Otonomy Inc (NASDAQ:OTIC): Pivotal Data In Focus

Otonomy Inc (NASDAQ:OTIC) is set to put out data from a phase III in its lead asset, Otiprio, before the year draws to a close. The drug is already approved in one indication, and is performing pretty well as part of its initial commercial launch, and if these phase III data come out as indicative of efficacy, there’s plenty of upside potential for the company and its market capitalization as we move into early 2017.

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So, with this in mind, and ahead of the data drop, here’s a look at the drug in question, and a discussion of what we are looking for when the numbers hit.

Here goes.

Otiprio picked up an approval for for the treatment of pediatric patients with bilateral otitis media with effusion undergoing tympanostomy tube placement. To put that another way, its an antibacterial for kids who are having ear surgery. Concurrent to this pediatric indication, the company is also developing the treatment for patients with acute otitis externa (which some readers will already know as swimmer’s ear). It’s basically an infection in the ear that comes about as a result of a moist environment – it affects people who aren’t swimmers, of course, but swimmer’s are particularly sensitive to this sort of condition because they spend lots of time in the water.

There’s not much value in us going into the MOA for the treatment in too much detail – it’s an antibiotic in the fluoroquinolones family, and Otonomy has just processed it in to an otic suspension (ear drops).

Let’s move on to the trial.

It’s a phase III, and it’s double blinded against a sham control arm. Sham controls aren’t as common as placebo controls, so by way of a quick explanation for those not familiar with them, it’s basically an action that mimics treatment, without actually administering anything. In this instance, physicians administer an empty syringe in to the middle ear in the sham arm, while the active arm gets 12mg of the drug administered the same way. There’s logic behind this – the company could have administered a saline solution or similar as part of its control, but in a condition caused by (or at least, exacerbated by) moisture in the ear, this wouldn’t be a great idea.

Anyway, back to the point. Otonomy is targeting an endpoint (primary) of clinical cure assessed by otoscopic examination at an up-to 8-day period post administration. This is going to be our main focus when the numbers come out, and beyond the primary, we’re looking at the safety and tolerability of the treatment. This latter point is a secondary in the trial.

Data to date has served up some strong indications of efficacy, and the drug has outperformed against sham in its studies so far, so we are expecting good things when the phase III hits this quarter. From a market perspective, analysts have put peak estimated sales of $300 million on the drug in its early indications, and an approval for externa would build upon that potential.

What’s the downside risk?

The company is yet to generate any real revenues from its lead at the moment (in the interest of balance, there’s some traction in place as far as commercialization goes and so revenues will start streaming in near term) and cash on hand isn’t great. On hand came in at a little over $46 million at last count (June 30, 2016) and this is far from enough to push Otiprio across a number of markets. Luckily, there is a substantial overlap of the markets, in the sense that the physicians who are going to be prescribing the drug in the indications in question are the same across the targets, so once approved, Otonomy can star presenting both pitches to physicians at one time.

The bottom line here is that the company is currently valued at a little over half a billion dollars, and given the potential market for its lead asset, there is probably some room for upside revaluation. However, if the Otonomy is going to capitalize on this potential, it needs to execute successfully on its commercialization strategy and expand the potential market – the latter category of which the next catalyst falls into.

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