Here's Why the Market Is Eviscerating Otonomy Inc. Stock Today

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What happened

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Otonomy Inc. (NASDAQ: OTIC) stock cratered Wednesday morning after the biotech and biopharmaceuticals company announced truly dismal results from a pivotal Phase 3 trial for its steroid candidate Otividex. Investors viewed the experimental treatment as the stock's main value driver, and word of its trial failure drove the stock 81.5% lower as of 12:02 p.m. EDT.

So what 

About 600,000 U.S. patients suffer from Meniere's disease, an incurable inner-ear affliction that leads to vertigo and progressive hearing loss. These patients lack effective treatment options, and now it looks like Otividex isn't going to be one.

Otividex is a long-lasting version of dexamethasone, a steroid that physicians have been using to reduce inflammation for more than 50 years. Patients receiving the candidate reported a 58% reduction in vertigo frequency from baseline. That would be impressive if patients receiving a placebo hadn't reported a 55% reduction.

Now what

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The results were bad enough that Otonomy will immediately suspend a nearly identical trial currently underway in Europe. Less clinical trial activity will help the company conserve its cash balance, which totaled $150.5 million at the end of June, but there's still an enormous gap between revenues and expenses. 

The company had expected adjusted operating expenses to reach between $80 million and $85 million this year. Meanwhile, sales figures for Otipro, the company's first approved drug, have been as disappointing as Otividex's trial data. The decades-old antibiotic reformulated as ear drops generated just $700,000 in sales during the first half of the year.

An application that could expand Otipro's addressable patient population to include those with swimmer's ear, which is currently under FDA review, could boost Otonomy's top line a bit next year. Even if it succeeds, though, it's hard to see the company climbing out of the crater Otividex's trial failure just made.

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Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.