, or success obtaining a facility fee reimbursement for DEXTENZA from CMS this November.

Ideally, Ocular would be able to self-fund its clinical programs which management believes is possible should CMS approve an approximate $500 facility fee for DEXTENZA at Ambulatory Surgery Centers.  DEXTENZA is a single-administration eye insert for the treatment of post-surgical ocular inflammation and pain used largely post cataract surgery which is expected to generate revenues at the upper end of $55M - $60M guidance in 2023. DEXTENZA currently penetrates less than 3% of U.S. cataract procedures, primarily due to an unfavorable reimbursement profile from CMS.  Ambulatory surgery centers (ASCs) do not receive a separate facility payment for DEXTENZA insertion post cataract surgery, making allocating the time to do so uneconomic. Currently, CMS payment rules instruct that all procedures at DEXTENZA’s payment level should generate a separate facility payment, except for DEXTENZA. Ocular has lobbied for the past couple years to change this, succeeding last year in the hospital setting, which would be great except that’s not where these procedures typically are done.  In November 2023, OCUL will learn if their campaign this year to change the reimbursement at ASCs prevails. Ocular expects that should they succeed, use of DEXTENZA at ASCs will increase exponentially. In August 2023, CMS’s Advisory Panel on Hospital Outpatient Payment recommended that DEXTENZA should generate a separate facility payment for the second consecutive year. This year, roughly 70% of comments on CMS’s final rule have been in relation to DEXTENZA. Ocular’s management is optimistic that they will receive the reimbursement change but sets only 50/50 odds of success.  Absent success with facility fee change, Ocular could also choose to sell the DEXTENZA product, which at 4-6x sales could generate $240-$360 million.  Management cites precedent transactions occurring at 10-15x sales, but we do not feel the need to underwrite such optimistic plan Bs.

Alternatively, OCUL may dispel investors’ and potential partners’ concerns around design for OTX-TKI’s pivotal trial by late November – early December 2023 enabling a reasonable capital raise or fair/attractive strategic partnership deal. Interestingly, the $82.5 million royalty fee liability in the Barings term loan agreement is reduced by 80% if Ocular enters into an LOI that results in a “change of control” by February 2, 2024; 70% if Ocular enters into an LOI that results in a “change of control” by August 2, 2024 suggesting that Ocular was mindful to protect the optionality of a sale of the company in the near term should strategic interest in OTX-TKI firm up. 

Investors, burned by the lack of a strategic partnership, are currently skeptical of a trial design that 1) compares a single dose of OTX-TKI against a single dose of Eylea to establish superiority and that 2) allows sick trial participants’ deteriorating vision to go untreated (20/20 to 20/40), albeit only to the visual acuity at which they entered the trial (20/40).  Would the FDA accept the superiority design despite Eylea being used off label?  How would the FDA treat recues in the statistical analysis? Would clinical trial sites agree to join the study given the ethical concerns (allowing the patients’ vision to deteriorate) and if so would they be successful in recruiting patients?  In effort to allay the primary concern of approvability, OCUL submitted a request for a Special Protocol Assessment (SPA) to the FDA on 9/12/2023.  A SPA effectively is a contract between a drug developer and the FDA that an approved trial design is supportive of marketing approval. Under the proscribed SPA process, the FDA has 45 days to respond to the Company, after which the Company may be required to have a Type A meeting, which would imply another 30 days to a potential verbal agreement. The Company believes there is a high probability that FDA approves the SPA based on interaction with the FDA to date with the need only to clarify how the FDA would want rescues[1] treated in the primary endpoint statistical analysis.  Agreement with the FDA on a SPA would de-risk Ocular’s pivotal Phase 3 trial design in the eyes of investors and potential strategic partners. OCUL plans to begin enrollment in the OTX-TKI Phase 3 upon approval of the SPA, with an early December 2023 target.  Quick enrollment would also allay investor concerns about funding and time to market.  Management is optimistic regarding both trial site and patient enrollment given interactions with leading ocular clinical trial site operators and is eager to demonstrate demand in the market for alternatives to expensive anti-VEGF injections.

As further sources of opportunity for Ocular, to fund the business near term and create long term commercial sales, OCUL has four programs in addition to OTX-TKI for wAMD in the clinic:

1. OTX-TKI for Diabetic Retinopathy
2. OTX-TIC program in Glaucoma. 
3. OTX-DED for Dry Eye Disease

Both the DR and Glaucoma programs are set to release top-line data by Q1 2024: Phase 1 data in DR and Phase 2 data in Glaucoma. Positive Phase 1 data for OTX-TKI in DR is expected, as positive results were seen in wet AMD, but confirmation could increase comfort for strategic partners in OTX-TKI’s overall prospects and set up an alternative pathway to FDA approval for OTX-TKI. OCUL expects to be prepared to initiate a Phase 3 pivotal trial for OTX-TKI in DR as early as Q1 2024. Separately, positive Phase 2 data indicating that OTX-TIC does not damage endothelial cells in patients with glaucoma could ignite strategic interest—OCUL has already indicated a willingness to partner-out OTX-TIC to fund a second pivotal trial for OTX-TKI. 

Ocular is also conducting a small trial to establish an appropriate placebo with which to potentially launch Phase 3 trials in OTX-DED in Dry Eye Disease.  Ocular’s ran a Phase 2 trial for OTX-DED in Dry Eye Disease that while it showed strong activity in the drug arm, it did not show statistically significant separation between the results of the drug arm and the placebo arm.  Ocular now believes that the placebo on its own increases tear production thus confounding the results.  Should Ocular develop an appropriate placebo management believes they could proceed directly to pivotal studies subject to funding.  

In summary OCUL represents an attractive package of significant upside opportunities with meaningful downside protection.  Either the OTX-TKI opportunity in wAMD or the DEXTENZA facility payment should result in significant appreciation in the stock, with downside protection available from a sale of DEXTENZA to a third party.  OTX-TKI in Diabetic Retinopathy, OTX-TIC in Glaucoma, and OTX-DED in Dry Eye Disease also offer attractive paths forward for the company.  It is not inconceivable that Ocular, in 2025, could have a multi-hundred-million-dollar commercial asset in DEXTENZA as well as four Phase 3 trials running simultaneously.