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OptiNose, Inc. (NASDAQ:OPTN)
Q1 2019 Earnings Call
May. 9, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the OptiNose Q1 2019 Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time.

(Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the call over to Jonathan Neely, VP of Investor Relations. Sir, you may begin.

Jonathan Neely -- Vice President of Investor Relations

Good morning, and thank you for joining us today as we review OptiNose's first quarter 2019 performance and our plans for the remainder of the year. I'm joined this morning by our CEO, Peter Miller; our President and Chief Operating Officer, Ramy Mahmoud; our CFO, Keith Goldan; and our Chief Commercial Officer, Tom Gibbs. The slides that will be presented on this call can be viewed on our website, optinose.com in the Investor section.

Before we start, I would like to remind you that our discussions during this conference call will include forward-looking statements. All statements that are not historical facts are hereby identified as forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those indicated by such statements.

Additional information regarding these factors is discussed under the cautionary note on forward-looking statements section of the earnings release that we issued this morning as well as under the Risk Factors section of OptiNose's most recent annual report on Form 10-K and Form 10-Q that are filed with the SEC and available at their website, sec.gov and on our website at optinose.com.

You are cautioned not to place undue reliance on forward-looking statements. Forward-looking statements during this conference call speak only as of the original date of this call or any earlier date indicated in such statement, and we undertake no obligation to update or revise any of these statements. We will now make prepared remarks and then we will move to a question-and-answer session.

With that, I will now turn the call over to Peter Miller. Peter?

Peter K. Miller -- Chief Executive Officer

Thank you, Jonathan, and good morning everybody. We appreciate you joining us this morning. We're excited to discuss the continued strong growth in demand for XHANCE and our plans to sustain that growth.

Starting on Slide 3, I'd like to begin by highlighting our key priorities. Our primary focus remains on continuing to drive XHANCE's prescription growth. I'm pleased to report today that as a consequence of that focus, we have followed the strong growth in the fourth quarter of last year with another quarter of over 50% prescription growth. Further, strong growth is continuing in the early part of the second quarter. I will review these encouraging results in detail in a few minutes.

Our second key priority is continuing to progress our clinical trial program in pursuit of a first-in-class indication for treatment of chronic sinusitis in the United States. Currently, we are aware of no drug in the United States or the world which has succeeded in receding this indication. We view this development program as a potentially important long-term value driver not only because of the data and potential first-in-class indication, but also because we believe it could facilitate future expansion to a broader primary care physician audience.

In the first quarter, we focused on activating additional clinical trial sites for the first of two anticipated trials and on preparations to start the second of the two trials we are currently planning as part of this program. Finally, with approximately $171 million of cash available at the end of March 2019, the strength of our balance sheet enables us to focus our 2019 efforts on the execution of our commercialization and development plans for XHANCE.

Turning to Slide 5, I'd like to start by highlighting the key execution levers that we believe will help us sustain strong XHANCE growth in 2019 and support continued growth in the longer term. The strong prescription growth we have delivered over the last eight months gives us confidence that our commercial strategy can produce continued robust adoption of XHANCE. We believe the continued focus of our sales force messaging on efficacy now increasingly enhanced by visual evidence from patients using XHANCE, will continue to drive further adoption.

In addition, the combination of the patient affordability programs we implemented last September, paired with broad market access, create an environment where many commercial patients can fill and refill XHANCE for low out-of-pocket costs. Importantly, we've begun to see very positive trends in refills, which suggests strong patient satisfaction with XHANCE.

The sustained growth being produced by our sales force has led us to decide to convert from a contract sales force model to an internal sales force. I'm pleased to say the transition was smoothly completed by April 1st and we believe our sales team has hit the field more excited than ever about their efforts in support of XHANCE.

In addition to driving growth through execution against our core strategy in our previously existing commercial sales footprint, we also recently completed an expansion of our salesforce, increasing our physician target reach by approximately 25%. This expansion is a clear opportunity to create new sources of prescription growth for XHANCE as these territory managers will primarily detail physicians in new geographies that we've not called on previously. I will share more details of this expansion in a few moments.

Third, our territory managers are now distributing a seven day starter sample to physician offices. The seven day starter will provide physicians with the opportunity to get patients started right away on XHANCE at the time of an office visits. It will also allow a patient to receive treatment during the time it may take for a prescription to be filled through a variety of available channels, including by mail.

We believe this may help increase initial fill rates and increase patient and physician satisfaction with the process of starting treatment. This is obviously different from the 30 day sample we've offered since the launch of XHANCE and has potential to help drive additional new prescriptions. Next, we continue to engage with payers with the objective of increasing the number of commercial lives that are in a plan that covers XHANCE. This is a driver that has two benefits; first, coverage increases the probability that patients who fill the prescription in a retail pharmacy location will be able to do so at a low out-of-pocket cost, increasing fill rates in that channel.

Second, increasing coverage improves our profitability by reducing the dollar amount of co-pay assistance that we provide to our patient affordability programs. Finally, and this is more of a long-term driver, I continue to be excited by the potential growth that could result from direct-to-consumer marketing of XHANCE. We're judicious in our approach and plan to field test pilots in three markets in the second half of 2019. If we are successful with our test programs, we believe DTC could become a significant driver to further increase future growth.

Turning to Slide 6; as I mentioned earlier, in April we deployed new Territory Managers into new geographies shown on this slide, raising the total number of sales territories in our plan from 80 to 100 or a 25% increase compared to our prior deployment. These Territory Managers have started to call on approximately 2,200 previously uncalled-on physicians. In total, we now have over 10,000 physicians in our target universe.

Having recently been with the entire sales team, I could not be more excited about the quality of the individuals on the team and the level of excitement and enthusiasm. The new territories include locations such as Boston, Nashville, Memphis, Portland and Baltimore, which were among the 30 largest cities in the United States. The sales representatives in our new geographies are launching the product into their new territories with the benefit of many key organizational learnings gleaned from the launch of XHANCE in prior territories over the last year.

Still, we know it takes time for new Territory Managers to access target physicians, increase product awareness, build appreciation of the clinical differentiation of XHANCE in appropriate patient types, and to also educate physicians on our patient affordability programs. As they achieve these -- those objectives, we expect they will contribute meaningfully toward sustained growth for XHANCE prescriptions as we progress into the second half of 2019.

Turning to Slide 7; I am very encouraged by the continued strong growth in prescription volume we've observed in the first part of 2019. The number of XHANCE prescriptions in the first quarter of 2019 exceeded 22,400, representing growth of 59% over the fourth quarter of 2018. That is the second consecutive quarter of prescription growth at or above 50% and is the product of success in attracting both new patients and increasing the number of refills.

Slide 8, we're also pleased with the strong prescription volume trends continuing into early second quarter of 2019. We don't have results for the full month of April yet. However, the number of XHANCE prescriptions in the four weeks ended April 26th was approximately 9,500, which represents growth of 15% compared to the previous four weeks ended March 29th. If XHANCE prescriptions will continue to grow at this rate, that would imply that the second quarter of 2019 will be the third consecutive quarter of approximately 50% growth.

In a few moments I will update you on our chronic sinusitis program and provide some closing remarks. And now I will turn the call over to our CFO, Keith Goldan for comments regarding first quarter results and perspectives regarding full year 2019.

Keith Goldan -- Chief Financial Officer

Thank you, Peter, and thank you to everybody who has joined today. Turning to Slide 10, as we reported earlier OptiNose recognized $4.5 million of net product revenue -- net revenues in the first quarter, including $4 million of XHANCE net product revenues and $0.5 million of licensing revenues. As noted on prior calls, one of the metrics that we track is average net revenue per prescription, which is calculated by dividing net revenue for the quarter by the estimated number of XHANCE prescriptions dispensed during that quarter.

We believe this is a useful metric to evaluate net revenues generated per prescription. However, this metric is subject to variability. That variability is impacted by factors that do not necessarily reflect the change in the price that is paid for an individual unit of XHANCE, including ordering patterns and inventory levels for our wholesale customers and pharmacies that we sell to directly, patient utilization rates of affordability programs, the proportion of patients acquiring XHANCE through an insurance benefit and other factors.

Based on available XHANCE prescription data purchased from third parties and data from our pharmacy partners, our average net revenue per prescription for the first quarter of 2019 was $177, which was slightly higher than our expected range of $155 to $175. As a reminder, with respect to first quarter 2019 average net revenue per prescription, the decrease from the fourth quarter was anticipated, primarily due to expectations for higher copay assistance due to the annual reset of insurance deductibles.

Importantly, I'd like to add that we observed favorable trends for the quarter for average net revenue per prescription, which supports our expectations for full year 2019 that I'll review in a moment.

Moving to Slide 11; for the first quarter of 2019, operating expenses were $30.9 million. Based on that, for the full year of 2019, we continue to expect total operating expenses, defined to sales, general and administrative plus research and development expenses to be in the range of $135 million to $142 million of which $10 million to $12 million is expected to be stock-based compensation.

Total operating expenses, including stock-based compensation -- excluding stock-based compensation are expected to be in the range of $125 million to $130 million. Finally, we also continue to expect the full year 2019 average net revenue per prescription will be between $185 to $205. Factors projected to support this increase include more patients meeting their out-of-pocket deductibles thresholds and increase in the proportion of prescription refills and improvements in market access.

I'll now turn the call back over to Peter to give a brief pipeline update and closing remarks. Peter?

Peter K. Miller -- Chief Executive Officer

Thank you, Keith. Turning to Slide 13, in addition to the launch of XHANCE, we believe significant additional long-term value could be created by the pursuit of a follow-on indication for the treatment of chronic sinusitis or CS. As we have mentioned before, this is an indication for which we are aware of no previous FDA approved drugs and the condition was significantly higher prevalence and which is treated by a larger universe of physicians.

In the first quarter of 2019, we focused on the execution of our plan to activate clinical trial sites. Although multiple sites are now screening and enrolling, we are continuing to add additional investigational sites to the first trial in the second quarter. We also continue to expect to start the second of the two planned CS trials in this quarter.

Turning to Slide 15; in conclusion, we are very encouraged by the sustained rate of growth in prescription volume that we are reporting today. We are also pleased that we're making progress toward our other strategic objectives including our chronic sinusitis program. Also important was the licensing of our EDS technology to Inexia. We believe this transaction completed in the first quarter, provides a template for future agreements in other therapeutic categories.

In conclusion, based on our progress, I continue to feel confident that we will succeed in building a leading ENT and Allergy Specialty Company, and I look forward to future updates.

Thank you. Now I'd like to open it up for Q&A.

Questions and Answers:

Operator

Thank you. (Operator Instructions) And our first question comes from the line of Gary Nachman with BMO Capital Markets. Your line is now open.

Rozae -- BMO Capital Markets -- Analyst

Hi, good morning. It's Rozae (ph) on for Gary. Thanks for taking the question. How should we expect seasonality to impact Rx volumes for the rest of the year, since I believe you previously indicated that summer is trough period for intranasal spray?

Peter K. Miller -- Chief Executive Officer

Yeah, you know I'll say it's -- it's Peter here. We believe it's a little bit too early for us to have a really good handle on how seasonality is going to impact us this year, and I say that for a couple of reasons. We obviously lived through last year. However, there really are important differences this year versus last year. First off, I should begin by saying, by the way, that our -- we are very pleased with the current strong growth that we've seen at the rate we've been growing.

But in terms of seasonality and sort of what will potentially impact us, as I said, important differences between this year and last year, including, we have a significantly higher number of refills this year. Last year we virtually had no refills, this year our -- reasonably significant proportion of our total TRx's are on refill.

The second, we made important changes to our patient affordability program this year versus last year. And finally, we have some important new levers, such as our seven day sample, which we didn't have last year. So, in summary, it's a little bit too early for us to really understand how seasonality is going to impact us.

Rozae -- BMO Capital Markets -- Analyst

Thanks. And could you also provide some more color on what drove the higher than expected net revenue per prescription in 1Q. I think previously you may have indicated it was trending toward the middle of the guidance range for 1Q?

Peter K. Miller -- Chief Executive Officer

Yeah. Keith. I'll pass that to you.

Keith Goldan -- Chief Financial Officer

Yes, Rozae (ph) , thanks for the question. I mean, as I -- you know we're -- obviously, we're pleased that we came in slightly above the range of $177. We had guided to a range of $155 to $175. Some of the factors that impacted that beat on the average net revenue per prescription included lower rebates than we had expected to pay back to the PBMs and the insurers as well as a slight -- some sight stocking that we saw in the first quarter.

Rozae -- BMO Capital Markets -- Analyst

Thank you.

Keith Goldan -- Chief Financial Officer

Thanks for the question.

Operator

Thank you. And our next question comes from the line of David Amsellem with Piper Jaffray. Your line is open.

Michael Ingerman -- Piper Jaffray & Co. -- Analsyt

Hi, good morning. This is Mickey Ingerman on for David this morning. Couple of quick ones, first with regards to payer access, are there still national plans that you guys are trying to onboard, or at this point is it smaller state and regional plans? And then, once you get that desired insurance coverage. What is a realistic steady state net revenue per prescription?

Peter K. Miller -- Chief Executive Officer

Yeah, Tom, maybe I'll pass the first part to you and Keith, and you can take the second part.

Tom Gibbs -- Chief Commercial Officer

Hi, thanks for the call. Mickey. We continue to have productive discussions with commercial and Medicare Part D payers, both at the national and the regional level. And as you may expect, the level of interest for XHANCE has increased with the potential launch of biologics for nasal polyps in the second half of 2019. So we feel really good about the conversations that we're having to-date across all payer types.

Peter K. Miller -- Chief Executive Officer

I think it's fair to say too Tom that there is a -- there are few nationals that are still out there that we're talking to, and we -- that's part of the reason we feel pretty good about, actually very good about our ability to increase the percent of total lives covered.

Keith Goldan -- Chief Financial Officer

And with respect to your question regarding the longer-term achievable average net revenue per prescription, I stated in my comments that we're standing by our guidance for the full year, which is $185 to $205 or the midpoint of $195. We ended last year right about in that range, but exited 4Q, if you recall, at $214. So, we still believe that those are achievable targets for us.

Peter K. Miller -- Chief Executive Officer

And Keith, the thing I would add to that is, longer term, we do feel we're going to see continued upward pressure on that measure, again, because refills, we do expect to even become a higher proportion of business and we do expect to continue to expand coverage.

Keith Goldan -- Chief Financial Officer

Yeah. Yeah, those two factors will definitely drive long-term -- are expected to drive long-term increases in our average net revenue per prescription.

Michael Ingerman -- Piper Jaffray & Co. -- Analsyt

Got it. And a few quick follow-ups; first, if you guys could talk to the portion of usage of XHANCE coming from the non-polyp population. And then if you can just speak to the significant difference in prescriptions between what you guys report and what we see on IQVIA? Thanks.

Peter K. Miller -- Chief Executive Officer

Yeah, so -- Tom, why don't you take the first one and Keith and Jonathan, you can take the second part of that.

Tom Gibbs -- Chief Commercial Officer

Sure. Thanks. Mickey, as we -- as it relates to the usage of XHANCE across indications, the first thing I would like to say is that obviously all of our promotional efforts and sales force details are focused on promoting within the nasal polyps indication. The data that I'll support is from NDTI physician survey data, which is a survey where they ask physicians what their prescribing the -- or what they're prescribing the product for? If you look at the distribution across indications, about 60% of all prescriptions are written for the chronic sinusitis umbrella, half split between chronic sinusitis and nasal polyps. The other is all other which predominantly is allergic rhinitis.

Peter K. Miller -- Chief Executive Officer

And with respect to your second question, Mickey we're seeing -- it varies on a week-by-week basis. But I think reliably, we're seeing about 75% to 80% of our full prescription volume reflected in the IQVIA numbers that are publicly available, for purchase.

Michael Ingerman -- Piper Jaffray & Co. -- Analsyt

Got it, thank you.

Operator

Thank you. And our following question comes from the line of David Steinberg from Jefferies. Your line is now open.

David Steinberg -- Jefferies -- Analyst

Okay, thank you. So my first question is on your gross margin, looked quite a bit higher than expected, like 84% or so, Is this sort of a sustainable gross margin throughout the year or is there some one-time items that led to this result. Secondly, if you look at the IQVIA numbers, a couple weeks ago, there is a big jump, abnormally high jump and I know it's because you added -- one of the specialty pharmacies was amalgamated into the IQVIA numbers.

Could you -- since that's the one way we can track your progress versus specialty, can you say what percent of the scripts roughly now that we can actually track every week or what's the ratio of retail to specialty? And then, you know you mentioned adding the new sales reps at places like Baltimore and Boston. Are these the first reps that you've actually had in the pretty large territory or did you already have reps? And then, related to that, how long will it take for these new reps to effectively become productive sales numbers?

Peter K. Miller -- Chief Executive Officer

You know -- David, I'll pass the first two to Keith and then Tom and I will handle the last two.

Keith Goldan -- Chief Financial Officer

So David, with respect to gross margin, we're not guiding on revenue, we are not guiding on gross margin. I will say that, Peter and I think have consistently said in meetings that we expect, although this is a drug device combination product, we expect XHANCE to be able to achieve typical pharma type margins.

In the launch of a product, there is always -- I think there's always variability. If you look across all product launches in gross margin as the supply chain is normalizing. So I think we worked through a lot of that, and you should hopefully start to see some normalization and less variability in the gross margin.

With respect to your IQVIA question, I believe you are first asking the proportionality which we commented was we're seeing about 75% to 80% of our total prescription volume being reflected in the IQVIA numbers. You are absolutely correct. And for those others on the call, there was a large spike during Q1 in the IQVIA reported data that was not additional volume necessarily, organic volume in terms of like XHANCE TRxs that was in fact IQVIA beginning to report the volume from one of our large pharmacy partners that IQVIA hadn't previously reported but that we, the Company was reported -- reporting in our numbers. When we presented TRx, we always combined the IQVIA number with our internal data that we receive from the pharmacy partners that don't report.

Peter K. Miller -- Chief Executive Officer

And David, regarding sales force, as we stated in the remarks, these regions are largely new regions. We did have minimal presence in a few of the regions, if you will, but the territories are virtually all sort of new territories, if you will. And that's what we highlighted, there is will be 2,200 previously uncalled physicians in our now universe of about 10,000 physicians and it's why we highlighted. We think it could be a real, pretty significant lever and driver of growth as these new territory managers start to have impact in the territories.

Regarding the time to impact, we again made remarks about that. We're, by the way, very encouraged by some of the early results that we're seeing. We have the benefit, as we mentioned, of having done this, we've launched the product in territories. We're obviously taking advantage of that learning. But it does take time to build territories, to get access to build the product differentiation as well as understanding of market access. So as I said, very encouraged -- we're billed however, in terms of the impact. Tom, if you have anything to add?

Tom Gibbs -- Chief Commercial Officer

No, I think you've summarized it very well. The one other thing that I would say is that we would expect, although we're very encouraged by the early signs and really excited about the team that we've hired, we would expect the new territory managers to contribute meaningful toward sustaining the growth in the second half of 2019.

Peter K. Miller -- Chief Executive Officer

Yeah, and I'll just say this, David, I -- probably for the benefit of, hopefully our -- some of our sales team is listening on the call. We just feel great about our sales team, the folks who are with us at the start who converted as well as the group we've hired, it's really a terrific group.

Operator

Thank you. And our following question comes from the line of Brandon Folkes with Cantor Fitzgerald. Your line is now open.

Brandon Folkes -- Cantor Fitzgerald -- Analyst

Hi, thanks for taking my questions and congratulations on the results. Firstly, can you talk a bit about where you are in terms of the percentage of physicians that you're calling on that fully understand that you have this new simplified co-pay program and the affordability of XHANCE. Secondly, perhaps can you help us think through the market dynamic when biologics do come to market and how XHANCE might either complement to compete with those products? And lastly, I know you talked about referrals on the call, but is it too early to have any insight into where persistency currently is for XHANCE? Thank you.

Peter K. Miller -- Chief Executive Officer

Yeah. Tom, I want to you to take the first one and Ramy will start on the second one and I'll pick the third.

Tom Gibbs -- Chief Commercial Officer

Thanks Peter, as it relates to the awareness and appreciation of our patient affordability program; we don't have specific data in terms of tracking awareness of our patient affordability program. I can tell you that our sales team in terms of their strategy that they are executing, the first thing I'd do is define the appropriate patient site. The second thing that they do is really drive home the efficacy message which is now amplified by the videos that we have. And the third element of the strategy they're executing is ensuring that each physician understands and appreciates the patient affordability program. If we look at our total number of -- of our target universe, how many people have prescribed XHANCE, it's about 66% of our total universe and I think that's representative of really having a good appreciation of the patient affordability program.

Peter K. Miller -- Chief Executive Officer

And Brandon, the thing I'll add, having just been out with -- talking with some of our territory managers is that just like we had doctors who want to get experience with the efficacy of the product, they frankly ultimately get experience to the patient affordability program. And they -- what really builds their confidence is that they see the product work and they also hear and know that the majority of patients are getting the product for either zero or $30 (ph) .

Ramy A. Mahmoud -- President and Chief Operating Officer

The second part of your question related to the relationship between biologics that are emerging in this space and XHANCE, I'll divide that into two parts. There is sort of a cost to payer component, and then there's a clinical and medical components. The cost to the payer component, I think we've said that the productive discussions already having with payers are likely to benefit from the potential approval of these biologics. They're extraordinarily more expensive in comparison to XHANCE and we think that that benefits the conversations that we're having now.

The clinical and medical question is interesting, if you look at the way in which trials were performed with Dupixent and with some of the other biologics following behind. And if you look at the labeling that they have for some other indications, it suggests that the products will be used in addition to a topically acting steroid like XHANCE. And if you look at Analog TRICARE in asthma, you see the same kind of treatment paradigms. So we think there's a good chance that these products will not be competitive, but will be complementary.

Peter K. Miller -- Chief Executive Officer

Yeah. And regarding the last question Brandon, on compliance for refill and persistency, we've said this and we really do mean it. It's still little bit too early to really understand true compliance, because as we've said before we really launched our new patient affordability program in September, which is a key element of people refilling. We obviously don't have a full year of data yet. I will say, however, that we're very pleased with current trends on refill.

Brandon Folkes -- Cantor Fitzgerald -- Analyst

Great, thank you very much for that, and congratulations again.

Peter K. Miller -- Chief Executive Officer

Thanks Brandon.

Keith Goldan -- Chief Financial Officer

Thanks Brandon.

Tom Gibbs -- Chief Commercial Officer

Thanks Brandon.

Operator

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back to Peter Miller for closing remarks.

Peter K. Miller -- Chief Executive Officer

Well, we just want to thank you for joining us this morning and we look forward to future updates. Thank you very much.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.

Duration: 30 minutes

Call participants:

Jonathan Neely -- Vice President of Investor Relations

Peter K. Miller -- Chief Executive Officer

Keith Goldan -- Chief Financial Officer

Tom Gibbs -- Chief Commercial Officer

Ramy A. Mahmoud -- President and Chief Operating Officer

Rozae -- BMO Capital Markets -- Analyst

Michael Ingerman -- Piper Jaffray & Co. -- Analsyt

David Steinberg -- Jefferies -- Analyst

Brandon Folkes -- Cantor Fitzgerald -- Analyst

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