OMEROS CORP annual report, FY2019

Omeros Corporation — FY 2019 Form 10-K

Reporting period: Fiscal year ended December 31, 2019; filed March 2, 2020. This is an annual filing, not a standalone quarterly report. Omeros is a commercial-stage biopharmaceutical company; OMIDRIA, its only FDA-approved U.S. product, is used during cataract and intraocular lens surgery. Most revenue came from U.S. OMIDRIA sales.

Financial performance and liquidity

Metric	FY 2019	FY 2018
Net product sales	$111.8 million	$29.9 million
Cost of product sales	$0.9 million	$0.5 million
Research and development	$109.7 million	$89.9 million
Selling, general and administrative	$64.6 million	$51.7 million
Operating loss	$63.4 million	$112.2 million
Net loss	$84.5 million	$126.8 million
Basic and diluted loss per share	$1.71	$2.61
Cash used in operations	$60.1 million	$103.7 million

• OMIDRIA’s reported gross margin was approximately 99.2% in 2019, based on net sales less reported product cost; operating expenses substantially exceeded gross profit.
• Fourth-quarter 2019 unaudited revenue was $33.4 million and net loss was $29.2 million, versus $22.0 million and $23.5 million, respectively, in fourth-quarter 2018.
• At year-end, cash, cash equivalents and short-term investments totaled $60.8 million; accounts receivable was $35.2 million; working capital was $48.3 million. The balance sheet reported total assets of $137.0 million and shareholders’ deficit of $109.0 million.
• Operating cash outflow improved year over year, mainly because OMIDRIA sales recovered. Financing provided $60.7 million in 2019, including $54.2 million of net proceeds from a December stock offering.
• The company had $210.0 million principal amount of 6.25% convertible senior notes due 2023, reported net of discounts and issuance costs at $158.2 million. It had no borrowings on its receivables-based credit line at year-end; availability is subject to eligible receivables and the facility’s $50 million cap.

Material changes and business developments

• OMIDRIA sales rose $81.9 million, or 274%, from 2018, principally following reinstatement of Medicare Part B separate reimbursement on October 1, 2018. The 2018 comparison was depressed by nine months without that separate payment.
• CMS declined to extend OMIDRIA’s separate payment beyond the current pass-through expiration date of September 30, 2020, while stating it would continue monitoring utilization and evidence. The company continued to pursue administrative and legislative alternatives.
• Research and development expense increased $19.8 million, driven principally by narsoplimab manufacturing and process-validation work, clinical studies, and development of other programs. SG&A increased $12.9 million, including higher commercial and pre-commercialization spending.
• In October 2019, Omeros began a rolling FDA BLA submission for narsoplimab for HSCT-TMA. The filing reported that nonclinical materials had been submitted and manufacturing validation lots completed; remaining clinical and chemistry, manufacturing and controls sections were still being prepared.
• The filing also reports clinical data announced March 2, 2020, after the fiscal year-end: narsoplimab’s HSCT-TMA pivotal trial showed a 54% complete response rate among all treated patients and 65% among those treated for at least four weeks. These are company-reported trial results, not FDA approval.
• Narsoplimab Phase 3 studies for IgA nephropathy and aHUS were ongoing. OMS527 completed Phase 1; OMS906 remained preclinical, with clinical trials targeted for the first half of 2020.

Outlook, risks and unusual items

• Going concern: Management and the auditor stated that substantial doubt existed about the company’s ability to meet obligations through March 2, 2021 and continue as a going concern. Management cited uncertain post-September 2020 OMIDRIA revenue and planned to rely on sales, potential credit-line use, financing, strategic transactions, or expense reductions. The statements were prepared on a going-concern basis without adjustments for a possible failure to continue.
• Management expected OMIDRIA sales to continue increasing at least through the first half of 2020 versus the same period in 2019, but could not forecast revenue after the pass-through period. If reimbursement efforts failed, the company expected to pursue an alternative sales strategy, with uncertain timing, uptake and net revenue.
• Management expected higher 2020 R&D spending, primarily for narsoplimab trials, manufacturing and marketing-application preparation, and higher SG&A for potential narsoplimab commercialization. No specific revenue, earnings or cash-flow guidance was provided.
• OMIDRIA accounted for substantially all revenue; four wholesalers each represented at least 10% of 2019 revenue and nearly all revenue in aggregate. The company also relied on contract manufacturers, including a single commercial OMIDRIA drug-product supplier under an agreement scheduled to expire in February 2022.
• Gross-to-net deductions were 27.7% of gross OMIDRIA sales in 2019; year-end related reserves and allowances were $12.5 million. The auditor identified patient-rebate estimation as a critical audit matter. Potential returns if reimbursement expires could affect future results.
• Other material risks include continued operating losses, financing and dilution needs, convertible-note service, clinical and regulatory uncertainty, manufacturing and supply dependence, payer pricing and reimbursement changes, and competition. The company reported no material legal proceedings as of the filing date.
• 2019 included no debt-extinguishment loss, unlike 2018, when a $13.0 million loss was recorded on repayment of prior debt. The $12.9 million 2018 income-tax benefit was nonrecurring. Adoption of lease accounting in 2019 added reported right-of-use assets and lease liabilities; prior-year figures were not recast.

Most important facts for investors to verify

• Whether Omeros secured separate or comparable reimbursement for OMIDRIA after September 30, 2020, and the resulting sales, pricing, and return levels.
• Actual cash runway, eligible borrowing capacity under the receivables-based credit line, and access to additional capital given the disclosed going-concern doubt.
• Completion and FDA acceptance of the narsoplimab HSCT-TMA BLA, regulatory decisions, and confirmation of trial results and safety data.
• Enrollment and outcomes in the Phase 3 narsoplimab programs, including whether timelines and planned development spending remain achievable.
• Trends in gross-to-net deductions, patient-rebate estimates, wholesaler inventory and concentration, and supply continuity as manufacturing arrangements change.
• Future debt-service and dilution exposure, including the $210 million convertible-note principal and outstanding equity awards.