OPTN - OptiNose: The Worst Has Been Avoided (Rating Upgrade)

2023-08-01 18:58:32 ET

Summary

• On August 10, OptiNose, one of the leaders in the global chronic rhinosinusitis market, will publish its financial results for the 2nd quarter of 2023.
• OptiNose's preliminary net revenue for the second quarter of 2023 was $19.5 million, up 65.3% from the previous quarter and down 5.4% from the first quarter of 2022.
• On May 4, 2023, the company announced that the FDA had accepted a supplemental new drug application seeking approval for Xhance as a treatment for chronic sinusitis.
• We continue our analytics coverage of OptiNose by upgrading to Outperform from Hold for the next 12 months.

On August 10 , OptiNose (NASDAQ: OPTN ), one of the leaders in the global chronic rhinosinusitis market, will publish its financial results for the 2nd quarter of 2023. The US healthcare system spends approximately $60 billion annually on treating patients with chronic rhinosinusitis and related symptoms, creating a huge business opportunity for the company.

Two weeks before the quarterly report, OptiNose delighted investors by announcing that Xhance, approved for treating chronic rhinosinusitis with nasal polyps, had preliminary net revenue of $19.5 million for the three months ending June 30, 2023. This value beat both Wall Street analysts' expectations and ours, which caused OptiNose's share price to rise by more than 10% over the past five days.

On May 4, 2023 , the company announced that the FDA had accepted a supplemental new drug application (sNDA) seeking approval for Xhance as a treatment for chronic sinusitis. The target decision date is December 16, 2023. Given the positive data from two phase 3 clinical trials, we believe OptiNose's medicine is highly likely to be approved and may be the first and only drug indicated for this disease that affects millions of Americans.

We continue our analytics coverage of OptiNose by upgrading to Outperform from Hold for the next 12 months.

The financial position of OptiNose and its prospects

OptiNose's preliminary net revenue for the second quarter of 2023 was $19.5 million, up 65.3% from the previous quarter and down 5.4% from the first quarter of 2022. The company's revenue growth came despite increased competition in the chronic rhinosinusitis with nasal polyps (CRSwNP) market from GSK's Nucala ( GSK ), Novartis's Xolair ( NVS ), Sanofi/Regeneron's Dupixent ( SNY ), and a CEO transition at the end of January 2023.

Moreover, the company's revenue has beaten analyst consensus estimates in recent quarters, which could signal to market participants that Wall Street is underestimating OptiNose. At the same time, OptiNose's Non-GAAP P/S [TTM] is 1.53x, 62.63% less than the sector average and 91.95% less than the average over the past five years.

According to Seeking Alpha , OptiNose's Q3 2023 revenue is expected to be $16.1 million, slightly lower than analysts' expectations for Q2 2023. At the same time, under our model, the total revenue of OptiNose will be higher and amount to $20.1 million.

QoQ's growth in Xhance sales should be driven by increased demand from primary care physicians in the US and a growing number of patients suffering from chronic rhinosinusitis with nasal polyps. People suffering from this disease experience inflammation of the mucous membrane of the nasal passages and paranasal sinuses and the formation of non-cancerous polyps in these areas, leading to significant discomfort in their daily lives.

On a more global scale, we expect Xhance sales to be $73.5 million in 2023, above the company's guidance .

Second, our expectation for XHANCE net revenue for the full year of 2023 is unchanged and is between USD62 million to USD68 million. It is important to note that we are not assuming revenues from a CS launch in our full year 2023 guidance.

At the same time, OptiNose's revenue should increase to $108 million in 2024 due to the drug's label expansion in December of this year.

We believe the likelihood of a favorable FDA decision is high due to the primary endpoints achieved in the two phase 3 clinical trials, the results of which were analyzed in detail and presented in the article "OptiNose: Potential Winner In Chronic Sinusitis Treatment."

OptiNose's gross profit margin in Q1 2023 was 85.59%, up year-over-year due to a decrease in the cost of raw materials needed to manufacture Xhance. At the same time, we forecast that by 2023 the company's gross profit margin will remain stable and reach 85.5%, and by 2024 this value will increase to 87.2%, thanks to lower inflation and an increase in average net revenue per prescription.

The company's earnings per share for the first three months of 2023 was -$0.14, up 41.7% year-over-year. According to Seeking Alpha data, OptiNose's EPS in the second quarter is expected to be between -$0.12 and -$0.1, up 21.4% from the consensus estimate for Q1 2023. While according to our model, OptiNose's EPS will be in this range and will be -$0.11.

Risks

In our assessment, there are two main risks to consider that could affect both OptiNose's financial position and its share price.

Lack of experimental drugs in clinical trials

OptiNose continues to reduce R&D spending, which amounted to $1.8 million in Q1 2023, down 78.9% year-on-year. However, the negative side of this is the lack of product candidates in clinical trials that could diversify revenue sources in the future.

The company remains unprofitable

Despite completing two Phase 3 clinical trials, the company is still not generating positive cash flow. Since OptiNose is a small pharmaceutical company, monitoring the decline rate in total cash and short-term investments is critical to minimize risks associated with a dilutive secondary public offering.

With current and future operating expenses, the company's level of cash will last until at least the first half of 2025. As a result, this should allow OptiNose's management to pursue a more aggressive marketing strategy for Xhance without selling the company's shares to raise capital.

Conclusion

On August 10, OptiNose, one of the leaders in the global chronic rhinosinusitis market, will publish its financial results for the 2nd quarter of 2023. On the other hand, two weeks before the quarterly report, OptiNose delighted investors by announcing that Xhance's preliminary net revenue was $19.5 million for the three months ending June 30, 2023.

In a previous article, we described one of the risks linked to the partnership between OptiNose and Pharmakon Advisors, which for a long time, continued to affect the company's investment attractiveness negatively. However, after the public offering of 26,320,000 shares and warrants at the end of November 2022, the terms of the agreement have changed for the better for investors, and the risk associated with it has significantly decreased.

The company has sufficient cash and cash equivalents for the next two years. With our anticipated approval of Xhance as the first and only medicine for chronic sinusitis, we are upgrading our previous rating from Hold to Buy for the next 12 months.

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