Omeros Corporation — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Omeros is a commercial-stage biopharmaceutical company; OMIDRIA, its only FDA-approved U.S. commercial product, is used during cataract surgery and intraocular lens replacement. Financial statements are unaudited.
Financial results and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $21.7 million | $11.3 million | $51.1 million | $28.7 million |
| Operating expenses | $26.8 million | $23.3 million | $80.8 million | $71.1 million |
| Operating loss | $5.1 million | $12.0 million | $29.8 million | $42.4 million |
| Net loss | $7.5 million | $14.0 million | $36.9 million | $47.1 million |
| Loss per diluted share | $0.16 | $0.34 | $0.83 | $1.19 |
| Operating cash used | Not stated by quarter | Not stated by quarter | $32.1 million | $40.6 million |
- Q3 net product sales were $21.7 million, up 91.9% year over year. Nine-month product sales were $51.1 million, up 78.9%. Product cost was low relative to sales; approximate product gross margin was 99% in both periods.
- At September 30, cash and cash equivalents were $1.0 million and short-term investments were $85.8 million, or $86.8 million combined for general corporate use. Receivables were $24.6 million. Restricted cash and investments of $5.8 million were not generally available.
- Debt and lease financing obligations, net, were $82.8 million, versus $79.5 million at year-end 2016. The CRG loan bears 12.25% annual interest; $3.0 million of interest had been deferred and added to principal by quarter-end. Interest expense was $2.8 million for Q3 and $8.2 million for the nine months.
- Shareholders’ equity was $9.2 million, compared with a $37.4 million deficit at December 31, 2016. The accumulated deficit was $506.8 million.
Changes versus the prior comparable periods
- Revenue growth reflected increased OMIDRIA adoption, more purchasing hospitals and ambulatory surgery centers, deeper sales within existing accounts, and higher unit sales. Sequentially, Q3 revenue rose 26.3% from Q2 2017.
- Net losses narrowed, principally as revenue growth improved operating results. R&D spending increased to $14.8 million in Q3 and $40.2 million for nine months, including higher OMS721 manufacturing and development costs. SG&A increased to $11.7 million in Q3 and $40.0 million for nine months, with patent-litigation costs a principal factor.
- Gross-to-net deductions rose to 24.7% of gross product sales in Q3 and 24.2% for nine months, from 11.6% and 9.3%, respectively, in 2016, largely due to rebates and discounts.
- Net cash used in operations improved by $8.6 million year over year for the nine-month period. Financing provided $73.9 million, including $63.6 million net proceeds from an August stock offering and $10.5 million from option exercises. Investment purchases and maturities drove much of the investing cash flow.
Outlook, developments and risks
- OMIDRIA reimbursement: Medicare pass-through status was scheduled to expire January 1, 2018. CMS’s November 2017 final rule provided for OMIDRIA to be included in the packaged procedural payment rather than separately paid. Omeros was pursuing continued separate or similar reimbursement and/or an extension, but could not predict the result. Without it, management expected eventual reductions in per-unit price and potentially significant revenue impact; customers might delay purchases or return product.
- Liquidity and debt: Management believed available assets, expected collection of receivables, and access to up to $45 million of additional CRG borrowing were sufficient to meet obligations through November 9, 2018, regardless of the reimbursement outcome. This was a management assessment, not a guarantee. The company expected continued negative operating cash flow and at least $6.8 million of debt service through that date. The additional borrowing was subject to customary conditions and available through March 21, 2018.
- Loan covenants: The CRG facility requires annual minimum revenue or a market-capitalization threshold. The 2017 revenue threshold is $55 million; management anticipated meeting it. Failure to meet applicable covenants could trigger default, acceleration, and lender remedies against substantially all assets, including intellectual property.
- Pipeline: OMS721 Phase 3 enrollment had opened for aHUS; the company planned Phase 3 programs in IgA nephropathy and HSCT-TMA. Trial progress, regulatory design and approval outcomes remain uncertain. OMS824 schizophrenia trials remained suspended at FDA request; Huntington’s disease development was subject to dosing limitations. Omeros expected to submit an IND or CTA for OMS527 in the first half of 2018.
- Other developments: In October 2017, Par acknowledged the validity of OMIDRIA patents and agreed not to launch a generic before the earlier of April 1, 2032 or specified events; Par is licensed to sell a generic thereafter through patent expiration and would pay a 15% royalty on its net sales. Separate patent litigation with Sandoz and Lupin continued, with trial-related stays expected through November 2019. These outcomes remain subject to legal and regulatory developments.
- Manufacturing and Europe: Omeros relied on third parties for manufacturing and had submitted an application seeking approval of Hospira as an OMIDRIA manufacturing site. The company reported adequate inventory for expected demand but did not yet have Hospira approval. OMIDRIA had to be placed on the market in at least one EEA country by July 28, 2018 to preserve its European authorization; partnering or an independent launch was uncertain.
- Other contingencies: Certain third-party contracts could require $3.8 million in termination fees if canceled within specified periods. The OMS103 licensee had not met its diligence obligations, including initiating sales. No formal financial guidance was provided. Management anticipated R&D costs would rise during the remainder of 2017 and SG&A costs would decrease, primarily with reduced patent-enforcement legal costs.
Important facts for investors to verify
- Whether Medicare reimbursement for OMIDRIA changed after January 1, 2018, and the resulting effect on pricing, sales, rebates, returns, and customer ordering.
- Whether OMIDRIA revenue met the CRG loan’s $55 million 2017 covenant and whether the company retained access to the additional $45 million borrowing.
- Cash burn, debt service, and the timing and collectability of the $24.6 million in receivables underlying management’s liquidity assessment.
- Progress and outcomes of OMS721 Phase 3 programs, including enrollment, endpoints, manufacturing readiness, and regulatory decisions.
- FDA approval of the Hospira manufacturing site and the company’s ability to maintain adequate OMIDRIA supply; progress toward the EEA market-placement deadline.
- Developments in the Sandoz and Lupin patent cases and the practical value of the Par settlement, including the conditions governing generic entry.