OPTINOSE, INC. You should read this section in conjunction with our unaudited interim consolidated financial statements and related notes included in Part I. Item 1 of this Form 10-Q and our audited consolidated financial statements and related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , filed with theSecurities and Exchange Commission (SEC) onMarch 5, 2020 . In addition to historical information, some of the information contained in this discussion and analysis includes forward-looking statements that involve risks and uncertainties. As a result of many factors, our actual results could differ materially from the results described in or implied by such forward-looking statements. Please refer to the "Note Regarding Forward-Looking Statements" section of this Form 10-Q for additional information. Company Overview We are a specialty pharmaceutical company focused on the development and commercialization of products for patients treated by ear, nose and throat (ENT) and allergy specialists. Our first commercial product, XHANCE® (fluticasone propionate) nasal spray, 93 micrograms (mcg), is a therapeutic utilizing our proprietary Exhalation Delivery System (EDS) device that delivers a topically-acting corticosteroid for the treatment of chronic rhinosinusitis with nasal polyps and, if approved, chronic rhinosinusitis without nasal polyps (also referred to as chronic sinusitis). Chronic rhinosinusitis is a serious nasal inflammatory disease that is treated using therapies, such as intranasal steroids (INS), which have significant limitations. We believe XHANCE has a differentiated clinical profile with the potential to become part of the standard of care for this disease because it is able to deliver medication to the primary site of inflammation high and deep in the nasal passages in regions not adequately reached by conventional INS. InSeptember 2017 , theU.S. Food and Drug Administration (FDA) approved XHANCE for the treatment of nasal polyps in patients 18 years of age or older. XHANCE was made widely available through commercial channels inApril 2018 . Business Updates in Response to the COVID-19 Pandemic The COVID-19 pandemic has caused business and economic disruption, and the duration and impact of that disruption is uncertain at this time. •Inmid-March 2020 , we transitioned to a full-time, virtual work environment in which all employees, including sales representatives (whom we refer to as territory managers), were encouraged to work from their place of residence. Our decision was based on actions taken by federal, state and local governments to contain the spread of severe acute respiratory coronavirus 2 (SARS-CoV-2) and the related Coronavirus Disease 2019 (COVID-19), as well as the impact of "social distancing" efforts and various mitigation actions implemented by healthcare practices acrossthe United States . •Federal, state and local government requirements and guidances have impacted virtually all of the physicians' offices in which our territory managers detail XHANCE. These impacts include reduced patient visits, temporary halt of territory managers' visits, and temporary closings of physicians' offices. Shortly after our transition to a full-time, virtual work environment, our territory managers began virtual details of XHANCE to target audience physicians. •We have been monitoring, and will continue to monitor, federal, state, and local government requirements and guidances. In certain instances, the various mitigation efforts have been updated to facilitate a return to a working environment with fewer restrictions. Where permitted by local requirements and the policies of physician offices, our territory managers began to return to in-person detailing of physicians in May and June. Given the localized nature of the restrictions that are in place and the potential for restrictions to return we have equipped our territory managers to operate in an environment that will include a mix of virtual and in-person physician detailing with dependencies on geography and time. •Late in the first quarter we began to observe an adverse impact of the COVID-19 pandemic on XHANCE prescription growth. This adverse impact was most pronounced during the "shelter-in-place" mitigation efforts that were prevalent from late-March through May. Although XHANCE prescription growth (and in particular, new prescription growth) continues to be adversely impacted by the COVID-19 pandemic, the magnitude of the impact has slowly improved as federal, state and local government requirements and guidances have been updated to facilitate economic reopening. Based on third-party prescription data as 19
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Table of Contents well as data from Preferred Pharmacy Network (PPN) partners, XHANCE prescriptions increased 11% from first quarter 2020 to second quarter 2020. Although XHANCE prescriptions have grown during this initial COVID-19 period, the rate of growth was below our pre-pandemic expectations. Due to the adverse effect of the COVID-19 pandemic on XHANCE prescription growth to date, as well as the unknown effect in the future, we withdrew our previous XHANCE revenue guidance for 2020. If the effects of the COVID-19 pandemic on XHANCE net revenues become more certain, we will evaluate providing guidance for XHANCE net revenues. Additionally, the duration and magnitude of the negative impact from the COVID-19 pandemic on XHANCE net revenue are uncertain and may affect the availability of additional capital under our Pharmakon Note Purchase Agreement and our ability to remain in compliance with our revenue covenants thereunder. •Due to the impacts of the COVID-19 pandemic, one of our contract manufacturers implemented a reduced work schedule and additional precautions which resulted in delays relating to the manufacture of XHANCE in second quarter 2020 but did not result in an interruption to commercial or clinical supply. Currently, all of our manufacturers are manufacturing XHANCE finished goods on time. Additionally, we believe we are maintaining appropriate levels of finished product inventories in the event of future supply disruption, however, the duration and magnitude of a future negative impact from COVID-19 could constrain our supply of XHANCE. •Previous guidance related to the expected timing of results from our ongoing chronic sinusitis trials indicated that results from both trials would be available in the second half of 2021. Pauses in patient enrollment due to factors related to COVID-19 have had, and may continue to have, varying effects in different geographies and over time but have not yet led to a change in our projected timeline for initial data availability. For those subjects currently participating in these studies, procedures to facilitate ongoing treatment and capture of data during periods of in-person care restrictions have been put in place. •In light of the uncertainties created by the COVID-19 pandemic, inMay 2020 we announced actions to reduce 2020 operating expenses while preserving our ability to drive XHANCE growth and complete our ongoing chronic sinusitis trials. These expense reductions include a reprioritization of project spending, a reduction in payroll costs, and lower near-term clinical trial expenses as the result of temporarily paused patient enrollment at research sites in response to the acute COVID-19 environment. The full impact of the COVID-19 pandemic on our business is still unknown. It is likely to continue to have negative impacts on XHANCE prescription growth and net revenues as a result of fewer patients visiting physician offices, rising unemployment adversely affecting demand and payor mix, and the availability and cost of capital for us to fund our business operations and service our debt. We will continue to assess the evolving impact of the COVID-19 pandemic and will make adjustments to our operations as necessary. Additional Business Updates We track and report metrics that we believe are an important part of assessing our progress in key strategic areas including: •XHANCE Prescriptions and Market Share. Based on third-party prescription data as well as data from PPN partners, the total estimated number of XHANCE prescriptions in the second quarter of 2020 was 62,500, which represents 84% growth for prescriptions when compared to estimated second quarter 2019 prescriptions of 33,900. The INS prescription market decreased approximately 12% from second quarter 2019 to second quarter 2020 based on third-party prescription data. In addition, the total estimated number of XHANCE prescriptions was 43,000 in the third quarter of 2019, 54,300 in the fourth quarter of 2019, and 56,100 in the first quarter of 2020. A seasonal effect has historically been observed in the INS prescription market in which market volume generally peaks near the middle of the second quarter and declines into the early part of the third quarter of each calendar year. As the result of the COVID-19 pandemic we expect the market volume peak and subsequent declines to be different in 2020. Based on third-party prescription data, the INS market decreased 11% from the second quarter of 2019 to the third quarter of 2019, increased 9% from the third quarter of 2019 to the fourth quarter of 2019, increased 8% from the fourth quarter of 2019 to the first quarter of 2020, and decreased 16% from the first quarter of 2020 to the second quarter of 2020. Although the underlying disease that we are treating is chronic and causes symptoms year-round, we believe the variation in patient flow through the offices of relevant specialists, and seasonality in disease flare-ups, has an impact on the number of patients that present themselves and who are therefore available 20
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to receive a new prescription for XHANCE. Demand has historically been, and we
expect will continue to be, impacted by the INS market seasonality and the
seasonal variation in patient visits with their doctor resulting in reduced
XHANCE prescription demand in the third quarter. Additionally, as we experienced
in 2020, we expect that the first quarter prescription demand and average net
revenue per prescription for XHANCE will be adversely impacted in future years
by the annual resetting of patient healthcare insurance plan deductibles and
changes in individual patients' healthcare insurance coverage, both of which
often occur in January.
We track the market share of XHANCE within our current target audience. For this
purpose, we calculate market share as the proportion of XHANCE prescriptions to
the number of prescriptions written for other INS within our current target
audience of over 10,000 physicians. We believe market share, in addition to
XHANCE prescription volume, provides important information regarding XHANCE
utilization because market share normalizes XHANCE prescriptions for market
effects including the INS market seasonality, seasonal variation in patient
visits with their doctor, annual deductible resets and annual changes in
individual patient's healthcare insurance coverage referenced above. Based on
third-party prescription data as well as data from PPN partners, we estimate
XHANCE had a market share of 2.2% in the second quarter of 2019, 3.0% in the
third quarter of 2019, 3.5% in the fourth quarter of 2019, 3.8% in the first
quarter of 2020, and 5.6% in the second quarter of 2020. Note that most of the
INS prescriptions written within our target physician audience are for chronic
sinusitis, allergic rhinitis and other conditions outside of our nasal polyp
indication. Our target physician audience is subject to revision each quarter to
account for changes such as revised sales target prioritization, and physician
retirements. Changes to the target physician audience can contribute some of the
quarter over quarter change in market share.
•XHANCE New Prescriptions and Refill Prescriptions. The underlying disease that
we are treating is chronic and, as a result, many patients may fill multiple
prescriptions per year. We monitor new prescriptions as they create the
potential for future refill prescriptions. Based on third-party prescription
data as well as data from PPN partners, the total estimated number of XHANCE new
prescriptions in the second quarter of 2020 was 18,700, which represents 20%
growth for new prescriptions when compared to estimated second quarter 2019 new
prescriptions of 15,600. In addition, the total estimated number of XHANCE new
prescriptions was 17,800 in the third quarter of 2019, 21,200 in the fourth
quarter of 2019 and 22,300 in the first quarter of 2020. Based on third-party
prescription data, the INS market for New Prescriptions decreased 25% from the
second quarter of 2019 to the second quarter of 2020 and decreased 30% from the
first quarter of 2020 to the second quarter of 2020.
We track refill prescriptions and provide patient assistance to support refill
programs that are administered by our PPN partners. Based on third-party
prescription data as well as data from PPN partners, the total estimated number
of XHANCE refill prescriptions in the second quarter of 2020 was 43,800, which
represents 139% growth for refill prescriptions when compared to estimated
second quarter 2019 refill prescriptions of 18,400. In addition, the total
estimated number of XHANCE refill prescriptions was 25,200 in the third quarter
of 2019, 33,000 in the fourth quarter of 2019, and 33,700 in the first quarter
of 2020.
•Prescribing Breadth and Depth. We track the number of physicians who prescribe
XHANCE in a time period to evaluate the breadth of prescribing. Based on
third-party prescription data as well as data from PPN partners, the total
estimated number of physicians who had at least one patient fill a prescription
for XHANCE in the second quarter of 2020 was 6,209, which represents 40% growth
when compared to the estimated 4,442 physicians who had at least one patient
fill a prescription for XHANCE in the second quarter of 2019. In addition, the
total estimated number of physicians who had at least one patient fill a
prescription for XHANCE was 5,075 in the third quarter of 2019, 5,859 in the
fourth quarter of 2019, and 6,345 in the first quarter of 2020.
We also track the number of prescriptions filled by a prescribing physician's
patients in a time period to evaluate depth of prescribing. Based on third-party
prescription data as well as data from PPN partners, the total estimated number
of physicians who had more than 15 XHANCE prescriptions filled by their patients
in the second quarter of 2020 was 1,028, which represents 97% growth when
compared to the estimated 523 physicians who had more than 15 XHANCE
prescriptions filled by their patients in the second quarter of 2019. In
addition, the total estimated number of physicians who had more than 15 XHANCE
prescriptions filled by their patients was 665 in the third quarter of 2019, 828
in the fourth quarter of 2019, and 895 in the first quarter of 2020.
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Table of Contents Sales, Marketing & Distribution We have established a commercial infrastructure designed to drive adoption and sales of XHANCE with healthcare professionals who treat patients with nasal polyps. We believe that approximately 15,000 physicians treat an estimated 3.5 million chronic rhinosinusitis patients, an estimated 1.2 million of whom have chronic rhinosinusitis with nasal polyps. Customer Model We have hired and deployed approximately 100 territory managers into unique, geographically-defined territories. These territory managers target over 10,000 ENTs, allergists and "specialty-like" primary care physicians, and we target additional physicians through digital and non-personal promotion in areas where we do and do not have territory managers. Our sales team is equipped with educational materials demonstrating the benefit and safety profile of XHANCE. In the future we may increase the number of geographic territories as well as hire additional territory managers in order to increase the number of called-on target physicians and frequency of calls. We believe that in the long term, direct to consumer (DTC) advertising could be an effective way to increase XHANCE prescription growth. In the second half of 2019 we conducted a single-season, multi-channel, pilot DTC advertising program in three markets. We extended the pilot in the same markets during the early part of 2020 in order to continue to evaluate the potential benefits of such a program. Kaléo Co-Promotion In July the Company entered into an agreement with kaléo, a pharmaceutical company dedicated to building innovative solutions for serious and life-threatening medical conditions, to co-promote XHANCE. Under the terms of the agreement, kaléo will promote XHANCE to an agreed-upon audience of office-based healthcare professionals, which is expected to increase promotional reach and frequency starting by the fourth quarter of 2020. The audience includes nearly 6,000 prescribers about half of whom are outside of the currentOptinose called-on universe of approximately 10,000 healthcare professionals. XHANCE Co-Pay Savings Program We believe our co-pay savings program provides an affordability solution for patients that physicians will support. This program provides patient co-pay assistance including a first prescription at no out-of-pocket cost ($0 co-pay) to eligible commercially insured patients and low subsequent co-pays for refills ranging from$0 to$50 per XHANCE unit. In second quarter 2020, we introduced ASSIST, a short-term patient assistance program to support patients during the early stages of the COVID-19 pandemic. ASSIST offered$0 patient out-of-pocket for the first three prescriptions for new commercially insured patients. We closed the ASSIST program to new patients at the end of June and returned to our previously successful co-pay support programs. Market Access Based on currently available third-party data and our internal analyses as ofJune 30, 2020 , we believe that approximately 75% of commercially insured lives are currently in a plan in which we have contracted for XHANCE coverage. However, payors may change coverage levels for XHANCE, positively or negatively, at any time. Additionally, payors generally impose restrictions on access to or usage of XHANCE, such as by requiring prior authorizations or "step-edits." For example, insurers may require that a patient first use a generic INS prior to becoming eligible for coverage for XHANCE. Some healthcare providers may not complete the administrative process required to demonstrate or document that the patients for whom XHANCE has been prescribed meet the payors' utilization management criteria (i.e., prior authorizations or step-edits) and, as a result, patients may not gain access to XHANCE treatment. In our contract negotiations with payors we seek to balance patient access and affordability, breadth of coverage, payor utilization management and rebate levels. We have also contracted with theCenters for Medicare and Medicaid Services for coverage of certain government insured lives and continue to expand XHANCE market access for other government-insured populations. Trade and Distribution We sell XHANCE primarily to PPN partners with whom we contract to perform certain patient services such as patient insurance benefit verification. We established this channel to offer patients the option of filling prescriptions through a network of preferred pharmacies that may be able to better serve the needs of patients through services including delivery of XHANCE by mail and performing certain patient services such as patient insurance benefit verification. We also sell XHANCE to wholesale pharmaceutical distributors, who, in turn, sell XHANCE to pharmacies, hospitals and other customers. We have contracted with a third-party logistics provider for key services related to logistics, warehousing and inventory management, and distribution. Further, our third-party logistics provider provides customer order fulfillment services and accounts receivable management.XHANCE Development 22
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In addition to XHANCE's existing indication for the treatment of nasal polyps,
in order to broaden our U.S. market opportunity, we initiated a clinical trial
program in pursuit of a follow-on indication for the treatment of chronic
sinusitis in the
OPN-019
In June, we announced the initiation of development of a new product candidate, OPN-019. OPN-019 will combine our proprietary nasal Exhalation Delivery System (EDS) technology with an antiseptic that has been recently shown in third party in vitro studies to kill the virus that causes COVID-19. Because components of the drug-device combination product candidate, including both the active drug and delivery device, are currently commercially available in theU.S. , we expect to be able to rapidly progress to a meeting with FDA to discuss an IND and then onward to clinical trials. We are focused on supporting the initial stages of development within our current operating expense plan and intend to seek grants, partnerships, and/or other sources of capital to fund future development. Financial Operations Overview The following discussion sets forth certain components of our consolidated statements of operations as well as factors that impact those items. Net product revenues Sales of XHANCE generated$10.3 million and$6.7 million in net product revenues for the three months endedJune 30, 2020 and 2019, respectively, and$17.3 million and$10.7 million for the six months endedJune 30, 2020 and 2019, respectively. In accordance with GAAP, we determine net product revenues for XHANCE, with specific assumptions for variable consideration components including but not limited to trade discounts and allowances, co-pay assistance programs and payor rebates. Based on available XHANCE prescription data purchased from third parties and data from our PPN partners, who collectively dispensed more than 80% of our total prescriptions (TRxs) in the period, our average net product revenues per prescription for the second quarter of 2020 was approximately$164 , an increase compared to average net product revenues per prescription of$126 in first quarter of 2020. The increase in average net product revenues in the second quarter of 2020 from the first quarter of 2020 is largely a consequence of reduced copay support under our assistance programs as the result of patients' meeting their out of pocket expense thresholds, and an increase in the proportion of prescription refills of total prescriptions. We calculate average net product revenues per prescription, one metric that we use to gauge the profitability of XHANCE, by dividing net product revenues for the quarter by the estimated number of XHANCE prescriptions dispensed during the quarter. As a result, average net product revenues per prescription is subject to variability. That variability is impacted by factors that do not necessarily reflect a change in the price that is paid for an individual unit of XHANCE, including but not limited to ordering patterns and inventory levels for our wholesale customers and PPN partners, patient utilization rates of affordability programs and the proportion of patients acquiring XHANCE through an insurance benefit. There is also the potential for variability that results from changes in estimation methodology by the third parties that we rely upon to provide prescription data which may lead to revisions of historical estimates of prescription volumes and our calculated average net product revenues per prescription. For the remainder of 2020, we believe average net product revenues per prescription will improve. Factors supporting this expected growth include patients meeting their out-of-pocket expense thresholds, the closing of the ASSIST program, and continued strength in the proportion of prescription refills. 23
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Table of Contents Licensing revenues InJanuary 2019 , OptiNose AS entered into the Inexia License Agreement with Inexia. Under the terms of the Inexia License Agreement, Inexia paid us a$0.5 million upfront payment. For each product developed under the Inexia License Agreement, we are eligible to receive up to$8.0 million of development milestone payments and up to$37.0 million of sales milestone payments. In addition, we are eligible to receive tiered, low-to-mid single digit royalties based on net sales of any products successfully developed and commercialized under the Inexia License Agreement. Other than the upfront payment, we do not anticipate the receipt of any milestone or royalty payments from Inexia in the near term. Costs of product sales Costs of product sales includes the cost of inventory sold, which includes direct and indirect manufacturing and supply chain costs. Research and development expense Research and development expense consists primarily of expenses incurred to prepare for, initiate and conduct our planned clinical trials, ongoing research efforts of new products and device improvements. We expense research and development costs as incurred. These expenses include: ?personnel expenses, including salaries, benefits and stock-based compensation expense; ?costs of funding clinical development performed by third parties, including pursuant to agreements with contract research organizations (CROs), as well as investigative sites and consultants that conduct or support our nonclinical studies and clinical trials; ?expenses associated with the continued development of our EDS devices; ?expenses incurred under agreements with contract manufacturing organizations (CMOs), including manufacturing scale-up expenses prior to regulatory approval of products for commercial sale and the cost of acquiring and manufacturing preclinical study and clinical trial materials; ?consultant fees and expenses associated with outsourced professional scientific development services; ?expenses for regulatory activities, including filing fees paid to regulatory agencies and costs incurred to compile and respond to filings with the FDA prior to regulatory approval of products for commercial sale; ?costs incurred to maintain, expand and protect our patent portfolio as it relates to product candidates in development; and ?allocated expenses for facility costs, including rent, utilities, depreciation and maintenance. We typically use our employee, consultant and infrastructure resources across our research and development programs. Although we track certain outsourced development costs by product candidate, we do not allocate personnel costs or other internal costs to specific product candidates. We plan to incur research and development expenses for the foreseeable future as we expect to continue the development of XHANCE for the treatment of chronic sinusitis and our other product candidates, including OPN-019. At this time, due to the inherently unpredictable nature of preclinical and clinical development and the regulatory approval process, compounded by the uncertainty introduced by the COVID-19 pandemic, the rate of subject enrollment, number of subjects required, and trial duration, we are unable to estimate with reasonable certainty the costs we will incur and the timelines we will require in our continued development efforts. Selling, general and administrative expense General and administrative expense consists primarily of personnel expenses, including salaries, benefits and stock-based compensation expense, for employees in executive, finance, accounting, business development, information technology, legal and human resource functions. General and administrative expense also includes corporate facility costs, including rent, utilities, depreciation and maintenance, not otherwise included in research and development expense, as well as regulatory fees and professional fees for legal, patent, accounting and other consulting services. Sales and marketing expenses include our sales team and supporting promotional materials, digital promotion, peer-to-peer education, congresses / conventions, samples, and marketing activities such as direct-to-patient / 24
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Table of Contents direct-to-consumer initiatives. Additionally, sales and marketing-related expenses include fees paid to our PPN partners for services unrelated to traditional distribution functions, such as data fees and benefit claims adjudication. Interest (income) expense Interest (income) expense consists of interest earned on our cash and cash equivalents held with institutional banks and interest expense is primarily related to our note purchase agreement (Pharmakon Senior Secured Notes) withPharmakon Advisors, LP (Pharmakon) and our former note purchase agreement (Athyrium Senior Secured Notes) withAthyrium Opportunities III Acquisition LP (Athyrium). Other (income) expense Other (income) expense consists primarily of foreign currency (income) losses due to exchange rate fluctuations on transactions denominated in a currency other than our functional currency. Consolidated Results of Operations Comparison of three months endedJune 30, 2020 and 2019 The following table sets forth our selected consolidated statements of operations data for the periods indicated (in thousands):
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