Here's Why Otonomy Inc (NASDAQ:OTIC) Is A Great Recovery Play

Otonomy Inc (NASDAQ:OTIC) announced on Wednesday that its lead development program has missed on a number of points and that the program is discontinued on the back of the results. The company took a more than 82% hit on the announcement, falling from more than $20 a share to current pricing in and around $3.60 apiece. We've seen a small bounce premarket on Thursday, but nothing substantial and far from any degree of consolation to shareholders that had an exposure to the stock. OTIC Daily ChartThere's a chance, however, that we are looking at a classic biotechnology oversell and – in turn – that there might be an opportunity to pick up an exposure to the stock at current prices in anticipation of a recovery. Perhaps not a recovery back towards the $20 mark, at least not yet, but we don't need to see the stock go back to $20 in order to register substantial gain on current levels.Before we get into the opportunity, let's quickly address the disappointment.The drug in question is called Otividex and Otonomy was running two parallel clinical trials, one in Europe and one in the US, in an attempt to prove that Otividex could be a safe and effective alternative to the current standard of care (which is dramatically lacking in this population) in Meniere's disease. This disease is a problem with the in area that causes vertigo and hearing loss and – right now – it's incurable.Anyway, the latest data shows that Otividex isn't the asset that's going to overcome the unmet need. The drug failed against both its primary endpoint and a spate of key secondary endpoints and, on the back of the failure, Otonomy has decided to discontinue both of the above mentioned trials (the one that just failed was US study, but Otividex has discontinued the European study now as well).So that's the downside, what are we looking at as potentially getting this one running again?Otonomy isn't a development stage biotechnology stock in the purest sense of the word – it already has one drug approved and on shelves in the US right now. It's called Otiprio and it's approved to target pediatric patients with bilateral otitis media with effusion undergoing tympanostomy tube placement.So far, the drug has disappointed from a topline perspective, having only generated around $700,000 in revenues for Otonomy during the first six months of 2017. It was only approved in December 2015, however, and it's not unusual for these sorts of drugs to take up to five years to reach peak sales.And that is not all.The company has a Supplemental New Drug Application (sNDA) with the FDA right now that is seeking to extend the target population to include patients with acute otitis externa, also known as swimmer’s ear. This is a much larger population than the currently approved one and – if the drug gets a green light for commercialization on the back of the sNDA – peak sales potential for Otiprio will increase many-fold.The application has a PDUFA of March 2, 2018 and there is a good chance that markets will load up on Otonomy across the next six months in anticipation of a positive outcome.The final piece of the puzzle is rooted in the balance sheet.As of June 30, the company had a cash balance (including short-term investments) of a little over $150 million. Debt is nonexistent and there's practically nothing in the way of liabilities (around $9 million worth of accounts payable, but that's it) meaning that at its current $108 million market capitalization, the company is priced at around a 45% discount to cash.Bottom line: this latest development is disappointing, but it's far from a death knell for the company and there is plenty of room for recovery from here on out.We will be updating our subscribers as soon as we know more. For the latest updates on OTIC, sign up below!Image courtesy of Conal Gallagher via FlickrDisclosure: We have no position in OTIC and have not been compensated for this article.