OptiNose Inc.
03/26/2025 | Press release | Distributed by Public on 03/26/2025 05:19
Annual Report for Fiscal Year Ending December 31, 2024 (Form 10-K)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our historical consolidated financial statements and the related notes thereto appearing in this Annual Report on Form 10-K. In addition to historical information, some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the "Risk Factors" section of this Annual Report on Form 10-K, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. See "Note Regarding Forward-Looking Statements"
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 microgram (mcg), is a therapeutic utilizing our proprietary Exhalation Delivery System™ (EDS®) that delivers a topically-acting corticosteroid for the treatment of chronic rhinosinusitis with and without nasal polyps. 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. Additionally, we believe the current practice of postoperative INS use could support XHANCE's adoption as a maintenance therapy to improve outcomes following sinus surgery.
In September 2017, the U.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 in April 2018.
In March 2024, the FDA approved XHANCE for the treatment of chronic rhinosinusitis without nasal polyps in patients 18 years of age and older. XHANCE is the first and only drug therapy approved by the FDA for the treatment of chronic rhinosinusitis without nasal polyps (also referred to by the medical community and payers as, chronic sinusitis), which is one of the most common diseases diagnosed in adult outpatient medicine. It is our view that the terms "chronic sinusitis" and "chronic rhinosinusitis without nasal polyps" are synonymous from a promotional and medical prospective, and therefore, use the terms interchangeable in this Annual Report on Form 10-K.
We are relaunching XHANCE to focus on the comparatively larger market opportunity that we believe is created by the new chronic sinusitis without nasal polyps indication. We plan to continue to focus our commercial efforts primarily to the ENT and allergy specialist audience while seeking partnerships to extend the commercialization of XHANCE into primary care. We realigned our 75 sales territories at the start of 2024 in order to optimize the chronic
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sinusitis prescribing potential within the called on specialist audience. As a result of the realignment and the new indication, approximately 40% of targets in the called on specialist audience are new to our territory managers. We completed training with our territory managers on new promotional materials during a national sales meeting the week of April 8, 2024 and deployed those to the field starting the week of April 15, 2024. In the second quarter of 2024, more than half of our territory manager sales calls were to targets who are new to our territory managers or have historically prescribed XHANCE infrequently. Successfully growing XHANCE prescribing in this audience, as well as our existing prescribing base, will be important to achieving our near and long term financial objectives.
In the first quarter of 2024 we launched a central in-take pharmacy model (commonly referred to as, a "HUB") to prepare for the growth we expect from XHANCE's new indication. In addition to offering the necessary scalability for our anticipated growth, we believe the HUB has the potential to provide improved protections for business continuity and more comprehensive and consistent patient support and prescription fulfillment services than our historical preferred pharmacy network. During the second quarter we transitioned a significant proportion of the XHANCE business from our historical preferred pharmacy network to the HUB. Although we may experience initial inefficiencies as a result of this transition, we believe we will begin to realize the benefits of the HUB model as we continue to optimize processes at the HUB and physician offices become familiar with working with the HUB.
In accordance with the Pediatric Research Equity Act, and as part of the FDA approvals of XHANCE for the treatment of chronic rhinosinusitis with and without nasal polyps in patients 18 years of age and older, we are required to conduct clinical trials of XHANCE for these conditions in adolescent patients. Under these post-marketing requirements, we are required to complete a study of XHANCE in adolescent patients 12 to 17 years of age with chronic rhinosinusitis with nasal polyps by March 2026 and submit a final report to the FDA by September 2026, and complete a study of XHANCE in adolescent patients 12 to 17 years of age with chronic rhinosinusitis without nasal polyps by March 2028 and submit a final report to the FDA by October 2028. Our study of XHANCE in adolescent patients with chronic rhinosinusitis without nasal polyps is ongoing, and we expect to commence the required study of XHANCE in adolescent patients with chronic rhinosinusitis without nasal polyps in 2025.
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.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.
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 physician specialists, and seasonality in disease flare-ups, has an impact on the number of patients that present themselves and who are therefore available to receive a new prescription for XHANCE.
Additionally, we believe that first quarter prescription demand and average net revenue per prescription for XHANCE is adversely impacted 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 believe our co-pay savings program and market access influence prescription volume. In the fourth quarter of 2023, and January 2024, we adjusted the terms of our co-pay savings program to decrease the number and proportion of total prescriptions filled by patients in commercial insurance plans that either do not cover XHANCE or are in commercial insurance plans that have high deductibles. In the future we may make additional changes to our co-pay savings program that could influence prescription volume.
Based on third-party prescription data as well as data from HUB and PPN partners, the total estimated number of XHANCE prescriptions in the fourth quarter of 2024 was 78,500, which represents a 1% decrease for prescriptions when compared to estimated fourth quarter 2023 prescriptions of 79,500. In addition, the total estimated number of XHANCE prescriptions was 65,500 in the first quarter of 2024, 66,200 in the second quarter of 2024, and 63,900 in the third quarter of 2024. We believe the sequential increase from third quarter 2024 to fourth quarter 2024 was driven by improved efficiency in prescription fulfillment, increased frequency of sales calls by our territory managers to target audience physicians, and improved sales force execution.
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We believe the 19% decrease from 339,400 for full year 2023 to 274,000 for full year 2024 was primarily driven by changes we made to our co-pay saving program intended to reduce the number of prescriptions filled by patients in commercial insurance plans that either do not cover XHANCE or are in commercial insurance plans that have high deductibles. Although reducing the number of filled prescriptions, we believe these changes had the intended effect of increasing average XHANCE net product revenues per prescription which increased 36% from $209 in full year 2023 to $285 in full year 2024 (as discussed in additional detail below).
•Market Access.Based on currently available third-party data as of January 31, 2025, we believe that approximately 70% of insured lives are currently in a plan that covers XHANCE. 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 physician attest that they are treating a patient for an approved indication prior to becoming eligible for coverage for XHANCE. As of January 31, 2025, approximately half of the commercial covered lives in plans that cover XHANCE are in a plan that requires a prior authorization and most of those prior authorizations request information regarding prior use of INS and patient diagnosis. However, payors can elect to change utilization management criteria to be more or less restrictive at any time, and more restrictive criteria would likely have a negative impact on prescriptions. In some cases, patients do not meet the payors' utilization management criteria, and in other cases, 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 rebates levels.
•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 HUB and PPN partners, the total estimated number of XHANCE new prescriptions in the fourth quarter of 2024 was 28,700, which represents an 8% increase for new prescriptions when compared to estimated fourth quarter 2023 new prescriptions of 26,500. In addition, the total estimated number of XHANCE new prescriptions was 24,700 in first quarter 2024, 25,300 in second quarter 2024, and 25,600 in third quarter 2024. We believe the fourth quarter 2024 increase in new prescriptions was primarily driven by improved efficiency in prescription fulfillment, increased frequency of sales calls by our territory managers to target audience physicians, and improved sales force execution.
We track refill prescriptions and provide patient assistance to support refill programs that are administered by our HUB and PPN partners. Based on third-party prescription data as well as data from Hub and PPN partners, the total estimated number of XHANCE refill prescriptions in the fourth quarter of 2024 was 49,800, which represents a 6% decrease for refill prescriptions when compared to estimated fourth quarter 2023 refill prescriptions of 53,000. In addition, the total estimated number of XHANCE refill prescriptions was 40,800 in first quarter 2024, 40,900 in second quarter 2024, and 38,200 in third quarter 2024.
•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 HUB and PPN partners, the total estimated number of physicians who had at least one patient fill a prescription for XHANCE in the fourth quarter of 2024 was 8,912, which represents 5% growth when compared to the estimated 8,478 physicians who had at least one patient fill a prescription for XHANCE in the fourth quarter of 2023. In addition, the total estimated number of physicians who had at least one patient fill a prescription for XHANCE was 8,451 in the first quarter of 2024, 8,561 in the second quarter of 2024, and 8,548 in the third quarter of 2024.
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 HUB and PPN partners, the total estimated number of physicians who had more than 15 XHANCE prescriptions filled by their patients in the fourth quarter of 2024 was 1,308, which represents an increase of 6% when compared to the estimated 1,229 physicians who had more than 15 XHANCE prescriptions filled by their patients in the fourth quarter of 2023. In addition, the total estimated number of physicians who had more than 15 XHANCE prescriptions filled by their patients was 1,023 in the first quarter of 2024, 1,056 in the second quarter of 2024, and 1,056 in the third quarter of 2024.
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•XHANCE Net Product Revenues per Prescription.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. Average XHANCE net product revenues per prescription were $286 in the fourth quarter of 2024 which represents an 14% increase when compared to the $250 average XHANCE net product revenues per prescription in the fourth quarter of 2023. We believe the increase in net revenue per prescription in the fourth quarter of 2023 was primarily driven by changes to our co-pay assistance program. In addition, average XHANCE net revenues per prescription were $227 in the first quarter of 2024, $309 in the second quarter of 2024, and $320 in the third quarter of 2024.
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 $78.2 million and $71.0 million in net product revenues for the years ended December 31, 2024 and 2023, 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, our average net product revenue per prescription for the fourth quarter of 2024 was $286 which represents an 14% increase when compared to the $250 in the fourth quarter of 2023. Average net product revenue per prescription for the year ended December 31, 2024 was $285, which represents a 36% increase compared to our average net product revenue per prescription of approximately $209 for the year ended December 31, 2023.
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.
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 the Exhalation Delivery System;
▪expenses related to the continued development of our product sample portfolio;
▪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;
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▪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; 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.
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, product samples, and marketing activities such as direct-to-patient / direct-to-consumer initiatives. Additionally, sales and marketing-related expenses include fees paid to our HUB and PPN partners for services unrelated to traditional distribution functions, such as patient services fees, data fees, benefit claims adjudication and program management fees.
Warrant Liability
In November 2022, the Company issued warrants in connection with a public offering. These warrants are required to be measured at fair value and reported as a liability in the consolidated balance sheet. We recorded the fair value of the warrants upon issuance using a Monte Carlo simulation and are required to revalue the warrants at each reporting date with any changes in fair value recorded on our statement of operations. The valuation of the warrants is considered under Level 3 of the fair value hierarchy due to the need to use assumptions in the valuation that are both significant to the fair value measurement and unobservable. The change in the fair value of the Level 3 warrants liabilities is reflected in the statement of operations for the years ended December 31, 2024 and 2023.
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 the Pharmakon Senior Secured Notes.
Other (income) expense
Other (income) expense consists primarily of unrealized gains and losses on our warrant liability, as well as foreign currency (income) losses due to exchange rate fluctuations on transactions denominated in a currency other than our functional currency.
Critical accounting policies and use of estimates
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of expenses during the reported period. We base our estimates on historical experience, known trends and events and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions.
While our significant accounting policies are described in more detail in the notes to our consolidated financial statements appearing elsewhere in this report, we believe that the following accounting policies are those most critical to the preparation of our consolidated financial statements.
Warrant Liability
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In November 2022, we issued warrants in connection with a public offering. Pursuant to the terms of the warrants, we could be required to settle the warrants in cash in the event of a "fundamental transaction" as defined in the warrant (which includes, among other things, an acquisition of the Company) and, as a result, the warrants are required to be measured at fair value and reported as a liability in the consolidated balance sheet. We recorded the fair value of the warrants upon issuance using a Monte Carlo simulation and are required to revalue the warrants at each reporting date with any changes in fair value recorded on our statement of operations. The valuation of the warrants is considered under Level 3 of the fair value hierarchy due to the need to use assumptions in the valuation that are both significant to the fair value measurement and unobservable. The change in the fair value of the Level 3 warrants liabilities is reflected in the statement of operations for the year ended December 31, 2024.
Revenue recognition
We account for revenue in accordance with Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers, which was adopted on January 1, 2018. We perform the following five steps to recognize revenue under ASC Topic 606: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. We only recognize revenue when it is probable that we will collect the consideration to which we are entitled in exchange for the goods or services that will be transferred to the customer.
Net product revenues
We recognize XHANCE revenue at the point the customer obtains control of the product, which generally occurs upon delivery. The transaction price that is recognized as revenue for products includes an estimate of variable consideration. Payment terms with customers do not exceed one year and, therefore, we do not account for a financing component in our arrangements. Incremental costs of obtaining a contract with a customer (for example, sales commissions) are expensed when incurred as the period of benefit is less than one year. Shipping and handling costs for product shipments to customers are recorded as selling, general and administrative expenses. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available. As of December 31, 2024, we did not make any material adjustment to our prior estimates of variable consideration. Further, we believe that reasonable variations in our estimates of variable consideration would not result in material changes to our financial statements. The components of our variable consideration include the following:
Provider Chargebacks and Discounts.Chargebacks for fees and discounts to providers represent the estimated obligations resulting from contractual commitments to sell products to qualified healthcare providers at prices lower than the list prices charged to customers who directly purchase the product from us. Customers charge us for the difference between what they pay for the product and the ultimate selling price to the qualified healthcare providers. These components of variable consideration are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and accounts receivable. Our provision for chargebacks and discounts consists of our estimates for these credits, which we evaluate based on historical data, estimated future trends, and estimates of inventory held by our customers.
Trade Discounts and Allowances.We generally provide customers with discounts that include incentive fees which are explicitly stated in the Company's contracts. These discounts are recorded as a reduction of revenue and accounts receivable in the period in which the related product revenue is recognized.
Product Returns.Consistent with industry practice, we have a product returns policy that provides customers a right of return for product purchased within a specified period prior to and subsequent to the product's expiration date. We estimate the amount of our product that may be returned and present this amount as a reduction of revenue in the period the related product revenue is recognized, in addition to establishing a current liability. We consider several factors in the estimation process, including expiration dates of product shipped to customers, inventory levels within the distribution channel, product shelf life, prescription trends and other relevant factors.
Government Rebates.We are subject to discount obligations under state Medicaid programs and Medicare. Reserves related to these discount obligations are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability. Our liability for these rebates consists of estimates of claims for the current quarter and estimated future claims that will be made for product that has been recognized as revenue but remains in the distribution channel inventories at the end of the reporting period.
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Payor Rebates.We contract with certain third-party payors, primarily health insurance companies and pharmacy benefit managers, for the payment of rebates with respect to utilization of our products. These rebates are based on contractual percentages applied to the amount of product prescribed to patients who are covered by the plan or the organization with which it contracts. We estimate these rebates and record such estimates in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability.
Patient Assistance.Other programs that we offer include voluntary co-pay patient assistance programs intended to provide financial assistance to eligible patients with prescription drug co-payments required by payors and coupon programs for cash payors. The calculation of the current liability for this assistance is based on an estimate of claims and the cost per claim that we expect to receive associated with product that has been recognized as revenue but remains in the distribution channel inventories at the end of each reporting period.
Distribution and Other Fees. We pay distribution and other fees to certain customers in connection with the sales of our products. We record distribution and other fees paid to our customers as a reduction of revenue, unless the payment is for a distinct good or service from the customer and we can reasonably estimate the fair value of the goods or services received. If both conditions are met, we record the consideration paid to the customer as an operating expense. These costs are typically known at the time of sale, resulting in minimal adjustments subsequent to the period of sale.
Stock-based compensation
We account for stock-based compensation awards in accordance with the FASB ASC Topic 718, Compensation - Stock Compensation (ASC 718). ASC 718 requires all stock-based compensation awards to employees to be recognized as expense based on their grant date fair values. We use the Black-Scholes option pricing model to value our stock option and restricted stock option awards and shares issued under our employee stock purchase plan. Restricted stock units are valued at the fair market value per share of our common stock on the date of grant. We account for forfeitures of stock option awards as they occur. For awards issued to employees, we recognize compensation expense on a straight-line basis over the requisite service period, which is generally the vesting period of the award. The resulting increase or decrease in value, if any, is recognized as expense or a reduction to expense, respectively, during the period the related services are rendered. Expense for awards with performance conditions is estimated and adjusted on a quarterly basis based upon our assessment of the probability that the performance condition will be met. In January 2022, we issued awards with vesting subject to specific market conditions. The calculation of the value of awards that are subject to market conditions, as well as the derived service period for these awards, are determined using a Monte Carlo simulation. Stock based compensation for awards that are subject to a market condition is recognized based over the derived service period.
Estimating the fair value of stock option awards and shares issued under the employee stock purchase plan requires the input of subjective assumptions, including the estimated fair value of our common stock, the expected life of the option, stock price volatility, the risk-free interest rate and expected dividends. The assumptions used in our Black-Scholes option-pricing model represent management's best estimates and involve a number of variables, uncertainties and assumptions and the application of management's judgment, as they are inherently subjective. If any assumptions change, our stock-based compensation expense could be materially different in the future.
These assumptions used in our Black-Scholes option-pricing model are estimated as follows:
•Expected Term. Due to the lack of sufficient company-specific historical data, the expected term of employee options is determined using the "simplified" method, as prescribed in SEC's Staff Accounting Bulletin (SAB) No. 107, whereby the expected life equals the arithmetic average of the vesting term and the original contractual term of the option. The expected term of non-employee options is equal to the contractual term.
•Expected Volatility. The expected volatility is based on our historical volatilities which were commensurate with the expected term assumption as described in SAB No. 107.
•Risk-Free Interest Rate. The risk-free interest rate is based on the interest rate payable on U.S. Treasury securities in effect at the time of grant for a period that is commensurate with the assumed expected term.
•Expected Dividends. The expected dividend yield is 0% because we have not historically paid, and do not expect for the foreseeable future to pay, a dividend on our common stock.
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The following table reflects the weighted average assumptions used to estimate the fair value of stock option awards granted and shares issued under the employee stock purchase plan during the year ended December 31, 2024.
| Year Ended December 31, 2024 | |||||||||||
|
2010 A&R Stock Incentive Plan(1)
|
2017 Employee Stock Purchase Plan | ||||||||||
| Risk free interest rate | 4.12 | % | 5.29 | % | |||||||
| Expected term (in years) | 5.96 | 0.5 | |||||||||
| Expected volatility | 75.31 | % | 70.57 | % | |||||||
(1) Includes options granted outside the 2010 A&R Stock Incentive Plan. The grants were made pursuant to the Nasdaq inducement grant exception in accordance with Nasdaq Listing Rule 5635(c)(4).
For information about our employee stock purchase plan, see Note 13to the Consolidated Financial Statements.
Recent Accounting Pronouncements
See Note 3 of our audited consolidated financial statements beginning on page F-1 of this Annual Report on Form 10-K for a description of recent accounting pronouncements applicable to our consolidated financial statements.
Consolidated Results of Operations
Comparison of the years ended December 31, 2024 and 2023
The following table sets forth our selected consolidated statements of operations data for the periods indicated (in thousands):
| Year Ended December 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Revenues: | |||||||||||
| Net product revenues | $ | 78,226 | $ | 70,987 | |||||||
| Total revenues | 78,226 | 70,987 | |||||||||
| Costs and expenses: | |||||||||||
| Cost of product sales | 7,231 | 8,633 | |||||||||
| Research and development | 3,855 | 5,303 | |||||||||
| Selling, general and administrative | 83,459 | 79,799 | |||||||||
| Total operating expenses | 94,545 | 93,735 | |||||||||
| Loss from operations | (16,319) | (22,748) | |||||||||
| Other (income) expense: | |||||||||||
| Interest expense | 17,309 | 17,001 | |||||||||
| Other (income) expense | (12,087) | (4,266) | |||||||||
| Total other (income) expense | 5,222 | 12,735 | |||||||||
| Net loss | $ | (21,541) | $ | (35,483) | |||||||
Net product revenues
Net product revenues related to sales of XHANCE were $78.2 million and $71.0 million for the years ended December 31, 2024 and 2023, respectively. The year-over-year increase is attributable primarily to the March 2024 label expansion of XHANCE for the treatment of chronic rhinosinusitis, as well as revisions that we made to our co-pay assistance program in the second half of 2023 as well as in January 2024 intended to increase average net revenue per prescription.
Cost of product sales
Cost of product sales related to XHANCE were $7.2 million and $8.6 million for the years ended December 31, 2024 and 2023, respectively, with the decrease attributable primarily to a decrease in units sold.
Research and development expense
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Research and development expenses were $3.9 million and $5.3 million for the years ended December 31, 2024 and 2023, respectively. The decrease is attributable to a decrease in costs related to the preparation and filing of our supplemental new drug application for XHANCE for the treatment of chronic rhinosinusitis without nasal polyps.
Selling, general and administrative expense
Selling, general and administrative expenses were $83.5 million and $79.8 million for the years ended December 31, 2024 and 2023, respectively. The increase was due primarily to an increase in sales and marketing costs related to our launch of XHANCE for the treatment of chronic sinusitis, as well as higher stock based compensation expense in 2024, which was partially offset by $1.1 million of severance costs recognized in 2023.
Interest (income) expense, net
Interest (income) expense, net, was $17.3 million and 17.0 million, for the years ended December 31, 2024 and 2023, respectively, which was primarily comprised of interest expense on the Pharmakon Senior Secured Notes during both periods. The increase was due primarily to higher interest rates in 2024.
Other income
In November 2022, we issued warrants in connection with a public offering. These warrants are required to be measured at fair value and reported as a liability in the consolidated balance sheet. We recorded the fair value of the warrants upon issuance using a Monte Carlo simulation and are required to revalue the warrants at each reporting date with any changes in fair value recorded on our statement of operations. The valuation of the warrants is considered under Level 3 of the fair value hierarchy due to the need to use assumptions in the valuation that are both significant to the fair value measurement and unobservable. The change in the fair value of the Level 3 warrants liabilities is reflected in the statement of operations for the years ended December 31, 2024 and December 31, 2023.
Other income includes primarily $12.1 million and $4.3 million for the years ended December 31, 2024 and 2023, respectively of unrealized gains on the fair value of warrants.
Liquidity and Capital Resources
Since inception, we have incurred significant net losses and expect to continue to incur net losses for the foreseeable future. We incurred net losses of $21.5 million and $35.5 million for the years ended December 31, 2024 and 2023, respectively. As of December 31, 2024, we had an accumulated deficit of $741.9 million. We have funded our operations primarily through the sale of stock and the issuance of debt, as well as through licensing revenues received under the terms of our license agreements and revenues from sales of XHANCE. We may never become profitable, or if we do, may not be able to sustain profitability on a recurring basis. As of December 31, 2024, we had $84.5 million in cash and cash equivalents.
The following table shows a summary of our cash flows for the periods indicated (in thousands):
| Year Ended December 31, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| Net cash used in operating activities | $ | (44,680) | $ | (20,532) | ||||||||||
| Net cash used in investing activities | (72) | (328) | ||||||||||||
| Net cash provided by financing activities | 55,553 | 300 | ||||||||||||
| Effects of exchange rates on cash and cash equivalents | - | - | ||||||||||||
| Net increase/(decrease) in cash and cash equivalents | $ | 10,801 | $ | (20,560) | ||||||||||
Operating activities
Cash used in operating activities increased by $24.1 million, from $20.5 million for the year ended December 31, 2023 to $44.7 million for the year ended December 31, 2024. The increase in cash used in operating activities was attributable primarily to an increase in accounts receivable and inventory, as well as a decrease in accounts payable and accrued expenses, partially offset by a smaller loss from operations for the year ended December 31, 2024
Investing activities
Cash used in investing activities decreased from the year ended December 31, 2023 to the year ended December 31, 2024 due to a decrease in equipment and software purchases during the year.
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Financing activities
Cash provided by financing activities increased for the year ended December 31, 2024 due to the registered direct offering completed in May 2024.
Registered Direct Offering
On May 10, 2024, we completed a registered direct offering pursuant to which it issued an aggregate of 2,120,000 shares of common stock at a purchase price of $15.00 per share and, in lieu of shares of common stock to certain investors, pre-funded warrants to purchase an aggregate of 1,580,000 shares of common stock at a price of $14.9999 per prefunded warrant which represents the per share offering price for common stock less the $0.0001 per share exercise price for each such pre-funded warrant. The aggregate net proceeds from the offering were $55.3 million.
A&R Note Purchase Agreement
The principal balance of the Pharmakon Senior Secured Notes outstanding under the A&R Note Purchase Agreement was $130,000 at December 31, 2024. See Note 10 of our audited consolidated financial statements beginning on page F-1 of this Annual Report on Form 10-K for a description of terms of the Pharmakon Senior Secured Notes and A&R Note Purchase Agreement, including repayment terms and applicable covenants.
Future funding requirements
We expect to continue to incur significant expenses in connection with our ongoing activities, particularly as we:
▪continue advertising and other promotional activities to support the commercialization of XHANCE;
▪continue to provide co-pay and other patient affordability programs for XHANCE;
▪conduct the adolescent studies mandated under the Pediatric Research Equity Act;
▪evaluate product candidates;
▪continue to contract to manufacture XHANCE;
▪maintain and protect our patent portfolio;
▪service our debt obligations under the Pharmakon Senior Secured Notes;
▪maintain infrastructure necessary to operate as a publicly-traded, commercial-stage company; and
▪hire additional staff and add operational, financial and information systems to execute our business plan.
Our future funding requirements, both near and long-term, will depend on many factors, including, but not limited to:
▪the success of our commercialization of XHANCE for the treatment of chronic rhinosinusitis with and without nasal polyps including, among other things, continued patient and physician adoption of XHANCE and our ability to maintain adequate insurance coverage and reimbursement for XHANCE;
▪the outcome, timing and cost of adolescent studies mandated under the Pediatric Research Equity Act;
▪the cost of commercialization activities for XHANCE, including product manufacturing, distribution, marketing and sales;
▪net product revenues received from sales of XHANCE;
▪the level of co-pay assistance and other patient affordability programs offered for XHANCE;
▪the costs involved in preparing, filing and prosecuting patent applications and annuity fees relating to issued patents;
▪the cost of maintaining and enforcing our intellectual property rights, as well as the cost of defending intellectual property disputes, including patent infringement actions brought by third parties against us;
▪the initiation, progress, timing, costs and results of clinical trials and other research and development related to future product candidates,
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▪the extent to which we in-license, acquire or otherwise partner in development or commercialization of other products, product candidates or technologies; and
▪our ability to maintain compliance with the financial covenants (including the requirement for us to achieve certain minimum trailing twelve-month consolidated XHANCE net sales and royalties thresholds and the requirement for us to maintain at least a minimum level of cash and cash equivalents at all times), and the other provisions under the A&R Note Purchase Agreement.
As of December 31, 2024, we had $84.5 million in cash and cash equivalents. In the event we are able to maintain compliance with the financial covenants and other terms of the A&R Pharmakon Note Purchase Agreement or obtain a waiver to or modification of such covenants, we believe our existing cash and cash equivalents would be sufficient to fund our operations and debt service obligations for approximately the next 12 months. However, as discussed below and elsewhere in this Annual Report on Form 10-K, there is substantial doubt about our ability to maintain compliance with such financial covenants and terms of the A&R Note Purchase Agreement and, as a result, substantial doubt about our ability to continue as a going concern.
We will likely require additional capital in the future secured through equity or debt financings, partnerships, collaborations, or other sources in order to maintain compliance with certain covenants of the A&R Note Purchase Agreement as discussed below, to meet our debt service obligations, including repayment of the Pharmakon Senior Secured Notes, and to carry out our planned development and commercial activities. If additional capital is not obtained when required, we may need to delay or curtail our operations until additional funding is received.
Our continuation as a going concern is dependent on our ability to maintain compliance with the financial covenants (including the requirement for us to achieve certain minimum trailing twelve-month consolidated XHANCE net sales and royalties thresholds, the requirement for us to maintain at least $30.0 million of cash and cash equivalents at all times (reduced to $20.0 million following the date of the first quarterly payment of principal due on September 30, 2025), referred to as "the liquidity covenant", and the requirement that our annual and quarterly financial statements not be subject to any qualification or statement as to "going concern" commencing with our financial statements for the fiscal year ending December 31, 2025), and the other provisions under the A&R Note Purchase Agreement, and our ability to generate sufficient cash flows from operations to meet our debt service obligations and to fund our operations and/or obtain additional capital through equity or debt financings, partnerships, collaborations, or other sources. The A&R Note Purchase Agreement includes events of default, in certain cases subject to customary periods to cure, following which Pharmakon may accelerate all amounts outstanding pursuant to the A&R Note Purchase Agreement. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.
The A&R Note Purchase Agreement includes a requirement that we achieve certain minimum trailing twelve-month consolidated XHANCE net sales and royalties thresholds commencing with the trailing twelve months ending March 31, 2025. We believe it is probable that we will not maintain compliance with the trailing twelve-month minimum consolidated XHANCE net sales and royalties thresholds for the entire one year period after the date these consolidated financial statements are issued. If we fail to achieve a minimum consolidated XHANCE net sales and royalties threshold, it will constitute a default under the A&R Note Purchase Agreement if we are unable to obtain a modification or waiver of such minimum consolidated XHANCE net sales and royalties threshold.
Further, the A&R Note Purchase Agreement includes a requirement that the report and opinion on our consolidated financial statements for the year ended December 31, 2025 and all of our subsequent quarterly and annual financial statements, not be subject to any statement or qualification as to "going concern" (referred to as, the "going concern covenant"). If we are unable to secure additional capital through equity or debt financings, partnerships, collaborations, or other sources, we believe it is unlikely that we will be able comply with the going concern covenant commencing with our financial statements for the year ending December 31, 2025, which will constitute a default under the A&R Note Purchase Agreement if we are unable to obtain a modification or waiver of such going concern covenant.
Additionally, commencing on September 30, 2025, we will be required to begin making principal repayments on our debt in eight quarterly installments of $16.3 million each through maturity in June 2027. We believe it is probable that, absent additional capital, we will not be able to maintain compliance with the minimum cash liquidity covenant under the A&R Note Purchase Agreement beginning in the first quarter of 2026.
If any of the foregoing defaults were to occur, the holders of the Pharmakon Senior Secured Notes may declare an event of default under the A&R Note Purchase Agreement and may elect to accelerate the repayment of all unpaid principal, accrued interest and other amounts due (which would also require us to pay an interest make-whole premium as specified in the A&R Note Purchase Agreement if the repayment of the debt is accelerated prior to May 21, 2026).
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Our plans to seek to mitigate these default risks include enhancing our commercial performance to accelerate growth in net revenues, seeking out partnership and collaboration opportunities to expand the market for XHANCE, and, if required, requesting a modification or waiver of the covenants under the A&R Note Purchase Agreement, or refinancing the debt. However, there can be no assurance that we will be successful in accelerating growth in net revenue, expanding the market for XHANCE, obtaining a modification or waiver of the covenants under the A&R Note Purchase Agreement, or refinancing the debt. If we are unable to accelerate growth in net revenue, expand the market for XHANCE, obtain a modification or waiver of the covenants under the A&R Note Purchase Agreement, and/or refinance the debt, we may need to delay or curtail its operations until we obtain additional capital which may not be available on a timely basis, on favorable terms, or at all, and such capital, if obtained, may not be sufficient to meet our payment obligations or enable us to continue to implement our long-term business strategy. In such an event, our business, prospects, financial condition and results of operations will be materially and adversely affected, and we may be unable to continue as a going concern. These factors raise substantial doubt about our ability to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the fair value for such assets or less than the value at which those assets are carried on our financial statements, and it is likely that investors will lose all or a part of their investment. Additionally, if we seek additional financing to fund our debt service obligations and business activities in the future and there remains substantial doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide funding to us on commercially reasonable terms, if at all.
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