OMEROS CORP annual report, FY2018

Business context and reporting period

Omeros Corporation is a commercial-stage biopharmaceutical company. This Form 10-K covers the fiscal year ended December 31, 2018; fourth-quarter figures are identified separately. OMIDRIA, used during cataract and intraocular lens replacement surgery, was its only FDA-approved U.S. commercial product. Its pipeline included three Phase 3 narsoplimab programs and earlier-stage programs.

Financial performance and liquidity

Fourth-quarter 2018 revenue was $22.0 million and net loss was $23.5 million, compared with $13.8 million revenue and $16.6 million net loss in fourth-quarter 2017. The filing does not report operating or net margins; calculated from reported figures, FY 2018 operating loss was about 376% of revenue and net loss about 425%.

At year-end, cash, cash equivalents and short-term investments were $60.5 million; accounts receivable was $22.8 million and working capital was $52.5 million. Omeros reported $2.4 million of lease financing obligations and $149.0 million net carrying value of convertible notes. In November 2018 it issued $210 million of 6.25% convertible notes due 2023, repaid the CRG loan, and had approximately $24.0 million net proceeds available for corporate use. The notes’ initial conversion price was approximately $19.22 per share.

Product cost of sales was $0.5 million against $29.9 million of net sales; the filing does not present a separate gross-margin measure. No dividend is anticipated.

Material changes versus the prior comparable period

• FY 2018 OMIDRIA sales fell 53.9% from 2017, primarily because Medicare Part B separate reimbursement lapsed from January through September 2018.
• Separate reimbursement resumed October 1, 2018 for two years. Fourth-quarter sales reached a record $22.0 million, but full-year revenue remained below 2017.
• R&D expense rose $34.3 million, mainly from narsoplimab manufacturing scale-up and Phase 3 IgA nephropathy trial costs, plus initiation of the OMS527 Phase 1 trial.
• Net loss increased substantially, also reflecting a $13.0 million loss on early debt extinguishment and higher interest expense. A $12.9 million income tax benefit related to the convertible-note equity component partially offset the loss.
• Operating cash use increased to $103.7 million from $36.2 million. Cash and short-term investments declined to $60.5 million from $83.7 million.

Outlook, risks and unusual items

• Management expected OMIDRIA sales to increase in 2019, but could not estimate the magnitude after the reimbursement restart. It was pursuing permanent separate or similar reimbursement beyond September 30, 2020, without assurance of success.
• Management expected 2019 R&D and SG&A expenses to increase, including for narsoplimab development and potential commercialization preparation. First-quarter 2019 interest expense was estimated at about $5.5 million, including $2.2 million of non-cash interest.
• Management and the auditor stated that substantial doubt existed about Omeros’s ability to continue as a going concern through March 1, 2020. The assessment excluded projected meaningful OMIDRIA growth, potential borrowing under a proposed receivables-based line of credit, and potential partnership or financing proceeds. Management cited financing, revenue generation and expense reductions—including delaying trials—as possible responses.
• Key risks include dependence on OMIDRIA and Medicare reimbursement, continuing cash burn and need for financing, clinical and regulatory uncertainty, reliance on contract manufacturers, and potential dilution or cash demands under the convertible notes. The notes’ capped-call protection applies only up to a $28.836 share price cap.
• Narsoplimab was in Phase 3 for HSCT-TMA, IgA nephropathy and aHUS. For HSCT-TMA, the company was preparing BLA and MAA submissions and reported regulatory discussions, but approval timing and outcome remained uncertain.
• Par and Lupin settlements restricted generic OMIDRIA entry until specified dates in 2032, subject to earlier-entry conditions; royalty terms apply to licensed generic sales during the stated patent period.

Important facts for investors to verify

• Whether OMIDRIA sales and sell-through sustain fourth-quarter levels, and whether separate reimbursement continues after September 2020.
• Cash runway, the status and terms of the proposed receivables-based credit line, and access to other financing or partnership proceeds.
• Convertible-note interest, maturity and conversion exposure, including dilution above the capped-call ceiling.
• Narsoplimab trial progress, regulatory filing plans, manufacturing readiness and any FDA or EMA requirements that change the anticipated approval path.
• Quarterly cash burn, R&D spending, gross-to-net deductions and customer/distributor concentration; four distributors together accounted for nearly all 2018 revenue.