Otonomy, Inc.

Good afternoon, and welcome to Otonomy's Third Quarter 2019 Financial Results and Business Update Conference Call. Joining me on the call from Otonomy are Dr.

David Weber, President and Chief Executive Officer; 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, patients recruitment and enrollment plans for and design and conduct of the Phase 3 clinical trial for OTIVIDEX and the Phase 1/2 clinical trial for OTO-313 and Phase 1/2 clinical trial for OTO-413; expectations regarding preclinical development including but not limited to the potential benefits of any activities under the collaboration agreement between AGTC and Otonomy, expectations regarding the benefits and value potential of Otonomy’s programs, expectations regarding funding of clinical development; program advancement and company operations into 2021; and expectations regarding financial guidance, including operating expenses for 2019 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.

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

We made significant progress in the third quarter toward our goal of reporting results from three clinical trials in 2020. Most importantly, we advanced enrollment in the Phase 3 trial of OTIVIDEX in Ménière’s disease with all participating countries actively enrolling patients.

For OTO-313 we successfully completed the initial safety cohort and initiated enrollment in the exploratory efficacy cohort of the Phase 1/2 trial in tinnitus patients. And finally we received FDA clearance to initiate the Phase 1/2 trial of OTO-413 in patients with hearing loss, which was an important milestone for this innovative program.

The successful completion of these trials is our highest priority and greatest focus. In parallel, we continued to advance multiple preclinical programs addressing important unmet needs in neurotology including a recently announced gene therapy collaboration targeting the most common cause of congenital hearing loss.

I'll provide an update on our clinical programs and overview of this collaboration in my brief comments. I will also highlight the financial results from the quarter and lower our spending guidance for the year.

It is important to note that our existing capital, will fund the company through the three clinical catalysts next year and into 2021. I plan to keep my remarks brief and we can then open up the call for any questions.

Beginning with the OTIVIDEX Phase 3 trial in Ménière’s disease, we updated the timing in our earnings release today. We expect results in the third quarter of 2020 which is a slight adjustment from our original timing of data late in the first half of 2020.

We are pleased with the progress we have made on enrollment of the trial and the timing reflects the care and methodical approach we've taken in site selection and patient recruitment. We have 60 sites enrolling patients across all participating countries.

As a reminder, the conduct and design of this study is based on the successful AVERTS-2 trial and we plan to enroll approximately 160 patients in the United States and Europe. The next product candidate in our clinical development pipeline is OTO-313, a sustained exposure formulation of the NMDA receptor antagonist gacyclidine in development for the treatment of tinnitus.

We have successfully completed the initial safety cohort of the Phase 1/2 trial and are now enrolling patients in the second cohort, which is the exploratory efficacy part of the study. Cohort 2 will enroll approximately 50 patients with persistent tinnitus who will be assessed across a number of endpoints, including the Tinnitus Functional Index or TFI, which is a validated clinical instrument that measures tinnitus severity and its impact on patients.

Importantly, for entry into Cohort 2, patients must have a TFI score that exceeds a specified level to ensure adequate disease severity at baseline. Patients in Cohort 2 receive a single intratympanic injection of OTO-313 or placebo, randomized 1:1 and are followed for two months.

We expect results in the second quarter of 2020. Our third clinical stage program is OTO-413, a sustained exposure formulation of brain-derived neurotrophic factor, or BDNF, that we are developing for the repair of cochlear synaptopathy.

Recent research has identified damage to synaptic connections as the underlying pathology in noise and age-related hearing loss that manifests as speech-in-noise hearing difficulty. Neurotrophic factors, including BDNF, have potential 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.

As I mentioned in my opening comments, we have recently initiated a Phase 1/2 clinical trial and expect to have results in the second half of 2020. This is an ascending dose safety and exploratory efficacy study that will enroll up to 40 patients with speech-in-noise hearing difficulty.

Patients will receive a single intratympanic injection of OTO-413 or placebo and be followed for three months. A number of efficacy endpoints will be evaluated including electrophysiological measurements of hearing function and speech-in-noise hearing tests.

We are excited to be the first company conducting a clinical trial of a therapeutic for synaptopathy, which has been an active area of neurotology research during the past decade. We believe that OTO-413 will not only provide clinical benefit for the many patients with impaired hearing in a noisy environment, but more generally for the large population of patients with loss of hearing function due to aging or noise exposure.

In addition to OTO-413 for synaptopathy, I also have ongoing preclinical development for OTO-6XX, which is our hair cell regeneration program to treat patients with severe hearing loss. Cochlear hair cells play a central role in hearing by converting sound waves into electrical signals that are then transmitted to the brain via auditory nerves.

It is well established but damage to hair cells through aging, excessive noise or exposure to other toxic chemicals leads to hearing loss. Unfortunately, for humans we cannot naturally regenerate hair cells like non-mammalian species such as birds and chickens.

However, it is possible to activate regenerative pathways via drug intervention, thereby providing an approach to treat this pathology. We have demonstrated hair cell regeneration in a nonclinical proof of concept model using a class of small molecules and have identified a candidate for further development.

Between our OTO-413 and OTO-6XX programs, we addressed two of the critical pathologies believed to underlie acquired forms of hearing loss. And with our recently announced strategic collaboration with AGTC, we extend the reach of our pipeline to now also include genetic hearing loss.

The goal of this program is to develop an AAV-based gene therapy to restore hearing in patients with sensorineural hearing loss caused by mutation in the gap junction protein beta 2 gene otherwise known as GJB2. Mutations in this gene are the most common cause of congenital hearing loss accounting for approximately 30% of all genetic hearing loss cases.

Patients born with this mutation can have severe to profound deafness in both ears that is identified in screening tests now performed routinely in newborns. The collaboration leverages, the expertise, technology and capabilities of each partner allowing each of us to do what we do best.

In addition, the structure is highly cost efficient by utilizing each partner's existing resources, sharing the workload and splitting the cost. We look forward to sharing more information about this program in the future.

Taken together, our clinical and preclinical programs comprise the broadest and most advanced product pipeline in the emerging field of neurotology. And we have the cash on hand to support the rich advancement.

As you will know from our financial statements in the earnings release and 10-Q, we finished the third quarter with $68 million in cash and short-term investments. We continue to manage our spending levels carefully and are in fact lowering our non-GAAP operating expense guidance by $5 million for full year 2019.

We also expect as we previously stated that 2020 operating expenses will be lower than 2019 and that our current capital will fund the company's operation through the three clinical trial readouts and into 2021. In summary, we have positioned Otonomy for a breakout year in 2020.

The OTIVIDEX Phase 3 trial, OTO-313 Phase 1/2 trial, and OTO-413 Phase 1/2 trial provide multiple value creation catalysts for the company and we are laser-focused on their successful completion. We look forward to bringing this message to investors through an expanded set of outreach activities beginning this quarter and continuing into 2020.

To this point, we will be attending the Piper Jaffray Healthcare Conference on December 3 in New York and participating in a hearing loss panel and investor meetings at the Evercore IFF Conference in Boston on December 4. Operator, we are now ready for questions.

Hi. This is Tara on for Tyler.

So in thinking ahead to OTIVIDEX Phase 3 readouts, can you kind of set the bar for us as far as expectations and what are meaningful changes in these patients? Make sure we expect a similar vertigo day benefit like we saw on AVERTS-2 and what about percent of vertigo decrease?

Thank you, Tara. Yes.

You can expect to similar to what we reported for AVERTS-2 and the Phase 2b trial that's in our corporate deck. We continue to focus and the primary outcome is on definitive vertigo days and change in definitive vertigo days and importantly, achieving the p-value that we've discussed with the agency.

We have – as you know, one successful trial with AVERTS-2. So really is duplicating that trial to provide two separate successful Phase 3 trials for submission of the NDA.

So the data would be consistent with what we've shown previously. The trial design is the same.

The endpoints are the same. And the data that we would expect to present both to investors and to the FDA are the same as AVERTS-2.

Okay. Thanks a lot for that.

Can I ask then for a summary for the Phase 2 in OTO-313? Can you explain more about how the TFI questionnaire will maybe inform future registrational endpoints and approval?

Like what specifics are you looking for regarding changes in hearing quality there?

Yes. Thank you.

So the TFI is a validated – considered a validated instrument. It was actually developed by a consortium of researchers and it plays out in that testing, which is represented by 25 questions that cover things like intrusiveness of the tentative, the sense of control that the patients have, their cognition, their ability to sleep, their auditory function and more quality of life like your emotional state is in that TFI through those 25 questions.

It's established through the validation of that work of what represents generally a meaningful change is 13 points and based on the work that has been done there. And we also understand the classification of patients.

So patients that typically are less than 25 on the TFI score considered mild, whereas 25 to 50 are moderate and higher than that are 50 and severe. Generally physicians consider any patient that has 25 and higher to be patients in need of treatment.

That'll be our primary outcome, because we do believe that is – as I said, a very measurable and validated instrument. We are also assessing separately other types of rating scales such as tentative loudness and annoyance and then also a patient global impression of change, basically where we're asking the patients of how they perceive their tentative since the beginning of the study to understand their overall perception of change.

Yes. Thanks so much for that.

That's super helpful. If I can ask one more question about the gene therapy pipeline?

Sure.

Okay. So you mentioned in the press release, regarding the AGTC collaboration that we’re targeting the patients with GJB2 mutation that has been identified from the routine hearing screens in newborns.

So I'm assuming your target population will include like newborns and infants with hearing loss due to that mutation. But we also know that the same genes that are responsible for homogenic deafness may also contribute to environmental hearing loss and due to like the drug exposure, noise and aging.

So will those patients also be included in your target population for this gene therapy?

No. Not initially at least.

This will be focused more on the pediatric population because they are the most severely threatened with hearing loss and progressive hearing loss. So typically this can be picked up on newborn screening.

And patients will continue to progress from there. So it's very important to catch them at an early stage.

And so that will be our initial focus for the gene therapy.

Okay, great. Thanks so much.

Hey, guys, thanks for taking the questions. I have a few.

With the OTIVIDEX Phase 3 that's enrolling a little bit slower than we had modeled. Can you just remind us what you're doing differently in this trial, maybe from AVERTS-1 such that a more deliberate enrollment speed is potentially an indicator of improved likelihood of success?

And I have a couple others. Thanks.

Yes, thanks Oren. I'm taking one at a time that's fine.

So great question and that actually is the key is, we’re very focused on being – very careful here and very deliberate in our enrollment. We think that is very key to the success of the trial based on our learnings from AVERTS-1.

As we've discussed previously, the real learnings was around AVERTS-1 was to control the placebo response and manage the patients expectation by us. And that was really kind of focused on three major areas and one of those was careful site selection.

So we have gone through – obviously, now we have 60 centers enrolling across all participating countries. That took time.

We needed to make sure we got it right. The right clinical centers and right investigators and we feel very confident in the group that we've assembled that are now all participating and enrolling.

So that was the first. From there it's really careful selection of the patients.

In this case, there are no – there is no advertising going on direct to patients unlike with the AVERTS-1, where there were investigators who are reaching out in the general population. This is all very controlled and targeted patients’ enrollment.

And so it's very – in that regard, it does take time. It is important that investigators are in identifying these patients and carefully selecting them.

So we're not putting pressure on the investigators in terms of trying to advertise or increase the enrollments. We want to be very deliberate in that patient population.

So we think that the few weeks to few months that we're talking about here in extending is just a safeguard to make sure we get ultimately are able to deliver a successful trial as well step.

All right. Thanks for that.

And just a follow-up on the tinnitus question. You mentioned that the TFI improvement of more than 13 is believed to be clinically meaningful.

Is that what's your targeting? Are you expecting any statistical significance in this small study?

Or are you just looking for any signal? And if so, if you do see a signal, what do you think the next steps are?

Should we expect another Phase 2 before jumping into something more advanced?

Well. Let's take that one at a time there in terms of Phase 2 to Phase 3.

But I think, first of all, this is not size for power. It is an exploratory efficacy trial because it is the first of its kind.

We have no prior clinical data to base sizing and powering on. It is what we consider exploratory.

And so we are looking for signals through these different endpoints, including the TFI. The TFI, as I mentioned, when the instrument was developed and validated by the consortium, they identified 13 point difference as being clinically meaningful.

But I should point out that in the absence of a therapeutic, that really is through other types of both the behavioral treatment of tentative and even some devices that have been tried and tentative. So I think it'll be up to – as we look at the data to understand what do we see with the TFI, but clearly that gives us a benchmark at least based on some prior work, even if it wasn't a pharmaceutical treatment.

I think clearly the patient global impression of change and the other endpoints that I've mentioned of loudness perception and annoyance perception are also very key to these patients. Given that it is the loudness and that annoyance that is the most debilitating for them in this disorder.

So that's how we look at the study and we would look to utilize the Phase 1/2 trial for them powering the future study. With regards to Phase 2, and additional Phase 2 – Phase 3, I think that is something that we will consider based on that data.

One of the thing, so clearly with very strong signals, the opportunity is to do what I will call a larger Phase 2, type Phase 3 trial or obviously based on the data, if we had confidence to go into a Phase 3 from there. I think one of the things that we also will want to look at however; in addition to this patient population recurrence studying is to look at bilateral patients as well.

So it's something that we are interested in, because there are many patients that have bilateral tinnitus and that could potentially be eligible. But that is something we want to look at probably in a separate study before including those patients.

Currently we're focused on unilateral patients and that is because there has been concern clinically and working with our KOLs of whether patients can really tell the difference if they have bilateral, can they really talk and understand the difference in their tentative between one ear and the other or is there confusion there because of both ears. And so that's why we're being very careful here using unilateral patients.

But I think one of the things you can probably expect from us in future work is to also include some bilateral patients to look at the ability to detect changes in those patients as well. I fade detect because I think that's the key.

We in our KOLs all believe that showing an effect in a single ear will equate to treatment of both ears ultimately that you'd be able to treat both ears mechanistically. It's more ability to differentiate the signaling for the patient reported outcome here.

Can they report the outcome very carefully between one ear versus the other is something I think we have to look at clinically, if that makes sense.

All right. At the risk of using my time, it was lost to me that there was a recent IPO of frequency therapeutics and other therapeutic company working, I think on hair cell regeneration, and I’m just curious, obviously, you can’t speak too much to what they’re doing, but maybe, you can just highlight how similar or different your approaches are and if you think that there will be any key learnings from what they’re doing?

Well, I think, one is, we’re very happy to see others entering the space. We think it definitely demonstrates the need and the opportunity that exists in this space.

And I think investors are clearly recognizing that through where they are currently in the market. We – that is one of the things, we see as a very strong disconnect between where we are with our pipeline, and where we sit today in the market?

OTO-413 and cochlear synaptopathy as we looked at synaptic-related hearing loss, it’s representing a very large population, in fact, there’s increasing evidence that when you talk about hearing loss, it’s not just hair cells, it’s loss of cochlear synapsis. In fact, you can detect synapse loss at an earlier stage and then you can hair cell loss.

So, there’s a growing thought process involved, and one that we’re actually focused on that you might actually be able to treat more patients and with – who have hearing loss through treating cochlear synaptopathy. So, this is where we see OTO-413 as a very exciting program.

We think it has a very large potential product opportunity against a very large population, although obviously, for the initial study, we’re focused very clearly on pure – what I’ll call pure synaptopathy patients, where they do not have a lot of hair cell involvement or to demonstrate that mechanistically. but we do think there is reach over into the broader population and that is something that we would be looking for with that program.

At the same time, we know that there are patients with very severe and profound hearing loss due to loss of the hair cells and that is where our hair cell regeneration program comes in, which we are very focused on. We’ve shown non-clinical proof-of-concept data there that I think investors can put right up against and do comparative relationship to what others have seen.

And we think we are in a very good place with what we’re seeing on the non-clinical side and are looking forward to advance that towards the clinic, which would then give us two different approaches to treat the broad category of hearing loss – acquired hearing loss, which represents the largest proportion of hearing loss patients.

Thanks. Appreciate all the answers.

Thank you.

Hi, good afternoon, and thank you for taking my questions. Congratulations on the progress this quarter.

Few questions, question regarding Ménière’s, I wanted to drill down on the Phase 3 trial for OTIVIDEX. Are there any additional details about enrollment that you can disclose?

What percentage of patients has been enrolled? And as you approached these Phase 3 data readout, can you remind us the size of them the nearest opportunity?

And I have a few follow-ups.

Okay. Thanks, Stacy.

I think, let me take that first question and then pass the second question off to Paul Cayer with regards to the market. With regards to the Phase 3 and details of enrollment, we really focus on timing to the results, which is why we originally – when starting the study in late 2018, we had indicated that we anticipated timing to the first half of 2019 – I’m sorry, 2020.

And what is key for us is the update today that we’ve now been able to narrow that down and provide it to the quarter of Q3 2024. The results – reported results for that study.

So that’s really how we track and convey our progress on the enrollment is to our time of – timing to data. From there, I can say that we are being as – again, as I’ve said, being very careful about patient selection, but are very pleased with the progress that we’ve made and also believe we’re doing a very good job of holding to those sets of important factors that we believe, could have contributed to the AVERTS-1, expectation bias, and placebo response.

hi, Stacy. It’s Paul, with regard to the market size, we have a brief summary of this on our corporate deck as you know.

So, we believe that in the United States, there are over 850,000 patients that have been diagnosed with Ménière’s diseases we’re looking at a historical patient-centric claims data. and based on their treatment patterns, we believe that about a third of them seek treatment each year.

So clearly, there is more that can be done to develop the market. it’s important to keep in mind that this is a market that in fact is really untapped, because there are no FDA-approved products in the U.S.

So, there are no companies that have done any building of the patient community, provide education and awareness to referring physicians that those patients should be seen by an ENT and then even within the ENT community, because there are no approved treatments and none that have demonstrated safety and efficacy and the kind of robust clinical trials that we’ve conducted and are continuing to conduct with the additional phase 3 trial. ENT is just sort of left not exactly knowing how to treat these patients.

So, they use a variety of approaches, but we do believe that with the successful additional phase 3 trial. We’ll be first to market and that will give us the opportunity to really help us standardize how these patients are treated when they come in experiencing acute vertigo.

And then beyond that, we’re looking forward to helping build the community of patients, so that we in fact are able to bring some of them back to treatment, because now, they have a reason to go back and see the ENT. So, as summarized on that slide, there’s also been external assessment of the opportunity and we believe it’s about a $500 million opportunity in the U.S.

it’s really helpful. And then finally, one last question on your AAV program, any guidance on when we should expect IND filing or how you could help us understand the potential requirements for this program?

Thanks.

Thanks, Stacy. Yes, I think at this point, we will look to the future, provide an update and timing with regards to the program and when we would expect to file an IND as well as other events around that program.

All right. Thank you very much.

Thank you.

Thank you everyone for participating in our call today. We hope to see you at the Piper Jaffrey or the Evercore IFF Conferences next month and wish you a good evening.

Thank you.