Otonomy Annual Report 2014

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K (Mark One)xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2014OR ¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934FOR THE TRANSITION PERIOD FROM TO Commission File Number 001-36591 Otonomy, Inc.(Exact name of registrant as specified in its Charter) Delaware 26-2590070(State or other jurisdiction ofincorporation or organization) (I.R.S. EmployerIdentification No.)6275 Nancy Ridge Drive, Suite 100San Diego, California 92121(Address of principal executive offices and Zip Code)(858) 242-5200(Registrant’s telephone number, including area code)Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registeredClass A common stock, par value $0.001 per share The NASDAQ Stock Market LLC(The NASDAQ Global Select Market)Securities registered pursuant to Section 12(g) of the Act: None Table of ContentsIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ¨ NO xIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ¨ NO xIndicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. YES x NO ¨Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required tobe submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). YES x NO ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10-K. xIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See thedefinition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer¨Accelerated filer¨Non-accelerated filerx(Do not check if a smaller reporting company)Smaller reporting company¨Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO xThe aggregate market value of the common stock held by non-affiliates of the Company as of August 13, 2014 was approximately $149.4 million, basedupon the closing price on The NASDAQ Global Select Market reported for such date. Shares of the registrant’s common stock held by each executive officer,director and holder of 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This calculationdoes not reflect a determination that certain persons are affiliates of the registrant for any other purpose. The Company has elected to use August 13, 2014 asthe calculation date, as on June 30, 2014 (the last business day of the Company’s most recently completed second fiscal quarter) there was no public marketfor the Company’s common stock.As of March 9, 2015 the number of outstanding shares of the registrant’s common stock, par value $0.001 per share, was 24,127,477.DOCUMENTS INCORPORATED BY REFERENCEAs noted herein, the information called for by Part III is incorporated by reference to specified portions of the registrant’s definitive proxy statement to befiled in conjunction with the registrant’s 2015 Annual Meeting of Stockholders, which is expected to be filed not later than 120 days after the Registrant’sfiscal year ended December 31, 2014. Table of ContentsOTONOMY, INC.ANNUAL REPORT ON FORM 10-KFOR THE YEAR ENDED DECEMBER 31, 2014TABLE OF CONTENTS Page PART I Item 1. Business 4 Item 1A. Risk Factors 42 Item 1B. Unresolved Staff Comments 78 Item 2. Properties 78 Item 3. Legal Proceedings 79 Item 4. Mine Safety Disclosures 79 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 80 Item 6. Selected Financial Data 82 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 83 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 95 Item 8. Financial Statements and Supplementary Data 96 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 120 Item 9A. Controls and Procedures 120 Item 9B. Other Information 121 PART III Item 10. Directors, Executive Officers and Corporate Governance 122 Item 11. Executive Compensation 122 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 122 Item 13. Certain Relationships and Related Transactions, and Director Independence 122 Item 14. Principal Accounting Fees and Services 122 PART IV Item 15. Exhibits, Financial Statement Schedules 123 Signatures 124 1Table of ContentsSPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTSThis Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended,as Section 21E of the Securities Exchange Act of 1934, as amended, which statements involve substantial risks and uncertainties. Forward-looking statementsgenerally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because theycontain words such as “anticipate,” “believe,” “could,” “estimate,” “expects,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,”“would” the negative of those terms, and similar expressions that convey uncertainty of future events or outcomes. Forward-looking statements contained inthis Annual Report on Form 10-K include, but are not limited to, statements about: • our expectations regarding our clinical development of OTO-104, including our expectations regarding the timing of results from our Phase 2bclinical trial and our plans regarding the initiation of a second pivotal trial; • our expectations regarding the development of OTO-311; • our expectations regarding our future development of our product candidates for additional indications; • the timing or likelihood of regulatory filings and approvals, including our submission of an IND for OTO-311 with the FDA; • our expectations regarding the future development of other product candidates; • our expectations regarding our OTO-104 Phase 2b clinical trial potentially serving as one of two pivotal trials required to support U.S. regulatoryapproval; • our expectations regarding the multiple-dose clinical safety requirement for U.S. regulatory approval of OTO-104 in the United States in patientswith Ménière’s disease; • the potential for commercialization of our product candidates, if approved, including our expectations regarding the timing of the anticipatedcommercial launch for AuriPro in the United States, if approved; • our expectations and statements regarding the potential pricing, market size, opportunity and growth potential for AuriPro and OTO-104, ifapproved for commercial use; • our expectations and statements regarding the adoption and use of AuriPro and OTO-104, if approved, by ENTs; • our expectations regarding potential coverage and reimbursement relating to AuriPro or OTO-104, if approved, or any other approved productcandidates; • our plans regarding the use of contract manufacturers for the production of our product candidates for clinical trials and, if approved, commercialuse; • our plans and ability to effectively build our own sales and marketing capabilities, or seek and establish collaborative partners, to commercializeour products; • our ability to advance product candidates into, and successfully complete, clinical trials; • the implementation of our business model, strategic plans for our business, products and technology; • the initiation, timing, progress and results of future preclinical studies and clinical trials; • the scope of protection we are able to establish and maintain for intellectual property rights covering our products and technology; • estimates of our expenses, future revenue, capital requirements and our needs for additional financing; • our financial performance; 2Table of Contents • developments and projections relating to our competitors and our industry; • our expectations regarding the expansion of our facilities; and • our expectations regarding the period during which we qualify as an emerging growth company under the JOBS Act.These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the section entitled“Risk Factors” and elsewhere in this Annual Report on Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment, and newrisks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or theextent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements wemay make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Annual Report on Form 10-Kmay not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in theforward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected inthe forward-looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy andcompleteness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the dateof this Annual Report on Form 10-K to conform these statements to actual results or to changes in our expectations, except as required by law.You should read this Annual Report on Form 10-K and the documents that we reference in this Annual Report on Form 10-K and have filed with theSEC as exhibits to this Annual Report on Form 10-K with the understanding that our actual future results, levels of activity, performance, and events andcircumstances may be materially different from what we expect. 3Table of ContentsPART IItem 1. BUSINESSOverviewWe are a clinical-stage biopharmaceutical company focused on the development and commercialization of innovative therapeutics for thetreatment of diseases and disorders of the ear. To overcome many of the limitations of delivering drugs to the middle and inner ear, we have developed aproprietary technology that is designed to deliver drug that is retained in the ear for an extended period of time following a single local administration, whichwe refer to as “sustained-exposure.” Utilizing this technology, we have advanced three product candidates into development. Our lead product candidate,AuriPro, is a sustained-exposure antibiotic for which we have completed two identical Phase 3 clinical trials in 532 pediatric patients with middle eareffusion, or fluid, at the time of tympanostomy tube placement, or TTP, surgery. Results of these Phase 3 trials demonstrate that AuriPro achieved the primaryefficacy endpoint with statistical significance (p<0.001) and that AuriPro was well tolerated. Based on these results, together with feedback received from apre-NDA meeting and communications with the U.S. Food and Drug Administration, or FDA, and supportive results from the one year drug product stabilitytesting required for filing, we submitted a New Drug Application, or NDA, for AuriPro to the FDA in February 2015. If approved within the standard reviewperiod, we anticipate a commercial launch for AuriPro in the United States in the first quarter of 2016. Our second product candidate, OTO-104, is asustained-exposure steroid that is in a Phase 2b clinical trial for patients with Ménière’s disease. We announced in December 2014 that we had achieved thetarget patient enrollment in this trial and expect to report results in the second quarter of 2015. During October 2014, we began enrollment in a multiple-dosesafety study in Ménière’s patients in the United Kingdom. Our third product candidate, OTO-311, is in preclinical development for the treatment for tinnitus.We plan to file an Investigational New Drug application, or IND, with the FDA for OTO-311 and initiate a Phase 1 clinical trial in 2015. There are no drugsapproved by the FDA for the lead indications we are currently pursuing for our product candidates.We estimate that more than 50 million people in the United States are affected by otic disorders and that approximately 20 million patientscurrently seek treatment each year for the most common conditions, including ear infections, balance disorders, tinnitus and hearing loss. As a result, webelieve the existing market for treatments is significant and that there also remains a large population of untreated patients. Despite this large marketopportunity, we believe the otic field has generally been overlooked by drug developers at least in part because of challenges in effectively delivering drugto the middle and inner ear. We believe that our sustained-exposure drug delivery technology overcomes some of these limitations, and that our productcandidates address important unmet medical needs in the emerging otology market.Our pipeline includes the following three product candidates: • AuriPro is a sustained-exposure formulation of the antibiotic ciprofloxacin in development for the treatment of middle ear effusion inpediatric patients requiring TTP surgery. We have completed two identical Phase 3 clinical trials that enrolled a total of 532 pediatricpatients at approximately 60 centers in the United States and Canada. Results of these trials demonstrate that AuriPro achieved theprimary efficacy endpoint, reduction in the incidence of treatment failures, with statistical significance (p<0.001) and that AuriPro waswell tolerated. In these trials, AuriPro reduced the risk of treatment failure, as measured by the occurrence of post-operative otorrhea(drainage) or any use of rescue antibiotics, by an average of 49% in all randomized patients across the two trials, and the rate of post-operative otorrhea or use of rescue antibiotics for documented otorrhea or otitis media by an average of 62% in all randomized patientsacross the two trials (p£0.004), in each case as compared to sham. Based on these results, together with feedback received from a pre-NDAmeeting and communications with the FDA and supportive results from the one year stability testing required for filing, we submitted anNDA for AuriPro to the FDA in February 2015. If approved within the standard review period, we anticipate a commercial launch forAuriPro in the United States in the first quarter of 2016. 4Table of Contents • OTO-104 is a sustained-exposure formulation of the steroid dexamethasone in development for the treatment of Ménière’s disease andother inner ear conditions. We are conducting a Phase 2b clinical trial at more than 50 centers in the United States and Canada, which webelieve will serve as one of two pivotal, single-dose efficacy trials required to support U.S. regulatory approval. In December 2014, weannounced that we had achieved the target patient enrollment of 140 patients, and subsequently concluded enrollment with a total of154 patients. We expect to report results from this clinical trial in the second quarter of 2015. If results are positive, we plan to initiate asecond pivotal trial of OTO-104 in 2015. During October 2014, we began enrollment in a multiple-dose safety study in Ménière’spatients in the United Kingdom. The prospective, randomized, placebo-controlled study, designed to evaluate the safety of multipledoses of OTO-104, will enroll 125 patients across multiple trial sites in the United Kingdom. In the first part of the study, patients will berandomized to receive two doses of either placebo or 12 mg OTO-104 by intratympanic (IT) injection given at three month intervals.Patients completing the double-blind portion of the study will be eligible to participate in an open-label extension study where allpatients will receive two IT injections of OTO-104 at three month intervals. We intend to use data from this U.K. study together with oneor more additional multiple-dose safety studies that we plan to initiate during 2015 to satisfy our multiple-dose clinical safetyrequirement for U.S. regulatory approval of OTO-104 in patients with Ménière’s disease which we believe, based on discussions from anEnd-of-Phase 1 meeting with the FDA, will require 100 patients treated for one year and 300 patients treated for six months. The FDA hasgranted OTO-104 Fast Track designation. • OTO-311 is a sustained-exposure formulation of the N-Methyl-D-Aspartate, or NMDA, receptor antagonist gacyclidine in developmentfor the treatment of tinnitus. We plan to file an IND with the FDA for OTO-311 and initiate a Phase 1 clinical trial in 2015. In November2014, we announced the completion of an exclusive license agreement with Ipsen that enables us to use clinical and non-clinicalgacyclidine data generated by Ipsen to support worldwide development and regulatory filings for OTO-311.We have global commercialization rights to our product candidates. Our strategy is to advance our product candidates to regulatory approvaland self-commercialize in the United States. In October 2014, we announced the appointment of an experienced Chief Commercial Officer to prepare for thecommercialization of AuriPro, if approved. We plan to build a focused sales force targeting otolaryngologists, also known as ear, nose and throat physicians,or ENTs, who specialize in the treatment of patients affected by diseases and disorders of the ear. Outside the United States, we plan to evaluate whether tocommercialize our products on our own or in collaboration with partners. We have a broad patent portfolio of approximately 60 issued patents and allowedpatent applications and at least 85 pending patent applications covering our product candidates and indications as well as other potential applications of ourtechnology in major markets around the world.Our mission is to develop and commercialize novel and best-in-class therapeutics to address unmet medical needs in the emerging otologymarket. We were founded in 2008 by Jay Lichter, Ph.D., a partner at Avalon Ventures, together with Jeffrey Harris, M.D., Ph.D., Chief of the Division ofOtolaryngology-Head and Neck Surgery at the University of California, San Diego, and several other experts in the field of otology. Dr. Lichter becameinterested in otology after suffering a severe attack of vertigo that was subsequently diagnosed by Dr. Harris as Ménière’s disease. Dr. Lichter’s battle withMénière’s disease, and his first-hand experience with the limitations of available treatments, led to the founding of Otonomy.In order to execute our mission, we have assembled an experienced management team backed by a strong group of institutional healthcareinvestors. Our management team has extensive drug development and commercialization capabilities led by David A. Weber, Ph.D., our President and ChiefExecutive Officer. Dr. Weber has relevant experience based on his previous tenure as acting Chief Executive Officer at Oculex (acquired by Allergan) andthen Chief Executive Officer at MacuSight, both companies that were developing 5Table of Contentslocally administered drug products for the eye. In October 2014, we announced the appointment of Anthony Yost as Chief Commercial Officer to prepare forthe commercialization of AuriPro, if approved. Mr. Yost has 30 years of experience in pharmaceutical product sales and marketing, including seniormanagement positions with Novartis AG, Innovex (a pharmaceutical sales and marketing services division of Quintiles Transnational Corporation), andSchering-Plough Corporation.Our StrategyOur objective is to develop and commercialize novel and best-in-class therapeutics to address unmet medical needs in the emerging otologymarket. The key elements of our strategy include: • Advance AuriPro Through Regulatory Approval and Pursue Development in Additional Indications. Our lead indication for AuriPro isthe treatment of middle ear effusion in pediatric patients requiring TTP surgery. We believe this indication represents a significant area ofunmet need, given that there are approximately one million TTP surgeries performed in the United States each year and no antibiotic eardrops are approved for this use. We have completed two identical Phase 3 clinical trials in a total of 532 pediatric patients. Results ofthese trials demonstrate that AuriPro achieved the primary efficacy endpoint with statistical significance (p<0.001) and that AuriPro waswell tolerated. Based on these results, together with feedback received from a pre-NDA meeting and communications with the FDA andsupportive results from the one year drug product stability testing required for filing, we submitted an NDA for AuriPro to the FDA inFebruary 2015 seeking regulatory approval in the United States and, if approved within the standard review period, anticipate acommercial launch in the first quarter of 2016. We plan to assess and prioritize future potential therapeutic indications for AuriPro,including recurrent ear infections in patients with tympanostomy tubes, acute otitis externa, chronic suppurative otitis media (aperforated tympanic membrane with persistent drainage from the middle ear), and prophylaxis following middle ear surgeries, andinitiate clinical trials in one or more of these indications during the first half of 2015. • Develop OTO-104 for Treatment of Ménière’s Disease and Other Inner Ear Disorders. Ménière’s disease is a debilitating disorderimpacting more than 600,000 patients in the United States with no FDA-approved drug treatments. We are currently conducting a Phase2b clinical trial for OTO-104 for patients with Ménière’s disease that we expect will serve as one of two pivotal, single-dose trialsrequired to demonstrate efficacy for an NDA submission in the United States. We announced in December 2014 that we had achieved thetarget patient enrollment in this trial and expect to report results in the second quarter of 2015. During October 2014, we beganenrollment in a multiple-dose safety study in Ménière’s patients in the United Kingdom. The prospective, randomized, placebo-controlled study, designed to evaluate the safety of multiple doses of OTO-104, will enroll 125 patients across multiple trial sites in theUnited Kingdom. We believe that the potential of OTO-104 for indications beyond Ménière’s disease could also be substantial given theuse of steroids for a broad range of otic disorders, such as sensorineural hearing loss, other balance disorders, and tinnitus. • Establish Our Own Sales and Marketing Capabilities to Commercialize Our Products in the United States. If approved, we plan tocommercialize AuriPro, OTO-104 and other products in the United States with our own focused, specialized sales force targetingapproximately 5,000 ENTs who perform the majority of TTP surgeries and treat many of the patients with Ménière’s disease, hearing loss,and tinnitus. Our initial target audience will comprise fewer than 2,500 ENTs who we believe perform approximately 80% of the TTPsurgeries in the United States. • Maximize the Commercial Potential of Our Products Outside the United States. Since we have global commercialization rights to ourproduct candidates, we are evaluating whether to develop and, if approved, commercialize our product candidates outside the UnitedStates on our own or in collaboration with partners. If we do enter into collaborations, our current preferred strategy is to 6Table of Contents establish broad collaborations with partners that have resources and interest for driving the development and commercialization ofinnovative therapeutics for the treatment of diseases and disorders of the ear. • Utilize Our Technology and Our Broad Patent Portfolio to Develop OTO-311 and Expand our Product Pipeline. We have a broadportfolio of issued patents and pending applications covering our product candidates as well as other potential applications of ourtechnology in major markets around the world. We are developing OTO-311 for the treatment of tinnitus and will continue to evaluatenew product opportunities to address significant unmet medical needs in otology. For example, one such area of great interest is thetreatment of chronic hearing loss where considerable research in the field is underway to identify drugs that will preserve or improvehearing function.Overview of OtologyThe field of otology is a subspecialty within otolaryngology that focuses on diseases and disorders of the ear. The three main parts of the ear andcommon medical conditions for each are as follows: • Outer ear (external region up to the tympanic membrane or ear drum)—infection or inflammation in this region is known as acute otitisexterna, commonly referred to as swimmer’s ear. • Middle ear (cavity on the inner-side of the ear drum containing the three small bones or ossicles that transmit sound to the inner ear)—infection and inflammation in this area, known as otitis media, is a common occurrence in young children. • Inner ear (compartment containing the cochlea for hearing and the vestibular organ for balance)—disorders associated with this regioninclude balance disorders, such as Ménière’s disease, as well as tinnitus and hearing loss. 7Table of ContentsWe estimate that more than 50 million people in the United States are affected by otic disorders and that approximately 20 million patientscurrently seek treatment each year for the most common conditions, including ear infections, balance disorders, tinnitus and hearing loss. As a result, webelieve the existing market for treatments is significant and that there also remains a large population of untreated patients. • The American Academy of Otolaryngology – Head and Neck Surgeons reports that approximately 2.5 million people in the United Statesare affected by acute otitis externa each year. • The National Institute on Deafness and Other Communications Disorders, or NIDCD, reports that three out of every four childrenexperience otitis media by the time they are three years old. • According to the NIDCD, more than 600,000 patients have been diagnosed with Ménière’s disease. • According to the American Tinnitus Association, approximately 16 million patients in the United States have tinnitus symptoms severeenough to seek medical attention, and about two million patients cannot function on a normal day-to-day basis. Furthermore, the UnitedStates Department of Defense reports that tinnitus accounts for the most prevalent service-connected disability among veterans and thatthe costs of service-related tinnitus are estimated to exceed $2 billion. • According to the NIDCD, approximately 36 million adults report some degree of hearing loss.Current Otology Treatments and LimitationsOuter ear infections, such as acute otitis externa, or swimmer’s ear, are typically treated with antibiotic ear drops and, in certain severe cases, oralantibiotics. If used properly, antibiotic ear drops are effective in resolving infections of the outer ear. However, treatment involves multi-dose, multi-dayregimens, and incomplete compliance with such regimens may lead to clinical treatment failure and the recurrence of infection in some patients.Middle ear infections, such as acute otitis media, are typically treated with oral antibiotics. However, this approach can result in systemic sideeffects and increased risk of bacterial resistance. Patients with persistent effusion or recurrent infections may be referred to an ENT for TTP surgery, duringwhich tympanostomy tubes are inserted through the eardrum to ventilate the middle ear cavity. As the tympanostomy tube itself is frequently insufficient totreat the middle ear effusion, antibiotic ear drops are routinely used off-label during and following the procedure. Antibiotic ear drops are also used, andapproved, for recurrent infections in patients with tympanostomy tubes. As with the outer ear, such antibiotic ear drop treatments involve multi-dose, multi-day regimens which can be problematic to follow, particularly in pediatric patients who represent the bulk of the TTP patient population.Inner ear disorders, including balance disorders, tinnitus and hearing loss, represent an emerging field for drug treatment. Local drug delivery viadirect injection through the ear drum has been demonstrated to offer a viable approach to address many disorders in this region since high drug levels can beachieved in the inner ear and systemic drug exposure is low. This injection, called an intratympanic, or IT, injection, allows for the delivery of drugs to themiddle ear cavity through the ear drum, and then to the inner ear compartment via passage through the round window membrane. In clinical trials, favorableresults have been reported with IT injection of steroids in patients with Ménière’s disease and sudden sensorineural hearing loss. However, a limitation of ITinjection of solution-based formulations is their rapid elimination from the middle ear cavity down the Eustachian tube when the patient talks, swallows orsits up. The short time that the solution remains in contact with the round window membrane in the middle ear cavity limits the amount of drug that can passinto the inner ear and also limits the duration over which drug is retained in the inner ear. We believe that this reduces the therapeutic effect and increasestreatment variability across patients. In an attempt to help mitigate this problem, ENTs require patients to remain immobilized for an extended period of timefollowing each IT injection, and return for additional IT injections during the course of treatment. Despite these efforts, drug levels measured in the inner earfollowing IT injection of solution decrease rapidly and decline away from the round window membrane.Given the compliance challenges of multi-dose, multi-day ear drop regimens for treating the middle ear, and anatomical barriers associated withachieving high and sustained drug levels in the inner ear via oral administration or an IT injection of solution, we believe that there is a large unmet medicalneed for improved otic drug delivery. 8Table of ContentsOur Proprietary Otic Drug Delivery TechnologyWe have developed a proprietary formulation technology that provides sustained drug exposure in the middle or inner ear from a single localadministration. Our technology utilizes a thermosensitive polymer, which transitions from a liquid to a gel at body temperature. The polymer is combinedwith drug microparticles to create a suspension that is retained in the middle ear cavity for an extended period of time. This prolonged residence timeprovides high and sustained drug exposure in the middle and inner ear. Potential benefits of our technology include: • Provides full course of treatment from a single local administration thereby eliminating the need for repeat dosing as is required withsolutions. • Achieves high drug levels in the target location and minimizes systemic exposure. • Provides high and sustained drug levels in the middle ear versus the pulsatile drug levels observed with antibiotic ear drops. • Provides drug distribution throughout the inner ear compartment compared to solutions which result in declining drug levels away fromthe round window membrane. • Eliminates the need for the patient to remain in a prone position for an extended period of time, improving patient acceptance andpractice efficiency. • Permits simple office-based administration by the ENT. • Avoids potential issues with patient compliance and challenges in completing multi-dose, multi-day treatment regimens.Our approach to address unmet needs in otology through optimized local drug delivery has been influenced by the rapid growth of intravitrealtreatments for the eye. Like the ear, the eye is a protected sensory organ. Over the last two decades, ophthalmologists have demonstrated that injecting drugsinto the eye can be done safely to treat debilitating visual disorders, such as age-related macular degeneration, or AMD. Drug therapies delivered viaintravitreal injection revolutionized the treatment of AMD patients and created a multi-billion dollar market for the biopharmaceutical industry. Similar toophthalmologists, ENTs are increasingly using locally administered drugs to treat both middle and inner ear conditions demonstrating the potential formultiple, significant new market opportunities for otology drug developers.Our Product CandidatesThe following table summarizes key information regarding our product candidate pipeline: 9Table of ContentsAuriPro: Sustained-Exposure Antibiotic for Otic IndicationsAuriPro is a sustained-exposure formulation of the antibiotic ciprofloxacin in development for the treatment of middle ear effusion in pediatricpatients requiring TTP surgery. We have completed two randomized, prospective, double-blind, sham-controlled Phase 3 clinical trials with identicalprotocols that enrolled a total of 532 pediatric patients at approximately 60 centers in the United States and Canada. Results of these trials demonstrate thatAuriPro achieved the primary efficacy endpoint, reduction in the incidence of treatment failures, with statistical significance (p<0.001) and that AuriPro waswell tolerated. In these trials, AuriPro reduced the risk of treatment failure, as measured by the occurrence of post-operative otorrhea (drainage) or any use ofrescue antibiotics, by an average of 49% in all randomized patients across the two trials, and the rate of post-operative otorrhea or use of rescue antibiotics fordocumented otorrhea or otitis media by an average of 62% in all randomized patients across the two trials (p£0.004), in each case as compared to sham. Basedon these results, together with feedback received from a pre-NDA meeting and communications with the FDA and supportive results from the one year drugproduct stability testing required for filing, we submitted an NDA for AuriPro to the FDA in February 2015. If approved within the standard review period, weanticipate a commercial launch in the United States in the first quarter of 2016. We plan to assess and prioritize future potential therapeutic indications forAuriPro, including acute otitis media with tympanostomy tube in place, or AOMT, acute otitis externa, chronic suppurative otitis media, and prophylaxisfollowing middle ear surgeries, and initiate clinical trials in one or more of these indications during the first half of 2015. We have global commercializationrights to AuriPro with patent protection in the United States until at least 2030.Background on use of antibiotics for otic indicationsAntibiotics are frequently used to treat otic infections with annual volume estimated to total approximately 21 million units per year in theUnited States. Of this total, approximately 13 million units are oral antibiotics. The remaining eight million units consist of antibiotic ear drops utilized in anumber of clinical conditions. FDA-approved indications for antibiotic ear drops include acute otitis externa and AOMT. Antibiotic ear drops are also usedoff-label during and following TTP surgery and for various other middle ear conditions. In total, we estimate that approximately 2.3 million antibiotic eardrop units are used each year for the middle ear.AuriPro for the treatment of otic indicationsOf the various indications where antibiotic ear drops are currently used, we selected TTP surgery as the lead indication for AuriPro for thefollowing reasons: • There are approximately one million TTP surgeries performed each year in the United States and antibiotic ear drops are used in nearlyall cases. • Despite their routine use, no antibiotic ear drop has received FDA approval for this indication. If approved, we anticipate that AuriProwill be the first and only product labeled for this indication at the time of approval. • A single-use, physician-administered product has significant advantages over multi-dose, multi-day ear drop regimens in this patientpopulation because it avoids potential issues with compliance. More than half of TTP surgeries are performed in patients age three andunder, and three-fourths are in children age five and under. Administration of ear drops in young children can be very challenging forcaregivers. This is compounded by the fact that current antibiotic ear drop products require multi-dose, multi-day regimens for efficacy.For example, CIPRODEX Otic’s treatment regimen is twice daily dosing for seven days and ofloxacin, a generic antibiotic, isadministered three-times daily for ten days. Full compliance with these multi-dose, multi-day regimens can be challenging, and missedantibiotic doses can compromise efficacy and increase the potential for bacterial resistance. 10Table of Contents • We believe the physician audience for this indication can be addressed with a focused, specialized sales force. We estimate that fewerthan 2,500 ENTs perform 80% of TTP surgeries in the United States. We therefore believe that promotion to this target group ofphysicians can be effectively achieved with a focused, specialized sales force.We plan to assess and prioritize additional development opportunities for AuriPro, including AOMT, acute otitis externa, chronic suppurativeotitis media, and prophylaxis following middle ear surgeries.AuriPro product profileAuriPro is a suspension containing the antibiotic ciprofloxacin and a thermosensitive polymer called Poloxamer 407 (P407), which exists as aliquid at or below room temperature and gels immediately upon transitioning to body temperature following administration. We selected ciprofloxacin sinceit is a broadly used antibiotic with activity against the bacterial pathogens common to otic infections and is present in several FDA-approved antibiotic eardrop products.AuriPro has been formulated to provide sustained-exposure of ciprofloxacin so that a single administration provides a full course of treatment.There are two components that enable sustained-exposure of ciprofloxacin to the middle ear following administration, specifically the P407 and use ofmicroparticles of ciprofloxacin. Immediately following injection, P407 gels thereby avoiding elimination down the Eustachian tube as is seen with solution-based formulations. Increasing residence time in the middle ear enables the localization and adherence of ciprofloxacin microparticles. The P407 gel remainsin the middle ear for approximately one week and leaves behind ciprofloxacin microparticles that provide sustained-exposure for approximately one to twoweeks.Preclinical pharmacokinetic studies demonstrate that a single administration of AuriPro provides sustained-exposure of ciprofloxacin in themiddle ear for approximately one to two weeks, as shown in the figure below. By comparison, repeat administration with CIPRODEX Otic ear drops through atympanostomy tube results in drug levels that fluctuate considerably. Importantly, this preclinical pharmacokinetic study suggests that a singleadministration of AuriPro may provide higher cumulative drug exposure in the middle ear than the multi-dose, multi-day regimen of antibiotic ear drops. 11Table of ContentsBased on this pharmacokinetic profile, efficacy in a standard preclinical model of otitis media, and supportive safety testing profile, we filed anIND and initiated a Phase 1b clinical trial in 2012.AuriPro clinical development program for use during TTP surgeryWe submitted an IND to the FDA in August 2011 to begin clinical development of AuriPro for the treatment of middle ear effusion in pediatricpatients requiring tympanostomy tube placement. AuriPro has been the subject of one Phase 1b clinical trial and two Phase 3 clinical trials for this indication.Our clinical development strategy, originally presented to the FDA during pre-IND discussions in November 2010, contemplated progressing directly from aPhase 1b clinical trial to two Phase 3 pivotal studies pending our ability to demonstrate an acceptable safety profile in the target population in the Phase 1bclinical trial. Following our Phase 1b clinical trial, we met with the FDA in September 2013, designated as an End-of-Phase 2 meeting by the FDA, to reviewthe results from the Phase 1b clinical trial and our development strategy to progress directly from Phase 1b to Phase 3, and to discuss the remainingrequirements for submission of an NDA under Section 505(b)(2). Following the Phase 3 clinical trials, we completed pre-NDA communications with the FDAconsisting of submitted questions and received responses related to clinical, non-clinical and file formatting matters and a face-to-face meeting related toChemistry, Manufacturing, and Controls, or CMC, matters. Based on responses provided by the FDA, we do not anticipate that the FDA will require us toconduct additional studies to support a registration filing or that the FDA will convene an advisory committee meeting prior to approving AuriPro; however,we have no assurances from the FDA that additional studies or additional information will not be required to support a registration filing or approval. InDecember 2014, we commenced one year stability testing for AuriPro drug product and have received results that we believe are supportive of regulatoryapproval and commercialization. Based on the Phase 3 clinical trial results, feedback received from a pre-NDA meeting and communications with the FDA,and supportive results from the one year drug product stability testing required for filing, we submitted an NDA for AuriPro to the FDA in February 2015.Section 505(b)(2) permits the submission of an NDA where some or all of the data required for approval comes from studies not conducted by or for theapplicant and for which the applicant has not obtained a right of reference. This regulatory approval pathway differs from submission of an NDA underSection 505(b)(1) where the data required for approval comes from studies conducted by or for the applicant or for which the applicant has obtained a right ofreference.AuriPro Phase 3 clinical trialsThe Phase 3 clinical trial program consisted of two identical prospective, randomized, double-blind, sham-controlled, multicenter, studies ofAuriPro given as a single IT injection for intra-operative treatment of middle ear effusion in pediatric patients requiring TTP surgery. As shown below, eachtrial consisted of two treatment arms, 6 mg AuriPro and no treatment (sham), with patients randomized 2 to 1, respectively. 12Table of ContentsThe primary endpoint of the Phase 3 clinical trials was the cumulative proportion of treatment failures defined as otorrhea (fluid drainingthrough the tube) observed by a blinded assessor from Day 4 through the Day 15 visit, or use of rescue antibiotics from Day 1 through the Day 15 visit,whichever occurred first. Patients ages six months to 17 years were eligible for the clinical trial if they presented with effusion (fluid) in both ears (bilateral) atthe time of TTP surgery. Following randomization, patients received either AuriPro or no treatment (sham). Treatment was administered in the operating roomfollowing the myringotomy (a small incision in the ear drum) and suctioning, and before the placement of the tube. As is customary in pediatric patients, allpatients were under general anesthesia for the procedure. Follow-up visits occurred on Day 4, 8, 15 and 29 after surgery.Enrollment in the AuriPro Phase 3 clinical trials commenced in November 2013 and was completed in April 2014. Approximately 60 trial sitesin the United States and Canada participated, and a total of 532 pediatric patients were enrolled across the two clinical trials that were internally designatedas Study 302 and Study 303. An analysis of the baseline patient demographics data from both trials suggests reasonable balance with no notable differencesbetween the treatment groups. All enrolled patients completed the Day 15 study visit, except for one patient in a sham group and one patient in an AuriProgroup who were randomized but not treated.In early July 2014, we announced that the Phase 3 clinical trials had demonstrated that AuriPro achieved its primary efficacy endpoint as well asseveral secondary endpoints and was well tolerated. As the figure below indicates, AuriPro demonstrated a reduction for the primary efficacy endpoint, theincidence of treatment failures through Day 15 in all randomized patients, which averaged 49% across the two trials, in each case as compared to sham. Thiseffect on the incidence of treatment failures was statistically significant (p<0.001) for both trials.The p-value is the probability that the reported result was achieved purely by chance (e.g., a p-value £ 0.001 means that there is a 0.1% or lessprobability that the difference between the sham group and the treatment group is purely due to chance). A p-value £ 0.05 is a commonly used criterion forstatistical significance and may be supportive of a finding of efficacy by regulatory authorities. One sensitivity analysis performed on the primary endpoint, the per-protocol analysis, evaluated the incidence of treatment failures in allenrolled patients who did not have a major protocol deviation. More than 80% of patients in each trial and treatment group qualified for this analysis. As thefigure below indicates, AuriPro provided a reduction in the rate of treatment failure through Day 15 in the per-protocol population averaging more than 60%across the two trials, in each case as compared to sham. This effect was statistically significant (p<0.001) for both trials. 13Table of Contents A post-hoc analysis was conducted that evaluated the cumulative proportion of patients in the Phase 3 trials considered treatment failures due toobservation of otorrhea by the blinded observer or use of either otic or systemic antibiotics with documentation of otorrhea or otitis media through Day 15.The figure below presents this data for the Phase 3 trials which indicate that AuriPro reduced the rate of post-operative otorrhea or use of rescue antibiotics fordocumented otorrhea or otitis media by more than 60% when averaged across both trials, in each case as compared to sham. This effect was statisticallysignificant in both trials (p£0.004). AuriPro was well tolerated in the Phase 3 clinical trials. There were no deaths, no serious adverse events related to AuriPro, and no subjects werediscontinued due to adverse events. There were no adverse findings demonstrated on physical examination or vital signs. Most adverse events were mild ormoderate in severity. Safety assessments included treatment-emergent adverse events, or TEAEs, hearing function testing and tympanometry (middle earfunction). Results for TEAEs are presented in the table below. Overall, there are no observed differences between AuriPro and sham treatment. 14Table of ContentsPhase 3 Results: Treatment-Emergent Adverse Events(Patients from Combined 302 and 303 Studies) System Organ Class: Number of Patients (%) Sham (N=174) AuriPro(N=356) Total patients with at least one TEAE reported 95 (54%) 189 (53%) Infections and infestations 40 (23%) 85 (24%) General disorders and administration site conditions 30 (17%) 62 (17%) Gastrointestinal disorders 17 (10%) 41 (11%) Respiratory, thoracic and mediastinal disorders 23 (13%) 38 (11%) Injury, poisoning and procedural complications 20 (11%) 26 (7%) Ear and labyrinth disorders 11 (6%) 25 (7%) Skin and subcutaneous tissue disorders 4 (2%) 13 (4%) All others £2% £2% Note: two patients were randomized but not treated (one patient in the sham group and one in the AuriPro group)Additionally, treatment with AuriPro was not found to have a negative impact on hearing, tympanometry or otoscopy (general examination ofthe ear), and there was no increase in the incidence of tube clogging with AuriPro.Results from the Phase 3 clinical trials have been accepted for presentation at the American Society of Pediatric Otolaryngology spring meetingin April 2015.AuriPro Phase 1b clinical trialThe single Phase 1b clinical trial, which evaluated AuriPro in pediatric patients with middle ear effusion requiring TTP surgery, had the samebasic study design as the Phase 3 clinical trials discussed above. Two dose levels of AuriPro were evaluated relative to P407 gel vehicle (placebo) and notreatment (sham). A total of 83 patients were enrolled in the clinical trial (21 in the sham group, 22 in the placebo group, 21 in the 4 mg AuriPro group, and19 in the 12 mg AuriPro group). An analysis of the baseline demographics data from these patients suggests reasonable balance with no notable differencesbetween treatment groups. All enrolled patients, except one, completed the clinical trial. This one patient was considered lost to follow-up because he/she didnot return to the trial site for the final visit.A schematic outlining the design of the Phase 1b clinical trial is shown below. Patients ages 6 months to 12 years were eligible for the clinicaltrial if they presented with effusion in both ears at the time of TTP surgery. Following randomization, patients received one of two concentrations of AuriPro,the P407 gel vehicle (placebo) or no treatment (sham). Treatment was administered in the operating room following the myringotomy and suctioning, andbefore the placement of the tube. As is customary in pediatric patients, all patients were under general anesthesia for the procedure. All patients were treatedand received tubes in both ears. 15Table of Contents Follow-up visits occurred on Day 4, 8, 15 and 29 after surgery. The primary endpoint for assessing clinical activity of AuriPro was thecumulative proportion of treatment failures defined as otorrhea observed by a blinded assessor from Day 4 through the Day 15 visit or use of rescueantibiotics from Day 1 through the Day 15 visit, whichever occurred first. Since the proportion of treatment failures was similar between the sham andplacebo groups, these groups were combined into a single control group (sham/placebo) according to the pre-specified statistical analysis plan. As the figurebelow indicates, both the 4 mg and 12 mg AuriPro doses demonstrated a statistically significant reduction (p<0.05) in the incidence of treatment failuresthrough Day 15 that exceeded 60%. The reduction in the proportion of treatment failures was similar between the two AuriPro dose levels as was expectedbased on the preclinical pharmacokinetic profile. AuriPro was well tolerated in the Phase 1b clinical trial. There were no deaths in the clinical trial and no serious adverse events that were relatedto AuriPro treatment. There were no adverse findings demonstrated on physical examination or vital signs. Most adverse events were mild or moderate inseverity. Safety assessments included TEAEs, including hearing function testing and tympanometry (middle ear function). Treatment with AuriPro was notfound to have a negative impact on hearing, tympanometry, or otoscopy (general examination of the ear). Additionally, there was no evidence of tubeclogging with AuriPro. 16Table of ContentsAuriPro preclinical development programIn addition to the pharmacokinetic profiling studies summarized above, the AuriPro preclinical development program included pharmacologicalstudies in established models of otitis media and otic safety testing.The pharmacological profile of AuriPro was compared to antibiotic ear drops in a standard preclinical model of otitis media. This studydemonstrated that a single administration of AuriPro reduced effusion volume and bacterial count to a level comparable to a multi-dose, multi-day regimenwith antibiotic ear drops administered through a tympanostomy tube. In a subsequent study, AuriPro demonstrated a reduction in effusion volume andbacterial count even without the placement of a tube thereby highlighting the potential for AuriPro to address new clinical indications where multi-dose,multi-day antibiotic ear drops are not utilized today.The preclinical safety program for AuriPro focused on ototoxicity and middle ear histology compared to multi-dose, multi-day antibiotic eardrops. In general, AuriPro’s profile compared favorably to antibiotic ear drop products already approved by the FDA for other otic indications.Potential market opportunity for AuriProThe initial target market for AuriPro totals approximately one million TTP procedures conducted each year in the United States, for which multi-dose, multi-day antibiotic ear drops are routinely used off-label today. Based on a survey conducted in 2014, ENTs expressed strong interest in using AuriProin these procedures once, and if, it becomes commercially available.The survey, which we commissioned a third-party market research firm to conduct, consisted of an online interview of 100 ENTs who werescreened to ensure that each participant performed a minimum of 25 TTP surgeries in the three months prior to the interview. Physicians who participated inour clinical trials of AuriPro were excluded from this survey. Overall, 55% of the ENTs screened were qualified to participate. During the interview process,each participant was presented a series of questions regarding their current practices with respect to TTP surgeries and various otic conditions, attitudestoward current treatments and areas of unmet need, and their reaction to a product profile and description of AuriPro. The participants relied solely on theAuriPro profile and description in responding to the questions presented in the study and no participant had prior experience with this product candidate.When asked to indicate the likelihood of using AuriPro during TTP procedures on a scale of 1 to 10, where 10 means “extremely likely” and 1 means “not atall likely,” 69% of the surveyed ENTs expressed a strong interest in using AuriPro by ranking their interest with an 8, 9 or 10. When participants were askedto rate AuriPro on various attributes such as safety, tolerability and frequency of complications, as compared to antibiotic ear drops, the AuriPro productprofile was rated as better than antibiotic ear drops by more than 80% of respondents for compliance/adherence, approximately 50% of respondents forpatient tolerability and achieving adequate drug exposure, and one-third or more of respondents for reducing the incidence of post-operative otorrhea,reducing the incidence of post-operative tube clogging and reducing the frequency of complications.The survey is subject to various limitations, such as a small sample size, the hypothetical nature of the questions asked, the informal nature of thequestions, the preliminary nature of the AuriPro profile used in the survey and other limitations, and therefore may not accurately reflect how ENTs willassess AuriPro or use it if it becomes commercially available in the future. Actual ENT adoption of AuriPro will also be affected by numerous factors outsidethe scope of the survey, including the safety and efficacy of AuriPro, the labeling of AuriPro, the extent to which ENTs become aware of AuriPro and itspotential benefits, the perceived advantages and disadvantages of AuriPro relative to other products or treatments, the availability of adequate coverage andreimbursement for AuriPro and other factors including the risk factors related to AuriPro in the “Risk Factors” section of this Annual Report on Form 10-K. Asa result, we cannot predict to what extent ENTs will ultimately adopt AuriPro, if approved, in the future.In addition to AuriPro’s perceived product benefits, we also expect that our ability to actively promote and educate physicians regarding AuriProwill be an important competitive advantage over a multi-dose, multi-day regimen of antibiotic ear drops. 17Table of ContentsWe plan to assess and prioritize future potential therapeutic indications for AuriPro, including AOMT, acute otitis externa, chronic suppurativeotitis media and prophylaxis following middle ear surgeries, and intend to initiate clinical trials in one or more of these indications during the first half of2015.OTO-104: Sustained-Exposure Steroid for Inner Ear DisordersOTO-104 is a sustained-exposure formulation of the steroid dexamethasone in development for the treatment of Ménière’s disease and otherinner ear conditions. We are conducting a Phase 2b clinical trial at more than 50 centers in the United States and Canada to assess reductions in vertigofrequency and improvements in tinnitus in patients with Ménière’s disease. We believe this trial will serve as one of two pivotal, single-dose efficacy trialsrequired to support U.S. regulatory approval. In December 2014, we announced that we had achieved the target patient enrollment of 140 patients, andsubsequently concluded enrollment with a total of 154 patients. We expect to report results from this clinical trial in the second quarter of 2015. If results arepositive, we plan to initiate a second pivotal trial of OTO-104 in 2015. During October 2014, we began enrollment in a multiple-dose safety study inMénière’s patients in the United Kingdom. The prospective, randomized, placebo-controlled study, designed to evaluate the safety of multiple doses of OTO-104, will enroll 125 patients across multiple trial sites in the United Kingdom. In the first part of the study, patients will be randomized to receive two dosesof either placebo or 12 mg OTO-104 by intratympanic (IT) injection given at three month intervals. Patients completing the double-blind portion of the studywill be eligible to participate in an open-label extension study where all patients will receive two IT injections of OTO-104 at three month intervals. Weintend to use data from this U.K. study together with one or more additional multiple-dose safety studies that we plan to initiate during 2015 to satisfy ourmultiple-dose clinical safety requirement for U.S. regulatory approval of OTO-104 in patients with Ménière’s disease which we believe, based on discussionsfrom an End-of-Phase 1 meeting with the FDA, will require 100 patients treated for one year and 300 patients treated for six months. The FDA has grantedOTO-104 Fast Track designation, which is a process designed to facilitate the development and expedite the FDA’s review of drugs to treat serious conditionsand fill unmet medical needs. We have global commercialization rights to OTO-104 with patent protection in the United States until at least 2029.Background on use of steroids for inner ear disordersMultiple clinical and preclinical publications support the potential benefit of steroids to treat patients with a broad range of otic conditionsincluding Ménière’s disease, other balance disorders, sudden sensorineural hearing loss, other types of sensorineural hearing loss, and tinnitus. We estimatethat there are over eight million patients treated each year in the United States for these inner ear disorders, and a similar if not larger population of patients inthe European Union. Treatment with steroids includes both off-label oral dosing and IT injection regimens. Published clinical reports using IT steroidstypically feature repeat injections per treatment regimen.Background on Ménière’s diseaseMénière’s disease is a chronic condition characterized by acute vertigo attacks, tinnitus, fluctuating hearing loss, and a feeling of aural fullness.Of these symptoms, the vertigo attacks are typically most troubling for patients since they disrupt daily activities and are difficult to anticipate and manage.In general, patients are diagnosed with unilateral Ménière’s disease in middle age and symptoms often continue for decades. Over time, the fluctuatinghearing loss becomes permanent in many patients and a subset of patients will develop symptoms in their second ear. According to the NIDCD, there are morethan 600,000 patients diagnosed with Ménière’s disease in the United States.The underlying cause of Ménière’s disease is not well understood and there is no known cure. The pathophysiology is believed to involve fluidbuildup in the inner ear compartment so the typical first line treatment in the United States is observance of a low-salt diet and off-label use of diuretics. Oraland IT steroids are used in a subset of Ménière’s patients who have persistent or severe symptoms. While treatment protocols vary greatly, the majority ofpublished clinical trials with off-label use of steroid solution in Ménière’s patients utilize repeat IT injections for each course of treatment. Patients who areunresponsive to steroid treatment may resort to surgical or chemical ablation, which can cause irreversible hearing loss. 18Table of Contents • We selected Ménière’s disease as the lead indication for OTO-104 in the United States for the following reasons: • There are more than 600,000 patients diagnosed with Ménière’s disease in the United States and there are currently no FDA-approveddrug treatments. • Ménière’s patients often suffer a high level of disability and have very poor quality of life, especially during acute attacks. • Empirical evidence from physician-sponsored clinical trials suggests clinical benefit with the use of steroids. • FDA considers Ménière’s disease to be a serious disorder. Accordingly, we applied for and were granted Fast Track designation for OTO-104. • As a chronic disorder, patients with Ménière’s disease may suffer from episodic acute attacks and require repeat courses of treatment overtheir lifetime. • Symptom definitions developed by the American Academy of Otolaryngology — Head and Neck Surgery provided the basis for thevertigo end point used in the evaluation of efficacy in our clinical program.We plan to assess and prioritize additional opportunities for OTO-104 in conditions where ENTs currently use steroids off-label, including otherbalance disorders, sudden sensorineural hearing loss, other types of sensorineural hearing loss and tinnitus.OTO-104 product profileOTO-104 is a suspension containing the steroid dexamethasone in P407, which exists as a liquid at or below room temperature and gelsimmediately following an intratympanic, or IT, injection. OTO-104 has been formulated to provide sustained-exposure in the inner ear compartment suchthat a single IT injection provides a full course of treatment. This profile was demonstrated in our preclinical studies as summarized in the graphic below.These studies showed measurable dexamethasone levels in the inner ear fluid, or perilymph, more than one month after a single OTO-104 injection. Bycomparison, IT injection of steroid solution provides less than a day of drug exposure in the perilymph. From these studies, we advanced 2% and 6% OTO-104 concentrations into a Phase 1b clinical trial as the 3 mg and 12 mg dose, respectively. 19Table of ContentsOTO-104 clinical development program for Ménière’s diseaseWe submitted an IND to the FDA in December 2009 to begin clinical development of OTO-104 for the treatment of vertigo associated withMénière’s disease. Based on discussions from an End-of-Phase 1 meeting with the FDA, we believe that two pivotal, single-dose trials will be required tosupport efficacy of OTO-104 for Ménière’s disease patients in an NDA submission. We are currently conducting a single-dose Phase 2b clinical trial that weexpect to serve as one of the two pivotal trials. In December 2014, we announced that we had achieved the target patient enrollment of 140 patients andsubsequently concluded enrollment with a total of 154 patients. Following successful completion of the Phase 2b clinical trial and an End-of-Phase 2meeting with the FDA in 2015, we plan to initiate a second pivotal, single-dose Phase 3 clinical trial in approximately 140 patients.In addition, based on discussions from an End-of-Phase 1 meeting we expect that the FDA will require multiple-dose clinical safety data in orderto approve OTO-104 for use in Ménière’s disease patients. During October 2014, we began enrollment in a multiple-dose safety study in Ménière’s patients inthe United Kingdom. The prospective, randomized, placebo-controlled study designed to evaluate the safety of multiple doses of OTO-104 will enroll 125patients across multiple trial sites in the United Kingdom. In the first part of the study, patients will be randomized to receive two doses of either placebo or12 mg OTO-104 by IT injection given at three month intervals. Patients completing the double-blind portion of the study will be eligible to participate in anopen-label extension where all patients will receive two IT injections of OTO-104 at three month intervals. We intend to use data from this U.K. studytogether with one or more additional multiple-dose safety studies that we plan to initiate during 2015 to satisfy our multiple-dose clinical safety requirementfor U.S. regulatory approval of OTO-104 in patients with Ménière’s disease which we believe, based on discussions from an End-of-Phase 1 meeting with theFDA, will require 100 patients treated for one year and 300 patients treated for six months.We have not yet conducted any multiple-dose clinical trials in the United States. Following completion of a Phase 1b clinical trial, the OTO-104program was put on Full Clinical Hold due to adverse findings in a preclinical study evaluating the safety of repeated doses of OTO-104. We generatedadditional preclinical data, which was submitted to the FDA. OTO-104 was subsequently removed from Full Clinical Hold in July 2013, allowing forinitiation of the current Phase 2b single-dose clinical trial, and placed on Partial Clinical Hold prohibiting the initiation of multiple-dose clinical trials in theUnited States pending the submission and review of additional preclinical data. We submitted additional preclinical data to the FDA and OTO-104 wasremoved from Partial Clinical Hold in June 2014.OTO-104 Phase 2b clinical trial in Ménière’s disease patientsWe are currently conducting a Phase 2b clinical trial for patients with Ménière’s disease at more than 50 centers in the United States and Canada.This trial is a prospective, randomized, double-blind, placebo-controlled Phase 2b clinical trial designed to assess the efficacy and safety of OTO-104 for thetreatment of Ménière’s disease in a total of 140 patients. In December 2014, we announced that we had achieved the target patient enrollment of 140 patients,and subsequently concluded enrollment with a total of 154 patients. The clinical trial has been designed and is being conducted to serve as one of the twopivotal, single-dose efficacy trials we expect that the FDA will require to support an NDA filing for treatment of Ménière’s disease patients.The primary endpoint of the Phase 2b clinical trial is the reduction in vertigo frequency during Month 3 following treatment compared to a onemonth baseline period. This endpoint is identical to the one used in the Phase 1b clinical trial and reviewed with the FDA at an End-of-Phase 1 meeting. Thetrial size was determined in order to provide 90% power to achieve statistical significance (p<0.05) for a 30% treatment effect which was the level observed inthe Phase 1b clinical trial. Tinnitus is being assessed as an exploratory endpoint in the clinical trial. The clinical trial will also assess the safety andtolerability of a single IT injection of OTO-104. 20Table of ContentsUpon screening, all patients enter into a one month observational period for a baseline assessment during which they record their vertigo andtinnitus symptoms via a daily diary. Following the lead-in period, eligible patients are randomized 1:1 to a single IT injection of 12 mg OTO-104 or P407 gelvehicle (placebo). Patients are observed for up to four months following treatment with Month 3 (weeks 9 through 12) used to evaluate efficacy versusplacebo.A schematic of the clinical trial design is shown in the figure below: We expect to announce results in the second quarter of 2015.OTO-104 Phase 1b clinical trial in Ménière’s disease patientsWe have completed a randomized, prospective, double-blind, placebo-controlled, multicenter, Phase 1b clinical trial of a single IT injection ofOTO-104 in patients with Ménière’s disease. A total of 44 patients were enrolled and completed the clinical trial. The Phase 1b clinical trial design wasgenerally the same as the ongoing Phase 2b clinical trial, except that two different doses of OTO-104, 3 mg or 12 mg, were evaluated relative to P407 gelvehicle (placebo), and patients were observed for three months following treatment. The primary endpoint for efficacy was vertigo frequency during Month 3compared to baseline. This is the same primary endpoint used in the ongoing Phase 2b clinical trial.OTO-104 was well tolerated in the Phase 1b clinical trial when administered as a single IT injection of 3 mg or 12 mg. There were no seriousadverse events observed during the clinical trial. There were no instances of persistent conductive hearing loss associated with OTO-104 injection. Protocolpre-specified Adverse Events of Interest, or AEIs, reported during the clinical trial included injection site perforation of the tympanic membrane, a single 12mg patient reporting vertigo during the procedure, and a single placebo patient with serous otitis media. Of these AEIs, only injection site perforation of thetympanic membrane was reported in more than a single patient. These perforations were predominantly described as pinhole perforations observed followingIT injection of OTO-104. Most of these perforations resolved spontaneously, and all but one of these resolved by the end of the clinical trial. In general, thesafety events were consistent with those reported in published clinical trials with the use of IT injections of steroids.Although the Phase 1b clinical trial was not designed to establish efficacy due to the relatively small number of patients enrolled in the trial,trends with respect to the clinical activity of OTO-104 were observed. As the graphic below indicates, the 12 mg OTO-104 group experienced a meanreduction of vertigo frequency from baseline totaling 73% in Month 3 compared to 56% for 3 mg OTO-104 and 42% for placebo. This provides a treatmentbenefit of 12 mg OTO-104 versus placebo of approximately 30%. In absolute terms, the 12 mg OTO-104 group achieved a reduction in days with vertigoepisodes from eight during baseline to two in Month 3. 21Table of Contents We have also assessed the Phase 1b clinical trial results using a patient responder analysis. As shown in the graphic below, 81% of patients in the12 mg OTO-104 group realized at least a 50% improvement in vertigo frequency in Month 3 versus baseline, compared to 71% for 3 mg OTO-104 and 50%of patients receiving placebo. In addition to the observed effect on vertigo, OTO-104 was associated with improvement in tinnitus, as measured by the Tinnitus HandicapInventory (THI-25). THI-25 is a patient questionnaire that provides a measure of the impact of tinnitus on a patient’s functional status. The average score atbaseline was 52-58 for the three treatment groups corresponding to a Moderate Handicap grade. As shown in the figure below, the mean change of THI-25total score from baseline to Month 3 totaled 15 for the 12 mg OTO-104 group, 12 for 3 mg OTO-104 and 4 for patients receiving placebo. Furthermore, thelevel of change experienced by patients in the 12 mg OTO-104 group moved the average handicap level of the group from Moderate grade at baseline toMild in Month 3. THI-25 is being assessed as an exploratory endpoint in the Phase 2b clinical trial. 22Table of Contents In summary, the Phase 1b clinical trial in Ménière’s disease patients demonstrated that OTO-104 is well tolerated when administered as a singleIT injection, and there were no serious adverse events observed during the clinical trial. Based on the observation of persistent pinhole perforations in thistrial, we modified the topical anesthetic used to numb the ear drum in the ongoing Phase 2b clinical trial. Although the Phase 1b clinical trial size was small,the results demonstrate that 12 mg of OTO-104 was associated with a clinically meaningful improvement in both vertigo frequency and tinnitus endpointscompared to placebo three months after treatment. Based on these results, we selected 12 mg OTO-104 for advancement into late-stage testing for Ménière’sdisease.OTO-104 preclinical development programIn addition to the pharmacokinetic profiling studies summarized above, the OTO-104 preclinical development program includedpharmacological studies in established hearing loss models and extensive safety testing.Since there are no preclinical models of Ménière’s disease, we conducted studies to evaluate pharmacological activity of a single IT injection ofOTO-104 in standard models of acute onset hearing loss. In particular, we have demonstrated that OTO-104 provides a protective effect when given beforeexposure to loud noise or ototoxic chemotherapeutic agents. Furthermore, administration of OTO-104 within two to three days following exposure toacoustic trauma promotes hearing recovery. These findings are consistent with published data for steroids, and supported dose selection for the Phase 1bclinical trial.The preclinical safety program for OTO-104 has focused on ototoxicity since the side effect profile of systemic dexamethasone in humans is wellcharacterized, and the level of systemic exposure from an IT injection is minimal. Ototoxicity testing has included single- and multiple-dosing studies ofOTO-104 in a number of species. We submitted preclinical data to the FDA and OTO-104 was subsequently removed from Partial Clinical Hold in June 2014.Potential market opportunity for OTO-104The initial target market for OTO-104 is the more than 600,000 patients diagnosed with Ménière’s disease in the United States. Based on asurvey conducted in 2014, ENTs expressed strong interest in using OTO-104 to treat patients with Ménière’s disease. 23Table of ContentsThe survey, which we commissioned a third-party market research firm to conduct, consisted of an online interview of 100 ENTs who werescreened to ensure that each participant treated a minimum of four patients with Ménière’s disease in the month prior to the interview. Physicians whoparticipated in our clinical trials of OTO-104 were excluded from this survey. Overall, 66% of the ENTs screened were qualified to participate. During theinterview process, each participant was presented a series of questions regarding their current practices for treatment of patients with Ménière’s disease,attitudes toward current treatments and areas of unmet need, and their reaction to a product profile and description of OTO-104. The participants relied solelyon the OTO-104 profile and description in responding to the questions presented in the study and no participant had prior experience with this product.When asked to indicate the likelihood of using OTO-104 to treat patients with Ménière’s disease on a scale of 1 to 10, where 10 means “extremely likely”and 1 means “not at all likely,” 57% of the surveyed ENTs expressed a high likelihood in using OTO-104 by ranking their interest with an 8, 9 or 10.The survey is subject to various limitations, such as a small sample size, the hypothetical nature of the questions asked, the informal nature of thequestions, the preliminary nature of the OTO-104 profile used in the survey, and other limitations, and therefore may not accurately reflect how ENTs willassess OTO-104 or use it if it becomes commercially available in the future. Actual ENT adoption of OTO-104 will also be affected by numerous factorsoutside the scope of the survey, including the safety and efficacy of OTO-104, the labeling of OTO-104, the extent to which ENTs become aware of OTO-104and its potential benefits, the perceived advantages and disadvantages of OTO-104 relative to other products or treatments, the availability of coverage andadequate reimbursement for OTO-104 and other factors including the risk factors related to OTO-104 in the “Risk Factors” section of this Annual Report onForm 10-K. As a result, we cannot predict to what extent ENTs will ultimately adopt OTO-104, if approved, in the future.We expect that with approval of OTO-104 and patient education the market opportunity will expand over time. We plan to assess and prioritizeadditional opportunities for OTO-104 in conditions where ENTs currently use steroids off-label, including other balance disorders, sudden sensorineuralhearing loss, other types of sensorineural hearing loss, and tinnitus.OTO-311: Sustained-Exposure Treatment for TinnitusOTO-311 is a sustained-exposure formulation of the NMDA receptor antagonist gacyclidine in development for the treatment of tinnitus.Historic and emerging clinical data generated by third parties support the use of NMDA receptor antagonists, including gacyclidine, as potential treatmentsfor tinnitus. We plan to file an IND with the FDA for OTO-311 and initiate a Phase 1 clinical trial in 2015. In November 2014, we announced the completionof an exclusive license agreement with Ipsen that enables us to use clinical and non-clinical gacyclidine data generated by Ipsen to support worldwidedevelopment and regulatory filings for OTO-311. We have global commercialization rights to OTO-311 with patent protection in the United States until atleast 2031.Background on tinnitusTinnitus is the medical term for hearing noise when there is no outside source of the sound. It is often described as a ringing in the ear but canalso sound like roaring, clicking, hissing or buzzing. The American Tinnitus Association reports that approximately 16 million patients in the United Stateshave tinnitus symptoms severe enough to seek medical attention, and about two million patients cannot function on a normal day-to-day basis. Furthermore,the United States Department of Defense reports that tinnitus accounts for the most prevalent service-connected disability among veterans and that the costsof service-related tinnitus are estimated to exceed $2 billion.While the most common cause of tinnitus is exposure to loud noise, a number of other factors can be involved including heart or blood vesselproblems, hormonal changes in women, ear and sinus infections, certain medications and thyroid problems. People with severe tinnitus may have troublehearing, working, and sleeping. At this time, there is no cure for tinnitus and there are no FDA-approved drugs for treating this debilitating condition. 24Table of ContentsBackground on NMDA receptor antagonists for tinnitusHistoric and emerging clinical data provide support for the use of NMDA receptor antagonists for the treatment of tinnitus. Mechanistically,agents from this therapeutic class may act to reduce dysfunctional activity resulting from injury to the hearing organ, or cochlea, and be perceived by thepatient as tinnitus. For example, Auris Medical Holding AG reported improvement in several patient reported outcome measures, including tinnitus loudnessand tinnitus severity, in a subset of patients treated in a Phase 2 clinical trial with repeat IT injections of AM-101, a formulation of the NMDA receptorantagonist esketamine, and Merz Pharmaceuticals GmbH reported an improvement in the tinnitus handicap index in a Phase 2 clinical trial with the oralNMDA receptor antagonist neramexane. We expect that the results of these and additional ongoing trials will be instructive in the design andimplementation of the clinical development program for our single-administration OTO-311 product candidate.Background on gacyclidineGacyclidine is a potent and selective NMDA receptor antagonist. Receptor binding studies have demonstrated potency and selectivity againstthe NMDA receptor subtype believed to be relevant for tinnitus, and biological activity has been demonstrated in a preclinical model of tinnitus. In addition,studies in preclinical models of neuroprotection have demonstrated a broad therapeutic window for activity versus neurotoxicity. Finally, binding studiesindicate that gacyclidine’s dissociation kinetics are slower than some other NMDA receptor antagonists which could be beneficial in achieving sustaineddrug levels in the inner ear following a single IT injection.Although never approved or commercialized, gacyclidine has been evaluated in clinical trials that we believe will be helpful to our developmentof OTO-311. The molecule was originally developed by Ipsen for the treatment of traumatic brain and spinal cord injury in the late 1990’s. These clinicaltrials evaluated systemic dosing of gacyclidine in over 300 patients from which they established a maximum tolerated dose, or MTD. Although we expectlimited systemic exposure with IT injection of OTO-311, we believe the reported MTD provides a useful upper limit for our dose selection activities. InNovember 2014, we announced the completion of an exclusive license agreement with Ipsen that enables us to use clinical and non-clinical gacyclidine datagenerated by Ipsen to support worldwide development and regulatory filings for OTO-311.Recent third-party pilot clinical trials with local administration of gacyclidine delivered using a micro-pump and indwelling catheter have beenconducted in patients with tinnitus. While not sized to demonstrate efficacy, we believe based on published results from one study conducted by Wenzel etal. in Germany and data from a second study that we have acquired from NeuroSystec that the trials provide evidence of clinical activity for gacyclidine inmodulating aspects of the tinnitus symptoms experienced by patients.Based partly on these prior clinical efforts, we acquired assets and patent rights related to gacyclidine which we intend to leverage in ourdevelopment of OTO-311 for tinnitus. From an affiliate of the NeuroSystec Corporation, we acquired data and intellectual property generated during theirdevelopment program. In a related transaction, we completed a license agreement with DURECT Corporation, or Durect, that gives us exclusive rights to apatent family directed to the use of gacyclidine for the treatment of tinnitus. This patent family has issued patents in the United States and Japan. We alsohave our own issued patents and pending applications directed to a sustained-exposure gacyclidine product that we expect will lengthen and broaden thecoverage for OTO-311 provided by the licensed patent.OTO-311 development programThe goal of the OTO-311 program is to develop a sustained-exposure formulation of gacyclidine that will provide a full course of treatment froma single IT injection. Following pre-IND meeting communications with the FDA, we plan to file an IND with the FDA for OTO-311 and initiate a Phase 1clinical trial in 2015. We anticipate the design and execution of our clinical development program will benefit from the results of tinnitus clinical trials in thefield. 25Table of ContentsPotential market opportunity for OTO-311 in tinnitusWe believe the treatment of tinnitus represents a significant market opportunity since the patient population is large, symptom severity can bedebilitating, and there are currently no FDA-approved drug treatments. If our development program is successful and OTO-311 is approved by the FDA, thenwe plan to market this product to ENTs with the same focused, specialized sales force that will be promoting our other approved product candidates.CompetitionWe expect to enter the highly competitive biopharmaceutical market. Successful competitors in the biopharmaceutical market must have theability to effectively discover, develop, test and obtain regulatory approvals for products, as well as the ability to effectively commercialize, market andpromote approved products, including communicating the effectiveness, safety and value of products to actual and prospective customers and medical staff.Numerous companies are engaged in the development, manufacture and marketing of biopharmaceutical products competitive with those that we aredeveloping. Our potential competitors may have substantially greater manufacturing, financial, research and development, personnel and marketingresources than we have. Our competitors may also have more experience and expertise in obtaining marketing approvals from the FDA and other regulatoryauthorities. In addition to product development, testing, approval and promotion, other competitive factors in the biopharmaceutical industry includeindustry consolidation, product quality and price, product technology, reputation, customer service and access to technical information. As a result, ourcompetitors may be able to develop competing or superior technologies and processes, and compete more aggressively and sustain that competition over alonger period of time than we could. Our technologies and products may be rendered obsolete or uneconomical by technological advances or entirelydifferent approaches developed by one or more of our competitors. As more companies develop new intellectual property in our market, the possibility of acompetitor acquiring patent or other rights that may limit our products or potential products increases, which could lead to litigation.Any product candidates that we successfully develop and commercialize will compete with existing treatments, including unapproved and off-label drug alternatives that are currently utilized by physicians to treat the indications for which we seek approval, as well as new treatments that may becomeavailable in the future.AuriProAntibiotic ear drops are currently the primary treatment option for middle ear effusion during TTP surgery. The leading branded antibiotic eardrop is CIPRODEX Otic from Alcon, a division of the Novartis Group. However, no antibiotic ear drop has been approved by the FDA for this use and theeffectiveness of this current treatment option relies on patient compliance for the full course of the multi-dose, multi-day regimen. The key competitivefactors affecting the success of AuriPro, if approved, are likely to be its efficacy, safety, tolerability, dosing regimen, route of administration, convenience andprice, and the availability of coverage and adequate reimbursement from government and other third-party payors. We are also aware that Alcon recentlyreceived FDA approval for a new antibiotic ear drop for use in treating acute otitis externa and may evaluate this product for various other otic indications,and that Otic Pharma Ltd. has a foam-based formulation of ciprofloxacin that is in clinical development for otic indications potentially including use duringTTP surgery.OTO-104There are no drugs currently approved by the FDA for the treatment of Ménière’s disease. Current treatments commonly used for Ménière’sdisease include observance of a low-salt diet and off-label use of diuretics, oral steroids, and repeat IT injections of steroid solution. Patients who areunresponsive to treatment may resort to surgical or chemical ablation, which can cause irreversible hearing loss. We are aware that Synphora AB isconducting a Phase 2/3 clinical trial with a formulation of latanoprost administered via single or repeat IT injections, and that Auris Medical Holding AG hasindicated it intends to evaluate AM-111 in an open-label study of Ménière’s patients. 26Table of ContentsOTO-311There are no drugs currently approved by the FDA for the treatment of tinnitus. Current treatments for tinnitus include the use of audio maskingdevices, such as white noise machines, hearing aids, cognitive behavioral therapy, and the off-label administration of antidepressants, anti-anxietymedications, and steroids. We are aware of other companies developing potential pharmaceutical treatments for tinnitus, including Auris Medical HoldingAG, which is conducting Phase 3 clinical trials evaluating repeat IT injections of AM-101 in patients with acute and post-acute inner ear tinnitus, AutifonyTherapeutics, which has initiated Phase 2 testing for their oral product candidate for tinnitus, Merz Pharmaceuticals GmbH, which has suspendeddevelopment of oral neramexane for chronic tinnitus while its partner in Japan, Kyorin Pharmaceuticals Co., continues with a Phase 2 clinical trial fortinnitus, and Novartis AG, which has completed a Phase 2 clinical trial for chronic tinnitus.Sales and MarketingIn October 2014, we announced the appointment of Anthony Yost as Chief Commercial Officer to prepare for the commercialization of AuriPro,if approved, including the hiring of a sales and marketing team. Mr. Yost has 30 years of experience in pharmaceutical product sales and marketing,including senior management positions with Novartis AG, Innovex (a pharmaceutical sales and marketing services division of Quintiles TransnationalCorporation) and Schering-Plough Corporation. Assuming receipt of regulatory approval for AuriPro, and successful completion of clinical trials and receiptof regulatory approval for our other product candidates, we plan to commercialize AuriPro, OTO-104, OTO-311 and any other approved products in theUnited States with our own focused, specialized sales force targeting approximately 5,000 ENTs who perform the majority of TTP surgeries and treat many ofthe patients with Ménière’s disease, hearing loss, and tinnitus. We believe that promotion to this target group of physicians can be effectively achieved with afocused sales force.For AuriPro, we expect that our initial target audience will comprise fewer than 2,500 ENTs who we believe perform approximately 80% of theTTP surgeries in United States. For OTO-104, we expect our initial target audience will be approximately 4,000 ENTs who account for approximately 80% ofthe prescription volume for the pharmaceutical class most frequently prescribed by ENTs, of whom a subset will also be targets for AuriPro.Outside of the United States, we plan to evaluate whether to commercialize our products on our own or in collaboration with partners.Third-Party Payor Coverage and ReimbursementSales of pharmaceutical products depend in significant part on the availability of coverage and adequate reimbursement by third-party payors,such as state and federal governments, including Medicare and Medicaid, and commercial insurers. Decisions regarding the extent of coverage and amount ofreimbursement to be provided for our products will most likely be made on a plan-by-plan basis.AuriProWe expect AuriPro to be reimbursed as a physician-administered drug in the United States. Our preliminary estimate for pricing of AuriPro is inthe range of $200 to $250 per unit which is sufficient for treating both ears of a single patient. We expect this pricing to represent a premium to CIPRODEXOtic, the leading branded ear drop product, which has a current reported Wholesale Average Cost of approximately $159 per unit which is sufficient for a fullcourse of treatment. We will conduct formal pricing research including testing with facilities and payors, prior to finalizing pricing for AuriPro. In order forphysicians to use AuriPro, we will need to have the product available in hospital outpatient facilities and ambulatory surgery centers, or ASCs, where themajority of pediatric TTP procedures are performed. 27Table of ContentsThe stocking of AuriPro in hospital outpatient facilities and ASCs will most likely require approval from hospital pharmacy and therapeuticcommittees and ASC administrators, respectively. The review by hospital pharmacy and therapeutic committees typically considers the product profile,clinical safety and efficacy results, current treatments used for the indication, level of interest/advocacy by the physician user base, and impact on facilityeconomics. This process can require up to a year to complete and approval is uncertain. The time and requirements for approval by ASC administrators willlikely vary by center and depend on a number of factors including level of interest / advocacy by the physician user base and impact to the facilityeconomics. As an FDA-approved, physician-administered medication, we expect that AuriPro will be assigned a unique J-Code. This could facilitatereimbursement on a cost plus basis for those facilities that contract with insurers on a fee for service basis. However, obtaining a unique J-Code for AuriPromay not provide incremental reimbursement for facilities that are reimbursed a fixed amount for performing the TTP surgery. As part of the AuriProcommercial launch plan, we expect to implement a comprehensive set of programs that support the value proposition of AuriPro with facility administratorsand payors.OTO-104Reimbursement for OTO-104 is expected to be separate from the IT injection procedure itself and based on the product’s average selling price,which we currently project will be in excess of $1,000 per treatment. Because we expect OTO-104 will be determined to be therapeutically distinct from anyother J-Code drug, we expect that the product will be assigned a unique J code. This will simplify billing and enable electronic adjudication by payorsaccording to the average selling price. If OTO-104 is approved by the FDA, we plan to devote considerable resources to the training and education of office-based billing personnel regarding the appropriate coding for OTO-104 use.ManufacturingWe currently contract with third parties for the manufacture, testing and storage of our product candidates and intend to continue to do so in thefuture. We do not own and have no plans to build our own clinical or commercial manufacturing capabilities. The use of contracted manufacturing isrelatively cost-efficient and has eliminated the need for our direct investment in manufacturing facilities. Because we rely on contract manufacturers, weemploy personnel with extensive technical, manufacturing, analytical and quality experience to oversee contract manufacturing and testing activities, and tocompile manufacturing and quality information for our regulatory submissions.Manufacturing is subject to extensive regulations that impose various procedural and documentation requirements, and which govern recordkeeping, manufacturing processes and controls, personnel, quality control and quality assurance, among others. Our systems and our contractors are requiredto be in compliance with these regulations, and this is assessed regularly through monitoring of performance and a formal audit program. To date, our third-party manufacturers have met our manufacturing requirements for clinical trials. We expect third-party manufacturers to be capable of providing sufficientquantities of our product candidates to meet anticipated commercial demands. We believe that there are alternate sources of raw material supply and finishedgoods manufacturing that can satisfy our requirements, although we cannot be certain that transitioning to such vendors, if necessary, would not result insignificant delay or material additional costs.Poloxamer 407The basis for the formulation of our current product candidates is P407, a thermosensitive polymer. We currently purchase P407 from a singlesupplier on a purchase-order basis and we do not have a long-term supply agreement. Although P407 is available from other sources, changing supplierscould disrupt our supply chain. We believe that we can effectively manage the risk of supply chain disruption by purchasing and storing quantities of P407sufficient for our clinical, and, if approved for marketing by the applicable regulatory authorities, our commercial requirements. 28Table of ContentsAuriProAuriPro is a suspension containing the antibiotic ciprofloxacin and P407. The raw materials needed for the manufacture of AuriPro arecommercially available from multiple sources and we have a supply agreement in place with a preferred source. We currently use a single third-party contractmanufacturer to produce AuriPro and we believe this manufacturer can satisfy our commercial requirements as specified under a commercial supplyagreement executed with this manufacturer.OTO-104OTO-104 is a suspension containing the steroid dexamethasone and P407. We currently purchase dexamethasone from a single supplier on apurchase-order basis and we do not have a long-term supply agreement. Although dexamethasone is commercially available from other sources, we do notanticipate needing an alternative supplier. We believe that we can effectively manage the risk of supply chain disruption by purchasing and storingquantities of dexamethasone sufficient for our clinical, and, if OTO-104 is approved for marketing by the applicable regulatory authorities, our commercialrequirements. We currently use two third-party contract manufacturers to produce OTO-104 that we believe can satisfy our clinical requirements. We arecurrently evaluating our supply chain for the commercial manufacture of OTO-104.OTO-311OTO-311 is a suspension containing gacyclidine and P407. As OTO-311 is in preclinical development, we have not yet selected a manufacturerfor the raw material or finished goods supply.Intellectual PropertyOur commercial success depends in part on our ability to obtain and maintain proprietary protection for our product candidates, noveldiscoveries, product development technologies and other know-how, to operate without infringing on the proprietary rights of others and to prevent othersfrom infringing our proprietary rights. Our policy is to seek to protect our proprietary position by, among other methods, filing U.S. and foreign patentapplications related to our proprietary technology, inventions and improvements that are important to the development and implementation of our business.We also rely on trademarks, trade secrets, know-how, continuing technological innovation and potential in-licensing opportunities to develop and maintainour proprietary position.As for the product candidates we develop and plan to commercialize, as a normal course of business, we intend to pursue composition andtherapeutic use patents, as well as novel indications for our product candidates. We also seek patent protection with respect to novel discoveries, includingnew active agent and delivery target applications. We have also pursued patents with respect to our proprietary manufacturing processes. We have sought andplan to continue to seek patent protection, either alone or jointly with our collaborators, as our collaboration agreements may dictate.It is possible that our current patents, or patents which we may later acquire, may be successfully challenged or invalidated in whole or in part.Nevertheless, we are not aware of any issued patents that we believe would prevent us from marketing our product candidates. It is also possible that we maynot obtain issued patents from our pending patent applications or other inventions we seek to protect. Due to uncertainties inherent in prosecuting patentapplications, patent applications are sometimes rejected and we subsequently abandon them. It is also possible that we may develop proprietary products ortechnologies in the future that are not patentable or that the patents of others will limit or altogether preclude our ability to do business. In addition, anypatent issued to us may provide us with little or no competitive advantage, in which case we may abandon such patent or license it to another entity. Formore information, please see “Risk Factors – Risks Related to Our Intellectual Property.” 29Table of ContentsOur patent estate includes patents and applications with claims directed to our AuriPro, OTO-104 and OTO-311 product candidates. Our patentestate also provides patents and applications with claims directed to a broad range of other active agents as potential future product candidates that aredelivered through our proprietary technology. Our patent estate, on a worldwide basis, includes approximately 60 issued patents and allowed patentapplications, and at least 85 pending patent applications with claims relating to our AuriPro, OTO-104, OTO-311, future product candidates, manufacturingprocesses and alternative otic delivery technologies.For AuriPro, we co-own a patent family with The Regents of the University of California, or UC, that is directed to the composition andtherapeutic use of AuriPro. Through an exclusive license agreement, we have acquired UC’s rights in this patent family. This family includes one issued U.S.patent and three pending U.S. applications. The expiry date of the U.S. patent, without extensions, is April 2030, and this patent and any future U.S. patentsissuing from the related applications are expected to be Orange Book (OB) listable. This family also includes issued patents or allowed applications inAustralia, Canada, Israel, Korea, Philippines, Russia, South Africa and Taiwan; and pending applications in Argentina, Brazil, China, Europe, India, Japan,Jordan, Mexico, Pakistan, Singapore, Thailand, Uruguay and Venezuela. Divisional patent applications have been filed in select countries of this family. Inaddition, we solely own a patent family directed to certain therapeutic uses of AuriPro. Finally, we have filed a solely owned U.S. provisional applicationdirected to manufacturing methods of AuriPro.For OTO-104, we co-own a patent family with UC directed to the composition and therapeutic use of OTO-104. Through an exclusive licenseagreement, we have acquired UC’s rights in this patent family. This family includes five issued U.S. patents and one pending U.S. application. The expirydates of the U.S. patents, without extensions, range from May 2029 to September 2029, and these patents and any future U.S. patent issuing from thisapplication are expected to be OB listable. This family also includes issued patents or allowed applications in Australia, Canada, China, Hong Kong, Japan,Korea, Mexico, Peru, Russia, Singapore, South Africa, Taiwan and UK; and pending applications in Argentina, Brazil, Chile, Europe, India, Indonesia, Israel,Jordan, Malaysia, Pakistan, Philippines, Thailand, Uruguay, Venezuela and Vietnam. Divisional patent applications have been filed in select countries forthis family. In addition, we solely own a patent family directed to additional therapeutic uses of OTO-104. Finally, we solely own an issued U.S. patentdirected to manufacturing methods of OTO-104. The expiry date of this U.S. patent, without extensions, is April 2030.For OTO-311, we co-own two patent families with UC directed to the composition and therapeutic use of OTO-311. Through an exclusivelicense agreement, we have acquired UC’s rights in both patent families. These families include one issued U.S. patent and one allowed U.S. application. Theexpiry date of the U.S. patent, without extensions, is April 2031, and this patent and any future U.S. patent issuing from this application are expected to beOB listable. These families also include issued patents or allowed applications in Australia, Canada, China, Korea, Mexico, Russia, South Africa, Taiwan andUK; and pending applications in Argentina, Brazil, Chile, Europe, India, Israel, Japan, Jordan, Pakistan, Thailand, Uruguay and Venezuela. Divisional patentapplications have been filed in select countries for those families. In addition, we have licensed from Durect a patent family directed to the therapeutic use ofOTO-311. This family includes one issued U.S. patent and one issued Japanese patent. The expiry date of the U.S. patent, without extension, is June 2024,and the patent is expected to be OB listable.For our future product candidates, we co-own eight other patent families with UC directed to a broad range of other active agents, including butnot limited to, anti-TNF agents, auris pressure modulators, CNS modulators, cytotoxic agents, anti-apoptotic agents, bone-remodeling modulators, freeradical modulators and ion channel modulators. As above, we have acquired, though an exclusive license, UC’s rights in those co-owned families.Furthermore, to strengthen our protection against potential design-around, we solely own a patent family directed to alternative formulations. Finally, wehave acquired from IncuMed LLC, an affiliate of the NeuroSystec Corporation, patent families directed to formulations or devices that deliver active agents,such as the active agent of OTO-311, into the ear for treatment of otic diseases through alternative delivery technologies. We will continue to pursueadditional patent protection as well as take appropriate measures to obtain and maintain proprietary protection for our innovative technologies. 30Table of ContentsIndividual patents extend for varying periods depending on the date of filing of the patent application or the date of patent issuance and thelegal term of patents in the countries in which they are obtained. Generally, patents issued for regularly filed applications in the United States are effective for20 years from the earliest effective filing date. In addition, in certain instances, a patent term can be extended to recapture a portion of the U.S. Patent andTrademark Office, or the USPTO, delay in issuing the patent as well as a portion of the term effectively lost as a result of the FDA regulatory review period.However, as to the FDA component, the restoration period cannot be longer than five years and the total patent term including the restoration period must notexceed 14 years following FDA approval. The duration of foreign patents varies in accordance with provisions of applicable local law, but typically is also20 years from the earliest effective filing date. In addition to the patents and allowed applications described in the preceding paragraphs, our pending patentapplications related to our product candidates, if issued, are expected to expire on dates ranging from 2029 to 2032. However, the actual protection affordedby a patent varies on a product by product basis, from country to country and depends upon many factors, including the type of patent, the scope of itscoverage, the availability of regulatory-related extensions, the availability of legal remedies in a particular country and the validity and enforceability of thepatent.In addition to patents, we have filed for trademark registration at the USPTO for “AuriPro” and “ProAuric”. Furthermore, we rely upon tradesecrets and know-how and continuing technological innovation to develop and maintain our competitive position. We seek to protect our proprietaryinformation, in part, using confidentiality agreements with our commercial partners, collaborators, employees and consultants and invention assignmentagreements with our employees. We also have confidentiality agreements or invention assignment agreements with our commercial partners and selectedconsultants. These agreements are designed to protect our proprietary information and, in the case of the invention assignment agreements, to grant usownership of technologies that are developed through a relationship with a third party. These agreements may be breached, and we may not have adequateremedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. To the extent that ourcommercial partners, collaborators, employees and consultants use intellectual property owned by others in their work for us, disputes may arise as to therights in related or resulting know-how and inventions. For more information, please see “Risk Factors–Risks Related to Our Intellectual Property.”Our commercial success will also depend in part on not infringing upon the proprietary rights of third parties. It is uncertain whether the issuanceof any third-party patent would require us to alter our development or commercial strategies, or our drugs or processes, obtain licenses or cease certainactivities. Our breach of any license agreements or failure to obtain a license to proprietary rights that we may require to develop or commercialize our futureproducts may have a material adverse impact on us. If third parties prepare and file patent applications in the United States that also claim technology towhich we have rights, we may have to participate in interference proceedings in the USPTO, to determine priority of invention. For more information, pleasesee “Risk Factors—Risks Related to Our Intellectual Property.”License and Other AgreementsThe Regents of the University of CaliforniaIn November 2008, we entered into an exclusive license agreement with UC which was subsequently amended in January 2010, June 2010, andNovember 2012. Under the license agreement, UC granted us an exclusive license under UC’s rights to patents and applications that are co-developed andco-owned with us (see above regarding our patent estate) for the treatment of human otic diseases. As such, we have acquired the entire commercial rights inthose patents and applications that cover our current and future product candidates. Under the agreement, UC reserved the right to use the patents andapplications for its and other nonprofit institutions’ research and educational purposes. 31Table of ContentsUnder our agreement with UC, we are obligated to diligently proceed with the development, manufacture and commercialization of licensedproducts. If we do not satisfy our diligence obligations, UC may either terminate the agreement or convert our license to a non-exclusive license. In addition,we are responsible for diligently prosecuting and maintaining the licensed patents, at our own expense; provided that if we decide to abandon a licensedpatent, UC may elect to continue prosecution and maintenance of such patent at its own expense. UC has the first right to prosecute and control any actionfor infringement of the patents licensed to us under our agreement with UC; provided that if UC does not initiate an enforcement action against a potentialinfringer within the time limits specified in the agreement, we have the right to do so ourselves.Our financial obligations under the license agreement include annual license maintenance payments until we commercialize the first productcovered under the license agreement, development milestone payments of up to $2.7 million per licensed product, of which $0.9 million has been paid forAuriPro and $0.3 million has been paid for OTO-104 (but such milestone payments are reduced by 75% for any orphan indication product), and a low single-digit royalty on net sales by us or our affiliates of licensed products. In addition, for each sublicense we grant we are obligated to pay UC a fixed percentageof all royalties as well as a sliding scale percentage of non-royalty sublicense fees received by us under such sublicense, with such percentage depending onthe licensed product’s stage of development when sublicensed to such third party. We have the right to offset a certain amount of third-party royalties,milestone fees or sublicense fees against the foregoing financial obligations, provided such third-party royalties or fees are paid by us in consideration forintellectual property rights necessary to commercialize a licensed product.Unless earlier terminated, the agreement will continue in effect until expiration of the longest lived patent licensed to us thereunder. UC mayterminate the license agreement for our uncured breach, or if a claim challenging the validity of the licensed patents is filed by or on behalf of us. We havethe right to terminate this agreement for any reason at any time upon prior notice to UC. The termination of our license agreement with UC may affect aportion of our patent portfolio for AuriPro, OTO-104, and OTO-311. For more information, please see “Risk Factors – Risks Related to our IntellectualProperty.”DURECT CorporationIn April 2013, we entered into an exclusive license agreement with Durect as a part of an asset transfer agreement between us and IncuMed LLC,an affiliate of the NeuroSystec Corporation. Under this license agreement, Durect granted us an exclusive (even as to Durect), worldwide, royalty-bearinglicense under Durect’s rights to certain patents and applications that cover our OTO-311 product candidate, as well as certain related know-how. Includedwithin the rights licensed from Durect is a sublicense from the Institut National de la Sante et de la Recherche Medicale, or INSERM, with respect toINSERM’s ownership interest in certain patents and patent applications owned jointly by INSERM and Durect.We are obligated to use commercially reasonable efforts to develop and commercialize licensed products containing the active ingredientgacyclidine, and in the event we do not satisfy this obligation following an opportunity to cure, Durect may elect to either terminate the agreement or convertour license to a non-exclusive license. In addition, we are responsible for prosecuting and maintaining the licensed patents, at our own expense; providedthat if we decide to abandon a licensed patent, Durect may elect to continue prosecution and maintenance of such patent at its own expense. We have the firstright, but not obligation, to prosecute and control any action for infringement of the patents licensed to us under our agreement with Durect.We are also subject to certain financial obligations under the license agreement. We are obligated to make one-time development milestonepayments of up to $2.3 million for the first licensed product. Upon commercializing a licensed product, we are obligated to pay Durect tiered low single-digitroyalties on annual net sales by us or our affiliates or sublicensees of the licensed products, and we have the right to offset a certain amount of third-partylicense fees or royalties against such royalty payments to Durect, provided such third-party fees or royalties are paid by us in connection with patent rightsnecessary to sell a licensed product containing the 32Table of Contentsactive ingredient gacyclidine. In addition, each sublicense we grant to a third party is subject to payment to Durect of a low double-digit percentage of allnon-royalty payments we receive under such sublicense. Additionally, we are also obligated to pay INSERM, on behalf of Durect, a low single-digit royaltypayment on net sales by us or our affiliates or sublicensees upon commercialization of the licensed product. The foregoing royalty payment obligation toDurect would continue on a product-by-product and country-by-country basis until expiration or determination of invalidity of the last valid claim withinthe licensed patents that cover the licensed product, and the payment obligation to INSERM would continue so long as Durect’s license from INSERMremains in effect.Unless earlier terminated, the agreement will continue in effect until expiration of all our royalty payment obligations thereunder. Durect mayterminate the license agreement for our uncured material breach, and either party may terminate the agreement upon written notice in the event of insolvencyor bankruptcy of the other party. We have the right to terminate this agreement for any reason at any time upon prior notice to Durect. The termination of ourlicense agreement with Durect would affect a portion of our patent portfolio for OTO-311. For more information, please see “Risk Factors—Risks Related toour Intellectual Property.”Asset Transfer AgreementIn April 2013, we entered into an asset transfer agreement with IncuMed, LLC, an affiliate of NeuroSystec Corporation, pursuant to which weacquired assets and patent rights related to gacyclidine. Pursuant to the asset transfer agreement, we made a one-time payment of $0.2 million and we areobligated to make certain one-time milestone payments in connection with the development and commercialization of products containing the activeingredient gacyclidine, up to a maximum of $5.3 million.Government RegulationGovernment authorities in the United States (at the federal, state and local level) and in other countries extensively regulate, among other things,the research, development, testing, quality control, manufacture, packaging, storage, recordkeeping, approval, labeling, advertising, promotion, distribution,marketing, import and export of pharmaceutical products such as those we are developing. The processes for obtaining regulatory approvals in the UnitedStates and in foreign countries and jurisdictions, along with subsequent compliance with applicable statutes and regulations, require the expenditure ofsubstantial time and financial resources. Our product candidates must be approved by the FDA before they may be legally marketed in the United States andby the appropriate foreign regulatory agency before they may be legally marketed in foreign countries. Generally, our activities in other countries will besubject to regulation that is similar in nature and scope as that imposed in the United States, although there can be important differences. Additionally, somesignificant aspects of regulation in Europe are addressed in a centralized way, but country-specific regulation remains essential in many respects.U.S. Drug Approval ProcessIn the United States, the FDA regulates drugs under the federal Food, Drug, and Cosmetic Act, or FDCA, and implementing regulations. Theprocess of obtaining regulatory approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes and regulations requiresthe expenditure of substantial time and financial resources. Failure to comply with the applicable U.S. requirements at any time during the productdevelopment process, approval process or after approval, may subject an applicant to a variety of administrative or judicial sanctions, such as the FDA’srefusal to approve pending NDAs, withdrawal of an approval, imposition of a clinical hold, issuance of warning letters, product recalls, product seizures, totalor partial suspension of production or distribution, injunctions, fines, refusals of government contracts, restitution, disgorgement or civil or criminalpenalties. • The process required by the FDA before a drug may be marketed in the United States generally involves the following: • completion of preclinical laboratory tests, animal studies and formulation studies in compliance with the FDA’s current good laboratorypractice, or cGLP, regulations; 33Table of Contents • submission to the FDA of an IND which must become effective before clinical trials may begin; • approval by an independent institutional review board, or IRB, at each clinical site before each trial may be initiated; • performance of adequate and well-controlled clinical trials in accordance with current good clinical practices, or cGCP, to establish thesafety and efficacy of the proposed drug or biological product for each indication; • submission to the FDA of an NDA; • satisfactory completion of an FDA advisory committee review, if applicable; • satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the product is produced to assesscompliance with cGMP, and to assure that the facilities, methods and controls are adequate to preserve the drug’s identity, strength,quality and purity; and • FDA review and approval of the NDA.Preclinical StudiesPreclinical studies include laboratory evaluation of product chemistry, toxicity and formulation, as well as animal studies to assess its potentialsafety and efficacy. An IND sponsor must submit the results of the preclinical tests, together with manufacturing information, analytical data and anyavailable clinical data or literature, among other things, to the FDA as part of an IND. Some preclinical testing may continue even after the IND is submitted.An IND automatically becomes effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions related to one or moreproposed clinical trials and places the trial on a clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before theclinical trial can begin. As a result, submission of an IND may not result in the FDA allowing clinical trials to commence.Clinical TrialsClinical trials involve the administration of the investigational new drug to patients under the supervision of qualified investigators inaccordance with cGCP requirements, which include the requirement that all research patients provide their informed consent (assent, if applicable) in writingfor their participation in any clinical trial. Clinical trials are conducted under protocols detailing, among other things, the objectives of the clinical trial, theparameters to be used in monitoring safety and the effectiveness criteria to be evaluated. A protocol for each clinical trial and any subsequent protocolamendments must be submitted to the FDA as part of the IND. In addition, an IRB at each institution participating in the clinical trial must review andapprove the plan for any clinical trial before it commences at that institution. Information about certain clinical trials must be submitted within specifictimeframes to the National Institutes of Health, or NIH, for public dissemination on their ClinicalTrials.gov website.Human clinical trials are typically conducted in three sequential phases, which may overlap or be combined: • Phase 1: The drug is initially introduced into healthy human patients with the target disease or condition and tested for safety, dosagetolerance, absorption, metabolism, distribution, excretion and, if possible, to gain an early indication of its effectiveness. • Phase 2: The drug is administered to a limited patient population to identify possible adverse effects and safety risks, to preliminarilyevaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage. • Phase 3: The drug is administered to an expanded patient population, generally at geographically dispersed clinical trial sites, in well-controlled clinical trials to generate enough data to 34Table of Contents statistically evaluate the efficacy and safety of the product for approval, to establish the overall risk-benefit profile of the product, and toprovide adequate information for the labeling of the product.Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and more frequently if serious adverseevents occur. Phase 1, Phase 2 and Phase 3 clinical trials may not be completed successfully within any specified period, or at all. Furthermore, the FDA mayimpose a partial or full clinical hold or the sponsor may suspend or terminate a clinical trial or development at any time on various grounds, including afinding that the research patients are being exposed to an unacceptable health risk.Development, or the aspects of development, that are subject to clinical hold may not continue until the sponsor has satisfied FDA requirementsfor information and has been notified that the hold is being removed. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution ifthe clinical trial is not being conducted in accordance with the IRB’s requirements or if the drug has been associated with unexpected serious harm topatients.The NDA Approval ProcessAssuming successful completion of the required clinical testing, the results of the preclinical studies and clinical trials, together with detailedinformation relating to the product’s chemistry, manufacture, controls and proposed labeling, among other things, are submitted to the FDA as part of an NDArequesting approval to market the product for one or more indications. In most cases, the submission of an NDA is subject to a substantial application userfee.The FDA conducts a preliminary review of all NDAs within the first 60 days after submission, before accepting them for filing, to determinewhether they are sufficiently complete to permit substantive review. The FDA may request additional information rather than accept an NDA for filing. In thisevent, the application must be resubmitted with the additional information. The resubmitted application is also subject to review before the FDA accepts itfor filing. Once the submission is accepted for filing, the FDA begins an in-depth substantive review. Under the Prescription Drug User Fee Act, or PDUFA,guidelines that are currently in effect, the FDA has a goal of ten months from the date of the FDA’s filing of a standard non-priority NDA to review and act onthe submission.The FDA reviews an NDA to determine, among other things, whether the drug is safe and effective and the facility in which it is manufactured,processed, packaged or held meets standards designed to assure the product’s continued safety, quality and purity. The FDA is required to refer an applicationfor a novel drug to an advisory committee or explain why such referral was not made. An advisory committee is a panel of independent experts, includingclinicians and other scientific experts, that reviews, evaluates and provides a recommendation as to whether the application should be approved and underwhat conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when makingdecisions.Before approving an NDA, the FDA typically will inspect the facility or facilities where the product is manufactured, which is not under thecontrol of the product sponsor. The FDA will not approve an application unless it determines that the manufacturing processes and facilities are incompliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. Additionally, beforeapproving an NDA, the FDA will typically inspect one or more clinical sites to assure compliance with cGCP.The FDA also may require submission of a risk evaluation and mitigation strategy, or REMS, plan to mitigate any identified or suspected seriousrisks. The REMS plan could include medication guides, physician communication plans, assessment plans and elements to assure safe use, such as restricteddistribution methods, patient registries or other risk minimization tools. 35Table of ContentsThe testing and approval process requires substantial time, effort and financial resources, and each may take several years to complete. Dataobtained from clinical activities are not always conclusive and may be susceptible to varying interpretations, which could delay, limit or prevent regulatoryapproval. The FDA may not grant approval on a timely basis, or at all.The FDA has a Fast Track program that is intended to expedite or facilitate the process for reviewing new products that meet certain criteria.Specifically, new products are eligible for Fast Track designation if they are intended to treat a serious or life-threatening disease or condition anddemonstrate the potential to address unmet medical needs for the disease or condition. Fast Track designation applies to the combination of the product andthe specific indication for which it is being studied. Unique to a Fast Track product, the FDA may consider for review sections of the NDA on a rolling basisbefore the complete application is submitted, if the sponsor provides a schedule for the submission of the sections of the NDA, the FDA agrees to acceptsections of the NDA and determines that the schedule is acceptable, and the sponsor pays any required user fees upon submission of the first section of theNDA. Our Fast Track Designation for OTO-104 may not result in faster development or approval, if at all.If the FDA’s evaluation of the NDA and inspection of the manufacturing facilities are favorable, the FDA may issue an approval letter, or, in somecases, a complete response letter. A complete response letter generally contains a statement of specific conditions that must be met in order to secure finalapproval of the NDA and may require additional clinical or preclinical testing in order for FDA to reconsider the application. Even with submission of thisadditional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval. If and when those conditionshave been met to the FDA’s satisfaction, the FDA will typically issue an approval letter. An approval letter authorizes commercial marketing of the drug withspecific prescribing information for specific indications.Even if the FDA approves a product, it may limit the approved indications for use for the product, require that contraindications, warnings orprecautions be included in the product labeling, require that post-approval studies, including Phase 4 clinical trials, be conducted to further assess a drug’ssafety after approval, require testing and surveillance programs to monitor the product after commercialization, or impose other conditions, includingdistribution restrictions or other risk management mechanisms, which can materially affect the potential market and profitability of the product. The FDAmay prevent or limit further marketing of a product based on the results of post-marketing studies or surveillance programs. After approval, some types ofchanges to the approved product, such as adding new indications, manufacturing changes and additional labeling claims, are subject to further testingrequirements and FDA review and approval.The Section 505(b)(2) NDAFor modifications to products previously approved by the FDA, an applicant may file an NDA under Section 505(b)(2) of the FDCA. This sectionpermits the submission of an NDA where some or all of the data required for approval comes from studies not conducted by or for the applicant and for whichthe applicant has not obtained a right of reference. Under this section, an applicant may rely on the FDA’s findings of safety and effectiveness in approval ofanother NDA or on studies published in the scientific literature. The applicant may be required to conduct additional studies or provide additionalinformation to fully demonstrate the safety and effectiveness of its modifications to the approved product. We intend to utilize the Section 505(b)(2) NDApathway for our AuriPro product candidate.Upon approval of an NDA, the FDA lists the product in a publication entitled “Approved Drug Products with Therapeutic EquivalenceEvaluations,” which is commonly known as the “Orange Book.” FDA also lists in the Orange Book patents identified by the NDA applicant as claiming thedrug or an approved method of using the drug. Any applicant who submits a Section 505(b)(2) NDA must certify to the FDA with regard to each relevantpatent that either (1) no patent information has been submitted to the FDA; (2) the patent has expired; (3) the listed patent has not expired, but will expire ona particular date and approval is sought after 36Table of Contentspatent expiration; or (4) the patent is invalid or will not be infringed upon by the manufacture, use or sale of the drug product for which the Section 505(b)(2)NDA is submitted. The last certification is known as a Paragraph IV certification. A notice of Paragraph IV certification must be provided to each owner of thepatent that is the subject of the certification and to the holder of the approved NDA to which the Section 505(b)(2) NDA refers. If the NDA holder submits thepatent information to the FDA prior to submission of the Section 505(b)(2) application and the NDA holder or patent owner(s) sues the Section 505(b)(2)applicant for infringement within 45 days of its receipt of the certification notice, the FDA is prevented from approving that Section 505(b)(2) applicationuntil the earlier of 30 months from the receipt of the notice of the Paragraph IV certification, the expiration of the patent or such shorter or longer period asmay be ordered by a court. This prohibition is generally referred to as the 30-month stay. A Section 505(b)(2) applicant that is sued for infringement may filea counterclaim to challenge the listing of the patent or information submitted to FDA about the patent. If we file a Paragraph IV certification with anySection 505(b)(2) application, we cannot assure you that our application will not be significantly delayed as a result of costly patent litigation.Post-Approval RequirementsDrugs manufactured or distributed pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA, including, amongother things, requirements relating to recordkeeping, periodic reporting, product sampling and distribution, advertising and promotion and reporting ofadverse experiences with the product. After approval, most changes to the approved product, such as adding new indications or other labeling claims aresubject to prior FDA review and approval. There also are continuing, annual user fee requirements for any marketed products and the establishments at whichsuch products are manufactured, as well as new application fees for supplemental applications with clinical data.The FDA may impose a number of post-approval requirements as a condition of approval of an NDA. For example, the FDA may require post-marketing testing, including Phase 4 clinical trials, and surveillance to further assess and monitor the product’s safety and effectiveness aftercommercialization.In addition, drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register theirestablishments with the FDA and state agencies, and are subject to periodic unannounced inspections by the FDA and these state agencies to determinecompliance with cGMP requirements. Changes to the manufacturing process are strictly regulated and often require prior FDA approval before beingimplemented. FDA regulations also require investigation and correction of any deviations from cGMP and impose reporting and documentation requirementsupon the sponsor and any third-party manufacturers that the sponsor may decide to use. Accordingly, manufacturers must continue to expend significanttime, money and effort in the area of production and quality control to maintain cGMP compliance.Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements and standards is not maintained orif problems occur after the product reaches the market. Later discovery of previously unknown problems with a product, including adverse events ofunanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in revisions to theapproved labeling to add new safety information; imposition of post-market studies or clinical trials to assess new safety risks; or imposition of distributionor other restrictions under a REMS program. Other potential consequences include, among other things: • restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or product recalls; • fines, warning letters or holds on post-approval clinical trials; • refusal of the FDA to approve pending NDAs or supplements to approved NDAs, or suspension or revocation of product licenseapprovals; • product seizure or detention, or refusal to permit the import or export of products; or 37Table of Contents • injunctions or the imposition of civil or criminal penalties.The FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on the market. Drugs may be promotedonly for the approved indications and in accordance with the provisions of the approved label, although doctors may prescribe drugs for off-label purposes.The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is foundto have improperly promoted off-label uses may be subject to significant liability.In addition, the distribution of prescription pharmaceutical products is subject to the Prescription Drug Marketing Act, or PDMA, whichregulates the distribution of drug and drug samples at the federal level, and sets minimum standards for the registration and regulation of drug distributors bythe states.Hatch-Waxman ExclusivityMarket and data exclusivity provisions under the Federal Food, Drug, and Cosmetic Act, or FFDCA, can delay the submission or the approval ofcertain applications for competing products. The FFDCA provides a five-year period of non-patent data exclusivity within the United States to the firstapplicant to gain approval of an NDA for a new chemical entity. A drug is a new chemical entity if the FDA has not previously approved any other new drugcontaining the same active moiety, which is the molecule or ion responsible for the action of the drug substance. During the exclusivity period, the FDA maynot accept for review an Abbreviated New Drug Application, or ANDA, or a Section 505(b)(2) NDA submitted by another company that references thepreviously approved drug. However, an ANDA or Section 505(b)(2) NDA may be submitted after four years if it contains a certification of patent invalidity ornon-infringement. The FFDCA also provides three years of marketing exclusivity for an NDA, Section 505(b)(2) NDA or supplement to an existing NDA orSection 505(b)(2) NDA if new clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant, are deemed bythe FDA to be essential to the approval of the application, for example, for new indications, dosages, strengths or dosage forms of an existing drug. This three-year exclusivity covers only the conditions of use associated with the new clinical investigations and, as a general matter, does not prohibit the FDA fromapproving ANDAs or Section 505(b)(2) NDAs for generic versions of the original, unmodified drug product. Five-year and three-year exclusivity will notdelay the submission or approval of a full NDA. However, an applicant submitting a full NDA would be required to conduct or obtain a right of reference toall of the preclinical studies and adequate and well-controlled clinical trials necessary to demonstrate safety and effectiveness.New Legislation and RegulationsFrom time to time, legislation is drafted, introduced and passed in Congress that could significantly change the statutory provisions governingthe testing, approval, manufacturing and marketing of products regulated by the FDA. In addition to new legislation, FDA regulations and policies are oftenrevised or interpreted by the agency in ways that may significantly affect our business and our products. It is impossible to predict whether further legislativechanges will be enacted or FDA regulations, guidance, policies or interpretations will be changed, or what the impact of such changes, if any, may be.Pharmaceutical Coverage, Pricing and ReimbursementSignificant uncertainty exists as to the coverage and reimbursement status of any drug products for which we may obtain regulatory approval.Sales of any of our product candidates, if approved, will depend, in part, on the extent to which the costs of the products will be covered by third-partypayors, including government health programs such as Medicare and Medicaid, commercial health insurers and managed care organizations. The process fordetermining whether a third-party payor will provide coverage for a drug product typically is 38Table of Contentsseparate from the process for setting the price of a drug product or for establishing the reimbursement rate that a payor will pay for the drug product oncecoverage is approved. Third-party payors may limit coverage to specific drug products on an approved list, also known as a formulary, which might notinclude all of the approved drugs for a particular indication.In order to secure coverage and reimbursement for any product that might be approved for sale, we may need to conduct expensivepharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness of the product, in addition to the costs required to obtainFDA or other comparable regulatory approvals. Whether or not we conduct such studies, our product candidates may not be considered medically necessaryor cost-effective. A third-party payor’s decision to provide coverage for a drug product does not imply that an adequate reimbursement rate will be approved.Further, one payor’s determination to provide coverage for a product does not assure that other payors will also provide coverage, and adequatereimbursement, for the product. Third-party reimbursement may not be sufficient to enable us to maintain price levels high enough to realize an appropriatereturn on our investment in product development.The containment of healthcare costs has become a priority of federal, state and foreign governments, and the prices of drugs have been a focus inthis effort. Third-party payors are increasingly challenging the prices charged for medical products and services, examining the medical necessity andreviewing the cost-effectiveness of drug products and medical services and questioning safety and efficacy. If these third-party payors do not consider ourproducts to be cost-effective compared to other available therapies, they may not cover our products after FDA approval or, if they do, the level of paymentmay not be sufficient to allow us to sell our products at a profit. The U.S. government, state legislatures and foreign governments have shown significantinterest in implementing cost-containment programs to limit the growth of government-paid healthcare costs, including price controls, restrictions onreimbursement and requirements for substitution of generic products for branded prescription drugs. Adoption of such controls and measures, and tighteningof restrictive policies in jurisdictions with existing controls and measures, could limit payments for pharmaceuticals such as our drug product candidates andcould adversely affect our net revenue and results.Pricing and reimbursement schemes vary widely from country to country. Some countries provide that drug products may be marketed only aftera reimbursement price has been agreed. Some countries may require the completion of additional studies that compare the cost-effectiveness of a particularproduct candidate to currently available therapies. For example, the European Union provides options for its member states to restrict the range of drugproducts for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. EuropeanUnion member states may approve a specific price for a drug product or it may instead adopt a system of direct or indirect controls on the profitability of thecompany placing the drug product on the market. Other member states allow companies to fix their own prices for drug products, but monitor and controlcompany profits. The downward pressure on healthcare costs in general, particularly prescription drugs, has become intense. As a result, increasingly highbarriers are being erected to the entry of new products. In addition, in some countries, cross-border imports from low-priced markets exert competitivepressure that may reduce pricing within a country. Any country that has price controls or reimbursement limitations for drug products may not allowfavorable reimbursement and pricing arrangements for any of our products.The marketability of any products for which we receive regulatory approval for commercial sale may suffer if the government and third-partypayors fail to provide adequate coverage and reimbursement. In addition, emphasis on managed care in the United States has increased and we expect willcontinue to increase the pressure on drug pricing. Coverage policies, third-party reimbursement rates and drug pricing regulation may change at any time. Inparticular, the Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010, which wecollectively refer to as the Affordable Care Act, or ACA, contains provisions that have the potential to substantially change healthcare delivery andfinancing, including impacting the profitability of drugs. For example, the Affordable Care Act revised the methodology by which rebates owed bymanufacturers to the state and federal government for covered outpatient 39Table of Contentsdrugs under the Medicaid Drug Rebate Program, extended the Medicaid Drug Rebate Program to utilization of covered drugs dispensed to individualsenrolled in Medicaid managed care organizations and subjected manufacturers to new annual fees and taxes for certain branded prescription drugs. Even iffavorable coverage and reimbursement status is attained for one or more products for which we receive regulatory approval, less favorable coverage policiesand reimbursement rates may be implemented in the future.Healthcare Law and RegulationHealthcare providers, physicians and third-party payors play a primary role in the recommendation and prescribing of any product candidates forwhich we may obtain marketing approval. Our business operations and arrangements with investigators, healthcare professionals, consultants, third-partypayors and customers may expose us to broadly applicable fraud and abuse and other healthcare laws. These laws may constrain the business or financialarrangements and relationships through which we research, manufacture, market, promote, sell and distribute our products that obtain marketing approval.Restrictions under applicable federal and state healthcare laws, include, but are not limited to, the following: • the federal healthcare Anti-Kickback Statute prohibits, among other things, persons or entities from knowingly and willfully soliciting,offering, receiving or paying any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, incash or in kind, to induce or reward either the referral of an individual for, or the purchase, lease, order or recommendation of, any good,facility, item or service, for which payment may be made, in whole or in part, under a federal healthcare program such as Medicare andMedicaid; • the federal false claims laws and civil monetary penalties law impose penalties and provide for civil whistleblower or qui tam actionsagainst individuals or entities for, among other things, knowingly presenting, or causing to be presented, to the federal government,claims for payment or approval that are false or fraudulent or making a false record or statement to avoid, decrease or conceal anobligation to pay money to the federal government; • the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, among other things, imposes criminal liability forknowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or knowingly andwillfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery ofor payment for healthcare benefits, items or services; • HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act and its implementing regulations, alsoimposes certain obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmissionof individually identifiable health information without proper written authorization; • the federal transparency requirements under the Affordable Care Act requires manufacturers of drugs, devices, biologicals and medicalsupplies to annually report to the Centers for Medicare & Medicaid Services, or CMS, an agency within the U.S. Department of Healthand Human Services, or HHS, information related to payments and other transfers of value provided to physicians and teaching hospitalsand certain ownership and investment interests held by physicians and their immediate family members; and • analogous state and foreign laws, such as state anti-kickback and false claims laws, that may apply to our business operations, includingour sales or marketing arrangements, and claims involving healthcare items or services reimbursed by governmental third-party payors,and in some instances, also such claims reimbursed by non-governmental third-party payors, including private insurers. 40Table of ContentsSimilar to the federal law, certain states also have adopted marketing and/or transparency laws relevant to manufacturers, some of which arebroader in scope. Other states impose restrictions on manufacturers marketing practices and require tracking and reporting of gifts, compensation, and otherremuneration to healthcare professionals and entities. State and foreign laws also govern the privacy and security of health information in somecircumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws will involve substantial costs. It ispossible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case lawinvolving applicable fraud and abuse or other healthcare laws. If our operations are found to be in violation of any of these laws or any other governmentalregulations that may apply to us, we may be subject to significant administrative, civil, and/or criminal penalties, damages, fines, disgorgement, individualimprisonment, exclusion from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of ouroperations. If any of the physicians or other providers or entities with whom we expect to do business is found to be not in compliance with applicable laws,they may be subject to administrative, civil, and/or criminal sanctions, including exclusions from government funded healthcare programs.Foreign RegulationIn order to market any product outside of the United States, we would need to comply with numerous and varying regulatory requirements ofother countries and jurisdictions regarding quality, safety and efficacy and governing, among other things, clinical trials, marketing authorization,commercial sales and distribution of our products. The cost of establishing a regulatory compliance system for numerous varying jurisdictions can be verysignificant. Whether or not we obtain FDA approval for a product, we would need to obtain the necessary approvals by the comparable foreign regulatoryauthorities before we can commence clinical trials or marketing of the product in foreign countries and jurisdictions. Although many of the issues discussedabove with respect to the United States apply similarly in the context of the European Union, the approval process varies between countries and jurisdictionsand can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries andjurisdictions might differ from and be longer than that required to obtain FDA approval. Regulatory approval in one country or jurisdiction does not ensureregulatory approval in another, but a failure or delay in obtaining regulatory approval in one country or jurisdiction may negatively impact the regulatoryprocess in others.The U.S. Foreign Corrupt Practices Act and Other Anti-Corruption LawsWe may be subject to a variety of domestic and foreign anti-corruption laws with respect to our regulatory compliance efforts and operations.The U.S. Foreign Corrupt Practices Act, commonly known as the FCPA, is a criminal statute that prohibits an individual or business from paying, offering,promising or authorizing the provision of money (such as a bribe or kickback) or anything else of value (such as an improper gift, hospitality, or favor),directly or indirectly, to any foreign official, political party or candidate for the purpose of influencing any act or decision in order to assist the individual orbusiness in obtaining, retaining, or directing business or other advantages (such as favorable regulatory rulings). The FCPA also obligates companies withsecurities listed in the United States to comply with certain accounting provisions. Those provisions require a company such as ours to (i) maintain booksand records that accurately and fairly reflect all transactions, expenses, and asset dispositions, and (ii) devise and maintain an adequate system of internalaccounting controls sufficient to provide reasonable assurances that transactions are properly authorized, executed and recorded. The FCPA is subject tobroad interpretation by the U.S. government. The past decade has seen a significant increase in enforcement activity. In addition to the FCPA, there are anumber of other federal and state anti-corruption laws to which we may be subject, including, the U.S. domestic bribery statute contained in 18 USC § 201(which prohibits bribing U.S. government officials) and the U.S. Travel Act (which in some instances addresses private-sector or commercial bribery bothwithin and outside the United States). Also, a 41Table of Contentsnumber of the countries in which we conduct activities have their own domestic and international anti-corruption laws, such as the UK Bribery Act 2010.There have been cases where companies have faced multi-jurisdictional liability under the FCPA and the anti-corruption laws of other countries for the sameillegal act.We can be held liable under the FCPA and other anti-corruption laws for the illegal activities of our employees, representatives, contractors,partners, agents, subsidiaries, or affiliates, even if we did not explicitly authorize such activity. Although we will seek to comply with anti-corruption laws,there can be no assurance that all of our employees, representatives, contractors, partners, agents, subsidiaries or affiliates will comply with these laws at alltimes. Noncompliance with these laws could subject us to whistleblower complaints, investigations, sanctions, settlements, prosecution, other enforcementactions, disgorgement of profits, significant fines, damages, other civil and criminal penalties or injunctions, suspension and/or debarment from contractingwith certain governments or other persons, the loss of export privileges, reputational harm, adverse media coverage, and other collateral consequences. Inaddition, our directors, officers, employees, and other representatives who engage in violations of the FCPA and certain other anti-corruption statutes mayface imprisonment, fines, and penalties. If any subpoenas or investigations are launched, or governmental or other sanctions are imposed, or if we do notprevail in any possible civil or criminal litigation, our business, results of operations and financial condition could be materially harmed. In addition,responding to any action will likely result in a materially significant diversion of management’s attention and resources and significant defense costs andother professional fees. Enforcement actions and sanctions could further harm our business, results of operations, and financial condition.Research and DevelopmentWe recognized $31.8 million and $16.3 million in research and development expenses in the years ended December 31, 2014 and 2013,respectively. From our inception through December 31, 2014, we have incurred an aggregate of approximately $75.7 million of research and developmentexpenses, the significant majority of which relate to our development of AuriPro and OTO-104.EmployeesAs of December 31, 2014, we had 38 full-time employees, including 29 employees engaged in research and development. None of ouremployees is represented by a labor union or covered by collective bargaining agreements, and we believe our relationship with our employees is good.Item 1A. RISK FACTORSInvesting in our common stock involves a high degree of risk. You should carefully consider the risks described below, as well as all other informationincluded in this Annual Report on Form 10-K, including our financial statements, the notes thereto and the section entitled “Management’s Discussion andAnalysis of Financial Condition and Results of Operations.” If any of the following risks actually occurs, our business, financial condition, operatingresults, prospects and ability to accomplish our strategic objectives could be materially harmed. As a result, the trading price of our common stock coulddecline and you could lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterialmay also impair our business operations and the market price of our common stock.Risks Related to Our Financial Condition and Capital RequirementsWe have a limited operating history and have incurred significant losses since our inception, and we anticipate that we will continue to incur losses for theforeseeable future, which makes it difficult to assess our future viability.We are a clinical-stage biopharmaceutical company with a limited operating history upon which you can evaluate our business and prospects.We are not profitable and have incurred losses in each year since we 42Table of Contentscommenced operations in 2008. In addition, we have limited experience and have not yet demonstrated an ability to successfully overcome many of the risksand uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the biopharmaceutical industry. Drugdevelopment is a highly speculative undertaking and involves a substantial degree of risk. To date, we have not obtained any regulatory approvals for any ofour product candidates, commercialized our product candidates or generated any revenue. We continue to incur significant research and development andother expenses related to our ongoing clinical trials and operations. We have recorded net losses of $42.9 million, $19.6 million and $7.6 million for theyears ended December 31, 2014, 2013 and 2012, respectively. As of December 31, 2014, we had an accumulated deficit of $102.5 million.We currently have no source of product revenue and may never become profitable.We expect to continue to incur significant losses for the foreseeable future. Our ability to achieve revenue and profitability is dependent on ourability to complete the development of our product candidates, obtain necessary regulatory approvals and successfully commercialize our products. We maynever succeed in these activities and therefore may never generate revenue that is significant or large enough to achieve profitability. Even if we achieveprofitability in the future, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our prior losses and expected future losseshave had and will continue to have an adverse effect on our stockholders’ equity (deficit) and working capital and any failure to become and remainprofitable may adversely affect the market price of our common stock, our ability to raise capital, and our viability.We will require substantial additional financing to commercialize AuriPro and to obtain regulatory approval for OTO-104 and OTO-311, and a failure toobtain this necessary capital when needed on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our commercialization efforts,product development, or other operations.Since our inception, most of our resources have been dedicated to the development of our product candidates, AuriPro, OTO-104 and OTO-311.In particular, obtaining regulatory approval for and commercializing AuriPro, and commencing and completing clinical trials for OTO-104 and OTO-311,will require substantial funds. We have funded our operations primarily through the sale and issuance of common stock, convertible preferred stock andconvertible notes. As of December 31, 2014, we had cash, cash equivalents and short-term investments of $156.0 million. We believe that we will continue toexpend substantial resources for the foreseeable future for the commercialization of AuriPro and the development of OTO-104, OTO-311 and any otherproduct candidates we may choose to pursue. These expenditures will include costs associated with marketing and selling any products approved for sale,manufacturing, preparing regulatory submissions, and conducting preclinical studies and clinical trials. We cannot estimate with reasonable certainty theactual amounts necessary to successfully complete the development and commercialization of our product candidates.Our future capital requirements depend on many factors, including: • the timing of regulatory approval for AuriPro; • the cost of commercialization activities if our products are approved for sale, including marketing, sales and distribution costs andrelated facilities expansion costs; • the timing of, and the costs involved in, clinical development and obtaining regulatory approvals for OTO-104, OTO-311 or any futureproduct candidates; • the cost of manufacturing our products; • the number and characteristics of any other product candidates we develop or acquire; • our ability to establish and maintain strategic collaborations, licensing or other commercialization arrangements and the terms andtiming of such arrangements; 43Table of Contents • the degree and rate of market acceptance of any approved products; • the emergence, approval, availability, perceived advantages, relative cost, relative safety and relative efficacy of other products ortreatments; • the expenses needed to attract and retain skilled personnel; • the costs associated with being a public company; • the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, including litigation costs andthe outcome of such litigation; • the timing, receipt and amount of sales of, or royalties on, future approved products, if any; and • any product liability or other lawsuits related to our products.Additional capital may not be available when we need it, on terms that are acceptable to us or at all. If adequate funds are not available to us on atimely basis, we may be required to delay, limit, reduce or terminate our establishment of sales and marketing, manufacturing or distribution capabilities orother activities that may be necessary to commercialize our product candidates, preclinical studies, clinical trials or other development activities.If we raise additional capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensingarrangements with third parties, we may have to relinquish certain valuable rights to our product candidates, technologies, future revenue streams or researchprograms or grant licenses on terms that may not be favorable to us. If we raise additional capital through public or private equity offerings, the ownershipinterest of our existing stockholders will be diluted and the terms of any new equity securities may have preferential rights over our common stock. If we raiseadditional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurringadditional debt or making capital expenditures or specified financial ratios, any of which could restrict our ability to develop and commercialize our productcandidates or operate as a business.Risks Related to Our Product CandidatesWe are substantially dependent on the regulatory and commercial success of our lead product candidate, AuriPro.To date, we have invested substantial resources in the development of our lead product candidate, AuriPro. AuriPro is our only product that hascompleted Phase 3 clinical development.Given the completion of our Phase 3 clinical trials for AuriPro, its future success is primarily subject to the risks associated with obtainingregulatory approval from the FDA and commercialization, including risks associated with: • the eligibility of AuriPro for the Section 505(b)(2) regulatory approval pathway which could potentially simplify the FDA approvalprocess; • the FDA’s acceptance of our NDA submission for AuriPro; • the FDA requiring additional studies or information to support our submission; • the successful and timely receipt of necessary marketing approval from the FDA to allow us to begin commercializing AuriPro in theUnited States; • the ability to manufacture commercial supplies of AuriPro; • our ability to build a sales organization to market AuriPro; 44Table of Contents • our success in educating physicians, patients and caregivers about the benefits, administration and use of AuriPro; • the availability, perceived advantages, relative cost, relative safety and relative efficacy of other products or treatments for middle eareffusion at the time of TTP surgery, particularly the off-label use of multi-dose, multi-day antibiotic ear drops; • the demand for the treatment of middle ear effusion in patients requiring TTP surgery; • the availability of coverage and adequate reimbursement for AuriPro; • our ability to enforce our intellectual property rights in and to AuriPro; and • a continued acceptable safety profile of AuriPro following approval.Many of these clinical, regulatory and commercial matters are beyond our control and are subject to other risks described elsewhere in this “RiskFactors” section. Accordingly, we cannot assure you that we will be able to successfully obtain regulatory approval of, commercialize or generate significantrevenue from AuriPro. If we cannot do so, or are significantly delayed in doing so, our business will be materially harmed.We are also dependent upon the clinical, regulatory and commercial success of OTO-104, our second product candidate.In addition to AuriPro, we have also invested substantial resources in the development of our second product candidate, OTO-104. OTO-104 iscurrently in a Phase 2b clinical trial and is our only other product candidate in clinical trials. We expect to report results for this clinical trial in the secondquarter of 2015 and, if the results are positive, initiate a Phase 3 clinical trial thereafter. We have initiated a multiple-dose safety study for OTO-104 inMénière’s patients in the United Kingdom and plan to initiate one or more additional multiple-dose safety studies during 2015 to satisfy our multiple-doseclinical safety requirement for U.S. regulatory approval of OTO-104 in Ménière’s patients.Given the stage of development of OTO-104, it is currently most subject to the risks associated with completing its current clinical trials andfuture clinical trials, including risks associated with: • the completion of enrollment of the ongoing Phase 2b clinical trial for OTO-104; • the use of patient reported outcomes in our Phase 2b clinical trial; • our ability to demonstrate the safety and efficacy of OTO-104 in this clinical trial; • the FDA’s willingness to accept the results of our Phase 2b clinical trial as one of two pivotal, single-dose efficacy trials required tosupport regulatory approval; • the successful implementation, enrollment and completion of a second pivotal, single-dose efficacy trial that demonstrates the safety andefficacy of OTO-104; • the successful implementation, enrollment and completion of one or more additional open-label safety studies and the ongoing multiple-dose safety study in the United Kingdom; and • the ability to file an NDA for regulatory approval with the FDA without the need for any additional clinical trials.If we are able to successfully complete the necessary clinical trials for OTO-104, its success will still remain subject to the risks associated withobtaining regulatory approval from the FDA and being commercialized, including risks associated with: • the timing of review, as the FDA’s grant of Fast Track designation for OTO-104 does not guarantee priority review; • the FDA’s acceptance of our NDA submission for OTO-104; 45Table of Contents • the successful and timely receipt of necessary marketing approval from the FDA to allow us to begin commercializing OTO-104 in theUnited States; • the ability to manufacture commercial supplies of OTO-104; • the ability of our future sales organization to sell OTO-104; • our success in educating physicians and patients about the benefits, administration and use of OTO-104; • the availability, perceived advantages, relative cost, relative safety and relative efficacy of other products or treatments for Ménière’sdisease; • patient demand for the treatment of Ménière’s disease; • the availability of coverage and adequate reimbursement for OTO-104; • our ability to enforce our intellectual property rights in and to OTO-104; and • a continued acceptable safety profile of OTO-104 following approval.Many of these clinical, regulatory and commercial matters are beyond our control and are subject to other risks described elsewhere in this “RiskFactors” section. Accordingly, we cannot assure you that we will be able to advance OTO-104 further through final clinical development, or obtainregulatory approval of, commercialize or generate significant revenue from OTO-104. If we cannot do so, or are significantly delayed in doing so, ourbusiness will be materially harmed.In addition to AuriPro and OTO-104, our long-term prospects depend in part upon advancing additional product candidates, such as OTO-311, intoclinical development and through to regulatory approval and commercialization.Although we are focused upon potential regulatory approval and commercialization of AuriPro and completion of the clinical trials andpotential regulatory approval and commercialization of OTO-104, the development of OTO-311 and other potential candidates for the treatment of inner andmiddle ear disorders is a key element of our long-term strategy. OTO-311 is currently in preclinical development and is therefore currently most subject to therisks associated with preclinical and clinical development, including the risks associated with: • generating sufficient data to support the initiation or continuation of clinical trials; • obtaining regulatory approval to commence clinical trials; • contracting with the necessary parties to conduct a clinical trial; • enrolling sufficient numbers of patients in clinical trials; • the timely manufacture of sufficient quantities of the product candidate for use in clinical trials; and • adverse events in the clinical trials.Even if we successfully advance OTO-311 or any other future product candidate into clinical development, their success will be subject to all ofthe clinical, regulatory and commercial risks described elsewhere in this “Risk Factors” section. Accordingly, we cannot assure you that we will ever be ableto develop, obtain regulatory approval of, commercialize or generate significant revenue from OTO-311 or any other future product candidate. 46Table of ContentsRisks Related to Our Business and StrategyClinical drug development involves a lengthy and expensive process with an uncertain outcome, results of earlier studies and trials may not be predictiveof future trial results, and our clinical trials may fail to adequately demonstrate the safety and efficacy of our product candidates.Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. A failure of one or more of ourclinical trials can occur at any time during the clinical trial process. The results of preclinical studies and early clinical trials of our product candidates maynot be predictive of the results of later-stage clinical trials. There is a high failure rate for drugs proceeding through clinical trials, and product candidates inlater stages of clinical trials may fail to show the required safety and efficacy despite having progressed through preclinical studies and initial clinical trials.A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safetyprofiles, notwithstanding promising results in earlier clinical trials, and we cannot be certain that we will not face similar setbacks. Even if our clinical trialsare completed, the results may not be sufficient to obtain regulatory approval for our product candidates.We have in the past experienced delays in our ongoing clinical trials and we may in the future. We do not know whether future clinical trials, ifany, will begin on time, need to be redesigned, enroll an adequate number of patients on time or be completed on schedule, if at all. Clinical trials can bedelayed, suspended or terminated for a variety of reasons, including failure to: • generate sufficient preclinical, toxicology, or other in vivo or in vitro data to support the initiation or continuation of clinical trials; • obtain regulatory approval, or feedback on trial design, to commence a trial; • identify, recruit and train suitable clinical investigators; • reach agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites; • obtain and maintain institutional review board, or IRB, approval at each clinical trial site; • identify, recruit and enroll suitable patients to participate in a trial; • have a sufficient number of patients complete a trial or return for post-treatment follow-up; • ensure clinical investigators observe trial protocol or continue to participate in a trial; • address any patient safety concerns that arise during the course of a trial; • address any conflicts with new or existing laws or regulations; • add a sufficient number of clinical trial sites; • timely manufacture sufficient quantities of product candidate for use in clinical trials; or • raise sufficient capital to fund a trial.Patient enrollment is a significant factor in the timing of clinical trials and is affected by many factors, including the size and nature of thepatient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, competing clinical trials andclinicians’ and patients’ or caregivers’ perceptions as to the potential advantages of the drug candidate being studied in relation to other available therapies,including any new drugs or treatments that may be approved for the indications we are investigating.We could also encounter delays if a clinical trial is suspended or terminated by us, by the data safety monitoring board for such trial or by theFDA or any other regulatory authority, or if the IRBs of the institutions 47Table of Contentsin which such trials are being conducted suspend or terminate the participation of their clinical investigators and sites subject to their review. Suchauthorities may suspend or terminate a clinical trial due to a number of factors, including failure to conduct the clinical trial in accordance with regulatoryrequirements or our clinical protocols, inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting in theimposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a product candidate, changes ingovernmental regulations or administrative actions or lack of adequate funding to continue the clinical trial.OTO-104 was previously subject to Full Clinical Hold that was removed in July 2013 and then subject to Partial Clinical Hold that was removedin June 2014. The removal of Full Clinical Hold allowed us to initiate the current Phase 2b clinical trial. As a result of OTO-104 being placed on Full ClinicalHold, AuriPro was also placed on Full Clinical Hold. The AuriPro Full Clinical Hold was removed in November 2012. We cannot assure you that our productcandidates will not be subject to new clinical holds in the future.If we experience delays in the completion of, or termination of, any clinical trial of our product candidates for any reason, the commercialprospects of our product candidates may be harmed, and our ability to generate product revenues from any of these product candidates will be delayed. Inaddition, any delays in completing our clinical trials will increase our costs, slow down our product candidate development and approval process andjeopardize our ability to commence product sales and generate revenues. Any of these occurrences may significantly harm our business, financial conditionand prospects. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead tothe denial of regulatory approval of our product candidates.We may be unable to obtain regulatory approval for our product candidates. The denial or delay of any such approval would delay commercialization andhave a material adverse effect on our potential to generate revenue, our business and our results of operations.The research, development, testing, manufacturing, labeling, packaging, approval, promotion, advertising, storage, recordkeeping, marketing,distribution, post-approval monitoring and reporting, and export and import of drug products are subject to extensive regulation by the FDA, and by foreignregulatory authorities in other countries. These regulations differ from country to country. To gain approval to market our product candidates, we mustprovide clinical data that adequately demonstrates the safety and efficacy of the product for the intended indication. We have not yet obtained regulatoryapproval to market any of our product candidates in the United States or any other country. Our business depends upon obtaining these regulatory approvals.The FDA can delay, limit or deny approval of our product candidates for many reasons, including: • our inability to satisfactorily demonstrate that the product candidates are safe and effective for the requested indication; • the FDA’s disagreement with our trial protocol or the interpretation of data from preclinical studies or clinical trials; • the population studied in the clinical trial may not be sufficiently broad or representative to assess safety in the full population for whichwe seek approval; • our inability to demonstrate that clinical or other benefits of our product candidates outweigh any safety or other perceived risks; • the FDA’s determination that additional preclinical or clinical trials are required; • the FDA’s non-approval of the formulation, labeling or the specifications of our product candidates; 48Table of Contents • the FDA’s failure to accept the manufacturing processes or facilities of third-party manufacturers with which we contract; or • the potential for approval policies or regulations of the FDA to significantly change in a manner rendering our clinical data insufficientfor approval.Even if we eventually complete clinical testing and receive approval of any regulatory filing for our product candidates, the FDA may grantapproval contingent on the performance of costly additional post-approval clinical trials. The FDA may also approve our product candidates for a morelimited indication or a narrower patient population than we originally requested, and the FDA may not approve the labeling that we believe is necessary ordesirable for the successful commercialization of our product candidates. To the extent we seek regulatory approval in foreign countries, we may facechallenges similar to those described above with regulatory authorities in applicable jurisdictions. Any delay in obtaining, or inability to obtain, applicableregulatory approval for any of our product candidates would delay or prevent commercialization of our product candidates and would materially adverselyimpact our business, results of operations and prospects.Even if AuriPro, OTO-104, OTO-311 or any future product candidates obtain regulatory approval, they may fail to achieve the broad degree of marketacceptance and use necessary for commercial success.Even if we obtain FDA or other regulatory approvals, our products may not achieve market acceptance among physicians and patients, and maynot be commercially successful. There are currently no FDA-approved drug treatments for the indications we are pursuing. Middle ear effusion in pediatricpatients requiring TTP surgery, our proposed indication for our lead candidate AuriPro, is currently treated with the off-label use of antibiotic ear drops. Ourproposed indication for OTO-104 is the treatment of vertigo associated with Ménière’s disease. Currently, Ménière’s disease patients are routinely prescribeda low-salt diet and off-label use of diuretics. Physicians may also prescribe the off-label use of antihistamines, anticholinergics, phenothiazines andbenzodiazepines as well as corticosteroids. Our proposed indication for OTO-311 is the treatment of tinnitus. Currently, physicians may attempt to treattinnitus symptoms with the off-label use of steroids, anxiolytics, antidepressants, and antipsychotics. The commercial success of our product candidates, ifapproved, will depend significantly on the adoption and use of the resulting product by physicians for approved indications. The decision to elect treatmentwith AuriPro for middle ear effusion in pediatric patients requiring TTP surgery, or to elect to utilize OTO-104 for Ménière’s disease or OTO-311 for tinnitus,rather than other products or treatments, may be influenced by a number of factors, including: • the cost, safety and effectiveness of our products as compared to other products or treatments; • physician willingness to adopt a new treatment in lieu of other products or treatments; • the extent to which physicians recommend our products to their patients; • patient or caregiver sentiment about the benefits and risks of our products; • proper training and administration of our products by physicians and medical staff, such that their patients do not experience excessivediscomfort during treatment or adverse side effects; • the procedural risks of IT injection, including persistent injection site perforation of the tympanic membrane, which has occurred in ourOTO-104 Phase 1b clinical trial; • overcoming any biases physicians or patients may have in favor of other products or treatments; • patient preference for non-injectable treatments; • patient or caregiver satisfaction with the results and administration of our product and overall treatment experience, including relativeconvenience and ease of administration; • the effectiveness of our sales and marketing efforts; • demand for the treatment of the relevant diseases or disorders; 49Table of Contents • product labeling or product insert requirements of the FDA or other regulatory authorities; • the prevalence and severity of any adverse events; • the revenue and profitability that our products will offer a physician as compared to other products or treatments; • the availability of coverage and adequate reimbursement by third-party payors and government authorities; and • general patient or caregiver confidence, which may be impacted by economic and political conditions.If our product candidates are approved for use but fail to achieve the broad degree of market acceptance necessary for commercial success, ouroperating results and financial condition will be adversely affected. In addition, even if any of our products gain acceptance, the markets for treatment ofpatients with our target indications may not be as significant as we estimate.Use of our product candidates could be associated with side effects or adverse events.As with most pharmaceutical products, use of our product candidates could be associated with side effects or adverse events which can vary inseverity and frequency. Side effects or adverse events associated with the use of our product candidates may be observed at any time, including in clinicaltrials or once a product is commercialized, and any such side effects or adverse events may negatively affect our ability to obtain regulatory approval ormarket our product candidates. Side effects such as toxicity or other safety issues associated with the use of our product candidates could require us toperform additional studies or halt development or sale of these product candidates or expose us to product liability lawsuits which will harm our business. Wemay be required by regulatory agencies to conduct additional preclinical or clinical trials regarding the safety and efficacy of our product candidates whichwe have not planned or anticipated. We cannot assure you that we will resolve any issues related to any product-related adverse events to the satisfaction ofthe FDA or any regulatory agency in a timely manner or ever, which could harm our business, prospects and financial condition.Some patients in our clinical trials have reported adverse events after being treated with AuriPro and OTO-104. For example, one patient in ourPhase 1b clinical trial of OTO-104 experienced a persistent injection site perforation of the tympanic membrane. If we are successful in commercializing ourproduct candidates, the FDA and other foreign regulatory agency regulations will require that we report certain information about adverse medical events ifthose products may have caused or contributed to those adverse events. The timing of our obligation to report would be triggered by the date we becomeaware of the adverse event as well as the nature of the event. We may fail to report adverse events we become aware of within the prescribed timeframe. Wemay also fail to appreciate that we have become aware of a reportable adverse event, especially if it is not reported to us as an adverse event or if it is anadverse event that is unexpected or removed in time from the use of our products. If we fail to comply with our reporting obligations, the FDA or other foreignregulatory agencies could take action including criminal prosecution, the imposition of civil monetary penalties, seizure of our products, or delay inapproval or clearance of future products.Our product candidates, if approved, will face significant competition in the biopharmaceutical industry and our failure to effectively compete withcompetitor drugs, including off-label drug use, and future competitors may prevent us from achieving significant market penetration and expansion.The biopharmaceutical industry is intensely competitive and subject to rapid and significant technological change. If approved, our productsmust compete with off-label drug use by physicians to treat the indications for which we seek approval, such as, in the case of AuriPro, the current use ofantibiotic ear drops to treat middle ear effusion in patients requiring TTP surgery. We are also aware that other companies, such as 50Table of ContentsAuris Medical Holding AG, Autifony Therapeutics, Kyorin Pharmaceuticals, Merz Pharmaceuticals GmbH, Novartis AG, Otic Pharma Ltd. and Synphora AB,are conducting clinical trials for potential products for the treatment of various otic indications, including ear infections, tinnitus and Ménière’s disease.Many companies in the biopharmaceutical industry have greater resources to discover, obtain patents, develop, test and obtain regulatory approvals forproducts, as well as commercialize, market and promote approved products, including communicating the effectiveness, safety and value of products toactual and prospective customers and medical staff. These companies may develop new drugs to treat the diseases and disorders we target, or seek to haveexisting drugs approved for use for new indications that treat the diseases and disorders we target. Mergers and acquisitions in the biopharmaceutical industrymay result in even more resources being concentrated in potential competitors. Competition may increase further as a result of advances in the commercialapplicability of technologies and greater availability of capital for investment in this industry. Our competitors may succeed in developing, acquiring orlicensing on an exclusive basis products that are more effective, easier to administer or less costly than our product candidates.We rely on third parties to conduct many of our preclinical studies and all of our clinical trials. If these third parties do not successfully carry out theircontractual duties or meet expected deadlines, we may be unable to obtain regulatory approval for, or commercialize, our product candidates.We do not have the ability to independently conduct many of our preclinical studies or any of our clinical trials. We rely on medical institutions,clinical investigators, contract laboratories, and other third parties, such as CROs, to conduct clinical trials on our product candidates. Third parties play asignificant role in the conduct of our clinical trials and the subsequent collection and analysis of data. These third parties are not our employees, and exceptfor remedies available to us under our agreements, we have limited ability to control the amount or timing of resources that any such third party will devoteto our clinical trials. If our CROs or any other third parties upon which we rely for administration and conduct of our clinical trials do not successfully carryout their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtainis compromised due to the failure to adhere to our clinical protocols, regulatory requirements, or for other reasons, or if they otherwise perform in asubstandard manner, our clinical trials may be extended, delayed, suspended or terminated, and we may not be able to complete development of, obtainregulatory approval for, or successfully commercialize our product candidates.We and the third parties upon which we rely are required to comply with Good Clinical Practice, or GCP, which are regulations and guidelinesenforced by regulatory authorities around the world for products in clinical development. Regulatory authorities enforce these GCP regulations throughperiodic inspections of clinical trial sponsors, principal investigators and clinical trial sites. If we or our third parties fail to comply with applicable GCPregulations, the clinical data generated in our clinical trials may be deemed unreliable and our submission of marketing applications may be delayed or theregulatory authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that, uponinspection, a regulatory authority will determine that any of our clinical trials comply or complied with applicable GCP regulations. In addition, our clinicaltrials must be conducted with material produced under current Good Manufacturing Practice, or cGMP, regulations, which are enforced by regulatoryauthorities. Our failure to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process.Moreover, our business may be impacted if our CROs, clinical investigators or other third parties violate federal or state fraud and abuse or false claims lawsand regulations or healthcare privacy and security laws. In order for our clinical trials to be carried out effectively and efficiently, it is imperative that ourCROs and other third parties communicate and coordinate with one another. Moreover, our CROs and other third parties may also have relationships withother commercial entities, some of which may compete with us. Our CROs and other third parties may terminate their agreements with us upon as few as 30days’ notice under certain circumstances. If our CROs or other third parties conducting our clinical trials do not perform their contractual duties orobligations, experience work stoppages, do not meet expected deadlines, terminate their agreements with us or need to be replaced, or if the quality oraccuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical trial protocols or GCPs, or for any other reason, we may 51Table of Contentsneed to conduct additional clinical trials or enter into new arrangements with alternative CROs, clinical investigators or other third parties. We may beunable to enter into arrangements with alternative CROs on commercially reasonable terms, or at all. Switching or adding CROs, clinical investigators orother third parties can involve substantial cost and require extensive management time and focus. In addition, there is a natural transition period when a newCRO commences work. As a result, delays may occur, which can materially impact our ability to meet our desired clinical development timelines. Althoughwe carefully manage our relationship with our CROs, clinical investigators and other third parties there can be no assurance that we will not encounter suchchallenges or delays in the future or that these delays or challenges will not have a material adverse impact on our business, prospects, financial condition orresults of operations.We rely completely on third parties to manufacture our preclinical and clinical drug supplies and we intend to rely on third parties to produce commercialsupplies of any approved products.We outsource the manufacture of our product candidates. We do not currently have the infrastructure or internal capability to manufacturesupplies of our product candidates for use in development and commercialization. If we were to experience an unexpected loss of supply of our productcandidates for any reason, whether as a result of manufacturing, supply or storage issues or otherwise, we could experience delays, disruptions, suspensions orterminations of, or be required to restart or repeat, any pending or ongoing clinical trials. Although we generally do not begin a clinical trial unless webelieve we have a sufficient supply of a product candidate to complete the clinical trial, we may be required to manufacture additional supplies of ourproduct candidates to the extent our estimates of the amounts required prove inaccurate, we suffer unexpected losses of product candidate supplies, or to theextent that we are required to have fresh product candidate supplies manufactured to satisfy regulatory requirements or specifications. Any significant delayor discontinuation in the supply of a product candidate, or the raw material components thereof, for an ongoing clinical trial due to the need to replace acontract manufacturer or other third-party manufacturer could considerably delay completion of our clinical trials, product testing and potential regulatoryapproval of our product candidates.Reliance on third-party manufacturers entails additional risks, including reliance on the third party for regulatory compliance and qualityassurance, the possible breach of the manufacturing agreement by the third party, and the possible termination or nonrenewal of the agreement by the thirdparty at a time that is costly or inconvenient for us. The facilities used by our third-party manufacturers must be accepted by the FDA pursuant to inspectionsthat will be conducted after we submit our NDA to the FDA. We do not control the implementation of the manufacturing process of, and are completelydependent on, our third-party manufacturers for compliance with the regulatory requirements, for manufacture of both active drug substances and finisheddrug products. If our third-party manufacturers cannot successfully manufacture material that conforms to applicable specifications and the strict regulatoryrequirements of the FDA or foreign regulatory authorities, we will not be able to secure and/or maintain regulatory acceptance of our contract manufacturingfacilities. In addition, we have no control over the ability of our contract manufacturers or other third-party manufacturers to maintain adequate qualitycontrol, quality assurance and qualified personnel. The failure of our third-party manufacturers to comply with applicable regulations could result insanctions being imposed on us, including fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, license revocation, seizures orrecalls of products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect supplies of our product candidatesor any other product candidates or products that we may develop. In addition, if the FDA does not accept these facilities for the manufacture of our productcandidates or if it withdraws any such acceptance in the future, we may need to find alternative manufacturing facilities, which would significantly impactour ability to develop, obtain regulatory approval for or market our product candidates, if approved. Any failure or refusal to supply the components for ourproduct candidates that we may develop could delay, prevent or impair our clinical development or commercialization efforts. If our contract manufacturerswere to breach or terminate their manufacturing arrangements with us, the development or commercialization of the affected product candidates could bedelayed, which could have an adverse effect on our business. Any change in our manufacturers could be costly because the commercial terms of any newarrangement could be less favorable and because the expenses relating to the transfer of necessary technology and processes could be significant. 52Table of ContentsAs we commercialize our products, we may encounter issues with manufacturing.Our product candidates have never been manufactured for commercial use, and there are risks associated with manufacturing for commercial useincluding, among others, potential problems with forecasting and cost overruns, process reproducibility, storage availability, stability issues, lot consistencyand timely availability of raw materials. Even if we could otherwise obtain regulatory approval for our product candidates, there is no assurance that ourcontract manufacturers will be able to manufacture the approved product to specifications acceptable to the FDA or foreign regulatory authorities, to produceit in sufficient quantities to meet the requirements for the potential launch of the product or to meet potential future demand. If our contract manufacturers areunable to produce sufficient quantities of the approved product for commercialization, our commercial efforts would be impaired, which would have anadverse effect on our business, financial condition, results of operations and growth prospects.We depend on a small number of suppliers for the raw materials necessary to produce our product candidates. The loss of these suppliers, or their failure tosupply us with these raw materials, would materially and adversely affect our business.We depend on the availability of key raw materials, including poloxamer for all of our product candidates, ciprofloxacin for AuriPro,dexamethasone for OTO-104, and gacyclidine for OTO-311, from a small number of third-party suppliers. Because there are a limited number of suppliers forthe raw materials that we use to manufacture our product candidates, we may need to engage alternate suppliers to prevent a possible disruption of themanufacture of the materials necessary to produce our product candidates for our clinical trials, and if approved, ultimately for commercial sale. We do nothave any control over the availability of raw materials. If we or our manufacturers are unable to purchase these raw materials on acceptable terms, at sufficientquality levels, or in adequate quantities, if at all, the commercialization of AuriPro and the development of OTO-104, OTO-311 or any future productcandidates, would be delayed or there would be a shortage in supply, which would impair our ability to meet our development objectives for our productcandidates or generate revenues from the sale of any approved products.Our ability to market our product candidates, if approved, will be limited to certain indications. If we want to expand the indications for which we maymarket our products, we will need to obtain additional regulatory approvals, which may not be granted.We are currently developing AuriPro for the treatment of middle ear effusion in pediatric patients requiring TTP surgery and OTO-104 for thetreatment of vertigo associated with Ménière’s disease. Although at an earlier stage, we plan to develop OTO-311 for the treatment of tinnitus. The FDA andother applicable regulatory agencies will restrict our ability to market or advertise our products to the scope of the approved label for the applicable productand for no other indications, which could limit physician and patient adoption. We may attempt to develop, and if approved, promote and commercializenew treatment indications for our products in the future, but we cannot predict when or if we will receive the regulatory approvals required to do so. Failure toreceive such approvals prevents us from promoting or commercializing the new treatment indications. In addition, we would be required to conductadditional clinical trials or studies to support approvals for additional indications, which would be time consuming and expensive, and may produce resultsthat do not support regulatory approvals. If we do not obtain additional regulatory approvals, our ability to expand our business will be limited.If our product candidates are approved for marketing, and we are found to have improperly promoted off-label uses, or if physicians misuse our products,we may become subject to prohibitions on the sale or marketing of our products, significant sanctions, product liability claims, and our image andreputation within the industry and marketplace could be harmed.The FDA and other regulatory agencies strictly regulate the marketing and promotional claims that are made about drug products. In particular, aproduct may not be promoted for uses or indications that are not 53Table of Contentsapproved by the FDA or such other regulatory agencies as reflected in the product’s approved labeling. For example, if we receive marketing approval forAuriPro for treatment of middle ear effusion in pediatric patients requiring TTP surgery, the first indication we are pursuing, we cannot promote the use of ourproduct in a manner that is inconsistent with the approved label. However, physicians are able to, in their independent medical judgment, use AuriPro ontheir patients in an off-label manner, such as for the treatment of other otic indications. If we are found to have promoted such off-label uses, we may receivewarning letters and become subject to significant liability, which would materially harm our business. The federal government has levied largeadministrative, civil and criminal fines against companies for alleged improper promotion and has enjoined several companies from engaging in off-labelpromotion. If we become the target of such an investigation or prosecution based on our marketing and promotional practices, we could face similarsanctions, which would materially harm our business. In addition, management’s attention could be diverted from our business operations, significant legalexpenses could be incurred, and our reputation could be damaged. The FDA has also requested that companies enter into consent decrees or permanentinjunctions under which specified promotional conduct is changed or curtailed. If we are deemed by the FDA to have engaged in the promotion of ourproducts for off-label use, we could be subject to prohibitions on the sale or marketing of our products or significant fines and penalties, and the impositionof these sanctions could also affect our reputation with physicians, patients and caregivers, and our position within the industry.Physicians may also misuse our products or use improper techniques, potentially leading to adverse results, side effects or injury, which may leadto product liability claims. If our products are misused or used with improper technique, we may become subject to costly litigation. Product liability claimscould divert management’s attention from our core business, be expensive to defend, and result in sizable damage awards against us that may not be coveredby insurance. We currently carry product liability insurance covering our clinical trials with policy limits that we believe are customary for similarly situatedcompanies and adequate to provide us with coverage for foreseeable risks. Although we maintain such insurance, any claim that may be brought against uscould result in a court judgment or settlement in an amount that is not covered, in whole or in part, by our insurance or that is in excess of the limits of ourinsurance coverage. Furthermore, the use of our products for conditions other than those approved by the FDA may not effectively treat such conditions,which could harm our reputation in the marketplace among physicians and patients.We currently have limited marketing capabilities and no sales organization. If we are unable to establish sales and marketing capabilities on our own orthrough third parties, we will be unable to successfully commercialize our products, if approved, or generate product revenue.To commercialize our products, if approved, in the United States and other jurisdictions we seek to enter, we must build our marketing, sales,managerial and other non-technical capabilities or make arrangements with third parties to perform these services, and we may not be successful in doing so.If our products receive regulatory approval, we expect to market such products in the United States through a focused, specialized sales force, which will becostly and time consuming. We have no prior experience in the marketing and sale of pharmaceutical products and there are significant risks involved inbuilding and managing a sales organization, including our ability to hire, retain and incentivize qualified individuals, generate sufficient sales leads, provideadequate training to sales and marketing personnel and effectively manage a geographically dispersed sales and marketing team. Outside of the UnitedStates, we may consider collaboration arrangements. If we are unable to enter into such arrangements on acceptable terms or at all, we may not be able tosuccessfully commercialize our products in certain markets. Any failure or delay in the development of our internal sales, marketing and distributioncapabilities would adversely impact the commercialization of our products. If we are not successful in commercializing our products, either on our own orthrough collaborations with one or more third parties, our future product revenue will suffer and we would incur significant additional losses. 54Table of ContentsTo establish our sales and marketing infrastructure and expand our manufacturing capabilities, we will need to increase the size of our organization, andwe may experience difficulties in managing this growth.As of December 31, 2014, we had 38 full-time employees, including 29 employees engaged in research and development. As we advance ourproduct candidates through the development process and to commercialization, we will need to continue to expand our development, regulatory, quality,managerial, sales and marketing, operational, finance and other resources to manage our operations and clinical trials, continue our development activitiesand commercialize our product candidates, if approved. As our operations expand, we expect that we will need to manage additional relationships withvarious manufacturers and collaborative partners, suppliers and other organizations.Due to our limited financial resources and our limited experience in managing a company with such anticipated growth, we may not be able toeffectively manage the expansion of our operations or recruit and train additional qualified personnel. In addition, the physical expansion of our operationsmay lead to significant costs and may divert our management and resources. Any inability to manage growth could delay the execution of our developmentand strategic objectives, or disrupt our operations, which could materially impact our business, revenue and operating results.Coverage and reimbursement decisions by third-party payors may have an adverse effect on pricing and market acceptance. Recent legislative andregulatory activity may exert downward pressure on potential pricing and reimbursement for our products, if approved, that could materially affect theopportunity to commercialize.There is significant uncertainty related to the third-party coverage and reimbursement of newly approved drugs. Patients who are providedmedical treatment for their conditions generally rely on third-party payors to reimburse all or part of the costs associated with their treatment. Therefore,market acceptance and sales of our products, if approved, in both domestic and international markets will depend significantly on the availability ofadequate coverage and reimbursement from third-party or government payors for any of our products and may be affected by existing and future healthcarereform measures. Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which drugsthey will cover and establish payment levels. We cannot be certain that coverage and adequate reimbursement will be available for any of our products, ifapproved, or that such coverage and reimbursement will be authorized in a timely fashion. Also, we cannot be certain that reimbursement policies will notreduce the demand for, or the price paid for, any of our products, if approved. If reimbursement is not available or is available on a limited basis for any of ourproducts, if approved, we may not be able to successfully commercialize any such products. Reimbursement by a third-party or government payor maydepend upon a number of factors, including, without limitation, the third-party or government payor’s determination that use of a product is: • a covered benefit under its health plan; • safe, effective and medically necessary; • appropriate for the specific patient; • cost-effective; and • neither experimental nor investigational.Obtaining coverage and reimbursement approval for a product from a government or other third-party payor is a time consuming and costlyprocess that could require us to provide supporting scientific, clinical and cost-effectiveness data for the use of our products to the payor. We may not be ableto provide data sufficient to gain acceptance with respect to coverage and reimbursement or to have pricing set at a satisfactory level. If reimbursement of ourproducts, if any, is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels such as may result where alternative or generictreatments are available, we may be unable to achieve or sustain profitability. 55Table of ContentsAssuming we obtain coverage for a given product, the resulting reimbursement payment rates might not be adequate or may require co-paymentsthat patients find unacceptably high. Patients are unlikely to use our products unless coverage is provided and reimbursement is adequate to cover asignificant portion of the cost of our products.In the United States, no uniform policy of coverage and reimbursement for products exists among third-party payors. Therefore, coverage andreimbursement for products can differ significantly from payor to payor. As a result, the coverage determination process is often a time-consuming and costlyprocess that will require us to provide scientific and clinical support for the use of our products to each payor separately, with no assurance that coverage andadequate reimbursement will be obtained. In some foreign countries, particularly in Europe, the pricing of prescription pharmaceuticals is subject togovernmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketingapproval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct additional clinical trials that comparethe cost-effectiveness of our products to other available therapies. If reimbursement of any of our products, if approved, is unavailable or limited in scope oramount in a particular country, or if pricing is set at unsatisfactory levels, we may be unable to achieve or sustain profitability of our products in suchcountry.In the United States, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or MMA, changed the way Medicare coversand pays for pharmaceutical products. The legislation established Medicare Part D, which expanded Medicare coverage for outpatient prescription drugpurchases by the elderly but provided authority for limiting the number of drugs that will be covered in any therapeutic class. The MMA also introduced anew reimbursement methodology based on average sales prices for physician-administered drugs. Any negotiated prices for any of our products, if approved,covered by a Part D prescription drug plan will likely be lower than the prices we might otherwise obtain outside of the Medicare Part D prescription drugplan. Moreover, while Medicare Part D applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy andpayment limitations in setting their own payment rates. Any reduction in payment under Medicare Part D may result in a similar reduction in payments fromnon-governmental payors.The United States and several other jurisdictions are considering, or have already enacted, a number of legislative and regulatory proposals tochange the healthcare system in ways that could affect our ability to sell any of our products profitably, if approved. Among policy-makers and payors in theUnited States and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs,improving quality and/or expanding access to healthcare. In the United States, the pharmaceutical industry has been a particular focus of these efforts and hasbeen significantly affected by major legislative initiatives. There have been, and likely will continue to be, legislative and regulatory proposals at the federaland state levels directed at broadening the availability of healthcare and containing or lowering the cost of healthcare. We cannot predict the initiatives thatmay be adopted in the future. The continuing efforts of the government, insurance companies, managed care organizations and other payors of healthcareservices to contain or reduce costs of healthcare may adversely affect: • the demand for any of our products, if approved; • the ability to set a price that we believe is fair for any of our products, if approved; • our ability to generate revenues and achieve or maintain profitability; • the level of taxes that we are required to pay; and • the availability of capital.In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act(collectively, ACA), became law in the United States. The goal of 56Table of ContentsACA is to reduce the cost of healthcare and substantially change the way healthcare is financed by both governmental and private insurers. While we cannotpredict what impact on federal reimbursement policies this legislation will have in general or on our business specifically, the ACA may result in downwardpressure on pharmaceutical reimbursement, which could negatively affect market acceptance of any of our products, if they are approved. Provisions of ACArelevant to the pharmaceutical industry include the following: • an annual, nondeductible fee on any entity that manufactures or imports certain branded prescription drugs and biologic agents,apportioned among these entities according to their market share in certain government healthcare programs, not including orphan drugsales; • an increase in the rebates a manufacturer must pay under the Medicaid Drug Rebate Program to 23.1% and 13% of the averagemanufacturer price for most branded and generic drugs, respectively; • a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts onnegotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for themanufacturer’s outpatient drugs to be covered under Medicare Part D; • extension of manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managedcare organizations; • expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additionalindividuals and by adding new mandatory eligibility categories for certain individuals with income at or below 133% of the FederalPoverty Level beginning in 2014, thereby potentially increasing manufacturers’ Medicaid rebate liability; • expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program; • new requirements to report annually certain financial arrangements with physicians and teaching hospitals, as defined in ACA and itsimplementing regulations, including reporting any payment or “transfer of value” provided to physicians and teaching hospitals and anyownership and investment interests held by physicians and their immediate family members during the preceding calendar year; • expansion of healthcare fraud and abuse laws, including the federal False Claims Act and the federal Anti-Kickback Statute, newgovernment investigative powers and enhanced penalties for noncompliance; and • a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in and conduct comparative clinical effectivenessresearch, along with funding for such research.The ACA may change in the future.If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of our products.We face an inherent risk of product liability as a result of the clinical testing of our product candidates and will face an even greater risk if wecommercialize any products. For example, we may be sued if any product we develop allegedly causes or is perceived to cause injury or is found to beotherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects inmanufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability and a breach of warranties. Claims could alsobe asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantialliabilities or be required 57Table of Contentsto limit commercialization of our products. Even a successful defense would require significant financial and management resources. Regardless of the meritsor eventual outcome, liability claims may result in: • decreased demand for our products; • injury to our reputation and significant negative media attention; • withdrawal of clinical trial participants or cancellation of clinical trials; • costs to defend the related litigation; • a diversion of management’s time and our resources; • substantial monetary awards to trial participants or patients; • regulatory investigations, product recalls, withdrawals or labeling, marketing or promotional restrictions; • exhaustion of any available insurance and our capital resources; • loss of revenue; and • the inability to commercialize any products we develop.Our inability to obtain and maintain sufficient product liability insurance at an acceptable cost and scope of coverage to protect againstpotential product liability claims could prevent or inhibit the commercialization of our products. We currently carry product liability insurance covering ourclinical trials with policy limits that we believe are customary for similarly situated companies and adequate to provide us with coverage for foreseeable risks.Although we maintain such insurance, any claim that may be brought against us could result in a court judgment or settlement in an amount that is notcovered, in whole or in part, by our insurance or that is in excess of the limits of our insurance coverage. If we determine that it is prudent to increase ourproduct liability coverage due to the commercial launch of any approved product, we may be unable to obtain such increased coverage on acceptable terms,or at all. Our insurance policies also have various exclusions and deductibles, and we may be subject to a product liability claim for which we have nocoverage. We will have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered byour insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts. Moreover, in the future, we may not be able to maintaininsurance coverage at a reasonable cost or in sufficient amounts to protect us against losses. If and when we obtain approval for marketing our productcandidates, we intend to expand our insurance coverage to include the sale of the applicable products; however, we may be unable to obtain this liabilityinsurance on commercially reasonable terms.If we fail to attract and retain senior management and key scientific personnel, we may be unable to successfully develop and commercialize our productcandidates.Our success depends in part on our continued ability to attract, retain and motivate highly qualified management, clinical and scientificpersonnel. We believe that our future success is highly dependent upon the contributions of our senior management, particularly our President and ChiefExecutive Officer, as well as our senior scientists and other members of our senior management team. The loss of services of any of these individuals, who allhave at-will employment arrangements with us, could delay or prevent the successful development of our product pipeline, completion of our plannedclinical trials or the commercialization of our product candidates.Although we have not historically experienced unique difficulties attracting and retaining qualified employees, we could experience suchproblems in the future. For example, competition for qualified personnel in the biotechnology and pharmaceuticals field is intense due to the limited numberof individuals who possess the skills and experience required by our industry. We will need to hire additional personnel as we expand our clinicaldevelopment and commercial activities. We may not be able to attract and retain quality personnel on acceptable terms, or at all, which may cause ourbusiness and operating results to suffer. 58Table of ContentsIf we are not successful in discovering, developing, acquiring and commercializing additional product candidates, our ability to expand our business andachieve our strategic objectives would be impaired.Although a substantial amount of our efforts are focused on the development and regulatory approval of our three product candidates, a keyelement of our strategy is to identify, develop and commercialize additional product candidates for the treatment of inner and middle ear diseases anddisorders. We are seeking to do so through our internal research programs and may explore strategic collaborations with third parties for the development oracquisition of new product candidates or products. Research programs to identify new product candidates require substantial technical, financial and humanresources, whether or not any product candidates are ultimately identified or successfully developed.Our internal computer systems, or those of our CROs or other contractors or consultants, may fail or suffer security breaches, which could result in amaterial disruption of our drug development programs.Despite the implementation of security measures, our internal computer systems and those of our CROs and other contractors and consultants arevulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. While wehave not experienced a material system failure, accident or security breach to date, if such an event were to occur and cause interruptions in our operations, itcould result in a material disruption of our drug development programs.Our employees, independent contractors, clinical investigators, CROs, consultants and vendors may engage in misconduct or other improper activities,including noncompliance with regulatory standards and requirements and insider trading.We are exposed to the risk that our employees, independent contractors, clinical investigators, CROs, consultants and vendors may engage infraudulent conduct or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure ofunauthorized activities to us that violates: (i) FDA regulations, including those laws requiring the reporting of true, complete and accurate information to theFDA, (ii) manufacturing standards, (iii) federal, state and foreign healthcare fraud and abuse laws, or (iv) laws that require the reporting of financialinformation or data accurately. Specifically, research, sales, marketing, education and other business arrangements in the healthcare industry are subject toextensive laws intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws may restrict or prohibit a wide range ofpricing, discounting, education, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Activitiessubject to these laws also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions andserious harm to our reputation. We have adopted a code of business conduct and ethics, but it is not always possible to identify and deter misconduct byemployees and other third parties, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanagedrisks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws. Ifany such actions are instituted against us, even if we are successful in defending ourselves or asserting our rights, those actions could have a significantimpact on our business. Violations of such laws subject us to numerous penalties, including, but not limited to, the imposition of civil, criminal andadministrative penalties, damages, monetary fines, disgorgement, individual imprisonment, possible exclusion from participation in Medicare, Medicaid andother federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of our operations, any ofwhich could adversely affect our ability to operate our business and our results of operations.We or the third parties upon whom we depend may be adversely affected by earthquakes, wildfires or other natural disasters and our business continuityand disaster recovery plans may not adequately protect us from a serious disaster.Our corporate headquarters are located in the San Diego area and we have a small office space in Alamo, California, each of which in the past hasexperienced severe earthquakes. We do not carry earthquake 59Table of Contentsinsurance. The San Diego area has also recently experienced serious wildfires. If a natural disaster or other event occurred that prevented us from using all or asignificant portion of our headquarters, that damaged critical infrastructure, such as product development and research efforts for our current productcandidates and finance records, or that otherwise disrupted operations, it may be difficult or, in certain cases, impossible for us to continue our business for asubstantial period of time. The disaster recovery and business continuity plans we have in place currently are limited and may not be adequate in the event ofa serious disaster or similar event. We may incur substantial expenses as a result of the limited nature of our disaster recovery and business continuity plans,which, particularly when taken together with our lack of earthquake insurance, could have a material adverse effect on our business.Furthermore, integral parties in our supply chain are geographically concentrated and operating from single sites, increasing their vulnerabilityto natural disasters or other sudden, unforeseen and severe adverse events. If such an event were to affect our supply chain, it could have a material adverseeffect on our business.Unfavorable global economic conditions could adversely affect our business, financial condition or results of operations.Our results of operations could be adversely affected by general conditions in the global economy and in the global financial markets. A severeor prolonged economic downturn, such as the most recent global financial crisis which caused extreme volatility and disruptions in the capital and creditmarkets, could result in a variety of risks to our business and our ability to raise additional capital when needed on acceptable terms, if at all. A weak ordeclining economy could also strain our suppliers, possibly resulting in supply disruption, or cause our customers and third-party payors to delay makingpayments for our services. Any of the foregoing could harm our business and we cannot anticipate all of the ways in which the current economic climate andfinancial market conditions could adversely impact our business.Risks Related to Our Intellectual PropertyIf our efforts to protect the intellectual property related to our product candidates are not adequate, we may not be able to compete effectively in ourmarket.We rely upon a combination of patents, trade secret protection and confidentiality agreements to protect the intellectual property related to ourproduct candidates and technology. Any disclosure to or misappropriation by third parties of our confidential proprietary information could enablecompetitors to quickly duplicate or surpass our technological achievements, eroding our competitive position in the market.The patent application process, also known as patent prosecution, is expensive and time-consuming, and we and our current or future licensorsand licensees may not be able to prepare, file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is alsopossible that we or our current licensors, or any future licensors or licensees, will fail to identify patentable aspects of inventions made in the course ofdevelopment and commercialization activities before it is too late to obtain patent protection on them. Therefore, it is possible that certain patentable aspectsof our inventions may not be protected in a manner consistent with the best interests of our business. Defects of form in the preparation or filing of our patentsor patent applications may exist, or may arise in the future, for example with respect to proper priority claims, inventorship, etc., although we are unaware ofany such defects that we believe are of material import. If there are material defects in the form or preparation of our patents or patent applications, suchpatents or applications may be invalid and unenforceable. If we or our current licensors, or any future licensors or licensees, fail to file patent applications, or,maintain, enforce or protect our patents, such patent rights may be reduced or eliminated. If our current licensors, or any future licensors or licensees, are notfully cooperative or disagree with us as to the prosecution, maintenance or enforcement of any patent rights, such patent rights could be compromised. Any ofthese outcomes could impair our ability to prevent competition from third parties, which may have an adverse impact on our business. 60Table of ContentsThe strength of patents in the pharmaceutical field involves complex legal and scientific questions and can be uncertain. This uncertaintyincludes changes to the patent laws through either legislative action to change statutory patent law or court action that may reinterpret existing law or rulesin ways affecting the scope or validity of issued patents. The patent applications that we own or in-license may fail to result in issued patents in theUnited States or foreign countries with claims that cover our product candidates. Even if patents do successfully issue from the patent applications that weown or in-license, third parties may challenge the validity, enforceability or scope of such patents, which may result in such patents being narrowed,invalidated or held unenforceable. For example, patents granted by the European Patent Office may be challenged, also known as opposed, by any personwithin nine months from the publication of their grant. Any successful challenge to our patents could deprive us of exclusive rights necessary for thesuccessful commercialization of our product candidates. Furthermore, even if they are unchallenged, our patents may not adequately protect our productcandidates, provide exclusivity for our product candidates, or prevent others from designing around our patents. If the breadth or strength of protectionprovided by the patents we hold or pursue with respect to our product candidates is challenged, it could dissuade companies from collaborating with us todevelop, or threaten our ability to commercialize our product candidates.Patents have a limited lifespan. In the United States, the natural expiration of a patent is generally 20 years after its effective filing date. Variousextensions may be available; however the life of a patent, and the protection it affords, is limited. Without patent protection for our product candidates, wemay be open to competition from generic versions of our product candidates. Further, if we encounter delays in our development efforts, including ourclinical trials, the period of time during which we could market our product candidates under patent protection would be reduced.Almost all of our patents and patent applications are entitled to effective filing dates prior to March 16, 2013. For U.S. patent applications forwhich patent claims are entitled to a priority date before March 16, 2013, an interference proceeding can be provoked by a third party, for example acompetitor, or instituted by the U.S. Patent and Trademark Office, or the USPTO, to determine who was the first to invent any of the subject matter covered bythose patent claims. An unfavorable outcome could require us to cease using the related technology or to attempt to license rights from the prevailing party.Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms. Our participation in an interferenceproceeding may fail and, even if successful, may result in substantial costs and distract our management.In addition to the protection afforded by patents, we also rely on trade secret protection to protect proprietary know-how that may not bepatentable or that we elect not to patent, processes for which patents may be difficult to obtain or enforce, and any other elements of our product candidates,and our product development processes (such as manufacturing and formulation technologies) that involve proprietary know-how, information or technologythat is not covered by patents. However, trade secrets can be difficult to protect. If the steps taken to maintain our trade secrets are deemed inadequate, wemay have insufficient recourse against third parties for misappropriating any trade secrets. Misappropriation or unauthorized disclosure of our trade secretscould significantly affect our competitive position and may have a material adverse effect on our business. Furthermore, trade secret protection does notprevent competitors from independently developing substantially equivalent information and techniques and we cannot guarantee that our competitors willnot independently develop substantially equivalent information and techniques. The FDA, as part of its Transparency Initiative, is currently consideringwhether to make additional information publicly available on a routine basis, including information that we may consider to be trade secrets or otherproprietary information, and it is not clear at the present time how the FDA’s disclosure policies may change in the future, if at all.In an effort to protect our trade secrets and other confidential information, we require our employees, consultants, advisors, and any other thirdparties that have access to our proprietary know-how, information or technology, for example, third parties involved in the formulation and manufacture ofour product candidates, and third parties involved in our clinical trials, to execute confidentiality agreements upon the commencement of their relationshipswith us. These agreements require that all confidential information developed by such 61Table of Contentsemployees, consultants, advisors, etc., or made known to them by us during the course of our relationship with them be kept confidential and not disclosed tothird parties. However, we cannot be certain that our trade secrets and other confidential proprietary information will not be disclosed despite having suchconfidentiality agreements. Adequate remedies may not exist in the event of unauthorized use or disclosure of our trade secrets. In addition, in somesituations, these confidentiality agreements may conflict with, or be subject to, the rights of third parties with whom our employees, consultants, or advisorshave previous employment or consulting relationships. To the extent that our employees, consultants or advisors use any intellectual property owned bythird parties in their work for us, disputes may arise as to the rights in any related or resulting know-how and inventions. If we are unable to preventunauthorized material disclosure of our trade secrets to third parties, we may not be able to establish or maintain a competitive advantage in our market,which could materially adversely affect our business, operating results and financial condition.Changes in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to protect our products.As is the case with other pharmaceutical companies, our success is heavily dependent on intellectual property, particularly on obtaining andenforcing patents. Obtaining and enforcing patents in the pharmaceutical industry involves both technological and legal complexity, and therefore, is costly,time-consuming and inherently uncertain. In addition, the United States has recently enacted and is currently implementing wide-ranging patent reformlegislation. Further, recent U.S. Supreme Court rulings have either narrowed the scope of patent protection available in certain circumstances or weakened therights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination ofevents has created uncertainty with respect to the value of patents, once obtained.For our U.S. patent applications containing a claim not entitled to priority before March 16, 2013, there is a greater level of uncertainty in thepatent law. In September 2011, the Leahy-Smith America Invents Act, or the American Invents Act, or AIA, was signed into law. The AIA includes a numberof significant changes to U.S. patent law, including provisions that affect the way patent applications will be prosecuted and may also affect patent litigation.The USPTO is currently developing regulations and procedures to govern administration of the AIA, and many of the substantive changes to patent lawassociated with the AIA. It is not clear what other, if any, impact the AIA will have on the operation of our business. Moreover, the AIA and itsimplementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of ourissued patents, all of which could have a material adverse effect on our business and financial condition.An important change introduced by the AIA is that, as of March 16, 2013, the United States transitioned to a “first-to-file” system for decidingwhich party should be granted a patent when two or more patent applications are filed by different parties claiming the same invention. A third party that filesa patent application in the USPTO after March 16, 2013 but before us could therefore be awarded a patent covering an invention of ours even if we had madethe invention before it was made by the third party. This will require us to be cognizant going forward of the time from invention to filing of a patentapplication. Furthermore, our ability to obtain and maintain valid and enforceable patents depends on whether the differences between our technology andthe prior art allow our technology to be patentable over the prior art. Since patent applications in the United States and most other countries are confidentialfor a period of time after filing, we cannot be certain that we were the first to either (i) file any patent application related to our product candidates or(ii) invent any of the inventions claimed in our patents or patent applications.Among some of the other changes introduced by the AIA are changes that limit where a patentee may file a patent infringement suit andprovided opportunities for third parties to challenge any issued patent in the USPTO. This applies to all of our U.S. patents, even those issued beforeMarch 16, 2013. Because of a lower evidentiary standard in USPTO proceedings compared to the evidentiary standard in United States federal courtnecessary to invalidate a patent claim, a third party could potentially provide evidence in a USPTO proceeding 62Table of Contentssufficient for the USPTO to hold a claim invalid even though the same evidence would be insufficient to invalidate the claim if first presented in a districtcourt action. Accordingly, a third party may attempt to use the USPTO procedures to invalidate our patent claims that would not have been invalidated if firstchallenged by the third party in a district court action.Depending on decisions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change inunpredictable ways that would weaken our ability to obtain new patents or to enforce our existing patents and any patents that we might obtain in the future.Obtaining and maintaining our patent protection depends on compliance with various procedural, documentary, fee payment and other requirementsimposed by governmental patent agencies, and our patent protection could be reduced or eliminated for noncompliance with these requirements.The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment andother similar provisions during the patent prosecution process. Periodic maintenance fees and various other governmental fees on any issued patent and/orpending patent applications are due to be paid to the USPTO and foreign patent agencies in several stages over the lifetime of a patent or patent application.We have systems in place to remind us to pay these fees, and we employ an outside firm and rely on our outside counsel to pay these fees. While aninadvertent lapse may sometimes be cured by payment of a late fee or by other means in accordance with the applicable rules, there are many situations inwhich noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in therelevant jurisdiction. If we fail to maintain the patents and patent applications directed to our product candidates, our competitors might be able to enter themarket earlier than should otherwise have been the case, which would have a material adverse effect on our business.We may not be able to protect our intellectual property rights throughout the world.Filing and prosecuting patent applications, and defending patents on our product candidates in all countries throughout the world would beprohibitively expensive. The requirements for patentability may differ in certain countries, particularly developing countries. For example, China has aheightened requirement for patentability, and specifically requires a detailed description of medical uses of a claimed drug. In addition, the laws of someforeign countries do not protect intellectual property rights to the same extent as laws in the United States. Consequently, we may not be able to prevent thirdparties from practicing our inventions in all countries outside the United States. Competitors may use our technologies in jurisdictions where we have notobtained patent protection to develop their own products and further, may export otherwise infringing products to territories where we have patentprotection, but enforcement on infringing activities is inadequate. These products may compete with our products, and our patents or other intellectualproperty rights may not be effective or sufficient to prevent them from competing.Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. Thelegal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual propertyprotection, particularly those relating to pharmaceuticals, which could make it difficult for us to stop the infringement of our patents or marketing ofcompeting products in violation of our proprietary rights generally in those countries. Proceedings to enforce our patent rights in foreign jurisdictions couldresult in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated orinterpreted narrowly and our patent applications at risk of not issuing, and could provoke third parties to assert claims against us. We may not prevail in anylawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. In addition, certain countries in Europeand certain developing countries, including India and China, have compulsory licensing laws under which a patent owner may be compelled to grantlicenses to third parties. In those countries, we may have limited remedies if our patents are infringed or if we are compelled to grant a license to our patents toa third party, which could materially diminish 63Table of Contentsthe value of those patents. This could limit our potential revenue opportunities. Accordingly, our efforts to enforce our intellectual property rights around theworld may be inadequate to obtain a significant commercial advantage from the intellectual property that we own or license. Finally, our ability to protectand enforce our intellectual property rights may be adversely affected by unforeseen changes in foreign intellectual property laws.Third-party claims alleging intellectual property infringement may adversely affect our business.Our commercial success depends in part on our avoiding infringement of the patents and proprietary rights of third parties, for example, patentsand proprietary rights of competitors. Our research, development and commercialization activities may be subject to claims that we infringe or otherwiseviolate patents owned or controlled by third parties, including our competitors. There are also patent applications, owned by third parties includingcompetitors, that have been filed but not issued that, if issued as patents, may be asserted against us. Numerous U.S. and foreign issued patents and pendingpatent applications, exist in the otic fields in which we are developing our product candidates. As the biotechnology and pharmaceutical industries expandand more patents are issued, the risk increases that our activities related to our product candidates may give rise to claims of infringement of the patent rightsof third parties. We cannot assure you that our product candidates will not infringe existing or future patents owned by third parties. We may not be aware ofpatents that have already issued that a third party, for example a competitor in the otic market, might assert are infringed by our product candidates. It is alsopossible that patents owned by third parties of which we are aware, but which we do not believe are relevant to our product candidates, could be found to beinfringed by our product candidates.Third parties making claims against us for infringement or misappropriation of their intellectual property rights may seek and obtain injunctiveor other equitable relief, which could effectively block our ability to further develop and commercialize our product candidates. Further, if a patentinfringement suit were brought against us, we could be forced to stop or delay research, development, manufacturing or sales of the product or productcandidate that is the subject of the suit. Regardless of the merits of any third-party claims, our defense against such claims, or other related actions we maytake, could cause us to incur substantial expenses, and would be a substantial diversion of employee resources from our business. In the event of a successfulclaim of infringement against us by a third party, we may have to (i) pay substantial damages, including treble damages and attorneys’ fees if we are found tohave willfully infringed the third party’s patents; (ii) obtain one or more licenses from the third party; (iii) pay royalties to the third party; and/or (iv) redesignany infringing products. Redesigning any infringing products may be impossible or require substantial time and monetary expenditure. Further, we cannotpredict whether any required license would be available at all or whether it would be available on commercially reasonable terms. In the event that we couldnot obtain a license, we may be unable to further develop and commercialize our product candidates, which could harm our business significantly. Even if weare able to obtain a license, the license would likely obligate us to pay license fees or royalties or both, and the rights granted to us might be nonexclusive,which could result in our competitors gaining access to the same intellectual property. Ultimately, we could be prevented from commercializing a product, orbe forced to cease some aspect of our business operations, if, as a result of actual or threatened patent infringement claims, we are unable to enter into licenseson acceptable terms.Engaging in litigation is very expensive, particularly for a company of our size, and time-consuming. Some of our competitors may be able tosustain the costs of litigation or administrative proceedings more effectively than we can because of greater financial resources. Patent litigation and otherproceedings may also absorb significant management time. Uncertainties resulting from the initiation and continuation of patent litigation or otherproceedings could impair our ability to compete in the marketplace. The occurrence of any of the foregoing could have a material adverse effect on ourbusiness, financial condition or results of operations. 64Table of ContentsWe may become involved in lawsuits to protect or enforce our patents or other intellectual property or the patents of our licensors, which could beexpensive and time consuming.Third parties may infringe or misappropriate our intellectual property, including our existing patents, patents that may issue to us in the future,or the patents of our licensors to which we have a license. As a result, we may be required to file infringement claims to stop third-party infringement orunauthorized use. Further, we may not be able to prevent, alone or with our licensors, misappropriation of our intellectual property rights, particularly incountries where the laws may not protect those rights as fully as in the United States.Generic drug manufacturers may develop, seek approval for, and launch generic versions of our products. If we file an infringement actionagainst such a generic drug manufacturer, that company may challenge the scope, validity or enforceability of our or our licensors’ patents, requiring usand/or our licensors to engage in complex, lengthy and costly litigation or other proceedings. For example, if we or one of our licensors initiated legalproceedings against a third party to enforce a patent covering our product candidates, the defendant could counterclaim that the patent covering our productcandidates is invalid and/or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability arecommonplace, and there are numerous grounds upon which a third party can assert invalidity or unenforceability of a patent.In addition, within and outside of the United States, there has been a substantial amount of litigation and administrative proceedings, includinginterference and reexamination proceedings before the USPTO or oppositions and other comparable proceedings in various foreign jurisdictions, regardingpatent and other intellectual property rights in the pharmaceutical industry. Recently, the AIA introduced new procedures including inter partes review andpost grant review. The implementation of these procedures brings uncertainty to the possibility of challenges to our patents in the future, includingchallenges to those patents perceived by our competitors as blocking entry into the market for their products, and the outcome of such challenges.Such litigation and administrative proceedings could result in revocation of our patents or amendment of our patents such that they do not coverour product candidates. They may also put our pending patent applications at risk of not issuing, or issuing with limited and potentially inadequate scope tocover our product candidates. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validityquestion, for example, we cannot be certain that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution.Additionally, it is also possible that prior art of which we are aware, but which we do not believe affects the validity or enforceability of a claim, may,nonetheless, ultimately be found by a court of law or an administrative panel to affect the validity or enforceability of a claim, for example if a priority claimis found to be improper. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all,of the patent protection on our product candidates. Such a loss of patent protection could have a material adverse impact on our business.Enforcing our or our licensor’s intellectual property rights through litigation is very expensive, particularly for a company of our size, and time-consuming. Some of our competitors may be able to sustain the costs of litigation more effectively than we can because of greater financial resources. Patentlitigation and other proceedings may also absorb significant management time. Uncertainties resulting from the initiation and continuation of patentlitigation or other proceedings could impair our ability to compete in the marketplace. The occurrence of any of the foregoing could have a material adverseeffect on our business, financial condition or results of operations.Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation or administrativeproceedings, there is a risk that some of our confidential information could be compromised by disclosure. In addition, during the course of litigation oradministrative proceedings, there could be public announcements of the results of hearings, motions or other interim proceedings or developments or publicaccess to related documents. If investors perceive these results to be negative, the market price for our common stock could be significantly harmed. 65Table of ContentsIf we fail to comply with our obligation in any of the agreements under which we license intellectual property rights from third parties or otherwiseexperience disruptions to our business relationships with our licensors, we could lose license rights that are important to our business.We are a party to a number of license agreements under which we are granted intellectual property rights that are crucial to our business. Aportion of our patent portfolio for our product candidates is exclusively in-licensed from DURECT Corporation, or Durect, which license includes asublicense to patents jointly owned by Durect and the Institut National de la Sante et de la Recherche Medicale, or INSERM. Under our existing licenseagreement with Durect, we are subject to various obligations, including development and commercialization diligence obligations and pre-commerciallaunch progress reporting obligations, as well as financial obligations such as potential development milestone payments, sublicensing income payments,and royalty payments to both Durect and INSERM. If we fail to comply with the diligence obligations or otherwise materially breach our license agreement,and fail to remedy such failure or cure such breach, Durect may have the right to terminate the license or, in the instance of our failure to meet the diligenceobligations, Durect may instead elect to convert our exclusive license to a non-exclusive license. In particular, the loss of the license from Durect wouldaffect a portion of the patent portfolio for OTO-311, which would adversely affect our ability to proceed with any development or potentialcommercialization of OTO-311, and could subject us to claims of patent infringement by Durect if OTO-311 is covered by the licensed patents.In addition, a significant portion of our patent portfolio for our product candidates was co-developed and is co-owned with The Regents of theUniversity of California, or UC, which licensed its rights to us through an exclusive worldwide license agreement. Under our existing license agreement withUC, we are subject to various obligations, including development and commercialization diligence obligations, patent prosecution and maintenanceobligations, and pre-commercial launch progress reporting obligations, as well as financial obligations such as potential development milestone payments,sublicensing income payments, and royalty payments. If we fail to comply with any of these obligations or otherwise breach other terms of our licenseagreement, and fail to cure such breach, UC may have the right to terminate the license or, in the instance where we fail to meet our diligence obligations, UCmay instead elect to change our exclusive license to a non-exclusive license. The loss of the license from UC would affect a significant portion of the patentportfolio for AuriPro, OTO-104 and OTO-311. While we could still proceed with development and, if approved, commercialization of AuriPro, OTO-104 andOTO-311 as co-owner of the licensed patents, third parties, such as our competitors, could enter into the market by obtaining a license from UC under UC’srights to such patents.Licensing of intellectual property rights is of critical importance to our business and involves complex legal, business and scientific issues.Disputes may arise between us and our licensors regarding intellectual property rights subject to a license agreement, including: • the scope of rights granted under the license agreement and other interpretation-related issues; • our right to sublicense intellectual property rights to third parties under collaborative development relationships; and • our diligence obligations with respect to the use of the licensed technology in relation to our development and commercialization of ourproduct candidates, and what activities satisfy those diligence obligations.While we would expect to exercise all rights and remedies available to us, including seeking to cure any breach by us, and otherwise seek topreserve our rights under the patents licensed to us, we may not be able to do so in a timely manner, at an acceptable cost or at all. Generally, the loss of anyone of our current licenses, or any other license we may acquire in the future, could materially harm our business, prospects, financial condition and results ofoperations. 66Table of ContentsWe may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information ofthird parties.We have received confidential and proprietary information from third parties. In addition, we employ individuals, consultants and independentcontractors who were previously employed at other biotechnology or pharmaceutical companies. We may be subject to claims that we or our employees,consultants or independent contractors have inadvertently or otherwise improperly used or disclosed confidential information of these third parties or theirformer employers. Further, we may be subject to ownership disputes in the future arising, for example, from conflicting obligations of consultants,independent contractors or others who are involved in developing our product candidates. We may also be subject to claims that former employees,consultants, independent contractors, collaborators or other third parties have an ownership interest in our patents or other intellectual property. Litigationmay be necessary to defend against these and other claims challenging our right to and use of confidential and proprietary information. If we fail in defendingany such claims, in addition to paying monetary damages, we may lose our rights therein. Such an outcome could have a material adverse effect on ourbusiness. Even if we are successful in defending against these claims, litigation could result in substantial cost and be a distraction to our management andemployees.Risks Related to Government RegulationOur business and products are subject to extensive government regulation.We are subject to extensive, complex, costly and evolving regulation by federal and state governmental authorities in the United States,principally by the FDA, the U.S. Drug Enforcement Administration, or DEA, the Centers for Disease Control and Prevention, or CDC, the U.S. Department ofHealth and Human Services, and its various agencies, and also from foreign regulatory authorities. Failure to comply with all applicable regulatoryrequirements, including those promulgated under the Federal Food, Drug, and Cosmetic Act, or FFDCA, and, the Public Health Service Act, and theControlled Substances Act, among others, may subject us to operating restrictions and criminal prosecution, monetary penalties and other disciplinaryactions, including, sanctions, warning letters, product seizures, recalls, fines, injunctions, suspension, revocation of approvals, or exclusion from futureparticipation in the Medicare and Medicaid programs. After our products receive regulatory approval or clearance, we, and our direct and indirect suppliers,remain subject to the periodic inspection of our plants and facilities, review of production processes, and testing of our products to confirm that we are incompliance with all applicable regulations. Adverse findings during regulatory inspections may result in the implementation of Risk Evaluation andMitigation Strategies, or REMS, programs, completion of government mandated clinical trials, and government enforcement action relating to labeling,advertising, marketing and promotion, as well as regulations governing cGMPs.The regulatory approval process is highly uncertain and we may not obtain regulatory approval for the commercialization of AuriPro, OTO-104, OTO-311or any future product candidates.The research, testing, manufacturing, labeling, approval, selling, import, export, marketing and distribution of drug products are subject toextensive regulation by the FDA and other regulatory authorities in the United States and other countries, which regulations differ from country to country.We are not permitted to market our product candidates in the United States until we receive approval of an NDA from the FDA. We have not obtainedmarketing approval for our product candidates anywhere in the world. Obtaining regulatory approval of a product can be a lengthy, expensive and uncertainprocess. In addition, failure to comply with FDA and other applicable United States and foreign regulatory requirements may subject us to administrative orjudicially imposed sanctions or other actions, including: • warning letters; • civil and criminal penalties; • injunctions; • withdrawal of approved products; 67Table of Contents • product seizure or detention; • product recalls; • total or partial suspension of production; and • refusal to approve pending NDAs or supplements to approved NDAs.Prior to obtaining approval to commercialize a product candidate in the United States or abroad, we must demonstrate with substantial evidencefrom well-controlled preclinical studies and clinical trials, and to the satisfaction of the FDA or other foreign regulatory agencies, that such productcandidates are safe and effective for their intended uses. Results from preclinical studies and clinical trials can be interpreted in different ways, andinsufficient or adverse results from preclinical studies can affect the ability to conduct clinical trials. For example, following completion of a Phase 1bclinical trial, the OTO-104 program was put on Full Clinical Hold due to adverse findings in a preclinical study evaluating the safety of repeated doses ofOTO-104. OTO-104 was subsequently removed from Full Clinical Hold in July 2013, allowing for initiation of the current Phase 2b single-dose clinical trial,and placed on Partial Clinical Hold prohibiting the initiation of multiple-dose clinical trials in the United States pending the submission and review ofadditional preclinical data. We submitted additional preclinical data to the FDA and OTO-104 was removed from Partial Clinical Hold in June 2014. As aresult of OTO-104 being placed on Full Clinical Hold, AuriPro was also placed on Full Clinical Hold. The AuriPro Full Clinical Hold was removed inNovember 2012. We cannot assure you that our product candidates will not be subject to new clinical holds in the future.Even if we believe the preclinical or clinical data for our product candidates are promising, such data may not be sufficient to support approvalby the FDA and other regulatory authorities. Administering product candidates to humans may produce undesirable side effects, which could interrupt, delayor halt clinical trials and result in the FDA or other regulatory authorities denying approval of a product candidate for any or all targeted indications.Regulatory approval is not guaranteed, and the approval process is expensive and may take several years. The FDA also has substantialdiscretion in the approval process. Despite the time and expense expended, failure can occur at any stage, and we could encounter problems that cause us toabandon or repeat clinical trials, or perform additional preclinical studies and clinical trials. The number of preclinical studies and clinical trials that will berequired for FDA approval varies depending on the product candidate, the disease or condition that the product candidate is designed to address and theregulations applicable to any particular product candidate. The FDA can delay, limit or deny approval of a product candidate for many reasons, including thefollowing: • a product candidate may not be deemed safe, effective, pure or potent; • FDA officials may not find the data from preclinical studies and clinical trials sufficient; • the FDA might not accept our third-party manufacturers’ processes or facilities; or • the FDA may change its approval policies or adopt new regulations.If AuriPro does not gain regulatory approval or OTO-104, OTO-311 or any future product candidates fail to demonstrate safety and efficacy inclinical trials or do not gain approval, our business and results of operations will be materially and adversely harmed.If the FDA does not conclude that AuriPro satisfies the requirements for the Section 505(b)(2) regulatory approval pathway, or if the requirements forapproval of AuriPro under Section 505(b)(2) are not as we expect, the development and approval of AuriPro will likely take significantly longer, costsignificantly more and entail significantly greater complexity and risks than anticipated, and in any case may not be successful.We are seeking FDA approval through the Section 505(b)(2) regulatory pathway for AuriPro. Section 505(b)(2) of the FFDCA permits thesubmission of an NDA where some or all of the data required for 68Table of Contentsapproval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference. Our ability to rely oncertain of the FDA’s findings of safety and effectiveness in approval of another NDA or on studies published in the scientific literature will depend on ourability to demonstrate the relevance to AuriPro. We may be required to conduct additional studies or provide additional information to fully demonstrate thesafety and effectiveness of our modifications to the approved product.By pursuing the Section 505(b)(2) regulatory pathway for AuriPro, our reliance on the prior FDA findings of safety and effectiveness of thereference product may require any approved labeling for AuriPro to include certain information that is included in the labeling of the reference product.If the FDA disagrees with our position that reliance on data for the reference product is appropriate, or if the data required for approval of ourSection 505(b)(2) NDA are different than anticipated, we may need to conduct additional development activities, provide additional data and information,and meet additional standards for regulatory approval. If this were to occur, the time and financial resources required to obtain FDA approval for AuriProwould likely substantially increase. Moreover, the inability to pursue the Section 505(b)(2) regulatory pathway could result in new competitive productsreaching the market faster than AuriPro, which could materially adversely impact our competitive position and prospects.In addition, our competitors may file citizens’ petitions with the FDA in an attempt to persuade the FDA that our product candidates, or theclinical trials that support their approval, contain deficiencies. Such actions by our competitors could delay or even prevent the FDA from approving anyNDA that we submit under Section 505(b)(2).Even if we receive regulatory approval for our product candidates, we will be subject to ongoing regulatory obligations and continued regulatory review,which may result in significant additional expense, or the limiting or withdrawal of regulatory approval and subject us to penalties if we fail to complywith applicable regulatory requirements.If and when regulatory approval has been granted, our product candidates or any approved product will be subject to continual regulatory reviewby the FDA and/or non-U.S. regulatory authorities. Additionally, any product candidates, if approved, will be subject to extensive and ongoing regulatoryrequirements, including labeling and other restrictions and market withdrawal and we may be subject to penalties if we fail to comply with regulatoryrequirements or experience unanticipated problems with our products. Any regulatory approvals that we receive for our product candidates may also besubject to limitations on the approved indications for which the product may be marketed or to the conditions of approval, or contain requirements forpotentially costly post-marketing testing, including Phase 4 clinical trials, and surveillance to monitor the safety and efficacy of the product. In addition, ifthe applicable regulatory agency approves our product candidates, the manufacturing processes, labeling, packaging, distribution, adverse event reporting,storage, advertising, promotion and recordkeeping for the product will be subject to extensive and ongoing regulatory requirements. These requirementsinclude submissions of safety and other post-marketing information and reports, registration, as well as continued compliance with cGMP and GCP for anyclinical trials that we conduct post-approval. Later discovery of previously unknown problems with our product candidates, including adverse events ofunanticipated severity or frequency, or problems with our third-party manufacturers’ processes, or failure to comply with regulatory requirements, may resultin, among other things: • restrictions on the marketing or manufacturing of the product, withdrawal of the product from the market, or voluntary or mandatoryproduct recalls; • fines, warning letters or holds on clinical trials; • refusal by the FDA to approve pending applications or supplements to approved applications filed by us, or suspension or revocation ofproduct approvals; 69Table of Contents • product seizure or detention, or refusal to permit the import or export of products; and • injunctions or the imposition of civil or criminal penalties.Our ongoing regulatory requirements may also change from time to time, potentially harming or making costlier our commercialization efforts.We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in theUnited States or other countries. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if weare not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained and we may not achieve or sustainprofitability, which would adversely affect our business.Our relationships with healthcare professionals, independent contractors, clinical investigators, CROs, consultants and vendors in connection with ourcurrent and future business activities are subject to federal and state healthcare fraud and abuse laws, false claims laws, transparency laws, governmentprice reporting, and health information privacy and security laws. If we are unable to comply, or have not fully complied, with such laws, we could facepenalties.We are subject to the various U.S. federal and state health care laws, including those intended to prevent healthcare fraud and abuse.The federal anti-kickback statute prohibits, among other things, persons or entities from knowingly and willfully soliciting, offering, receivingor paying any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward eitherthe referral of an individual for, or the purchase, lease, order or recommendation of, any good, facility, item or service, for which payment may be made, inwhole or in part, under a federal healthcare program such as Medicare and Medicaid Remuneration has been broadly defined to include anything of value,including, but not limited to, cash, improper discounts, and free or reduced price items and services. Many states have similar laws that apply to their statehealth care programs as well as private payors.The federal False Claims Act, or FCA, and civil monetary penalties law impose penalties against individuals or entities for, among other things,knowingly presenting, or causing to be presented, to the federal government, claims for payment or approval that are false or fraudulent or making a falserecord or statement to avoid, decrease or conceal an obligation to pay money to the federal government. The FCA has been used to, among other things,prosecute persons and entities submitting claims for payment that are inaccurate or fraudulent, that are for services not provided as claimed, or for servicesthat are not medically necessary. The FCA includes a whistleblower provision that allows individuals to bring actions on behalf of the federal governmentand share a portion of the recovery of successful claims.Additionally, state and federal authorities have aggressively targeted medical technology companies for, among other things, alleged violationsof these anti-fraud statutes, based on improper research or consulting contracts with doctors, certain marketing arrangements that rely on volume-basedpricing, off-label marketing schemes, and other improper promotional practices.The federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, among other things, imposes criminal liability forknowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or knowingly and willfully falsifying,concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits,items or services.Additionally, HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act and its implementingregulations, also imposes certain obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission ofindividually identifiable health information without proper written authorization. 70Table of ContentsOur operations will also be subject to the federal transparency requirements under the Affordable Care Act, which requires manufacturers ofdrugs, devices, biologicals and medical supplies to annually report to the Centers for Medicare & Medicaid Services, or CMS, an agency within the U.S.Department of Health and Human Services, or HHS, information related to payments and other transfers of value provided to physicians and teachinghospitals and certain ownership and investment interests held by physicians and their immediate family members.If any of our business activities, including but not limited to our relationships with healthcare providers, violate any of the aforementioned laws,we may be subject to administrative, civil and/or criminal penalties, damages, monetary fines, disgorgement, individual imprisonment, possible exclusionfrom participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and futureearnings and curtailment or restructuring of our operations. Also, the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws generallyprohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. Wecannot assure you that our internal control policies and procedures will protect us from reckless or negligent acts committed by our employees, futuredistributors, partners, collaborators or agents. Violations of these laws, or allegations of such violations, could result in fines, penalties or prosecution andhave a negative impact on our business, results of operations and reputation.Legislative or regulatory healthcare reforms in the United States or abroad may make it more difficult and costly for us to obtain regulatory clearance orapproval of our product candidates or any future product candidates and to produce, market, and distribute our products after clearance or approval isobtained.From time to time, legislation is drafted and introduced in Congress in the United States or by governments in foreign jurisdictions that couldsignificantly change the statutory provisions governing the regulatory clearance or approval, manufacture, and marketing of regulated products or thereimbursement thereof. In addition, FDA or foreign regulatory agency regulations and guidance are often revised or reinterpreted by the FDA or theapplicable foreign regulatory agency in ways that may significantly affect our business and our products. Any new regulations or revisions orreinterpretations of existing regulations may impose additional costs or lengthen review times of our product candidates or any future product candidates. Wecannot determine what effect changes in regulations, statutes, legal interpretation or policies, when and if promulgated, enacted or adopted may have on ourbusiness in the future. Such changes could, among other things, require: • changes to manufacturing methods; • recall, replacement, or discontinuance of one or more of our products; and • additional recordkeeping.Each of these would likely entail substantial time and cost and could materially harm our business and our financial results. In addition, delaysin receipt of or failure to receive regulatory clearances or approvals for any future products would harm our business, financial condition, and results ofoperations.If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that couldhave a material adverse effect on the success of our business.We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and thehandling, use, storage, treatment and disposal of hazardous materials and wastes. Our operations involve the use of hazardous and flammable materials,including chemicals and biological materials. Our operations also produce hazardous waste products. We generally contract with third parties for the disposalof these materials and wastes. We cannot eliminate the risk of contamination or injury from these materials. In the event of contamination or injury resultingfrom our use of hazardous materials, we could be held liable for any resulting damages, and any liability could exceed our resources. We also could incursignificant costs associated with civil or criminal fines and penalties. 71Table of ContentsWe maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting fromthe use of hazardous materials or other work-related injuries with policy limits that we believe are customary for similarly situated companies and adequate toprovide us with coverage for foreseeable risks. Although we maintain such insurance, this insurance may not provide adequate coverage against potentialliabilities. In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. Thesecurrent or future laws and regulations may impair our research, development or production efforts. Failure to comply with these laws and regulations also mayresult in substantial fines, penalties or other sanctions.Risks Related to Ownership of Our Common StockThe market price of our common stock has been and may continue to be volatile, and you could lose all or part of your investment.Prior to our initial public offering, there was no public market for our common stock. An active trading market for our shares may never developor, if developed, may not be sustained. Moreover, the trading price of our common stock may fluctuate substantially. The stock market in general and themarket for pharmaceutical companies in particular have experienced extreme volatility that has often been unrelated to the operating performance ofparticular companies. The market price of our common stock may be highly volatile and could be subject to wide fluctuations in response to various factors,some of which are beyond our control, including: • regulatory or legal developments; • results from or delays in clinical trials of our product candidates; • announcements of regulatory approval or disapproval of our product candidates; • commercialization of our products; • FDA or other regulatory actions affecting us or our industry; • introductions and announcements of new products by us, any commercialization partners or our competitors, and the timing of theseintroductions and announcements; • variations in our financial results or those of companies that are perceived to be similar to us; • changes in the structure of healthcare payment systems; • announcements by us or our competitors of significant acquisitions, licenses, strategic partnerships, joint ventures or capitalcommitments; • market conditions in the pharmaceutical and biopharmaceutical sectors and issuance of securities analysts’ reports or recommendations; • actual or anticipated quarterly variations in our results of operations or those of our future competitors; • changes in financial estimates or guidance, including our ability to meet our future revenue and operating profit or loss estimates orguidance; • sales of substantial amounts of our stock by insiders and large stockholders, or the expectation that such sales might occur; • general economic, industry and market conditions; • additions or departures of key personnel; • intellectual property, product liability or other litigation against us; • expiration or termination of our potential relationships with strategic partners; 72Table of Contents • limited trading volume of our common stock; and • the other factors described in this “Risk Factors” section.If securities or industry analysts do not continue to publish research or publish unfavorable research about our business, our stock price and tradingvolume could decline.The trading market for our common stock will be influenced in part on the research and reports that equity research analysts publish about us andour business. Although certain equity research analysts currently cover us, we do not have any control of the analysts or the content and opinions included intheir reports or whether any such analysts will continue to, or whether new analysts will, cover us for any given period of time. The price of our common stockcould decline if one or more equity research analysts downgrade our stock or issue other unfavorable commentary or research. If one or more equity researchanalysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which in turn could cause our stockprice or trading volume to decline.Sales of substantial amounts of our common stock in the public markets, or the perception that such sales might occur, could cause the market price of ourcommon stock to drop significantly, even if our business is doing well.Sales of a substantial number of shares of our common stock in the public market could occur at any time. If our stockholders sell, or the marketperceives that our stockholders intend to sell, substantial amounts of our common stock in the public market, the market price of our common stock coulddecline significantly.As of December 31, 2014, we had 21,173,270 shares of common stock outstanding, approximately 11,536,595 of which are subject to 90-daylock-up agreements entered into in connection with our follow-on public offering that expire on April 22, 2015. Following the expiration of the lock-ups (orearlier if permitted by the managing underwriters), all shares of our common stock, will be eligible for sale in the public market, subject in some cases to thevolume and other restrictions of Rule 144 under the Securities Act of 1933, as amended, or the Securities Act, as well as our insider trading policy. Inaddition, shares issued or issuable upon exercise of options and warrants vested as of the expiration of the lock-up period may be eligible for sale at that time.Sales of our common stock by current stockholders may make it more difficult for us to sell equity or equity-related securities in the future at a time and pricethat we deem reasonable or appropriate, and make it more difficult for you to sell shares of our common stock.In addition, on August 13, 2014, we filed a registration statement on Form S-8 registering 2,093,580 shares of common stock reserved forissuance pursuant to awards outstanding under our Amended and Restated 2010 Equity Incentive Plan, 2,606,875 shares of common stock reserved forissuance pursuant to future awards under our 2014 Plan, and 380,000 shares reserved for issuance pursuant to future awards under our ESPP. Shares registeredunder this registration statement on Form S-8 will be available for sale in the public market subject to vesting arrangements and the exercise of such options,the lock-up arrangements described above and, in the case of our affiliates, the restrictions of Rule 144. As of December 31, 2014, options to purchase959,232 shares of our common stock were exercisable.Certain holders of approximately 13,415,846 shares of our common stock, including shares issuable upon the exercise of outstanding optionsand warrants, are entitled to certain rights with respect to the registration of their shares under the Securities Act, subject to the 90-day lock-up arrangementdescribed above. Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under theSecurities Act, except for shares held by our affiliates as defined in Rule 144 under the Securities Act. Any sales of securities by these stockholders couldhave a material adverse effect on the market price of our common stock. 73Table of ContentsClaims for indemnification by our directors and officers may reduce our available funds to satisfy successful third-party claims against us and may reducethe amount of money available to us.Our amended and restated certificate of incorporation and amended and restated bylaws provide that we will indemnify our directors and officers,in each case to the fullest extent permitted by Delaware law.In addition, as permitted by Section 145 of the Delaware General Corporation Law, our amended and restated bylaws and our indemnificationagreements that we have entered into with our directors and officers provide that: • We will indemnify our directors and officers for serving us in those capacities, or for serving other business enterprises at our request, tothe fullest extent permitted by Delaware law. Delaware law provides that a corporation may indemnify such person if such person actedin good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the registrant and, withrespect to any criminal proceeding, had no reasonable cause to believe such person’s conduct was unlawful. • We may, in our discretion, indemnify employees and agents in those circumstances where indemnification is permitted by applicablelaw. • We are required to advance expenses, as incurred, to our directors and officers in connection with defending a proceeding, except thatsuch directors or officers shall undertake to repay such advances if it is ultimately determined that such person is not entitled toindemnification. • We are not obligated pursuant to our amended and restated bylaws to indemnify a person with respect to proceedings initiated by thatperson against us or our other indemnitees, except with respect to proceedings authorized by our board of directors or brought to enforcea right to indemnification. • The rights conferred in our amended and restated bylaws are not exclusive, and we are authorized to enter into indemnificationagreements with our directors, officers, employees and agents and to obtain insurance to indemnify such persons. • We may not retroactively amend our amended and restated bylaw provisions to reduce our indemnification obligations to directors,officers, employees and agents.To the extent that a claim for indemnification is brought by any of our directors or officers, it would reduce the amount of funds available for usein our business.If we sell shares of our common stock in future financings, stockholders may experience immediate dilution and, as a result, the market price of ourcommon stock may decline.We may from time to time issue additional shares of common stock at a discount from the current trading price of our common stock. As a result,our stockholders would experience immediate dilution upon the purchase of any shares of our common stock sold at such discount. In addition, asopportunities present themselves, we may enter into financing or similar arrangements in the future, including the issuance of debt securities, preferred stockor common stock. If we issue common stock or securities convertible into common stock, our common stockholders would experience additional dilutionand, as a result, the market price of our common stock may decline.Concentration of ownership of our common stock among our existing principal stockholders may effectively limit the voting power of other stockholders.As of January 31, 2015, our executive officers, directors and current beneficial owners of 5% or more of our common stock, in aggregate,beneficially owned approximately 56.9% of our outstanding common stock. 74Table of ContentsAccordingly, these stockholders, acting together, may significantly influence all matters requiring stockholder approval, including the election and removalof directors and any merger or other significant corporate transactions. These stockholders may therefore delay or prevent a change of control, even if such achange of control would benefit our other stockholders. The significant concentration of stock ownership may adversely affect the market price of ourcommon stock due to investors’ perception that conflicts of interest may exist or arise.Anti-takeover provisions in our corporate charter documents and under Delaware law could make an acquisition of us more difficult, which coulddiscourage takeover attempts and lead to management entrenchment, and the market price of our common stock may be lower as a result.Certain provisions in our certificate of incorporation and bylaws may make it difficult for a third party to acquire, or attempt to acquire, controlof our company, even if a change in control was considered favorable by you and other stockholders. For example, our board of directors has the authority toissue up to 10,000,000 shares of preferred stock. Our board of directors can fix the price, rights, preferences, privileges, and restrictions of the preferred stockwithout any further vote or action by our stockholders. The issuance of shares of preferred stock may delay or prevent a change in control transaction. As aresult, the market price of our common stock and the voting and other rights of our stockholders may be adversely affected. An issuance of shares of preferredstock may result in the loss of voting control to other stockholders.Our charter documents contain other provisions that could have an anti-takeover effect, including provisions that: • establish that our board of directors is divided into three classes, Class I, Class II and Class III, with each class serving staggered threeyear terms; • provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than aquorum; • provide that our directors may only be removed for cause; • eliminate cumulative voting in the election of directors; • authorize our board of directors to issues shares of preferred stock and determine the price and other terms of those shares, includingpreferences and voting rights, without stockholder approval; • provide our board of directors with the exclusive right to elect a director to fill a vacancy or newly created directorship; • permit stockholders to only take actions at a duly called annual or special meeting and not by written consent; • prohibit stockholders from calling a special meeting of stockholders; • require that stockholders give advance notice to nominate directors or submit proposals for consideration at stockholder meetings; • authorize our board of directors, by a majority vote, to amend the bylaws; and • require the affirmative vote of at least 66 2/3% or more of the outstanding shares of common stock to amend many of the provisionsdescribed above.In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which limits the ability ofstockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us. Finally, our amended and restated certificate ofincorporation provides that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and ourstockholders. These provisions could discourage potential acquisition proposals and could delay or prevent a change in control transaction. They could alsohave the effect of discouraging others from making 75Table of Contentstender offers for our common stock, including transactions that may be in your best interests. These provisions may also prevent changes in our managementor limit the price that certain investors are willing to pay for our stock.We may be subject to securities litigation, which is expensive and could divert management attention.The market price of our common stock has been and will likely to continue to be volatile, and in the past companies that have experiencedvolatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future.Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriouslyharm our business.Because we do not anticipate paying any cash dividends on our common stock in the foreseeable future, capital appreciation, if any, will be your solesource of gains.We have not declared or paid cash dividends on our common stock to date. We currently intend to retain our future earnings, if any, to fund thedevelopment and growth of our business. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeablefuture.Our ability to use our net operating loss carryforwards and certain other tax attributes to offset future taxable income may be subject to certainlimitations.As of December 31, 2014 we had U.S. federal and California net operating loss carryforwards, or NOLs, of approximately $60.5 million and $59.4million, respectively, which expire in various years beginning in 2030, if not utilized. As of December 31, 2014, we had federal and California research anddevelopment tax credit carryforwards of approximately $2.8 million and $1.6 million, respectively. The federal research and development tax creditcarryforwards expire in various years beginning in 2030, if not utilized. The California research and development credit will carry forward indefinitely. UnderSections 382 and 383 of Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an “ownership change,” the corporation’sability to use its pre-change NOLs and other pre-change tax attributes, such as research tax credits, to offset its future post-change income and taxes may belimited. In general, an “ownership change” occurs if there is a cumulative change in our ownership by “5% shareholders” that exceeds 50 percentage pointsover a rolling three-year period. Similar rules may apply under state tax laws. We believe we have experienced certain ownership changes in the past andhave reduced our deferred tax assets related to NOLs and research and development tax credit carryforwards accordingly. In the event that it is determinedthat we have in the past experienced additional ownership changes, or if we experience one or more ownership changes as a result of future transactions in ourstock, then we may be further limited in our ability to use our NOLs and other tax assets to reduce taxes owed on the net taxable income that we earn in theevent that we attain profitability. Any such limitations on the ability to use our NOLs and other tax assets could adversely impact our business, financialcondition and operating results in the event that we attain profitability.We have incurred and will continue to incur costs as a result of operating as a public company and our management has been and will continue to berequired to devote substantial time to new compliance initiatives and corporate governance practices, including maintaining an effective system ofinternal control over financial reporting.As a public company listed in the United States, and increasingly after we are no longer an “emerging growth company,” we have incurred andwill continue to incur significant additional legal, accounting and other expenses that we did not incur as a private company. In addition, changing laws,regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act and regulations implemented by the SECand The NASDAQ Stock Market, or NASDAQ, may increase legal and financial compliance costs and make some activities more time consuming. These laws,regulations and standards are 76Table of Contentssubject to varying interpretations and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory andgoverning bodies. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased generaland administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. Ifnotwithstanding our efforts to comply with new laws, regulations and standards, we fail to comply, regulatory authorities may initiate legal proceedingsagainst us and our business may be harmed.As a public company in the United States, we are required, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, to furnisha report by management on, among other things, the effectiveness of our internal control over financial reporting. We need to disclose any materialweaknesses identified by our management in our internal control over financial reporting, and, when we are no longer an “emerging growth company,” wewill need to provide a statement that our independent registered public accounting firm has issued an opinion on our internal control over financialreporting. We expect that our first report on compliance with Section 404 will be furnished in connection with our financial statements for the year endingDecember 31, 2015. The controls and other procedures are designed to ensure that information required to be disclosed by us in the reports that we file withthe SEC, is disclosed accurately and is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. We are in theearly stages of conforming our internal control procedures to the requirements of Section 404 and we may not be able to complete our evaluation, testing andany required remediation needed to comply with Section 404 in a timely fashion. Our independent registered public accounting firm was not engaged toperform an audit of our internal control over financial reporting for the year ended December 31, 2014 or for any other period. Accordingly, no such opinionwas expressed.Even after we develop these new procedures, these new controls may become inadequate because of changes in conditions or the degree ofcompliance with these policies or procedures may deteriorate and material weaknesses in our internal control over financial reporting may be discovered. Wemay err in the design or operation of our controls, and all internal control systems, no matter how well designed and operated, can provide only reasonableassurance that the objectives of the control system are met. Because there are inherent limitations in all control systems, there can be no absolute assurancethat all control issues have been or will be detected. If we are unable, or are perceived as unable, to produce reliable financial reports due to internal controldeficiencies, investors could lose confidence in our reported financial information and operating results, which could result in a negative market reaction.To fully comply with Section 404, we will need to retain additional employees to supplement our current finance staff, and we may not be ableto do so in a timely manner, or at all. In addition, in the process of evaluating our internal control over financial reporting, we expect that certain of ourinternal control practices will need to be updated to comply with the requirements of Section 404 and the regulations promulgated thereunder, and we maynot be able to do so on a timely basis, or at all. In the event that we are not able to demonstrate compliance with Section 404 in a timely manner, or are unableto produce timely or accurate financial statements, we may be subject to sanctions or investigations by regulatory authorities, such as the SEC or NASDAQ,and investors may lose confidence in our operating results and the price of our common stock could decline. Furthermore, if we are unable to certify that ourinternal control over financial reporting is effective and in compliance with Section 404, we may be subject to sanctions or investigations by regulatoryauthorities, such as the SEC or stock exchanges, and we could lose investor confidence in the accuracy and completeness of our financial reports, whichcould hurt our business, the price of our common stock and our ability to access the capital markets.We also expect that being a public company will make it more expensive for us to obtain director and officer liability insurance, and we may berequired to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract andretain qualified persons to serve on our board of directors, on committees of our board of directors or as members of senior management. 77Table of ContentsWe are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth companies could make our commonstock less attractive to investors.We are an “emerging growth company,” as defined in the JOBS Act enacted in April 2012, and may remain an “emerging growth company” forup to five years following the completion of our initial public offering, or December 31, 2019, although, if we have more than $1.0 billion in annual revenue,the market value of our common stock that is held by non-affiliates exceeds $700 million as of June 30 of any year, or we issue more than $1.0 billion of non-convertible debt over a three-year period before the end of that five-year period, we would cease to be an “emerging growth company” as of the followingDecember 31. For as long as we remain an “emerging growth company,” we are permitted and intend to continue to rely on exemptions from certaindisclosure requirements that are applicable to other public companies that are not “emerging growth companies.” These exemptions include: • being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financialstatements, with correspondingly reduced “Management’s discussion and analysis of financial condition and results of operations”disclosure; • not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting; • not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regardingmandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financialstatements; • reduced disclosure obligations regarding executive compensation; and • exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of anygolden parachute payments not previously approved.In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying withnew or revised accounting standards, delaying the adoption of these accounting standards until they would apply to private companies. We have irrevocablyelected not to avail ourselves of this exemption and, as a result, we have and will continue to adopt new or revised accounting standards on the relevant dateson which adoption of such standards is required for other public companies. We cannot predict whether investors will find our common stock less attractiveas a result of our reliance on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market forour common stock and the market price of our common stock may be reduced or more volatile.Item 1B. UNRESOLVED STAFF COMMENTSNone.Item 2. PROPERTIESOur corporate headquarters is located in San Diego, California, where we occupy an approximately 14,500 square foot facility. The current termof our lease on this facility expires in February 2017. We have an option to extend this lease by an additional five years, which would extend our leasethrough February 2022. We expect that we will expand our facilities in order to accommodate our anticipated growth in connection with ourcommercialization efforts and that additional space will be available on commercially reasonable terms. 78Table of ContentsItem 3. LEGAL PROCEEDINGSFrom time to time, we may be involved in various claims and legal proceedings relating to claims arising out of our operations. We are notcurrently a party to any legal proceedings that, in the opinion of our management, are likely to have a material adverse effect on our business. Regardless ofoutcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.Item 4. MINE SAFETY DISCLOSURENot applicable. 79Table of ContentsPART IIItem 5. MARKET FOR REGISTRANT’S COMMON EQUITY RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIESMarket Information for Common StockOur common stock began trading on The NASDAQ Global Select Market under the symbol “OTIC” on August 13, 2014. Prior to that date, therewas no public trading market for our common stock. The following table sets forth for the periods indicated the high and low sales price per share of ourcommon stock, as reported on The NASDAQ Global Select Market: Quarter High Low Third quarter ended September 30, 2014 (beginning August 13, 2014) $28.20 $15.19 Fourth quarter ended December 31, 2014 $40.45 $19.86 Holders of RecordOn March 9, 2015, the closing sale price of our common stock on The NASDAQ Global Select Market was $36.77. As of March 9, 2015, therewere approximately 59 stockholders of record of our common stock. The actual number of stockholders is greater than this number of record holders andincludes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees. This number of holders of recordalso does not include stockholders whose shares may be held in trust or by other entities.Dividend PolicyWe have never declared or paid cash dividends on our common stock. We currently intend to retain all available funds and any future earningsfor use in the operation of our business and do not anticipate paying any dividends on our common stock in the foreseeable future. Any future determinationto declare dividends will be made at the discretion of our board of directors and will depend on, among other factors, our financial condition, operatingresults, capital requirements, general business conditions and other factors that our board of directors may deem relevant.Information About Our Equity Compensation PlansInformation regarding our equity compensation plans is incorporated by reference to Item 12, “Security Ownership of Certain Beneficial Ownersand Management and Related Stockholder Matters” of Part III of this Annual Report on Form 10-K.Recent Sale of Unregistered SecuritiesIn 2014, we sold unregistered securities as described below. Share amounts have been retroactively adjusted for the 35.16-for-1 reverse stocksplit effected on July 31, 2014.On April 23, 2014, we sold an aggregate of 4,126,080 shares of series D convertible preferred stock at a per share purchase price of $11.96pursuant to a series D preferred stock purchase agreement for aggregate cash proceeds to the Company of approximately $49.3 million.In August 2014, we issued an aggregate of 228,902 shares of common stock that were not registered under the Securities Act to investorspursuant to the cash and net exercise of warrants at an exercise price of $8.79 per share, for aggregate cash proceeds to the Company of approximately $1.2million. 80Table of ContentsFrom January 1, 2014 through August 13, 2014 (the date of the filing of our registration statement on Form S-8, File No. 333-198116), pursuantto the terms of our Amended and Restated 2010 Equity Incentive Plan, we issued an aggregate of 57,870 shares of common stock that were not registeredunder the Securities Act to employees, a former employee and a director pursuant to the exercise of stock options at a weighted-average exercise price of$2.52 for cash proceeds of approximately $145,696.In 2014, we granted stock options under our equity incentive plans to purchase an aggregate of 1,543,830 shares of our common stock atexercise prices ranging between $1.76 and $34.12 per share to a total of 41 employees, directors, officers and consultants.None of the foregoing transactions involved any underwriters, underwriting discounts or commissions, or any public offering, and eachtransaction was deemed to be exempt from the registration requirements of the Securities Act, in reliance on (i) Section 4(2) of the Securities Act (orRegulation D promulgated thereunder) as transactions by an issuer not involving any public offering or (ii) Rule 701 promulgated under Section 3(b) of theSecurities Act as transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under Rule 701. The recipients ofthe securities in each of these transactions represented their intentions to acquire the securities for investment only and not with a view to or for sale inconnection with any distribution thereof and appropriate restrictive legends were placed upon the stock certificates issued in these transactions.Use of ProceedsOn August 12, 2014, our Registration Statement on Form S-1 (File No. 333-197365) was declared effective by the SEC for our initial publicoffering of common stock. We started trading on The NASDAQ Global Select Market on August 13, 2014, and the transaction formally closed on August 18,2014. In connection with the IPO, we issued 7,187,500 shares of common stock, including exercise of the underwriters’ option to purchase an additional937,500 shares, at an offering price of $16.00 per share. J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Piper Jaffray & Co.and Sanford C. Bernstein & Co. LLC acted as the underwriters. We received aggregate proceeds of approximately $104.1 million, net of underwritingdiscounts, commissions and offering-related transaction costs incurred. There has been no material change in the planned use of proceeds from our initialpublic offering as described in our final prospectus filed with the SEC on August 13, 2014 pursuant to Rule 424(b).On January 22, 2015, our Registration Statement on Form S-1 (File No. 333- 201401) was declared effective by the SEC for our follow-on publicoffering of common stock. The transaction formally closed on January 28, 2015. In conjunction with the offering, we issued 2,932,500 shares of commonstock, including exercise of the underwriters’ option to purchase an additional 382,500 shares, at an offering price of $29.25 per share. J.P. Morgan SecuritiesLLC, Piper Jaffray & Co., Cowen and Company, LLC and Sanford C. Bernstein & Co. LLC acted as the underwriters. We received aggregate proceeds ofapproximately $80.0 million, net of underwriting discounts, commissions and offering-related transaction costs. There has been no material change in theplanned use of proceeds from our public offering as described in our final prospectus filed with the SEC on January 23, 2015 pursuant to Rule 424(b).Performance GraphThis performance graph shall not be deemed “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of the Securities Exchange Act of1934, as amended (Exchange Act), or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference intoany filing of Otonomy, Inc. under the Securities Act of 1933, as amended, or the Exchange Act.The following graph compares the cumulative total return to stockholders on our common stock relative to the cumulative total returns of theNASDAQ Composite Index and the NASDAQ Biotechnology Index. An investment of $100 (with reinvestment of all dividends) is assumed to have beenmade in our common 81Table of Contentsstock and in each index on August 13, 2014, the date our common stock began trading on The NASDAQ Global Select Market, and its relative performance istracked through December 31, 2014. The returns shown are based on historical results and are not intended to suggest future performance. Item 6. SELECTED FINANCIAL DATAThe following selected historical consolidated financial data should be read in conjunction with Part II, Item 7, “Management’s Discussion andAnalysis of Financial Condition and Results of Operations”, our consolidated financial statements and the related notes included in Item 8, “FinancialStatements and Supplementary Data” of this Annual Report on Form 10-K. Years Ended December 31, 2014 2013 2012 Statements of Operations Data: Operating expenses: Research and development $31,803 $16,336 $8,523 General and administrative 7,836 3,514 2,408 Total operating expenses 39,639 19,850 10,931 Loss from operations (39,639) (19,850) (10,931) Other (expense) income (3,238) 291 3,362 Net loss and comprehensive loss (42,877) (19,559) (7,569) Accretion to redemption value of convertible preferred stock (35) (539) (801) Net loss attributable to common stockholders$(42,912) $(20,098) $(8,370) Net loss per share attributable to common stockholders, basic and diluted$(5.46) $(268.79) $(118.99) Weighted-average shares used to compute net loss per share attributable tocommon stockholders, basic and diluted 7,853,228 74,772 70,343 82Table of Contents As of December 31, 2014 2013 Balance Sheets Data: Cash and cash equivalents $139,810 $37,284 Short-term investments 16,223 — Working capital 152,285 36,298 Total assets 159,164 39,757 Convertible preferred stock warrant liability — 646 Convertible preferred stock — 95,153 Accumulated deficit (102,469) (59,557) Total stockholders’ equity (deficit) 153,613 (58,977) Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSYou should read the following discussion and analysis of our financial condition and results of operations together with the section entitled“Selected Financial Data” and the financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion containsforward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from thoseanticipated in these forward-looking statements as a result of various factors, including those discussed in the section entitled “Risk Factors” and in otherparts of this Annual Report on Form 10-K.OverviewWe are a clinical-stage biopharmaceutical company focused on the development and commercialization of innovative therapeutics for the treatment ofdiseases and disorders of the ear. To overcome many of the limitations of delivering drugs to the middle and inner ear, we have developed a proprietarytechnology that is designed to deliver drug that is retained in the ear for an extended period of time following a single local administration, which we refer toas “sustained-exposure.” Utilizing this technology, we have advanced three product candidates into development: AuriPro, OTO-104 and OTO-311.AuriPro is a sustained-exposure formulation of the antibiotic ciprofloxacin for which we have completed two identical Phase 3 clinical trials in532 pediatric patients with middle ear effusion requiring tympanostomy tube placement, or TTP, surgery. Results of these Phase 3 trials demonstrate thatAuriPro achieved the primary efficacy endpoint with statistical significance (p<0.001) and that AuriPro was well tolerated. Based on these results, togetherwith feedback received from a pre-NDA meeting and communications with the U.S. Food and Drug Administration, or FDA, and supportive results from theone year stability testing required for filing, we submitted a New Drug Application, or NDA, for AuriPro to the FDA in February 2015. If approved within thestandard review period, we anticipate a commercial launch for AuriPro in the United States in the first quarter of 2016.OTO-104 is a sustained-exposure formulation of the steroid dexamethasone in development for the treatment of Ménière’s disease and other inner earconditions. We are conducting a Phase 2b clinical trial at more than 50 centers in the United States and Canada, which we believe will serve as one of twopivotal, single-dose efficacy trials required to support U.S. regulatory approval. In December 2014, we announced that we had achieved the target patientenrollment of 140 patients, and subsequently concluded enrollment with a total of 154 patients. We expect to report results from this clinical trial in thesecond quarter of 2015. If results are positive, we plan to initiate a second pivotal trial of OTO-104 in 2015. During October 2014, we began enrollment in amultiple-dose safety study in Ménière’s patients in the United Kingdom. The prospective, randomized, placebo-controlled study, designed to evaluate thesafety of multiple doses of OTO-104, will enroll 125 patients across multiple trial sites in the United Kingdom. In the first part of the study, patients will berandomized to receive 83Table of Contentstwo doses of either placebo or 12 mg OTO-104 by intratympanic, or IT, injection given at three month intervals. Patients completing the double-blindportion of the study will be eligible to participate in an open-label extension study where all patients will receive two IT injections of OTO-104 at threemonth intervals. We intend to use data from this U.K. study together with one or more additional multiple-dose safety studies that we plan to initiate during2015 to satisfy our multiple-dose clinical safety requirement for U.S. regulatory approval of OTO-104 in patients with Ménière’s disease which we believe,based on discussions from an End-of-Phase 1 meeting with the FDA, will require 100 patients treated for one year and 300 patients treated for six months. TheFDA has granted OTO-104 Fast Track designation, which is a process designed to facilitate the development and expedite the FDA’s review of drugs to treatserious conditions and fill unmet medical needs.OTO-311 is a sustained-exposure formulation of the N-methyl-D-aspartate receptor antagonist gacyclidine in development for the treatment of tinnitus.We plan to file an Investigational New Drug application, or IND, for OTO-311 with the FDA and initiate a Phase 1 clinical trial during 2015. In November2014, we announced the completion of an exclusive license agreement with Ipsen that enables us to use clinical and non-clinical gacyclidine data generatedby Ipsen to support worldwide development and regulatory filings for OTO-311.We have global commercialization rights to our product candidates. Our strategy is to advance our product candidates through regulatory approval andself-commercialize in the United States. In October 2014, we announced the appointment of an experienced Chief Commercial Officer to prepare for thecommercialization of AuriPro, if approved. We plan to build a focused sales force targeting ENTs, who specialize in the treatment of patients affected bydiseases and disorders of the ear. Outside the United States, we plan to evaluate whether to commercialize our products on our own or in collaboration withpartners. We have a broad patent portfolio of more than 60 issued patents and allowed patent applications and at least 85 pending patent applicationscovering our product candidates and indications, as well as other potential applications of our technology in major markets around the world.We have a limited operating history. Since our inception in 2008, we have devoted substantially all of our efforts to developing our productcandidates, including conducting preclinical and clinical trials and providing general and administrative support for these operations. We do not have anyapproved products and have not generated any revenue from product sales or otherwise.From inception to December 31, 2014, we have raised net cash proceeds of approximately $143.8 million from the sale of convertible preferred stock,convertible notes and warrants. In August 2014, we completed our initial public offering, or IPO, in which we sold 7,187,500 shares of common stock at anoffering price of $16.00 per share, which included the exercise in full by the underwriters of their option to purchase up to 937,500 additional shares ofcommon stock. Proceeds from the IPO were approximately $104.1 million, net of underwriting discounts, commissions and offering-related transaction costsincurred. As of December 31, 2014, we had cash, cash equivalents and short-term investments of $156.0 million.In January 2015, we completed a follow-on public offering of 2,932,500 shares of our common stock, which includes the exercise in full by theunderwriters of their option to purchase 382,500 shares of common stock, at an offering price of $29.25 per share. Proceeds from the follow-on public offeringwere approximately $80.0 million, net of underwriting discounts, commissions and offering-related transaction costs.We have never been profitable, and as of December 31, 2014, we had an accumulated deficit of $102.5 million. Our net losses were $42.9 million,$19.6 million and $7.6 million for the years ending December 31, 2014, 2013 and 2012, respectively. Substantially all of our net losses have resulted fromcosts incurred in connection with our development programs and from general and administrative costs associated with our operations. 84Table of ContentsWe expect to continue to incur significant expenses and increasing operating losses for the foreseeable future as we continue to develop, seekregulatory approval, and commercialize our product candidates. In the near term, we anticipate that our expenses will increase substantially as we: • file for regulatory approval and prepare for commercialization of AuriPro in the United States; • conduct our clinical development program for OTO-104; • complete preclinical development and initiate clinical development of OTO-311; • contract to manufacture our product candidates; • evaluate opportunities for development of additional product candidates; • maintain and expand our intellectual property portfolio; • hire additional staff, including clinical, scientific, operational, financial, sales and marketing and management personnel, to execute our businessplan; and • operate as a public company.We will need substantial additional funding to support our operating activities, especially as we approach the potential commercial launch of AuriProin the United States and as we build our sales and marketing capabilities. We anticipate that our existing cash and cash equivalents and short-terminvestments, together with the net proceeds from our follow-on public offering completed in January 2015, will not be sufficient for us to commercializeAuriPro, register and commercialize OTO-104, and complete clinical development of OTO-311. Accordingly, we will continue to require substantialadditional capital. The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our clinicaldevelopment efforts, the timing and nature of the regulatory approval process for our product candidates, and our ability to effectively begincommercializing AuriPro. We anticipate that we will seek to fund our operations through public or private equity or debt financings or other sources, such aspotential collaboration arrangements. We may not be able to raise capital on terms acceptable to us, or at all. Our failure to raise capital as and when neededcould have a negative impact on our financial condition and our ability to pursue our business strategies. We believe that our existing cash and cashequivalents and short-term investments, together with the net proceeds from our follow-on offering completed in January 2015, will be sufficient to fund ourcurrently planned operations for at least the next 24 months.In November 2008, we entered into an exclusive license agreement with the Regents of the University of California, or UC. Under the licenseagreement, UC granted us an exclusive license under their rights to patents and applications that are co-developed and co-owned with us for the treatment ofhuman otic diseases. Our financial obligations under the license agreement include annual license maintenance payments until we commercialize the firstproduct covered under the license agreement, development milestone payments of up to $2.7 million per licensed product, of which $0.9 million has beenpaid for AuriPro and $0.3 million has been paid for OTO-104 (but such milestone payments are reduced by 75% for any orphan indication product), and alow single-digit royalty on net sales by us or our affiliates of licensed products. In addition, for each sublicense we grant we are obligated to pay UC a fixedpercentage of all royalties as well as a sliding-scale percentage of non-royalty sublicense fees received by us under such sublicense, with such percentagedepending on the licensed product’s stage of development when sublicensed to such third party. We have the right to offset a certain amount of third-partyroyalties, milestone fees or sublicense fees against the foregoing financial obligations, provided such third-party royalties or fees are paid by us inconsideration for intellectual property rights necessary to commercialize a licensed product.In April 2013, we entered into an exclusive license agreement with DURECT Corporation, or Durect, as part of an asset transfer agreement between usand IncuMed LLC, an affiliate of the NeuroSystec Corporation. Under this license agreement, Durect granted us an exclusive, worldwide, royalty-bearinglicense under Durect’s rights to certain patents and applications that cover our OTO-311 product candidate, as well as certain related know-how. Under thislicense agreement and the asset transfer agreement, we are obligated to make one-time milestone payments of up to $7.5 million for the first licensed product.Upon commercializing a licensed product, we are obligated to pay Durect tiered, low single-digit royalties on annual net sales by us or our 85Table of Contentsaffiliates or sublicensees of the licensed products, and we have the right to offset a certain amount of third-party license fees or royalties against such royaltypayments to Durect. In addition, each sublicense we grant to a third party is subject to payment to Durect of a low double-digit percentage of all non-royaltypayments we receive under such sublicense. Additionally, we are also obligated to pay the Institut National de la Sante et de la Recherche Medicale, orINSERM, on behalf of Durect, for a low single-digit royalty payment on net sales by us or our affiliates or sublicensees upon commercialization of thelicensed product. The foregoing royalty payment obligation to Durect would continue on a product-by-product and country-by-country basis untilexpiration or determination of invalidity of the last valid claim within the licensed patents that cover the licensed product, and the payment obligation toINSERM would continue so long as Durect’s license from INSERM remains in effect.Financial Operations OverviewRevenueTo date, we have not generated any revenue. We do not expect to generate any revenue from any product candidates that we develop unless and untilwe obtain regulatory approval and commercialize our products or enter into collaborative agreements with third parties. In the future, if AuriPro is approvedfor commercial sale in the United States, we may generate revenue from product sales. We do not expect to commercialize AuriPro before 2016, if ever.Operating ExpensesResearch and development expensesOur research and development expenses primarily consist of costs associated with the preclinical and clinical development of our product candidates.Our research and development expenses include: • employee-related expenses, including salaries, benefits, travel and stock-based compensation expense; • external development expenses incurred under arrangements with third parties, such as fees paid to CROs in connection with our clinical trials,costs of acquiring and evaluating clinical trial data such as investigator grants, patient screening fees, laboratory work and statistical compilationand analysis, and fees paid to consultants and our scientific advisory board; • costs to acquire, develop and manufacture clinical trial materials, including fees paid to contract manufacturers; • payments related to licensed products and technologies; • costs related to compliance with drug development regulatory requirements; and • facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities,depreciation of leasehold improvements and equipment, and laboratory and other supplies.We expense our internal and third-party research and development expenses as incurred.The following table summarizes our research and development expenses (in thousands) by product candidate: Years Ended December 31, 2014 2013 2012 Third-party development costs: AuriPro $10,510 $5,712 $2,394 OTO-104 10,793 3,510 1,290 OTO-311 1,986 46 — Total third-party development costs 23,289 9,268 3,684 Other unallocated internal research and development costs 8,514 7,068 4,839 Total research and development costs$31,803 $16,336 $8,523 86Table of ContentsWe expect our research and development expenses to increase substantially for the foreseeable future as we pursue expanded indications for AuriProand advance our other product candidates through their respective clinical development programs. The process of conducting preclinical studies and clinicaltrials necessary to obtain regulatory approval is costly and time consuming. We may never succeed in achieving regulatory approval for any of our productcandidates. The probability of success for each product candidate will be affected by numerous factors, including preclinical data, clinical data, competition,manufacturing capability and commercial viability. We are responsible for all of the research and development costs for our programs.Completion dates and completion costs for our clinical development programs can vary significantly for each current and future product candidate andare difficult to predict. We therefore cannot estimate with any degree of certainty the costs we will incur in connection with development of our productcandidates. We anticipate that we will make determinations as to which programs and product candidates to pursue and how much funding to direct to eachprogram and product candidate on an ongoing basis in response to the results of ongoing and future clinical trials, regulatory developments, and our ongoingassessments as to each current or future product candidate’s commercial potential. We will need to raise substantial additional capital in the future tocomplete clinical development for our product candidates. We may enter into collaborative agreements in the future in order to conduct clinical trials andgain regulatory approval of our product candidates, particularly in markets outside of the United States. We cannot forecast which product candidates may besubject to future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plansand overall capital requirements.The costs of clinical trials may vary significantly over the life of a program owing to the following: • per patient trial costs; • the number of sites included in the trials; • the countries in which the trials are conducted; • the length of time required to enroll eligible patients; • the number of patients that participate in the trials; • the number of doses that patients receive; • the drop-out or discontinuation rates of patients; • potential additional safety monitoring or other studies requested by regulatory agencies; • the duration of patient follow-up; • the phase of development of the product candidate; and • the efficacy and safety profile of the product candidate.General and administrative expensesOur general and administrative expenses consist primarily of salaries, benefits, travel and stock-based compensation expense, and other related costsfor our employees and consultants in executive, administrative, finance and human resource functions. Other general and administrative expenses includefacility-related costs not otherwise included in research and development and professional fees for accounting, auditing, tax and legal fees, and other costsassociated with obtaining and maintaining our patent portfolio, and conducting commercial assessments for our product candidates.We expect our general and administrative expenses to increase substantially as we hire additional personnel to support commercialization of ourproduct candidates. We also anticipate increased expenses related to audit, legal, regulatory, and tax-related services associated with maintaining compliancewith stock exchange listing 87Table of Contentsand SEC requirements, director’s and officer’s liability insurance premiums, and investor relations-related expenses. Additionally, if and when we believethat a regulatory approval of a product candidate appears likely, we expect to incur significant increases in our general and administrative expenses relatingto the sales and marketing of the product candidate.Other (Expense) IncomeOther (expense) income has included interest expense on our convertible notes payable, including amortization of debt discount, the change in fairvalue of the convertible preferred stock warrant liability, the change in fair value of the convertible preferred stock purchase right liability and interestincome earned on cash and cash equivalents and short-term investments. The convertible preferred stock purchase right expired in June 2012, at which timethe fair value of the convertible preferred stock purchase right liability was recognized in other (expense) income. In connection with the IPO, all of ouroutstanding warrants to purchase convertible preferred stock were either (i) exercised and the underlying shares of preferred stock were automaticallyconverted into shares of common stock or (ii) converted into warrants to purchase common stock. Prior to the exercise and conversion of the warrants topurchase convertible preferred stock, we performed the final revaluation of the warrant liability upon the closing of the IPO in August 2014 and recorded the$2.6 million increase in fair value to change in fair value of convertible preferred stock warrant liability. The warrant liability was then reclassified toadditional paid-in capital.Critical Accounting Policies and Significant Judgments and EstimatesOur financial statements are prepared in accordance with generally accepted accounting principles in the United States of America. The preparation ofthese financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, and expenses and thedisclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and assumptions, including thoserelated to accrued expenses and stock-based compensation. We base our estimates on our historical experience, known trends and events, and various otherfactors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assetsand liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.While our significant accounting policies are described in more detail in Note 2 to our financial statements appearing elsewhere in this Annual Reporton Form 10-K, we believe that the following accounting policies are most critical to the judgments and estimates used in the preparation of our financialstatements.Clinical Trial Expense AccrualsAs part of the process of preparing our financial statements, we are required to estimate expenses resulting from our obligations under contracts withvendors, CROs and consultants and under clinical site agreements in connection with conducting clinical trials. The financial terms of these contracts varyand may result in payment flows that do not match the periods over which materials or services are provided under such contracts.Our objective is to reflect the appropriate trial expenses in our financial statements by recording those expenses in the period in which services areperformed and efforts are expended. We account for these expenses according to the progress of the trial as measured by patient progression and the timing ofvarious aspects of the trial. We determine accrual estimates through financial models taking into account discussion with applicable personnel and outsideservice providers as to the progress or state of consummation of trials. During the course of a clinical trial, we adjust the clinical expense recognition if actualresults differ from our estimates. We make estimates of accrued expenses as of each balance sheet date based on the facts and circumstances known at thattime. Our clinical trial accruals are dependent upon accurate reporting by CROs and other third-party vendors. Although we do not expect our estimates todiffer materially from amounts actually incurred, our understanding 88Table of Contentsof the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts thatare too high or too low for any particular period. For the years ended December 31, 2014, 2013 and 2012 there were no material adjustments to our priorperiod estimates of accrued expenses for clinical trials.Convertible Preferred Stock Warrant LiabilityPrior to our IPO, warrants exercisable for shares of our Series A and Series C convertible preferred stock were classified as liabilities at their estimatedfair value, based on the characteristics and provisions of each instrument. At each reporting date the convertible preferred stock warrants were revalued, withfair value changes recorded as a component of other (expense) income.Through December 31, 2012, we estimated the fair value of our outstanding convertible preferred stock warrants using a Black-Scholes-Merton optionpricing model based on inputs as of the valuation measurement dates for the estimated fair value of the underlying convertible preferred stock, the remainingcontractual terms of the warrants, the risk-free interest rate, the expected dividend yield and the estimated volatility of the price of our convertible preferredstock. In 2013, all of our outstanding convertible preferred stock warrants were valued using a hybrid of the option pricing model and the probability-weighted expected return method. The key inputs into the models included the probability and timing of expected liquidity event dates, discount rates andthe selection of appropriate market comparable transactions and multiples to apply to our various historical and forecasted operating metrics.In connection with the IPO, all of the outstanding warrants to purchase convertible preferred stock were either (i) exercised and the underlying shares ofpreferred stock were automatically converted into shares of common stock or (ii) converted into warrants to purchase common stock. Prior to the exercise andconversion of the warrants to purchase convertible preferred stock, we performed the final revaluation of the warrant liability upon the closing of the IPO inAugust 2014 and recorded the $2.6 million increase in fair value to change in fair value of convertible preferred stock warrant liability on the statement ofoperations. The warrant liability was then reclassified to additional paid-in capital.Other InformationNet Operating Loss and Research and Development Tax Credit CarryforwardsAs of December 31, 2014, we had federal and California net operating loss, or NOL, carryforwards of $60.5 million and $59.4 million, respectively. Ourfederal and California NOL carryforwards will begin to expire in 2030, unless we utilize them beforehand. As of December 31, 2014, we also had federal andCalifornia research and development tax credit carryforwards of $2.8 million and $1.6 million, respectively. The federal research and development tax creditcarryforwards will begin expiring in 2030 unless we utilize them beforehand. The California research and development tax credit will carry forwardindefinitely.Pursuant to Internal Revenue Code, or IRC, Sections 382 and 383, our annual use of our NOL and research and development tax credit carryforwardsmay be limited in the event that a cumulative change in ownership of more than 50% occurs within a three-year period. We have determined that we haveexperienced ownership changes in the past. We have reduced our deferred tax assets related to our NOL and federal research and development tax creditcarryforwards that we expect to expire unused as a result of these ownership changes. We have excluded these tax attributes from our deferred tax assets witha corresponding reduction of the valuation allowance with no net effect on our income tax expense or our effective tax rate. The California research anddevelopment tax credits were not limited because these credits carry forward indefinitely. Future ownership changes as a result of the closing of this offeringor subsequent shifts in our stock ownership may further limit our ability to utilize our remaining NOL and research and development tax credit carryforwards.As of December 31, 2014, we had a full valuation allowance against our deferred tax assets. 89Table of ContentsJOBS ActOn April 5, 2012, the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, was enacted. Section 107 of the JOBS Act provides that an“emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying withnew or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until thosestandards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result,we adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.We are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements provided by the JOBS Act. Subjectto certain conditions set forth in the JOBS Act, as an “emerging growth company,” we intend to rely on certain of these exemptions, including those relatingto (i) providing an auditor’s attestation report on our system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Actand (ii) complying with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotationor a supplement to the auditor’s report providing additional information about the audit and the financial statements, known as the auditor discussion andanalysis.We will remain an “emerging growth company” until the earliest of (i) the last day of our first fiscal year in which we have total annual gross revenuesof $1 billion or more, (ii) the date on which we are deemed to be a “large accelerated filer” under the rules of the SEC with at least $700 million ofoutstanding equity securities held by non-affiliates, (iii) the date on which we have issued more than $1 billion in non-convertible debt during the previousthree years, or (iv) the last day of our fiscal year following the fifth anniversary of the date of the completion of our IPO.Results of OperationsComparison of the Years Ended December 31, 2014 and 2013The following table sets forth the significant components of our results of operations for the years ended December 31, 2014 and 2013 (in thousands): Years Ended December 31, 2014 2013 Change Research and development $31,803 $16,336 $15,467 General and administrative 7,836 3,514 4,322 Interest expense 39 2,528 (2,489) Change in fair value of convertible preferred stock warrant liability 3,300 (2,833) 6,133 Research and development expenses. The increase of $15.5 million in research and development expenses was primarily due to a $7.3 million increasein ongoing clinical trial-related expenses for our OTO-104 product candidate that advanced into a Phase 2b clinical trial at the end of 2013 and a $4.8million increase in clinical trial-related expenses for our AuriPro product candidate that advanced into Phase 3 clinical trials during the second half of 2013.In addition, there was a $2.4 million increase in personnel costs, including stock-based compensation expense and overhead, due to additional headcount,$2.0 million in expenses associated with OTO-311 following our acquisition in October 2013 of certain assets and rights to intellectual property related toOTO-311, and a $0.3 million increase in lab supplies and services to support our increased research and development activities. These increases werepartially offset by a $1.3 million decrease in license fees, which was primarily due to two clinical milestones achieved during 2013, compared with no suchclinical milestones achieved during 2014. 90Table of ContentsGeneral and administrative expenses. The increase of $4.3 million in general and administrative expenses was primarily related to the expansion of ouroperating activities, costs associated with becoming a publicly traded company, and costs related to commercial preparation activities. The overall increase iscomprised of an increase of $2.2 million in personnel costs, including stock-based compensation expense, due to additional headcount, and an increase of$2.1 million in expenses for outside services, including consulting costs, legal fees, accounting fees, corporate development and market research.Interest expense. During the year ended December 31, 2014, our interest expense consisted of amortization of the deferred financing costs on our creditfacility with Square 1 Bank, which expired on July 31, 2014. During the year ended December 31, 2013, our interest expense was comprised of non-cashinterest expense, including amortization of debt discount, on the convertible notes that we issued between August 2012 and January 2013, which were allconverted into shares of our convertible preferred stock in August 2013. The decrease of $2.5 million in interest expense was a result of the convertible notesbeing outstanding during most of the year ended December 31, 2013 but not during the year ended December 31, 2014.Change in fair value of convertible preferred stock warrant liability. The fair value of our convertible preferred stock warrant liability increased by$3.3 million for the year ended December 31, 2014 compared to a decrease of $2.8 million for the year ended December 31, 2013. These changes resultedfrom the revaluation of our convertible preferred stock warrants.In connection with the IPO, all of our outstanding warrants to purchase convertible preferred stock were either (i) exercised and the underlying shares ofpreferred stock were automatically converted into shares of common stock or (ii) converted into warrants to purchase common stock. Prior to the exercise andconversion of the warrants to purchase convertible preferred stock, we performed the final revaluation of the warrant liability upon the closing of the IPO inAugust 2014 and recorded the $2.6 million increase in fair value to change in fair value of convertible preferred stock warrant liability. The warrant liabilitywas then reclassified to additional paid-in capital.Comparison of the Years Ended December 31, 2013 and 2012The following table sets forth the significant components of our results of operations for the years ended December 31, 2013 and 2012 (in thousands): Years Ended December 31, 2013 2012 Change Research and development $16,336 $8,523 $7,813 General and administrative 3,514 2,408 1,106 Interest expense 2,528 444 2,084 Change in fair value of convertible preferred stock warrant liability (2,833) (100) (2,733) Change in fair value of convertible preferred stock purchase right — (3,707) 3,707 Research and development expenses. The increase of $7.8 million in research and development expenses was primarily due to a $3.3 million increasein clinical trial-related expenses for our AuriPro product candidate that advanced into Phase 3 clinical trials during the second half of 2013, a $2.2 millionincrease in clinical trial-related expenses for our OTO-104 product candidate that advanced into a Phase 2b clinical trial at the end of 2013 and a $1.1 millionincrease in license fees we paid to the University of California following our achievement of success-based clinical milestones in 2013 for AuriPro and OTO-104. In addition, there was a $1.0 million increase in payroll, allocated overhead and travel expenses during 2013 due to an increase in the number ofdevelopment personnel and $0.2 million in expenses associated with our acquisition in October 2013 of certain assets and rights to intellectual propertyrelated to OTO-311. 91Table of ContentsGeneral and administrative expenses. The increase of $1.1 million in general and administrative expenses was due to a $0.5 million increase inexpenses for outside services that were primarily related to market research and preparing for our initial public offering, a $0.3 million increase in intellectualproperty expenses, a $0.2 million increase in personnel costs related to additional headcount, including stock-based compensation expense, and $0.1 millionof legal expenses associated with our acquisition in October 2013 of certain assets and rights to intellectual property related to OTO-311.Interest expense. Interest expense during the years ended December 31, 2013 and 2012 was comprised of non-cash interest expense on the convertiblenotes that we issued between August 2012 and January 2013, which were all converted into shares of our preferred stock in August 2013. The increase of $2.1million in interest expense was due to the acceleration of debt discount of $1.1 million resulting from the conversion of the convertible notes prior to the endof their terms and an increase of $1.0 million due to higher convertible note balances that were outstanding during approximately eight months during 2013compared to approximately four months during 2012.Change in fair value of convertible preferred stock warrant liability. The fair value of our convertible preferred stock warrant liability decreased by$2.8 million for the year ended December 31, 2013 compared to a decrease of $0.1 million for the year ended December 31, 2012. The decreases resulted fromthe revaluation of our convertible preferred stock warrants.Change in fair value of preferred stock purchase right. The $3.7 million decrease in the fair value of our convertible preferred stock purchase rightliability for the year ended December 31, 2013 compared to the year ended December 31, 2012 was due to the expiration of our convertible preferred stockpurchase right in June 2012.Liquidity and Capital ResourcesWe have incurred significant losses and negative cash flows from operations since our inception. As of December 31, 2014, we had an accumulateddeficit of $102.5 million and we expect to continue to incur significant losses for the foreseeable future. We expect our research and development and generaland administrative expenses to continue to increase substantially for the foreseeable future and, as a result, we will need additional capital to fund ouroperations, which we may obtain through one or more public or private equity or debt financings, or other sources such as potential collaborationarrangements.From inception to December 31, 2014, we have raised net cash proceeds of approximately $143.8 million from the sale of convertible preferred stock,convertible notes and warrants. In August 2014, we completed our IPO in which we sold 7,187,500 shares of common stock at an offering price of $16.00 pershare, which included the exercise in full by the underwriters of their option to purchase up to 937,500 additional shares of common stock. Proceeds from theIPO were approximately $104.1 million, net of underwriting discounts, commissions and offering-related transaction costs incurred. As of December 31,2014, we had cash, cash equivalents and short-term investments of $156.0 million.In January 2015, we completed a follow-on public offering of 2,932,500 shares of our common stock, which includes the exercise in full by theunderwriters of their option to purchase 382,500 shares of common stock, at an offering price of $29.25 per share. Proceeds from the follow-on public offeringwere approximately $80.0 million, net of underwriting discounts, commissions and offering-related transaction costs. 92Table of ContentsThe following table summarizes our cash flows for the years ended December 31, 2014, 2013 and 2012 (in thousands): Years Ended December 31, 2014 2013 2012 Net cash (used in) provided by: Operating activities $(35,219) $(19,467) $(10,828) Investing activities (16,931) (511) (185) Financing activities 154,676 52,599 8,014 Net increase (decrease) in cash 102,526 32,621 (2,999) Operating activities. For all years presented, the primary use of cash was to fund increased levels of development activities for our product candidates,which activities and uses of cash we expect to continue for the foreseeable future. During the year ended December 31, 2014, we used cash in operatingactivities of $35.2 million, while our net loss was $42.9 million. The difference consisted of $5.2 million of net non-cash adjustments, primarily comprised ofstock-based compensation expense, the change in fair value of our convertible preferred stock warrant liability and depreciation and amortization expense,together with $2.5 million of net change in our operating assets and liabilities.During the year ended December 31, 2013, we used cash in operating activities of $19.5 million, while our net loss was $19.6 million. The differenceconsisted of $0.1 million of net non-cash adjustments, primarily comprised of stock-based compensation expense, the change in fair value of our convertiblepreferred stock warrant liability, depreciation and amortization expense and non-cash interest expense.During the year ended December 31, 2012, we used cash in operating activities of $10.8 million, while our net loss was $7.6 million. The differenceconsisted of $2.6 million of net non-cash adjustments, primarily comprised of a $3.7 million gain on the change in fair value of the convertible preferredstock purchase right which expired in 2012, partially offset by non-cash adjustments for stock-based compensation expense, depreciation and amortizationexpense, non-cash interest expense and deferred rent, together with $0.6 million of net change in our operating assets and liabilities.Investing activities. Net cash used in investing activities was $16.9 million, $0.5 million and $0.2 million for the years ended December 31, 2014,2013 and 2012, respectively. During the year ended December 31, 2014, $16.2 million was used to purchase short-term investments, $0.8 million was usedfor capital expenditures and $0.1 million was provided by the removal of the restriction on our restricted cash. Net cash used in investing activities during theyears ended December 31, 2013 and 2012 was primarily for capital expenditures.Financing activities. Net cash provided by financing activities was $154.7 million, $52.6 million and $8.0 million for the years ended December 31,2014, 2013 and 2012, respectively. During 2014, proceeds from our IPO were $104.1 million after deducting underwriting discounts, commissions andoffering-related transaction costs, net proceeds from the sale of our series D convertible preferred stock were $49.2 million and proceeds from the cashexercise of convertible preferred stock warrants were $1.2 million. During 2013, net proceeds from the sale of our series C convertible preferred stock were$45.6 million and net proceeds from the issuance of convertible notes were $7.0 million. During 2012, net proceeds from our issuance of convertible noteswere $8.0 million.Funding RequirementsTo date, we have not generated any revenue. We do not expect to generate any revenue from any product candidates that we develop unless and untilwe obtain regulatory approval and commercialize our products or enter into collaborative agreements with third parties. In the future, if AuriPro is approvedfor commercial sale in the United States, we may generate revenue from product sales. We do not expect to commercialize AuriPro 93Table of Contentsbefore 2016, if ever. We expect to continue to incur significant losses for the foreseeable future, and we expect the losses to increase as we continue thedevelopment of, and seek regulatory approvals for, our product candidates, and begin to commercialize any approved products. We are subject to all of therisks incident in the development of new therapeutic products, and we may encounter unforeseen expenses, difficulties, complications, delays and otherunknown factors that may adversely affect our business. We expect to incur additional costs associated with operating as a public company and we will needsubstantial additional funding in connection with our continuing operations.We believe that our existing cash and cash equivalents and short-term investments, together with the proceeds from our follow-on public offeringcompleted in January 2015, will be sufficient to fund our projected operating requirements for at least the next 24 months. However, we may need to raiseadditional funds sooner to prepare for the commercialization of AuriPro and the further development of our other product candidates and may not be able todo so on commercially reasonable terms, or at all.Until we can generate a sufficient amount of revenue from our products, if ever, we expect to finance our future cash needs through public or privateequity or debt financings, or other sources such as potential collaboration agreements. In any event, we do not expect to achieve significant revenue fromproduct sales prior to the use of our existing cash balance. Additional capital may not be available on reasonable terms, if at all. If we are unable to raiseadditional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development orcommercialization of one or more of our product candidates. If we raise additional funds through the issuance of additional debt or equity securities, it couldresult in dilution to our existing stockholders, increased fixed payment obligations and the existence of securities with rights that may be senior to those ofour common stock. If we incur indebtedness, we could become subject to covenants that would restrict our operations and potentially impair ourcompetitiveness, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rightsand other operating restrictions that could adversely impact our ability to conduct our business. Any collaboration agreements we enter into may providecapital in the near-term but limit our potential cash flow and revenue in the future. Any of the foregoing could significantly harm our business, financialcondition and prospects.Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement andinvolves risks and uncertainties, and actual results could vary as a result of a number of factors. We have based this estimate on assumptions that may proveto be wrong, and we could utilize our available capital resources sooner than we currently expect. The amount and timing of future funding requirements,both near- and long-term, will depend on many factors, including: • the design, initiation, progress, size, timing, costs and results of preclinical studies and clinical trials for our product candidates; • the outcome, timing and cost of regulatory approvals by the FDA and comparable foreign regulatory authorities, including the potential for theFDA or comparable foreign regulatory authorities to require that we perform more studies than, or evaluate clinical endpoints other than, thosethat we currently expect; • the timing and costs associated with manufacturing our product candidates for clinical trials, preclinical studies and, if approved, for commercialsale; • the cost of establishing sales, marketing and distribution capabilities for any products for which we may receive regulatory approval andcommercialize, including related facilities expansion costs; • the number and characteristics of product candidates that we pursue; • the potential acquisition and in-licensing of other technologies, products or assets; • the extent to which we are required to pay milestone or other payments under our in-license agreements and the timing of such payments; 94Table of Contents • the cost of preparing, filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; • our need to expand our development activities, including our need and ability to hire additional employees; • the costs associated with being a public company; • the effect of competing technological and market developments; and • the cost of litigation, including potential patent litigation.If we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, financialcondition and results of operations could be materially adversely affected.Off-Balance Sheet ArrangementsDuring the periods presented we did not have, nor do we currently have, any off-balance sheet arrangements as defined under the applicable rules of theSEC.Contractual Obligations and CommitmentsThe following table summarizes our contractual obligations as of December 31, 2014 that will affect our future liquidity (in thousands): Less Than 1Year 1-3 Years 3-5 Years More Than 5Years Total (in thousands) Operating lease obligations(1) $552 $731 $7 $— $1,290 Total contractual obligations$552 $731 $7 $— $1,290 (1)We lease our facility under an operating lease. In September 2011, we entered into a non-cancelable lease for laboratory and office space that commenced in February 2012 andexpires in February 2017. Minimum future annual obligations under this lease total $1.0 million, and are reflected in the table above.We have payment obligations under license agreements that are contingent upon future events such as our achievement of specified development,regulatory and commercial milestones and are required to make development milestone payments and royalty payments in connection with the sale ofproducts developed under these agreements. As of December 31, 2014, we were unable to estimate the timing or likelihood of achieving the milestones ormaking future product sales and, therefore, any related payments are not included in the table above. Under our license agreement with UC, we are obligatedto pay annual license maintenance fees of $25,000 until we commercialize the first product covered under the license agreement.Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKInterest Rate FluctuationsAs of December 31, 2014, we had cash and cash equivalents and short-term investments of $156.0 million which are comprised of cash in checking andsavings accounts, money market funds and certificates of deposit. The primary objective of our investment activities is to preserve principal and liquiditywhile maximizing income without significantly increasing risk. We do not enter into investments for trading or speculative purposes. We do not believe thatan immediate 10% increase in interest rates would have a material effect on the fair market value of our portfolio, and therefore, we do not expect ouroperating results or cash flows to be materially affected to any degree by a sudden change in market interest rates. 95Table of ContentsForeign Currency Exchange Rate FluctuationsTo date, the vast majority of our contractual obligations have been denominated in U.S. dollars; however, we contract with a CRO in the UnitedKingdom and are subject to fluctuation in foreign currency rates in connection with such contract. In the future, we may contract with investigational sitesand other CROs in foreign countries. We do not hedge our foreign currency exchange rate risk. To date, we have not incurred any material effects fromforeign currency changes in connection with such contract.InflationInflation generally affects us by increasing our cost of labor and clinical trial costs. We do not believe that inflation has had a material effect on ourbusiness, financial condition or results of operations during the periods presented.Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 96Table of ContentsOtonomy, Inc.Index to Financial Statements Page Report of Independent Registered Public Accounting Firm 98 Balance Sheets 99 Statements of Operations and Comprehensive Loss 100 Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) 101 Statements of Cash Flows 102 Notes to Financial Statements 103 97Table of ContentsReport of Independent Registered Public Accounting FirmTo the Board of Directors and Stockholders of Otonomy, Inc.We have audited the accompanying balance sheets of Otonomy, Inc. as of December 31, 2014 and 2013, and the related statements of operations andcomprehensive loss, convertible preferred stock and stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31,2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We werenot engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control overfinancial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on atest basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Otonomy, Inc. at December 31,2014 and 2013, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S.generally accepted accounting principles./s/ Ernst & Young LLPSan Diego, CaliforniaMarch 18, 2015 98Table of ContentsOtonomy, Inc.Balance Sheets(in thousands, except share and per share data) December 31, 2014 2013 Assets Current assets: Cash and cash equivalents $139,810 $37,284 Restricted cash — 75 Short-term investments 16,223 — Prepaid and other current assets 1,669 1,654 Total current assets 157,702 39,013 Property and equipment, net 1,257 683 Other long-term assets 205 61 Total assets$159,164 $39,757 Liabilities, Convertible Preferred Stock and Stockholders’ Equity (Deficit)Current liabilities:Accounts payable$1,710 $2,014 Accrued expenses 3,046 384 Accrued compensation 575 244 Current portion of deferred rent 86 73 Total current liabilities 5,417 2,715 Convertible preferred stock warrant liability — 646 Deferred rent, net of current portion 134 220 Total liabilities 5,551 3,581 Commitments and ContingenciesConvertible preferred stock, $0.001 par value; no shares authorized at December 31, 2014; 9,519,809 shares authorized atDecember 31, 2013Series A convertible preferred stock, no shares issued or outstanding at December 31, 2014; 404,671 shares designated atDecember 31, 2013; 339,863 shares issued and outstanding at December 31, 2013; $2,987 liquidation preference atDecember 31, 2013 — 10,561 Series B convertible preferred stock, no shares issued or outstanding at December 31, 2014; 1,708,076 shares designatedat December 31, 2013; 1,708,076 shares issued and outstanding at December 31, 2013; $15,014 liquidation preferenceat December 31, 2013 — 23,007 Series C convertible preferred stock, no shares issued or outstanding at December 31, 2014; 7,407,062 shares designatedat December 31, 2013; 7,040,026 shares issued and outstanding at December 31, 2013; $92,823 liquidation preferenceat December 31, 2013 — 61,585 Stockholders’ equity (deficit):Preferred stock, $0.001 par value, 10,000,000 shares authorized at December 31, 2014; no shares authorized atDecember 31, 2013; no shares issued or outstanding at December 31, 2014 and 2013 — — Common stock, $0.001 par value; 200,000,000 and 11,851,717 shares authorized at December 31, 2014 and 2013,respectively; 21,173,270 and 75,325 shares issued and outstanding as of December 31, 2014 and 2013, respectively 21 — Additional paid-in capital 256,061 580 Accumulated deficit (102,469) (59,557) Total stockholders’ equity (deficit) 153,613 (58,977) Total liabilities, convertible preferred stock, and stockholders’ equity (deficit)$159,164 $39,757 See accompanying notes. 99Table of ContentsOtonomy, Inc.Statements of Operations and Comprehensive Loss(in thousands, except share and per share data) Years Ended December 31, 2014 2013 2012 Operating expenses: Research and development $31,803 $16,336 $8,523 General and administrative 7,836 3,514 2,408 Total operating expenses 39,639 19,850 10,931 Loss from operations (39,639) (19,850) (10,931) Other (expense) income:Interest expense (39) (2,528) (444) Change in fair value of convertible preferred stock warrant liability (3,300) 2,833 100 Change in fair value of convertible preferred stock purchase right — — 3,707 Other income (expense), net 101 (14) (1) Total other (expense) income (3,238) 291 3,362 Net loss and comprehensive loss (42,877) (19,559) (7,569) Accretion to redemption value of convertible preferred stock (35) (539) (801) Net loss attributable to common stockholders$(42,912) $(20,098) $(8,370) Net loss per share attributable to common stockholders, basic and diluted$(5.46) $(268.79) $(118.99) Weighted-average shares used to compute net loss per share attributable to common stockholders, basicand diluted 7,853,228 74,772 70,343 See accompanying notes. 100Table of ContentsOtonomy, Inc. Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)(in thousands, except share data) Series AConvertiblePreferred Stock Series BConvertiblePreferred Stock Series CConvertiblePreferred Stock Series DConvertiblePreferred Stock Common Stock AdditionalPaid-inCapital Accu-mulatedDeficit TotalStockholders’Equity(Deficit) Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Balance at December 31, 2011 339,863 $10,556 1,708,076 $21,690 — $— — $— 72,631 $— $198 $(31,089) $(30,891) Issuance of common stock uponexercise of stock options — — — — — — — — 1,066 — 3 — 3 Stock-based compensation expense — — — — — — — — — — 191 — 191 Accretion to redemption value ofconvertible preferred stock — 3 — 798 — — — — — — — (801) (801) Net loss — — — — — — — — — — — (7,569) (7,569) Balance at December 31, 2012 339,863 10,559 1,708,076 22,488 — — — — 73,697 — 392 (39,459) (39,067) Issuance of Series C convertiblepreferrred stock, includingconversion of convertible notesand accrued interest, net ofissuance costs of $315 — — — — 7,040,026 61,567 — — — — — — — Issuance of common stock uponexercise of stock options — — — — — — — — 1,628 — 5 — 5 Stock-based compensation expense — — — — — — — — — — 183 — 183 Accretion to redemption value ofconvertible preferred stock — 2 — 519 — 18 — — — — — (539) (539) Net loss — — — — — — — — — — — (19,559) (19,559) Balance at December 31, 2013 339,863 10,561 1,708,076 23,007 7,040,026 61,585 — — 75,325 — 580 (59,557) (58,977) Issuance of Series D convertiblepreferred stock, net of issuancecosts of $86 — — — — — — 4,126,080 49,239 — — — — — Issuance of common stock uponexercise of stock options, net ofearly exercise liability — — — — — — — — 61,974 — 110 — 110 Issuance of common stock uponexercise of warrants — — — — — — — — 228,902 — 1,201 — 1,201 Conversion of convertiblepreferred stock into commonstock (339,863) (10,561) (1,708,076) (23,007) (7,040,026) (61,616) (4,126,080) (49,243) 13,619,569 14 144,413 — 144,427 Initial public offering of commonstock — — — — — — — — 7,187,500 7 104,119 — 104,126 Reclassification of convertiblepreferred stock warrant liabilityto additional paid-in capital — — — — — — — — — — 3,946 — 3,946 Stock-based compensation expense — — — — — — — — — — 1,692 — 1,692 Accretion to redemption value ofconvertible preferred stock — — — — — 31 — 4 — — — (35) (35) Net loss — — — — — — — — — — — (42,877) (42,877) Balance at December 31, 2014 — $— — $— — $— — $— 21,173,270 $21 $256,061 $(102,469) $153,613 See accompanying notes. 101Table of ContentsOtonomy, Inc.,Statements of Cash Flows(in thousands) Years Ended December 31, 2014 2013 2012 Cash flows from operating activities: Net loss $(42,877) $(19,559) $(7,569) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 213 257 192 Stock-based compensation 1,692 183 191 Non-cash interest expense 39 2,528 444 Change in fair value of convertible preferred stock warrant liability 3,300 (2,833) (100) Change in fair value of convertible preferred stock purchase right — — (3,707) Amortization of discount or premium on short-term investments 1 — — Deferred rent (73) (24) 317 Changes in operating assets and liabilities: Prepaid and other assets (34) (1,013) (530) Accounts payable (309) 874 641 Accrued expenses 2,498 60 (472) Accrued compensation 331 60 (235) Net cash used in operating activities (35,219) (19,467) (10,828) Cash flows from investing activities:Purchases of short-term investments (16,224) — — Decrease (increase) in restricted cash 75 (25) — Purchases of property and equipment (782) (486) (185) Net cash used in investing activities (16,931) (511) (185) Cash flows from financing activities:Proceeds from convertible notes payable — 7,009 8,011 Proceeds from issuance of convertible preferred stock, net of issuance costs 49,239 45,585 — Proceeds from issuance of common stock, net of fees 104,126 — — Proceeds from issuance of restricted common stock and exercise of stock options, net of early exercise liability 110 5 3 Proceeds from exercise of preferred stock warrants 1,201 — — Net cash provided by financing activities 154,676 52,599 8,014 Net change in cash 102,526 32,621 (2,999) Cash and cash equivalents at beginning of period 37,284 4,663 7,662 Cash and cash equivalents at end of period$139,810 $37,284 $4,663 Supplemental disclosure of non-cash investing and financing activities:Purchase of property and equipment in accounts payable and accrued expenses$5 $15 $— Conversion of convertible notes payable and accrued interest into convertible preferred stock$— $15,982 $— Deferred public offering costs in accrued expenses$164 $— $— See accompanying notes. 102Table of ContentsOtonomy, Inc.,Notes to Financial Statements1. Description of Business and Basis of PresentationDescription of BusinessOtonomy, Inc. (the Company) was incorporated in the state of Delaware on May 6, 2008. The Company is a clinical-stage biopharmaceutical companyfocused on the development and commercialization of innovative therapeutics for the treatment of diseases and disorders of the ear. The Company’sproprietary technology is designed to deliver drug that is retained in the ear for an extended period of time following a single local administration. Utilizingthis technology, the Company has advanced three product candidates into development. AuriProTM is a sustained-exposure formulation of the antibioticciprofloxacin for which the Company has completed two Phase 3 clinical trials in pediatric patients with middle ear effusion at the time of tympanostomytube placement surgery. The Company submitted a New Drug Application for AuriPro to the U.S. Food and Drug Administration in February 2015. OTO-104is a sustained-exposure formulation of the steroid dexamethasone that is in a Phase 2b clinical trial for the treatment of patients with Ménière’s disease. OTO-311 is a sustained-exposure formulation of the N-methyl-D-aspartate (NMDA) receptor antagonist gacyclidine in preclinical development as a potentialtreatment for tinnitus.Initial Public OfferingIn August 2014, the Company completed its initial public offering (the IPO) of 7,187,500 shares of common stock, which includes the exercise in fullby the underwriters of their option to purchase up to 937,500 shares of common stock, at an offering price of $16.00 per share. Proceeds from the IPO were$104.1 million, net of underwriting discounts and commissions and offering-related transaction costs incurred. In connection with the IPO: (i) the Company’soutstanding shares of convertible preferred stock were automatically converted into 13,619,569 shares of common stock, (ii) the warrants exercisable forSeries A convertible preferred stock were automatically converted into warrants exercisable for 142,113 shares of common stock and (iii) the warrantsexercisable for Series C convertible preferred stock were exercised and such shares were automatically converted into 228,902 shares of common stock.Reverse Stock SplitOn July 31, 2014, the Company filed an amendment to its amended and restated certificate of incorporation, affecting a one-for-35.16 reverse stocksplit of its outstanding common and convertible preferred stock, which was approved by the Company’s board of directors on July 29, 2014. Theaccompanying financial statements and notes to the financial statements give retroactive effect to the reverse split for all periods presented.Basis of PresentationAs of December 31, 2014, the Company has devoted substantially all of its efforts to product development, raising capital, and building infrastructureand has not realized revenues from its planned principal operations. The accompanying financial statements have been prepared assuming the Company willcontinue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Companyhas incurred operating losses and negative cash flows from operating activities since inception. As of December 31, 2014, the Company had cash, cashequivalents and short-term investments of $156.0 million and an accumulated deficit of $102.5 million. The Company anticipates that it will continue toincur net losses into the foreseeable future as it: (i) continues the development and begins commercialization of its product candidates AuriPro, OTO-104 andOTO-311; (ii) works to develop additional product candidates through research and development programs; and (iii) expands its corporate infrastructure. TheCompany plans to continue to fund its losses from operations and capital funding needs through future debt and/or equity 103Table of Contentsfinancings or other sources, such as potential collaboration agreements. If the Company is not able to secure adequate additional funding, the Company maybe forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, and/or suspend or curtail planned programs.Any of these actions could materially harm the Company’s business, results of operations, and future prospects.2. Summary of Significant Accounting PoliciesUse of EstimatesThe accompanying financial statements have been prepared in accordance with GAAP. The preparation of financial statements in conformity withGAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the financial statements and the reported amounts of expense during the reporting period. The most significant estimates in theCompany’s financial statements relate to equity awards and clinical trial accruals. Although these estimates are based on the Company’s knowledge ofcurrent events and actions it may undertake in the future, actual results may ultimately materially differ from these estimates and assumptions.Segment ReportingOperating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by thechief operating decision-maker in making decisions regarding resource allocation and assessing performance. The Company views its operations andmanages its business in one operating segment.Concentrations of Credit RiskFinancial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents andshort-term investments. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. The Company hasnot experienced any losses in such accounts and believes it is not exposed to significant risk on its cash balances due to the financial position of thedepository institution in which those deposits are held. Additionally, the Company established guidelines regarding approved investments and maturities ofinvestments, which are designed to maintain safety and liquidity.Cash and Cash EquivalentsCash and cash equivalents consist of cash and highly liquid investments with original maturities of three months or less at the date of purchase. Thecarrying amounts approximate fair value due to the short maturities of these instruments. Cash and cash equivalents include cash in readily availablechecking, savings and money market accounts, as well as certificates of deposit.Short-Term InvestmentsThe Company carries short-term investments classified as available-for-sale at fair value as determined by prices for identical or similar securities at thebalance sheet date. Short-term investments consist of both Level 1 and Level 2 financial instruments in the fair value hierarchy (see Note 7). Realized gains orlosses of available-for-sale securities are determined using the specific identification method and net realized gains and losses are included in interestincome. The Company periodically reviews available-for-sale securities for other-than temporary declines in fair value below the cost basis, and wheneverevents or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. 104Table of ContentsFair Value of Financial InstrumentsThe carrying value of the Company’s cash and cash equivalents, restricted cash, short-term investments, prepaid expenses and other current assets,other assets, accounts payable, accrued liabilities, and accrued compensation approximate fair value due to the short-term nature of these items.Property and EquipmentProperty and equipment generally consist of manufacturing equipment, furniture and fixtures, computers, and scientific and office equipment and arerecorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets (generally three to ten years). Leaseholdimprovements are stated at cost and are depreciated on a straight-line basis over the lesser of the remaining term of the related lease or the estimated usefullives of the assets. Repairs and maintenance costs are charged to expense as incurred.Impairment of Long-Lived AssetsThe Company assesses the value of its long-lived assets, which consist of property and equipment, for impairment on an annual basis and wheneverevents or changes in circumstances and the undiscounted cash flows generated by those assets indicate that the carrying amount of such assets may not berecoverable. While the Company’s current and historical operating losses and negative cash flows are indicators of impairment, management believes thatfuture cash flows to be received support the carrying value of its long-lived assets and, accordingly, has not recognized any impairment losses throughDecember 31, 2014.Clinical Trial Expense AccrualsAs part of the process of preparing the Company’s financial statements, the Company is required to estimate expenses resulting from the Company’sobligations under contracts with vendors, clinical research organizations and consultants and under clinical site agreements in connection with conductingclinical trials. The financial terms of these contracts are subject to negotiations, which vary from contract to contract and may result in payment flows that donot match the periods over which materials or services are provided under such contracts.The Company’s objective is to reflect the appropriate clinical trial expenses in its financial statements by recording those expenses in the period inwhich services are performed and efforts are expended. The Company accounts for these expenses according to the progress of the trial as measured by patientprogression and the timing of various aspects of the trial. The Company determines accrual estimates through financial models taking into accountdiscussion with applicable personnel and outside service providers as to the progress or state of its trials. During the course of a clinical trial, the Companyadjusts its clinical expense if actual results differ from its estimates. The Company makes estimates of accrued expenses as of each balance sheet date basedon the facts and circumstances known at that time. Accordingly, the Company’s clinical trial accruals are dependent upon accurate reporting by contractresearch organizations and other third-party vendors. Although the Company does not expect its estimates to be materially different from amounts actuallyincurred, the Company’s understanding of the status and timing of services performed relative to the actual status and timing of services performed may varyand may result in reporting amounts that are too high or too low for any particular period. For the years ended December 31, 2014, 2013 and 2012, there wereno material adjustments to prior period estimates of accrued expenses for clinical trials.Research and DevelopmentResearch and development expenses include the costs associated with the Company’s research and development activities, including salaries, benefitsand occupancy costs. Also included in research and development expenses are third-party costs incurred in conjunction with contract manufacturing for theCompany’s research and development programs and clinical trials, including the cost of clinical trial drug supply, costs incurred by contract researchorganizations and regulatory expenses. Research and development costs are expensed as incurred. 105Table of ContentsPatent ExpensesThe Company expenses all costs as incurred in connection with patent applications (including direct application fees, and the legal and consultingexpenses related to making such applications) and such costs are included in general and administrative expenses in the accompanying statements ofoperations.Convertible Preferred StockPrior to the Company’s IPO, the Company’s outstanding convertible preferred stock was classified as temporary equity instead of stockholders’ deficitin accordance with authoritative guidance for the classification and measurement of potentially redeemable securities, as the stock was conditionallyredeemable at the holder’s option and upon certain change in control events that are outside the Company’s control, including the liquidation, sale, ortransfer of control of the Company. Upon such change in control events, holders of the convertible preferred stock could cause its redemption.In connection with the IPO, all of the Company’s outstanding shares of convertible preferred stock were automatically converted into shares ofcommon stock.Convertible Preferred Stock WarrantsPrior to the Company’s IPO, warrants exercisable for shares of the Company’s Series A and Series C convertible preferred stock were classified asliabilities in the accompanying balance sheets based upon the characteristics and provisions of each instrument. Convertible preferred stock warrants wereclassified as derivative liabilities and were recorded at their fair value on the date of issuance. At each reporting date the convertible preferred stock warrantswere revalued, with fair value changes recognized as increases in or decreases to the change in fair value of convertible preferred stock warrant liability in theaccompanying statements of operations.In connection with the IPO, all of the Company’s outstanding warrants to purchase convertible preferred stock were either (i) exercised and theunderlying shares of preferred stock were automatically converted into shares of common stock or (ii) converted into warrants to purchase common stock.Prior to the exercise and conversion of the warrants to purchase convertible preferred stock, the Company performed the final revaluation of the warrantliability upon the closing of the IPO in August 2014 and recorded the $2.6 million increase in fair value to change in fair value of convertible preferred stockwarrant liability in the accompanying statements of operations. The warrant liability was then reclassified to additional paid-in capital on the accompanyingbalance sheets.Convertible Preferred Stock Purchase RightThe Company determined that its obligation to issue, and the investors’ obligation to purchase, additional shares of the Company’s Series Bconvertible preferred stock represented a freestanding financial instrument and required liability accounting. This freestanding convertible preferred stockpurchase right liability was initially recorded at fair value, with fair value changes recognized as increases in or decreases to the change in fair value ofconvertible preferred stock purchase right in the accompanying statements of operations. In June 2012, the convertible preferred stock purchase right expiredand its change in fair value was recognized in change in fair value of convertible preferred stock purchase right in the accompanying statements ofoperations.Stock-Based CompensationThe Company accounts for stock-based compensation expense related to stock options and employee stock purchase plan (ESPP) rights by estimatingthe fair value on the date of grant using the Black-Scholes-Merton 106Table of Contentsoption pricing model net of estimated forfeitures. For awards subject to time-based vesting conditions, stock-based compensation expense is recognizedusing the straight-line method.The Company accounts for stock options granted to non-employees, including members of the scientific advisory board, using the fair value approach.Stock options granted to non-employees are subject to periodic revaluation over their vesting terms with the related expense being recognized as researchand development and/or general and administrative expense in the accompanying statements of operations.Income TaxesThe Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities forthe expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities aredetermined on the basis of the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the yearin which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the periodthat includes the enactment date.The Company recognizes net deferred tax assets to the extent that the Company believes these assets are more likely than not to be realized. In makingsuch a determination, management considers all available positive and negative evidence, including future reversals of existing taxable temporarydifferences, projected future taxable income, tax-planning strategies, and results of recent operations. If management determines that the Company would beable to realize its deferred tax assets in the future in excess of their net recorded amount, management would make an adjustment to the deferred tax assetvaluation allowance, which would reduce the provision for income taxes.The Company uses a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate tax positions taken orexpected to be taken in a tax return by assessing whether they are more likely than not sustainable, based solely on their technical merits, upon examinationand including resolution of any related appeals or litigation process. The second step is to measure the associated tax benefit of each position as the largestamount that the Company believes is more likely than not realizable. Differences between the amount of tax benefits taken or expected to be taken in theCompany’s income tax returns and the amount of tax benefits recognized in its financial statements, represent its unrecognized income tax benefits, whichthe Company either records as a liability or as a reduction of deferred tax assets.Comprehensive LossComprehensive loss is defined as the change in equity during a period from transactions and other events and/or circumstances from non-ownersources. For all periods presented, comprehensive loss is equal to net loss.Net Loss Per ShareBasic net loss per common share is calculated by dividing the net loss attributable to common stockholders by the weighted-average number ofcommon shares outstanding during the period, without consideration for potentially dilutive securities. Diluted net loss per share is computed by dividingthe net loss attributable to common stockholders by the weighted-average number of common shares and potentially dilutive securities outstanding for theperiod determined using the treasury-stock and if-converted methods. For purposes of the diluted net loss per share calculation, potentially dilutive securitiesare excluded from the calculation of diluted net loss per share because their effect would be anti-dilutive and therefore, basic and diluted net loss per sharewere the same for all periods presented. 107Table of ContentsPotentially dilutive securities excluded from the calculation of diluted net loss per share attributable to common stockholders are as follows (incommon stock equivalent shares): As of December 31, 2014 2013 2012 Convertible preferred stock — 9,493,489 2,453,463 Convertible notes payable — — 580,580 Warrants to purchase convertible preferred stock — 483,517 255,013 Warrants to purchase common stock 142,113 — — Unvested restricted common stock subject to repurchase 13,627 — 859 Options to purchase common stock 2,707,477 1,235,705 382,663 2,863,217 11,212,711 3,672,578 Recently Issued Accounting StandardsIn June 2014, the Financial Accounting Standards Board (FASB) issued guidance that eliminates the financial reporting distinction betweendevelopment stage entities and other reporting entities under accounting principles generally accepted in the United States of America (GAAP), therebyeliminating the requirements to present inception-to-date information in the financial statements and to label the financial statements as those of adevelopment stage entity. The Company has early adopted, as permitted, the new guidance as of June 30, 2014, and therefore has not labeled its financialstatements as those of a development stage entity or included any inception-to-date information. The new guidance is to be applied retrospectively andimpacts the presentation of the financial statements, but does not impact the Company’s financial position, results of operations or cash flows.In August 2014, the FASB issued guidance which requires management to assess an entity’s ability to continue as a going concern and to providerelated footnote disclosure in certain circumstances. This standard is effective for annual reporting periods ending after December 15, 2016 and interimperiods thereafter. Early application is permitted. The adoption of this guidance will have no impact on the Company’s financial position, results ofoperations or cash flows.3. Available-for-Sale SecuritiesThe Company invests in available-for-sale securities consisting of money market funds and certificates of deposit. Available-for-sale securities areclassified as part of either cash and cash equivalents or short-term investments in the balance sheets. Available-for-sale securities with maturities of threemonths or less from the date of purchase have been classified as cash equivalents, and were $18.8 million as of December 31, 2014. Available-for-salesecurities with maturities of more than three months from the date of purchase have been classified as short-term investments, and were $16.2 million as ofDecember 31, 2014. There have been no unrealized gains or losses related to the Company’s short-term investments.The Company determined that there were no other-than-temporary declines in the value of any available-for-sale securities as of December 31, 2014.The Company did not hold any available-for-sale securities as of December 31, 2013. All of the Company’s available-for-sale investment securities maturewithin one year.The Company obtains the fair value of its available-for-sale securities from the custodian bank or from a professional pricing service. The fair values ofavailable-for-sale securities are validated by comparing the fair values reported by the custodian bank to quoted market prices or to fair values obtained froma second source professional pricing service. 108Table of Contents4. Balance Sheet DetailsPrepaid and Other Current AssetsPrepaid and other current assets are comprised of the following (in thousands): December 31, 2014 2013 Prepaid clinical trial costs $843 $1,478 Other 826 176 Total$1,669 $1,654 Property and Equipment, NetProperty and equipment, net consists of the following (in thousands): December 31, 2014 2013 Laboratory equipment $1,109 $908 Manufacturing equipment 945 392 Computer equipment and software 116 93 Leasehold improvements 67 67 Office furniture 19 17 2,256 1,477 Less: accumulated depreciation and amortization (999) (794) Total$1,257 $683 Depreciation expense was $0.2 million, $0.3 million and $0.2 million for the years ended December 31, 2014, 2013 and 2012, respectively.Accrued ExpensesAccrued expenses consist of the following (in thousands): December 31, 2014 2013 Accrued clinical trial costs $2,397 $196 Accrued other 649 188 Total$3,046 $384 5. Notes Payable and Convertible Preferred Stock WarrantsNotes PayableIn August 2012 and October 2012, the Company entered into a note and warrant purchase agreement (the 2012 Convertible Note Agreement) underwhich the Company issued $8.0 million in secured convertible promissory notes (the 2012 Notes) with a stated interest rate of 8% per annum. InJanuary 2013, the Company issued an additional $7.0 million in secured convertible promissory notes in a subsequent closing under the 2012 ConvertibleNote Agreement (the 2013 Notes). 109Table of ContentsIn connection with the issuance of the 2012 Notes and the 2013 Notes, the Company issued warrants which were exercisable for Series C convertiblepreferred stock. The debt discount was amortized using the effective interest rate method over the term of the convertible notes to interest expense in theaccompanying statements of operations.In August 2013, the 2012 Notes and the 2013 Notes in the amount of approximately $16.0 million, including interest, converted into 1,818,191 sharesof Series C convertible preferred stock. Concurrent with the closing of the Series C convertible preferred stock, the warrants issued in conjunction with the2012 Notes and the 2013 Notes converted into warrants for the purchase of an aggregate of 341,404 shares of Series C convertible preferred stock with anexercise price of $8.79 per share.WarrantsOutstanding warrants as of December 31, 2013 consisted of warrants to purchase 64,801 shares of Series A convertible preferred stock at an exerciseprice of $31.092 and warrants to purchase 341,404 shares of Series C convertible preferred stock at an exercise price $8.79 per share. The aggregate fair valueof the Series A and Series C convertible preferred stock warrants as of December 31, 2013 was approximately $46,000 and $0.6 million, respectively. Theshares of Series A convertible preferred stock were convertible into shares of common stock at a ratio of 1:2.193204365. The shares of Series C convertiblepreferred stock were convertible into shares of common stock at a ratio of 1:1.In connection with the closing of the IPO, (i) the Series A convertible preferred stock warrants automatically converted into warrants to purchase142,113 shares of common stock at an exercise price of $14.1765 per share, which warrants remained outstanding as of December 31, 2014, and (ii) of the341,404 Series C convertible preferred stock warrants, 204,773 warrants were net exercised for 92,271 shares of Series C convertible preferred stock, theremaining warrants for the purchase of 136,631 shares of Series C convertible preferred stock were cash exercised for proceeds to the Company of $1.2million, and all of the shares of Series C convertible preferred stock were automatically converted to shares of common stock.Non-Cash Interest ExpenseThe following table summarizes interest expense recognized under the Company’s convertible notes payable and convertible preferred stock warrants(in thousands): Years Ended December 31, 2014 2013 2012 Stated interest on convertible notes payable $— $749 $228 Amortization of deferred financing costs associated with the convertible preferred stockwarrants 39 1,779 216 Total interest expense$39 $2,528 $444 6. Commitments and ContingenciesOperating LeasesIn December 2010, the Company signed a sublease agreement with a related party for a one-year term through December 31, 2011. In December 2011,the Company extended the term of the sublease through December 2012 on a month-to-month basis. In June 2012, the Company vacated the premises andfulfilled its obligations under the sublease.In September 2011, the Company entered into a lease agreement with a third party on a new facility for a five-year term commencing in February 2012. 110Table of ContentsRent expense was $0.4 million for each of the years ended December 31, 2014, 2013 and 2012, respectively. For financial reporting purposes, rentexpense is recognized on a straight-line basis over the term of the lease. Accordingly, rent expense recognized in excess of rent paid is accounted for asdeferred rent in the accompanying balance sheets.As of December 31, 2014, future minimum annual obligations under all non-cancellable operating lease commitments, including the facility leasedescribed above are as follows (in thousands): 2015$552 2016 571 2017 160 2018 7 Total$1,290 LitigationFrom time to time, the Company may be involved in various lawsuits, legal proceedings, or claims that arise in the ordinary course of business.Management believes there are no claims or actions pending against the Company as of December 31, 2014 which will have, individually or in theaggregate, a material adverse effect on its business, liquidity, financial position, or results of operations. Litigation, however, is subject to inherentuncertainties, and an adverse result in these or other matters may arise from time to time that may harm the Company’s business.License AgreementsThe following table summarizes costs recognized, in research and development, under the Company’s license agreements and other non-cancellableroyalty and milestone obligations (in thousands): Years Ended December 31, 2014 2013 2012 License and other fees $75 $250 $25 Milestone fees — 1,100 — Total license and related fees$75 $1,350 $25 Intellectual Property LicensesThe Company has acquired exclusive rights to develop patented rights, information rights and related know-how for the Company’s AuriPro, OTO-104and OTO-311 product candidates and potential future product candidates under licensing agreements with third parties in the course of its research anddevelopment activities. The licensing rights obligate the Company to make payments to the licensors for license fees, milestones, license maintenance feesand royalties. Annual license and maintenance fees related to these agreements is $25,000. The license and maintenance fees will continue until the firstcommercial sale of a product. In addition, the Company issued 710 shares of common stock as compensation for one of the licenses. The Company is alsoresponsible for patent prosecution costs, in the event such costs are incurred. 111Table of ContentsUnder one of these agreements, the Company has achieved five development milestones, totaling $1.2 million, related to its clinical trials for bothAuriPro and OTO-104. The Company may be obligated to make additional milestone payments under these agreements as follows (in thousands, except sharedata): Shares ofCommon Stock CashPayments Development 1,066 $3,235 Regulatory 1,066 12,670 Commercialization — 1,000 Total 2,132 $16,905 In addition, the Company may owe royalties of less than five percent on sales of commercial products, if any, developed using these licensedtechnologies. The Company may also be obligated to pay to the licensors a percentage of fees received if and when the Company sublicenses the technology.As of December 31, 2014, the Company has not yet developed a commercial product using the licensed technologies and it has not entered into anysublicense agreements for the technologies.Other Royalty ArrangementsThe Company entered into an agreement related to three provisional patents for AuriPro under which the Company may be obligated to pay a one-timemilestone payment of $0.5 million upon the first commercial sale of an approved product and to pay royalties of less than one percent on product sales. Theroyalties are payable until the later of: (i) the expiration of the last to expire patent owned by the Company in such country covering AuriPro; or (ii) 10 yearsafter the first commercial sale of AuriPro after receipt of regulatory approval for AuriPro in such country.During October 2014, the Company entered into an exclusive license agreement with Ipsen that enables the Company to use clinical and non-clinicalgacyclidine data generated by Ipsen to support worldwide development and regulatory filings for OTO-311. Under this license agreement, the Company isobligated to pay Ipsen low single-digit royalties on annual net sales of OTO-311 by the Company or its affiliates or sublicensees, up to a maximumcumulative royalty totaling $10.0 million.7. Fair ValueThe accounting guidance defines fair value, establishes a consistency framework for measuring fair value and expands disclosure for each major assetand liability category measured at fair value on either a recurring basis or nonrecurring basis. Fair value is defined as the price that would be received to sellan asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Accounting guidance establishes athree-tier fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuringfair value. These tiers are based on the source of the inputs and are as follows: Level 1:Observable inputs such as quoted prices in active markets for identical assets or liabilities.Level 2:Inputs other than quoted prices in active markets that are observable either directly or indirectly.Level 3:Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. 112Table of ContentsThe following fair value hierarchy table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31,2014 and 2013 (in thousands): Fair Value Measurement at Reporting Date Using Total Level 1 Level 2 Level 3 December 31, 2014: Assets Money market funds $17,840 $17,840 $— $— Certificates of deposit 17,160 — 17,160 — $35,000 $17,840 $17,160 $— December 31, 2013:LiabilitiesConvertible preferred stock warrants(1)$646 $— $— $646 $646 $— $— $646 (1)Convertible preferred stock warrant liabilities to purchase Series A and Series C convertible preferred stock at December 31, 2013 are classified as Level 3 and are measured usinga hybrid of the option pricing model and the PWERM on each reporting date. The key inputs into the models include the probability and timing of expected liquidity events,discount rates and the selection of appropriate market-comparable transactions and multiples to apply to the Company’s various historical and forecasted operational metrics.The following table provides a reconciliation of all liabilities measured at fair value using Level 3 significant unobservable inputs (in thousands): Convertible PreferredStock Warrant Liability Balance at December 31, 2012 $2,909 Issuance of convertible preferred stock warrants 570 Change in fair value (2,833) Balance at December 31, 2013 646 Change in fair value 3,300 Reclassification to additional paid-in capital uponclosing of IPO (3,946) Balance at December 31, 2014$— Changes in the fair value of the convertible preferred stock warrant liability were recognized in change in fair value of convertible preferred stock warrantliability in the accompanying statements of operations.Convertible Preferred Stock Purchase RightThe convertible preferred stock purchase right (the Purchase Right) was recorded as a liability in accordance with the accounting guidance at itsestimated fair value on the date of issuance of $3.8 million, and was revalued at each reporting date for any changes in the estimated fair value.The estimated fair value of the Purchase Right was determined using a valuation model that considers the probability of achieving a milestone, theentity’s cost of capital, the estimated time period the Purchase Right will be outstanding, consideration received for the instrument with the Purchase Right,the number of shares to be issued and specific share pricing to satisfy the Purchase Right, and any changes in the fair value of the underlying instrument tothe Purchase Right. The second closing of the Series B convertible preferred stock financing was completed on May 18, 2011, at which time 996,382 sharesof Series B convertible preferred stock 113Table of Contentswere purchased and the related portion of the fair value of the Purchase Right of $1.2 million was reclassified to Series B convertible preferred stock in theaccompanying balance sheets. The Purchase Right related to the third tranche expired in June 2012, at which time the carrying value of the liability of $3.7million was recognized in change in fair value of convertible preferred purchase right in the accompanying statements of operations.8. Convertible Preferred Stock and Stockholders’ Equity (Deficit)Convertible Preferred StockAs of December 31, 2013, there were 339,863 shares of Series A convertible preferred stock outstanding, 1,708,076 shares of Series B convertiblepreferred stock outstanding, and 7,040,026 shares of Series C convertible preferred stock outstanding. In April 2014, the Company completed the sale of4,126,080 shares of Series D convertible preferred stock to new and existing investors for net cash proceeds of $49.2 million.In connection with the IPO, all of the Company’s outstanding shares of convertible preferred stock were automatically converted into 13,619,569shares of common stock. The shares of Series A convertible preferred stock were convertible into shares of common stock at a ratio of 1:2.193204365 at theoption of the holder, subject to certain anti-dilution and other adjustments. The shares of Series B convertible preferred stock, Series C convertible preferredstock and Series D convertible preferred stock were convertible into shares of common stock at a ratio of 1:1 at the option of the holder, subject to certainanti-dilution and other adjustments.No preferred stock dividends were ever paid or declared by the Company.Common Stock Subject to RepurchaseThe Company’s 2010 Equity Incentive Plan (the 2010 Plan), allows for early exercise of certain option awards issued under the plan. As ofDecember 31, 2014, options had been exercised for the purchase of 13,627 shares of common stock, which were unvested and subject to repurchase. Underthe authoritative guidance, early exercise is not considered an exercise for accounting purposes and, therefore, any payment for unvested shares is recognizedas a liability at the original exercise price. As of December 31, 2014, the Company has recorded an early exercise liability of $46,000 and no shares havebeen repurchased by the Company. As of December 31, 2013, no options had been early exercised.Common Stock Reserved for Future IssuanceCommon stock reserved for future issuance is as follows in common equivalent shares: December 31, 2014 2013 Conversion of convertible preferred stock $— $9,493,489 Warrants for the purchase of convertible preferred stock — 483,517 Warrants for the purchase of common stock 142,113 — Common stock options issued and outstanding 2,707,477 1,235,705 Common stock options available for future grant 1,953,059 537,993 Common stock reserved for issuance under ESPP 380,000 — Total common stock reserved for future issuance$5,182,649 $11,750,704 114Table of Contents9. Stock Compensation Plans2010 Equity Incentive PlanThe Company granted awards under the 2010 Plan until June 2014. The terms of the 2010 Plan provide for the grant of incentive stock options to theCompany’s employees and for the grant of nonstatutory stock options, restricted stock, restricted stock units and stock appreciation rights to the Company’semployees, directors and consultants. The compensation committee of the board of directors had the authority to approve the employees and other serviceproviders to whom equity awards were granted and had the authority to determine the terms of each award, subject to the terms of the 2010 Plan, including(i) the number of shares of common stock subject to the award; (ii) when the award becomes exercisable; (iii) the option or stock appreciation right exerciseprice, which must be at least 100% of the fair market value of the common stock as of the date of grant; and (iv) the duration of the option or stockappreciation right (which may not exceed 10 years). Options granted under the 2010 Plan generally are scheduled to vest over four years, subject tocontinued service, and subject to certain acceleration of vesting provisions, and expire no later than 10 years from the date of grant. In connection with theadoption of the 2014 Equity Incentive Plan, the Company terminated the 2010 Plan for future use and provided that no further equity awards are to begranted under the 2010 Plan. All outstanding awards under the 2010 Plan will continue to be governed by their existing terms.2014 Equity Incentive PlanIn July 2014, the Company’s board of directors adopted and the Company’s stockholders approved a 2014 Equity Incentive Plan (the 2014 Plan), andthe 2014 Plan became effective August 11, 2014. The 2014 Plan permits the grant of incentive stock options to the Company’s employees and for the grantof nonstatutory stock options, restricted stock, restricted stock units, stock appreciation rights, performance units and performance shares to the Company’semployees, directors and consultants.Upon adoption of the 2014 Plan, a total of 2,606,875 shares of common stock were reserved for issuance, including 386,875 shares of common stockpreviously available for issuance under the 2010 Plan. In addition, the shares to be reserved for issuance under the 2014 Plan will also include shares subjectto stock options or similar awards granted under the 2010 Plan that expire or terminate without having been exercised in full and shares issued pursuant toawards granted under the Company’s 2010 Plan that are forfeited to or repurchased by the Company.The number of shares available for issuance under the 2014 Plan will also include an annual increase on the first day of each fiscal year beginning in2015, equal to the lesser of (i) 2,500,000 shares; (ii) 5% of the outstanding shares of common stock as of the last day of the immediately preceding fiscal year;or (iii) such other amount as the Company’s board of directors may determine. Effective January 1, 2015, the number of shares available for future issuancewas increased by 1,058,663 shares.The compensation committee of the board of directors has the authority to approve the employees and other service providers to whom equity awardsare granted and to determine the terms of each award, subject to the terms of the 2014 Plan. The compensation committee may determine the number of sharessubject to an award, except that the 2014 Plan provides certain limits on the number of awards that may be granted to non-employee members of the board ofdirectors under the 2014 Plan in any fiscal year. Options and stock appreciation rights granted under the 2014 Plan must have a per share exercise price equalto at least 100% of the fair market value of a shares of the common stock as of the date of grant and may not expire later than 10 years from the date of grant. 115Table of ContentsAs of December 31, 2014, 1,953,059 options were available for grant under the 2014 Plan. The following table summarizes stock option activity for theyear ended December 31, 2014 (in thousands except per share amounts and years): Options Weighted-AverageExercise Price Weighted-AverageRemainingContractualTerm (In Years) AggregateIntrinsic Value Outstanding as of December 31, 2013 1,236 $2.06 9.2 $47 Granted 1,543 $16.36 Exercised (62) $2.51 Forfeited (10) $2.49 Outstanding as of December 31, 2014 2,707 $10.20 9.0 $62,993 Options vested and expected to vest as ofDecember 31, 2014 2,679 $10.15 9.0 $62,466 Options exercisable as of December 31, 2014 959 $3.30 7.2 $28,802 The following table summarizes certain information regarding stock options (in thousands, except per share data): Years Ended December 31, 2014 2013 2012 Weighted-average grant date fair value per share of options granted during the period $11.23 $1.28 $0.79 Fair value of options vested during the period 543 206 194 Cash received from options exercised during the period(1) 155 5 3 Intrinsic value of options exercised during the period 132 — — (1)For the year ended December 31, 2014, cash received from options exercised during the period includes cash proceeds of $46,000 for shares which were early exercised andsubject to repurchase as of December 31, 2014. The Company has reflected the early exercise liability within accrued expenses in the accompanying balance sheets.2014 Employee Stock Purchase PlanIn July 2014, the Company’s board of directors adopted and the stockholders approved the Company’s 2014 Employee Stock Purchase Plan (theESPP), which became effective upon adoption by the Company’s board of directors. The ESPP allows eligible employees to purchase shares of theCompany’s common stock at a discount through payroll deductions of up to 15% of their eligible compensation, subject to any plan limitations. The offeringperiods generally start on the first trading day on or after June 1 and December 1 of each year and end on the first trading day on or before June 1 andDecember 1 approximately twenty-four months later, and will include six-month purchase periods. The administrator may, in its discretion, modify the termsof future offering periods. Due to the timing of our initial public offering, the first offering period started on August 12, 2014 and will end on June 1, 2016.The ESPP initially authorized the issuance of 380,000 shares of the Company’s common stock pursuant to rights granted to employees for their payrolldeductions. The number of shares available for issuance under the ESPP will also include an annual increase on the first day of each fiscal year beginning in2015, equal to the lesser of (i) 800,000 shares; (ii) 1.5% of the outstanding shares of common stock as of the last day of the immediately preceding fiscal year;or (iii) such other amount as the Company’s board of directors may determine. Effective January 1, 2015, the number of shares available for future issuancewas increased by 317,599 shares. 116Table of ContentsThrough December 31, 2014, no shares of common stock have been issued pursuant to ESPP purchases.Stock-Based Compensation ExpenseThe following are the weighted-average underlying assumptions used to determine the fair value of stock options and ESPP rights using the Black-Scholes-Merton option pricing model: Years Ended December 31, 2014 2013 2012 Stock Options: Risk-free interest rate 1.8% 2.0% 1.0% Expected dividend yield 0.0% 0.0% 0.0% Expected volatility 80.6% 85.5% 92.2% Expected term (in years) 6.1 6.1 6.1 Employee Stock Purchase Plan: Risk-free interest rate 0.2% Expected dividend yield 0.0% Expected volatility 65.1% Expected term (in years) 1.2 Risk-Free Interest Rate. The Company bases the risk-free interest rate assumption on observed interest rates appropriate for the expected term of theoption grants.Expected Dividend Yield. The Company bases the expected dividend yield assumption on the fact that it has never paid cash dividends and has nopresent intention to pay cash dividends.Expected Volatility. The expected volatility assumption is based on volatilities of a peer group of similar companies whose share prices are publiclyavailable. The peer group was developed based on companies in the biopharmaceutical industry.Expected Term. The expected term represents the period of time that options are expected to be outstanding. Because the Company does not havehistorical exercise behavior, it determines the expected life assumption using the simplified method, which is an average of the contractual term of the optionand its ordinary vesting period.Total non-cash stock-based compensation expense recognized in the accompanying statements of operations is as follows (in thousands): Years Ended December 31, 2014 2013 2012 Research and development $760 $62 $78 General and administrative 932 121 113 Total stock-based compensation$1,692 $183 $191 As of December 31, 2014, unrecognized compensation cost related to stock options was $17.2 million which is expected to be recognized over aremaining weighted-average vesting period of 3.2 years. As of December 31, 2014, unrecognized compensation cost related to ESPP rights was $0.3 millionwhich is expected to be recognized over a remaining weighted-average vesting period of 0.4 years. 117Table of Contents10. Income TaxesPursuant to Internal Revenue Code (IRC) Sections 382 and 383, annual use of the Company’s net operating loss and research and development creditcarryforwards may be limited in the event that a cumulative change in ownership of more than 50% occurs within a three-year period. The Company hascompleted an IRC Section 382/383 analysis, regarding the limitation of net operating loss and research and development credit carryforwards as ofDecember 31, 2014. As a result of the analysis, three ownership changes were determined to have occurred. Based on these changes, the deferred tax assets fornet operating losses and federal research and development credits of $3.2 million and $0.3 million, respectively, have been removed from the deferred taxasset schedule and the Company has recorded a corresponding decrease in the valuation allowance. The California research and development credits were notlimited as these credits carry forward indefinitely. The Company will continue to consider changes in ownership that may cause losses of tax attributes in thefuture.Significant components of the Company’s deferred tax assets are as follows (in thousands): December 31, 2014 2013 Deferred tax assets: Net operating loss carryforwards $24,047 $18,620 Research and development credits 2,334 1,363 Depreciation and amortization 10,509 906 Accrued expenses 138 76 Deferred rent 88 116 Other, net 441 31 Total deferred tax assets 37,557 21,112 Less: valuation allowance (37,557) (21,112) Total$— $— Due to the Company’s history of losses and uncertainty regarding future earnings, a full valuation allowance has been recorded against the Company’sdeferred tax assets, as it is more likely than not that such assets will not be realized. A valuation allowance of approximately $37.6 million and $21.1 millionhas been established as of December 31, 2014 and 2013, respectively.At December 31, 2014, the Company had federal and California net operating loss carryforwards of approximately $60.5 million and $59.4 million,respectively, net of IRC Section 382 limitations. The federal and California net operating loss carryforwards will begin to expire in 2030, unless previouslyutilized. At December 31, 2014, the Company also had federal and California research and development credit carryforwards of approximately $2.8 millionnet of IRC Section 383 limitations and $1.6 million, respectively. The federal research and development credit carryforwards will begin expiring in 2030unless previously utilized. The California research credit will carry forward indefinitely.The following is a reconciliation of the expected recovery of income taxes between those that are based on enacted tax rates and laws, to thosecurrently reported for the years ended December 31 (in thousands): 2014 2013 2012 Federal statutory rate $(14,578) $(6,650) $(2,573) State tax (net of federal benefit) (2,235) (1,148) (628) Permanent items, other 6 6 2 Change in fair value of convertible preferred stock warrant liability 1,122 (963) (1,260) 118Table of Contents 2014 2013 2012 Change in fair value of convertible preferred stock purchase right $— $— $(34) Non-deductible interest — 855 150 Stock compensation 256 59 54 Other adjustments (45) 91 10 Research and development credits (1,597) (1,236) (160) Uncertain tax positions 627 409 60 Change in valuation allowance 16,445 8,578 4,380 Provision for income taxes$1 $1 $1 The following table summarizes the activity related to our gross unrecognized tax benefits (in thousands): December 31, 2014 2013 2012 Balance at the beginning of the year $1,057 $515 $422 Adjustments related to prior year tax positions 14 136 (4) Increases related to current year tax positions 703 406 97 Decreases due to statute of limitations expiration — — — Decreases due to IRC Section 382/383 limitation — — — $1,774 $1,057 $515 The Company’s policy is to include interest and penalties related to unrecognized income tax benefits as a component of income tax expense. TheCompany has no accruals for interest or penalties in the accompanying balance sheets as of December 31, 2014 and 2013 and has not recognized interest orpenalties in the accompanying statements of operations for the years ended December 31, 2014 and 2013.Due to the valuation allowance recorded against the Company’s deferred tax assets, future changes in unrecognized tax benefits will not impact theCompany’s effective tax rate. The Company does not expect its unrecognized tax benefits to change significantly in the next 12 months.The Company is subject to taxation in the United States and California. Due to the net operating loss carryforwards, the U.S. federal and state returnsare open to examination by the IRS and California for all years since inception. The Company has not been, nor is it currently, under examination by thefederal or any state tax authority.11. Selected Quarterly Financial Data (unaudited)The following table contains quarterly financial information for 2014 and 2013. The Company believes that the following information reflects allnormal recurring adjustments necessary for a fair statement of the information for the periods presented. The operating results for any quarter are notnecessarily indicative of results for any future period. First Quarter Second Quarter Third Quarter Fourth Quarter (in thousands, except per share data) Year Ended December 31, 2014 Total operating expenses $10,556 $9,828 $9,401 $9,854 Other income (expense) (265) (403) (2,630) 60 Net loss attributable to common stockholders (10,834) (10,246) (12,038) (9,794) Net loss per share attributable to commonstockholders, basic and diluted (129.52) (109.07) (1.23) (0.46) 119Table of Contents First Quarter Second Quarter Third Quarter Fourth Quarter (in thousands, except per share data) Year Ended December 31, 2013 Total operating expenses $3,818 $3,809 $4,355 $7,868 Other income (expense) 1,329 143 (1,292) 111 Net loss attributable to common stockholders (2,686) (3,865) (5,777) (7,770) Net loss per share attributable to commonstockholders, basic and diluted (36.65) (51.45) (76.69) (103.15) 12. Subsequent EventsIn January 2015, the Company completed a follow-on public offering of 2,932,500 shares of its common stock, which includes the exercise in full bythe underwriters of their option to purchase 382,500 shares of common stock, at an offering price of $29.25 per share. Proceeds from the follow-on publicoffering were approximately $80.0 million, net of underwriting discounts, commissions and offering-related transaction costs.Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone.Item 9A. CONTROLS AND PROCEDURESEvaluation of Disclosure Controls and ProceduresOur management is responsible for establishing and maintaining adequate internal control over financial reporting. Management, with theparticipation of our Chief Executive Officer and our Chief Financial and Business Officer, evaluated the effectiveness of our disclosure controls andprocedures as of December 31, 2014. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act,means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that itfiles or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by acompany in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including itsprincipal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that anycontrols and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and managementnecessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosurecontrols and procedures as of December 31, 2014, our Chief Executive Officer and our Chief Financial and Business Officer concluded that, as of such date,our disclosure controls and procedures were effective at the reasonable assurance level.Management’s Report on Internal Control over Financial ReportingThis Annual Report on Form 10-K does not include a report of management’s assessment regarding internal control over financial reporting or anattestation report of our independent registered public accounting firm due to a transition period established by the rules of the SEC for newly publiccompanies. 120Table of ContentsChanges in Internal Control over Financial ReportingThere were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2014 that havematerially affected, or are reasonably likely to materially affect, our internal control over financial reporting.Inherent Limitations of Disclosure Controls and Internal Control over Financial ReportingBecause of their inherent limitations, our disclosure controls and procedures and our internal control over financial reporting may not preventmaterial errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that theobjectives of the control system are met. The effectiveness of our disclosure controls and procedures and our internal control over financial reporting issubject to risks, including that the controls may become inadequate because of changes in conditions or that the degree of compliance with our policies orprocedures may deteriorate.Item 9B. OTHER INFORMATIONNone. 121Table of ContentsPart IIIItem 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEThe information required by this item will be contained in our definitive proxy statement to be filed with the Securities and Exchange Commission inconnection with our 2015 annual meeting of stockholders (the “Proxy Statement”), which is expected to be filed not later than 120 days after the end of ourfiscal year ended December 31, 2014, and is incorporated in this report by reference.Item 11. EXECUTIVE COMPENSATIONThe information required by this item will be set forth in the Proxy Statement and is incorporated herein by reference.Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSThe information required by this item will be set forth in the Proxy Statement and is incorporated herein by reference.Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe information required by this item will be set forth in the Proxy Statement and is incorporated herein by reference.Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICESThe information required by this item will be set forth in the Proxy Statement and is incorporated herein by reference. 122Table of ContentsPART IVItem 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULESThe following documents are filed as a part of this Annual Report on Form 10-K:(1) Financial Statements:Our Financial Statements are listed in the “Index to Financial Statements” under Part II, Item 8 of this Annual Report on Form 10-K.(2) Financial Statement Schedules:Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in thefinancial statements or notes herein.(3) ExhibitsThe documents listed in the Exhibit Index of this Annual Report on Form 10-K are incorporated by reference or are filed with this AnnualReport on Form 10-K, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K). 123Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this annual report on Form10-K to be signed on its behalf by the undersigned, thereunto duly authorized.Date: March 18, 2015 OTONOMY, INC. By: /s/ David A. Weber David A. Weber, Ph.D. President and Chief Executive OfficerPOWER OF ATTORNEYEach person whose signature appears below constitutes and appoints David A. Weber, Ph.D. and Paul E. Cayer, and each of them acting individually,as his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him or her and in his or her name, place andstead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and otherdocuments in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, fullpower and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents andpurposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or hissubstitutes, may lawfully do or cause to be done by virtue thereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrantand in the capacities and on the dates indicated: Signature Title Date/s/ David A. WeberDavid A. Weber, Ph.D. President, Chief Executive Officer and Director(Principal Executive Officer) March 18, 2015/s/ Paul E. CayerPaul E. Cayer Chief Financial and Business Officer(Principal Accounting Officer) March 18, 2015/s/ Peter BisgaardPeter Bisgaard Chairman of the Board of Directors March 18, 2015 /s/ Vickie CappsVickie Capps Director March 18, 2015 /s/ Brian DoveyBrian Dovey Director March 18, 2015 /s/ Chau Q. KhuongChau Q. Khuong Director March 18, 2015 /s/ Jay LichterJay Lichter, Ph.D. Director March 18, 2015 /s/ John P. McKearnJohn P. McKearn, Ph.D. Director March 18, 2015 /s/ Heather PrestonHeather Preston, M.D. Director March 18, 2015 124Table of ContentsEXHIBIT INDEX ExhibitNumber Incorporation by Reference Description Form File No. Exhibit Filing Date 2.1# Asset Transfer Agreement between the Registrant and IncuMed, LLC, dated April 30, 2013. S-1 333-197365 2.1 7/11/2014 3.1 Amended and Restated Certificate of Incorporation of the Registrant. S-1 333-197365 3.2 8/1/2014 3.2 Amended and Restated Bylaws of the Registrant. S-1 333-197365 3.4 8/1/2014 4.1 Third Amended and Restated Investors’ Rights Agreement among the Registrant and certainof its stockholders, dated April 23, 2014. S-1 333-197365 4.1 7/11/2014 4.2 Specimen common stock certificate of the Registrant. S-1 333-197365 4.2 7/28/201410.1+ Form of Indemnification Agreement between the Registrant and each of its directors andexecutive officers. S-1 333-197365 10.1 8/1/201410.2+ Amended and Restated 2010 Equity Incentive Plan and forms of agreement thereunder. S-1 333-197365 10.2 8/1/201410.3+ 2014 Equity Incentive Plan and forms of agreements thereunder. S-1 333-197365 10.3 8/1/201410.4+ 2014 Employee Stock Purchase Plan and form of agreement thereunder. S-1 333-197365 10.4 8/1/201410.5+ Executive Incentive Compensation Plan. S-1 333-197365 10.5 7/28/201410.6+ Executive Employment Agreement between the Registrant and David A. Weber, Ph.D., datedJuly 30, 2014. S-1 333-197365 10.6 8/1/201410.7+ Executive Employment Agreement between the Registrant and Paul E. Cayer, dated July 31,2014. S-1 333-197365 10.7 8/1/201410.8+ Executive Employment Agreement between the Registrant and Carl LeBel, Ph.D., datedJuly 31, 2014. S-1 333-197365 10.8 8/1/201410.9+ Executive Employment Agreement between the Registrant and Robert Michael Savel, II,dated July 31, 2014. S-1 333-197365 10.9 8/1/201410.10+ Executive Employment Agreement between the Registrant and Anthony J. Yost, datedOctober 20, 2014. S-1 333-201401 10.10 1/8/201510.11 Lease Agreement between the Registrant and ARE-SD Region No. 25, LLC, datedSeptember 23, 2011, as amended on May 28, 2014. S-1 333-197365 10.9 7/11/201410.12 Loan and Security Agreement between the Registrant and Square 1 Bank, dated July 31,2013. S-1 333-197365 10.10 7/11/201410.13# License and Commercialization Agreement between the Registrant and DURECTCorporation, dated April 30, 2013. S-1 333-197365 10.11 7/11/201410.14# License Agreement between the Registrant and The Regents of the University of California,dated November 5, 2008, as amended on January 27, 2010, June 9, 2010 and November 7,2012. S-1 333-197365 10.12 7/11/201410.15 Form of Warrant to Purchase Series A Convertible Preferred Stock issued pursuant to theRegistrant’s Note and Warrant Purchase Agreement, dated December 8, 2008. S-1 333-197365 10.13 7/11/201410.16 Form of Warrant to Purchase Shares of Preferred Stock issued pursuant to the Registrant’sNote and Warrant Purchase Agreement, dated August 23, 2012. S-1 333-197365 10.14 7/11/2014 125Table of ContentsExhibitNumber Incorporation by Reference Description Form File No. Exhibit Filing Date 10.17 Warrant to Purchase Stock issued pursuant to Loan and Security Agreement between theRegistrant and Square 1 Bank, dated July 31, 2013. S-1 333-197365 10.15 7/11/2014 23.1 Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm. 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-OxleyAct 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-OxleyAct 32.1* Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-OxleyAct 32.2* Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-OxleyAct 101.INS XBRL Instance Document. 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB XBRL Taxonomy Extension Label Linkbase Document. 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. *The certifications attached as Exhibit 32.1 and 32.2 that accompany this Annual Report on Form 10-K are not deemed filed with the Securities andExchange Commission and are not to be incorporated by reference into any filing of Otonomy, Inc. under the Securities Act of 1933, as amended, orthe Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K, irrespective of anygeneral incorporation language contained in such filing.#Portions of the exhibit have been omitted pursuant to an order granted by the Securities and Exchange Commission for confidential treatment.+Indicates management contract or compensatory plan. 126Exhibit 23.1Consent of Independent Registered Public Accounting FirmWe consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-198116) pertaining to the 2014 Equity Incentive Plan, 2014Employee Stock Purchase Plan, and the Amended and Restated 2010 Equity Incentive Plan of Otonomy, Inc. of our report dated March 18, 2015, with respectto the financial statements of Otonomy, Inc. included in this Annual Report (Form 10-K) of Otonomy, Inc. for the year ended December 31, 2014./s/ Ernst & Young LLPSan Diego, CaliforniaMarch 18, 2015Exhibit 31.1CERTIFICATION OF PERIODIC REPORT UNDER SECTION 302 OFTHE SARBANES-OXLEY ACT OF 2002I, David A. Weber, Ph.D., certify that: 1.I have reviewed this Annual Report on Form 10-K of Otonomy, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared; (b)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonablylikely to materially affect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting.Date: March 18, 2015 /s/ David A. Weber David A. Weber, Ph.D.President and Chief Executive OfficerExhibit 31.2CERTIFICATION OF PERIODIC REPORT UNDER SECTION 302 OFTHE SARBANES-OXLEY ACT OF 2002I, Paul E. Cayer, certify that: 1.I have reviewed this Annual Report on Form 10-K of Otonomy, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared; (b)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonablylikely to materially affect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting.Date: March 18, 2015 /s/ Paul E. CayerPaul E. CayerChief Financial and Business OfficerExhibit 32.1CERTIFICATION OF CHIEF EXECUTIVE OFFICERPURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) and Section 1350 ofChapter 63 of Title 18 of the United States Code (18 U.S.C. §1350), I, David A. Weber, Ph.D., President and Chief Executive Officer of Otonomy, Inc. (the“Company”), hereby certify that: 1.The Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, to which this Certification is attached as Exhibit 32.1(the “Periodic Report”), fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act; and 2.The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of theCompany.Date: March 18, 2015 By:/s/ David A. WeberName:David A. Weber, Ph.D.Title:President and Chief Executive OfficerExhibit 32.2CERTIFICATION OF CHIEF FINANCIAL OFFICERPURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) and Section 1350 ofChapter 63 of Title 18 of the United States Code (18 U.S.C. §1350), I, Paul E. Cayer, Chief Financial and Business Officer of Otonomy, Inc. (the “Company”),hereby certify that: 1.The Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, to which this Certification is attached as Exhibit 32.2(the “Periodic Report”), fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act; and 2.The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of theCompany.Date: March 18, 2015 By:/s/ Paul E. CayerName:Paul E. CayerTitle:Chief Financial and Business Officer

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