Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the Ocular Therapeutix Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. It is now my pleasure to turn the call over to Donald Notman, Chief Financial Officer of Ocular Therapeutix. Please go ahead, sir.

Thank you, operator. Good afternoon, everyone, and thank you for joining us on our second quarter 2021 financial results and business update conference call. This afternoon, after the close, we issued a press release providing an update on the Company’s product development programs and details of the Company’s financial results for the quarter ended June 30, 2021. The press release can be accessed on the Investors portion of our website at investors.ocutx.com. Leading the call today will be Antony Mattessich, our President and Chief Executive Officer, who will provide a summary of our corporate development and an update on the commercial progress of DEXTENZA. Also speaking on the call today will be Dr. Michael Goldstein, our President, Ophthalmology and Chief Medical Officer, who will give an update on our clinical developments and pipeline. Following Michael’s remarks, I will provide an overview of the financial highlights for the second quarter before turning the call back over to Antony for his summary and questions. For Q&A, we will be joined by Scott Corning, our Senior Vice President, Commercial; and Chris White, our Senior Vice President, Business and Corporate Development. As a reminder, on today’s call, certain statements we will be making may be considered forward-looking for the purposes of the Private Securities Litigation Reform Act of 1995. In particular, any statements regarding our regulatory and product development plans as well as our research activities are forward-looking statements. These statements are subject to a variety of risks and uncertainties that may cause actual results to differ from those forecasted, including those risks described in our most recent quarterly report on Form 10-Q filed this afternoon with the SEC. I will now turn the call over to Anthony.

Thank you, Donald, and welcome, everyone, to Ocular Therapeutix' Second Quarter 2021 Earnings Report. It's been a good first half of the year, and I'm proud of the team's efforts as we continue our efforts to build a leading ophthalmology company with therapeutics that have the potential to transform the way common eye diseases are treated. At Ocular, we begin with the end in mind. We first think about the size and dynamism of the disease state in ophthalmology and then consider the key unmet need in that space. It is only then that we apply our technology to the opportunity and determine whether we may be able to build a therapeutic that can meet that key unmet need and become the standard of care. We believe that all of our development programs satisfy these requirements, from the largest opportunity in wet AMD, where we believe our OTX-TKI could become the most durable product on the market to glaucoma where OTX-TIC could solve the problem of patient compliance to dry eye disease for OTX-CSI and OTX-DED could improve the patient experience relative to current therapies. And finally, to DEXTENZA that we believe fulfills the patient and physician desires to have a more convenient drop-free solution for the treatment of post-surgical inflammation and pain. Not only do the product candidates, we develop target key unmet clinical needs in their respective spaces, but we have designed them with product characteristics that we believe will lend themselves to more efficient commercialization. All of the therapeutics at Ocular are designed in medical benefit buy-and-bill products with associated procedure codes. Products with these characteristics are optimized through an account selling approach. Account selling structures can be more targeted than reach and frequency models employed by companies that sell traditional prescription benefit medications. DEXTENZA has been…

Thanks, Antony. Let me begin with an update on our back-of-the-eye program, OTX-TKI. As Antony noted, we are pleased to have recently dosed our first subject in the U.S.-based multicenter prospective randomized controlled trial that is evaluating a single OTX-TKI implant containing axitinib compared to aflibercept administered every eight weeks in subjects previously treated with anti-VEGF therapy. The U.S.-based Phase I clinical trial of OTX-TKI is being conducted under an exploratory IND application at five sites with a total of 20 randomized subjects, 15 subjects being treated with a single OTX-TKI implant containing 600-microgram dose of axitinib with an anti-VEGF induction injection and five subjects being treated at eight-week intervals with aflibercept. The trial is designed to assess the safety, durability and tolerability of OTX-TKI as well as to assess preliminary biological activity in subjects by measuring anatomical and functional changes. Based on the early data that we have shared to date in the ongoing Phase I trial of OTX-TKI in Australia, we continue to see signals of biological activity, including decreases in retinal fluid in some subjects as early as two months following implant administration. Additionally, we are seeing encouraging durability of six months or longer across cohorts and durability beyond one year in some subjects. OTX-TKI has thus far been well tolerated and has been observed to have a favorable safety profile. No serious ocular adverse events have been observed or reported to date. While the drug product profile is still emerging, we are pleased with the interim data and OTX-TKI's potential to reduce intraretinal and/or subretinal fluid. Moving to our glaucoma program, OTX-TIC. We have completed a U.S.-based Phase I clinical trial evaluating the safety, biological activity, durability and tolerability of OTX-TIC in subjects with primary open-angle glaucoma or ocular hypertension. We presented interim data in May…

Thanks, Mike. Gross product revenue net of discounts, rebates and returns, which the Company refers to as total net product revenue, was $11.7 million and represented a 631% increase over the same period in 2020. Net product revenue of DEXTENZA in the second quarter was $11.1 million versus $1.4 million in the comparable quarter of 2020, reflecting a nearly 7x increase. Total net product revenue for the second quarter in 2021 also included net product revenue of $0.6 million from ReSure Sealant. Research and development expenses for the second quarter were $13.9 million versus $8 million for the comparable period in 2020, driven primarily by increased headcount as well as increased clinical trial costs associated with the initiation of the U.S.-based Phase I trial of OTX-TKI as well as the ongoing Phase II clinical trials for OTX-CSI and OTX-DED, the ongoing Phase I clinical trial of OTX-TKI in Australia and the DEXTENZA post-approval pediatric trial. Selling and marketing expenses in the quarter were $8.4 million as compared to $6.2 million for the same quarter in 2020, reflecting increased personnel costs associated with the expansion of our field force. Finally, general and administrative expenses were $8.6 million for the second quarter versus $5.1 million in the comparable quarter of 2020. The increase in expenses stemmed primarily from increased personnel expenses and professional fees. With respect to the financial results for the second quarter, the Company reported a net loss of $8.5 million or a loss of $0.11 per share on a basic and a loss of $0.25 per share on a diluted basis. This compares to a net loss of $36.6 million or a loss of $0.64 per share on a basic and diluted basis for the same period in 2020. The decreased loss was due primarily to a $30.4 million…

Thanks, Donald. So before opening the call up for questions, let me do a quick summary. DEXTENZA enjoyed fantastic performance in the quarter with $11.1 million in net sales, growing nearly 65% over the previous quarter. We are pleased with continued progress on our pipeline and our growing presence at key medical meetings like ASCRS that allow us to share our progress. In wet AMD, we dosed the first patient with OTX-TKI in our U.S.-based clinical trial using a single 600-microgram insert. In glaucoma, data from our Phase I trial of OTX-TIC continues to support a durable rapid onset product profile that could potentially set the standard of care for patient compliance. We remain in a position to advance that program into a Phase II clinical trial in the fourth quarter of 2021. In dry eye disease, we are conducting two Phase II clinical trials 1 for OTX-CSI and 1 for OTX-DED. We plan to announce clinical data from OTX-CSI in the fourth quarter of this year and in the first quarter of 2022 for OTX-DED. Beyond dry eye disease, we submitted our sNDA for DEXTENZA in allergic conjunctivitis in December 2020 and have a PDUFA target action date of October 18, 2021. Finally, we announced an exciting collaboration with Mosaic Biosciences. This marks an important step forward for our company and how we approach the discovery and development of ophthalmic products and serves to enhance our current strategy, which includes a pipeline that we believe to be one of the most comprehensive ophthalmology pipelines in the industry today. We look forward to a busy and productive 2021. And with that, I will turn the call over for questions.

[Operator Instructions] Our first question comes from the line of Jon Wolleben with JMP Securities. Your line is open. Please go ahead.

Congrats on the progress. I appreciate you taking the questions. Just one on DEXTENZA to start. Can you discuss the gross to net in 2Q and then how that dynamic is shifting? And then what do you think the potential outcomes are for the proposed pricing? And when we might get an update on what that funnel pricing looks like?

Yes. I'll just hand it over to Donald in a second. But as I mentioned last quarter, where we had a growth that was somewhat slower than in-market growth, and I said I wouldn't take too much credit for the somewhat over market -- in-market growth for this quarter. There is definitely an element of stocking that helped us have a higher growth rate for the quarter than we had in an in market. So, we were growing in market 50%. We grew two markets 65%, but there were some adjustments within the gross to net that I'll let Don speak to you about.

Jon, thanks for the question. Yes, so the gross to net did improve for us over the course of the quarter. There are two primary drivers of that. One is, in the first quarter, for the first time, actually, we took an accrual for the anticipated rebate that is in the pipeline. So that was kind of a bit of a onetime hit, and it's begun to normalize. So that was a smaller number. And the -- the other aspect of the rebates that are now -- the rebate of the gross to net that improved was out of product returns. We have been now -- I think we've had DEXTENZA in the market for over a year and now have the data to have a better understanding of what the returns will look like and they're coming in much lower than originally anticipated. So we've begun to reduce that deduction in the gross to net. Where this will sort out over the next several quarters, we'd probably finished basically in the mid-20% kind of discount range. And a space that would be more or less in that range moving forward but that will depend in terms of rebate levels, et cetera, as we go forward.

Sorry, Jon, you had a second question?

Yes. I was hoping you could walk us through the process of the proposed reimbursement pricing and what those different outcomes might look like for DEXTENZA and the long-term growth.

That's a very complicated series. You're talking about the continued separate payment in the ASCs and hospitals?

Correct.

I mean there's a number of different avenues through which that can happen. There's changes in the status indicator that would allow for permanent separate payment. Clearly, there is a -- at least for the proposed rule, there's the potential of continuing the opiate exclusion -- sorry, the non-opiate exclusion where you are a product used in surgery. You have an indication in pain. It's important, obviously, you have an indication in pain and you are used -- and you're a non-opiate product that, that has an exception in the system that allows for continued separate payment. We're happy to see in the proposed rule that, that was extended not only from the ASC but also in the HOPD setting. So there'll be the complete set of surgical settings that would be -- would give us access under that non-opiate exclusion. There are also potentials for the price of the drug to be paid out of a facility payment depending on what APC class we eventually wind up in the post pass-through period. So there's a number of different avenues that could be taken that would allow for continued separate payment.

Okay. And if I could squeeze in a couple on OTX-CSI, I'm looking forward to that data in the fourth quarter. Can you remind us the difference in the two formulations you're looking at? And I know you're still blind to the data, but I was wondering if you could comment on the dropout rate you're seeing so far in the study.

Thanks, Jon. This is Mike. So there are two different formulations of OTX-CSI being looked at in two vehicle formulations. So the two CSI formulations have the same amount of drug but have slightly different hydrogel compositions, which lead to slightly different release and dissolution rates. And the two different vehicle formulations, one matches very similar to the two CSI formulations and one is a rapidly degrading hydrogel. So anyway, so we'll see what the results of this. And the second part of your question was?

Dropout rate...

Yes, exceedingly low. So we don't have the whole exact number, but it's exceedingly low at this point.

And our next question comes from the line of Joe Catanzaro with Piper Sandler.

Congrats on all the progress. Maybe actually a similar line of questioning here. Wondering if maybe you could speak to DEXTENZA selling trends that you saw in July and whether it reverted back to the sawtooth pattern that you've historically seen in the first month of the quarter? And just maybe more generally, if you could provide just a little bit of guidance around expectations for the rest of the year.

Yes. Joe, I did -- the quarter acted exactly as most of the quarter did before since we've had the rebate program where you had a bit of a sort of flat first two months of the quarter and then a very strong final month of the quarter. We would expect that to continue going forward. As we mentioned before, we are considering the possibility of giving guidance for DEXTENZA sales going forward, but we have not done that yet or made the decision to do that yet.

Okay. Got it. That's helpful. And then with regards to the Medicare proposed fee schedule for 0356T, are there any established fee schedules for press similar procedures that you could reference during the comment period? And I guess I'm thinking about the insertion of just a basic silicone plug and where that falls.

Right. I mean there are two. There's dilation and then there's insertion of a nondrug plug and dilation is around the $65 just for dilation itself, which is part of the procedure for 0356T and then insertion of a nondrug plug is closer to $150. So yes, those as comparative procedures certainly would suggest that there's upward movement. Although, the process doesn't really relate to similar procedures, you really have to do it within the logic of the way the RUC actually calculated the payments. I think Mike can add a little more color on how that works.

I was going to say it's not as simple as you might think, and that it's the most, as Antony said, the analogous procedure, but there are other procedure codes where you can, for example, probe and then irrigate the nasolacrimal system, and there's a whole series of codes that apply there. So as he mentioned, there's just an opportunity to compare this to a number of different procedures at a number of different levels.

Okay. Got it. If I could just squeeze maybe one last one in around the termination of the Regeneron collaboration. Could you maybe speak to your view around how the preclinical work was progressing on the program just to maybe help us get a sense of what contributed to Regeneron's decision?

Yes, we were very satisfied with the pace of the work. As we mentioned before, we actually have been very fortunate to have been in this collaboration. Regeneron was -- the scientists at Regeneron were fantastic to work with. The aflibercept is a great molecule where we learned a lot about how to formulate that with our hydrogel. We also learned how to get into the suprachoroidal space, certainly in the preclinical model, and that could be a very important space for us going forward. So we're very excited to have been in the collaboration, but I truly believe that there's more opportunity now outside of the collaboration than there was inside of the collaboration. And obviously, we'll sort of have to ask you to stay tuned on exactly what we do going forward with it, but as we look at a number of different possibilities given the opportunities that we see in the marketplace that are occurring all over.

And our next question comes from the line of Dane Leone with Raymond James. Your line is open. Please go ahead.

This is [indiscernible] on for Dane. On the proposed Medicare Physician Fee Schedule for DEXTENZA, if reimbursement rates are not revised higher, how could this potentially impact the utilization?

So you're talking about the CPT procedure code? Yes, we, right now, within the system that's within the T code that we have, we're getting reimbursement rates across the MACs that are ranging between $30 in the lowest MAC and 250 in the highest, averaging out about 100. We have not noticed the difference in penetration of total cataract volume among the MACs. So there's really no basis to suggest that, that payment rate would need to be higher in order to get better penetration, although it certainly stands to reason that the higher they are, the more attractive the use of an intracanalicular drug delivery device would be to the doctor. So we think that from a fairness standpoint, that, that should be reimbursed at a higher level. And that's really what drives what we're doing, less so about the penetration that we would expect our drugs to get.

And our next question comes from the line of Georgi Yordanov with Cowen and Company. Your line is open. Please go ahead.

So I guess the TKI program, congratulations on the initiation of the U.S.-based trial. Could you discuss, and I guess, remind us of the decision to include a control group in the study? And how should we be interpreting the results from the trial? And then related to that, do you plan to announce interim data? And when should we expect initial efficacy data from this trial?

Thanks for those questions. So the trial design is different than the Australian trial in that we have -- we're looking at a slightly different population. So in the Australian trial, as you know, we're taking patients who have active fluid and we're asking the question can you get rid of that fluid, whether it's intraretinal fluid or subretinal fluid. And so there, what we're seeing is the fluid there that has gone or not. And in the U.S. trial, we're actually looking at a different population. So we're looking at those patients who have wet age-related macular degeneration who have been previously treated with an anti-VEGF drug. So they're starting without fluid, and then we're giving them the TKI. We're following them out. And the question that you would ask about a control group is, well, if you didn't give anything, what would they do. So we want to have a control group just to demonstrate -- to have a comparison in the trial. And the way it's designed is that it's a 3:1 randomization, where every three patients who get the TKI, one patient will remain on aflibercept. We're targeting 20 patients. As noted, enrollment has already started. There is not an interim analysis at currently planned, although that we do have the option to take an interim look at some point later, probably early next year if we chose to do that.

Got it. And then on the glaucoma program, just if you could remind us, once the trial is initiated in Q4, when should we be expecting potential results from this trial? And what would be the plan for registrational studies? Would you need to run two separate pivotal studies? Or is this Phase II trial powered sufficiently to service one of two pivotal?

Yes. So the glaucoma program called OTX-TIC, as you know, is initiating in Q4. We're targeting three different those groups with 135 subjects. We haven't yet given guidance on how long that trial will take, but obviously, it takes longer to enroll that trial than it will, for example, the dry eye disease trials. It is not powered for statistical significance. So presumably, we would then need to do two Phase III trials after the Phase II trials completes.

And our next question comes from the line of Yi Chen with H.C. Wainwright. Your line is open. Please go ahead.

First, can you comment on the potential revenue contribution from DEXTENZA from the allergic conjunctivitis indication once approved?

We've given no forward guidance on what we expect that indication to be. I mean, clearly, it is a very strategic indication for us as we move into the office environment, but we haven't made public a number. Clearly, we have some internal forecasts that are -- we believe to be reasonably ambitious, and we're very excited about the opportunity that AC gives us. But we're -- we haven't put out a number.

Got it. And regarding the two hydrogel formulations used in the OTX-CSI, is that the two -- same two different formulations used for OTX-TIC?

No. So in short, no. So we have a number of different PEG formulations that we look at. They are different combinations and every indication, every program, the formulations are different depending on the indication. So yes, there's no overlap really between any of the programs.

So the formulation is also different from the formulation used in DEXTENZA?

That's correct. I mean they're all based on a similar case, so the actual compositions are different.

Okay. So with these different formulations, do you expect a different an impact in efficacy or safety or both?

Really about durability. So in terms of safety, I think we probably put every combination of PEG both on the surface as well as in the eye. So we don't expect any safety differences. Efficacy is really about rate of delivery of the drug over a certain period of time for a particular indication. So we target the -- we create each drug independently so that we can match the desired durability with the indication we're looking at.

[Operator Instructions] Our next question comes from the line of Anita Dushyanth with Berenberg. Your line is open. Please go ahead.

Just wanted to get some clarity on the sNDA for the allergic conjunctivitis. So I mean, considering that the reimbursement will sort of kick in from January, can you sort of give an idea of like what percentage of patients that are in the cataract surgery are also candidates for the allergic conjunctivitis?

Yes. It's not so much the cataract patients that are candidates for AC. It's more the doctors that treat cataract and how -- in their office environment, how often they see patients who have moved through the step edits or the earlier treatments of antihistamines and the like in order to get into the office and need something additional for allergic conjunctivitis. That overlap is extremely high. So something like 90% of the doctors who we see in the cataract world actually are high potentials also in the allergic conjunctivitis world. The allergic conjunctivitis opportunity is much broader, so it doesn't encompass all of that opportunity. It actually is quite a small percentage of it. But there are 10 million patients a year who present to physicians with a desire for something better than what they're getting over the counter for allergic conjunctivitis entities. So that's a large number even to get a slice of the slice. The opportunity can be fairly significant.

Thank you. And this does conclude today's question-and-answer session as well as today's conference call. Ladies and gentlemen, thank you for participating, and you may now disconnect. Everyone, have a great day.