Omeros Corporation — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Omeros is a commercial-stage biopharmaceutical company; OMIDRIA, used in cataract and intraocular lens procedures, was its only U.S.-approved commercial product. Its pipeline included clinical-stage programs, notably OMS721, and preclinical programs.
Financial performance and liquidity
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| OMIDRIA net sales, 2018 | $4.6 million | $7.9 million |
| OMIDRIA net sales, 2017 | $21.7 million | $51.1 million |
| Operating loss, 2018 | $35.4 million | $93.7 million |
| Net loss, 2018 | $39.5 million | $103.2 million |
| Net loss, 2017 | $7.5 million | $36.9 million |
| Basic and diluted loss per share, 2018 | $0.81 | $2.13 |
| Research and development expense, 2018 | $26.9 million | $64.4 million |
| Selling, general and administrative expense, 2018 | $13.2 million | $36.8 million |
- Quarterly cost of product sales was $36,000 against $4.6 million in sales, implying a product gross margin of approximately 99%. Operating margin was negative; the filing reports a $35.4 million operating loss.
- Cash used in operating activities was $79.1 million for the first nine months, versus $32.1 million in the prior-year period. Investing activities provided $27.5 million and financing activities provided $51.0 million; cash and cash equivalents declined by $0.6 million to $2.8 million.
- At September 30, cash, cash equivalents and short-term investments totaled $55.2 million, down from $83.7 million at December 31, 2017. Restricted investments were $5.8 million. Current assets were $66.0 million and current liabilities $24.6 million.
- Notes payable and lease financing obligations were reported at $132.3 million before accounting deductions and current lease obligations; the balance-sheet carrying amount of non-current notes and lease obligations, net, was $131.7 million. The CRG facility bears 12.25% annual interest. Omeros borrowed the remaining $45 million available under it in May 2018 and had deferred $7.1 million of interest into principal by quarter-end.
Material changes versus the prior comparable period
- Sales and earnings deteriorated sharply: nine-month OMIDRIA revenue fell about 85% year over year, while nine-month net loss increased to $103.2 million from $36.9 million. Management attributed the sales decline primarily to expiration of Medicare pass-through reimbursement on January 1, 2018.
- Pass-through reimbursement was reinstated effective October 1, 2018 for two years. Omeros reported substantially higher wholesaler sell-through in late September and October; October customer purchases were approximately 17,500 units, with sell-through at 81% of October 2017. The company cautioned that the pace and extent of recovery were uncertain.
- Q3 included $2.1 million of revenue from wholesaler inventory previously deferred because of weak downstream demand, recognized in anticipation of renewed customer demand after reimbursement returned.
- R&D spending rose, primarily due to OMS721 manufacturing scale-up and clinical costs, including initiation of its Phase 3 IgA nephropathy trial, and initiation of the OMS527 Phase 1 trial. Interest expense also increased following the additional CRG borrowing and deferred interest.
Outlook, management commentary and risks
- Going concern: Management concluded substantial doubt existed about Omeros’s ability to continue as a going concern through November 8, 2019, under the required assessment assumptions. That assessment did not count future equity, debt or partnership funding, or meaningful OMIDRIA receipts after reimbursement was reinstated. The company said additional financing or partnering may be necessary; absent funding, it could reduce expenses, delay trials or restructure.
- Management expected continued negative cash flow until OMIDRIA sales or other revenue sources fund operations and debt service. It expected Q4 R&D expense to likely increase and SG&A to potentially increase slightly.
- The CRG agreement requires either $75 million of net revenue in calendar 2019 or a specified market-capitalization threshold (stated as $375 million based on then-outstanding loan principal); an equity or subordinated-debt raise and loan paydown may provide an alternative. Default could allow acceleration and lender control of pledged assets, including intellectual property.
- Separate OMIDRIA reimbursement was secured only through September 30, 2020 under the extension. Permanent or similar reimbursement thereafter was uncertain. Management cited CMS rulemaking possibilities but gave no assurance of success.
- OMS721 Phase 3 trials were underway in HSCT-TMA, IgA nephropathy and aHUS. Management reported interim HSCT-TMA survival results from a Phase 2 study and encouraging, small-cohort IgA nephropathy observations, while acknowledging the limited patient numbers and need for further clinical and regulatory review. OMS527 Phase 1 completion was expected in the first half of 2019; OMS906 clinical trials were targeted for late 2019 or early 2020.
- Omeros relied on contract manufacturers and had $11.5 million of firm goods-and-services commitments; cancellation fees could also total $11.5 million under specified terms. Additional development milestones and royalties were possible but not quantified.
- OMIDRIA generic-entry litigation was concluded. Based on settlements and Sandoz’s revised certification, the company stated the earliest entry date for the three generic manufacturers was April 2032, subject to the agreements. The filing also describes Sandoz’s Paragraph III position as preventing FDA approval before patent expiry in July 2033.
- Disclosure controls were judged effective as of September 30, 2018, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether OMIDRIA demand and cash collections continued to recover after pass-through reimbursement resumed, and whether sales translate into sufficient cash flow.
- The company’s financing runway and ability to raise capital or obtain partners, given the going-concern warning and operating cash burn.
- Performance against CRG’s 2019 revenue or market-capitalization covenant and the effect of the 12.25% borrowing cost and deferred interest.
- Whether separate reimbursement for OMIDRIA will remain available after September 2020 and on commercially adequate terms.
- Progress, safety and efficacy evidence in OMS721 trials, including the limited size and preliminary nature of reported interim findings, and the timing of regulatory submissions.
- Contract-manufacturing capacity, supply commitments, potential cancellation costs, and any unquantified licensing milestones or royalties.