Turns Out We Got It Right On Otonomy Inc (NASDAQ:OTIC)

Inc (NASDAQ:OTIC). It's been a few months since we outlined our reasons why we thought the company was a great recovery play and, this week, we have seen our justification for buying the company validated in the markets.On Wednesday, after markets closed in the US, Otonomy announced some data from a phase 3 trial of a development asset called Otividex.Alongside the data, we also saw a financial update outlining third-quarter numbers and management held a conference call to review both the data and the financial standing of the company. OTIC Daily ChartWhen we last covered the stock, the drug in question, Otividex had just failed a phase 3 study in the same indication – Ménière's disease – that it has now reportedly passed in.So what's going on?Otonomy was conducting two parallel phase 3 clinical trials of Otividex in the Ménière's disease indication, one in the US and one in Europe. Back in August, the company put out data from the US study and the trial failed to hit its primary and secondary endpoints. There was some indication of efficacy, however the p-values associated with the data weren't low enough to warrant a claim of statistical significance and, in turn, the trial was deemed a failure.Subsequent to the announcing of this failure, Otonomy reported that it was discontinuing all activity associated with the clinical development of Otividex in the Ménière's disease indication.The data we just saw derived from the European version of the US clinical study.And in this instance, the p-values that proved the downfall of the trial in the US have come in below the threshold necessary for statistical significance, qualifying the trial as a success.What does all this mean?Well, Otonomy now has a chance to pull Otividex back from the brink of failure. Whether the company can do that, however, remains to be seen. It all comes down to how the FDA responds to the development. If management can sit down with the agency in the US and persuade it to accept the European study data over the US study data, there is a chance we could see a registration application based on these numbers alone.If the FDA is a little harsher, it might request a second phase 3 trial in the US, the data from which could be used to shore up the European numbers as part of a reinforced registration application.It can be notoriously difficult to get a quick meeting with the agency in the US but, against a backdrop of reform aimed at improved turnover times, Otonomy could realistically squeeze in a sit-down before the end of the year. The company expects to update markets as to the outcome of any such meeting during the first quarter of next year, at which point we should learn whether the FDA is willing to accept the data or will request further investigation, as per the two scenarios outlined above.This serves up a major near-term catalyst for anybody looking to trade Otonomy into the start of 2018. Specifically, if the company can get a favorable outcome from its meeting with the FDA, it's going to appreciate considerably based on the fact that it won't need to dilute shareholders to raise the capital necessary to conduct a third phase 3 investigation.If the agency does require an additional study, we will likely see a near-term dip (on the inverse interpretation of the above-mentioned dilution necessity) but this might, in turn, present an opportunity to pick up some cheap shares ahead of a longer-term successful outcome for the program.Cash on hand September 30 was $134 million, which isn't bad for a company of this size. With that said, however, and as outlined above, if Otonomy needs to conduct further studies, a raise is pretty much inevitable during the first quarter of next year.Check out our previous coverage of this one here. We will be updating our subscribers as soon as we know more. For the latest updates on OTIC, sign up below!Image courtesy of Colm Britton via FlickrDisclosure: We have no position in OTIC and have not been compensated for this article.