Omeros Corporation — Q1 2017 Form 10-Q
Business context and period. Unaudited consolidated results for the three months ended March 31, 2017, compared with Q1 2016. Omeros is a biopharmaceutical company; OMIDRIA, used during cataract and intraocular-lens surgery, was its only FDA-approved U.S. commercial product. The company’s other principal activities include clinical and preclinical drug development.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Revenue | $12.3 million | $7.4 million |
| OMIDRIA net product sales | $12.3 million | $7.2 million |
| Operating loss | $12.7 million | $19.5 million |
| Net loss | $15.1 million; $0.34 per share | $20.5 million; $0.54 per share |
| Operating cash used | $12.7 million | $16.6 million |
| Cash, equivalents and short-term investments | $33.7 million available for general use | $45.3 million at Dec. 31, 2016 |
| Restricted cash and investments | $5.8 million | $5.8 million at Dec. 31, 2016 |
| Notes payable and lease financing, net | $80.5 million | $79.5 million at Dec. 31, 2016 |
| Current assets / current liabilities | $51.4 million / $17.0 million | — |
| Shareholders’ deficit | $48.1 million | $37.4 million at Dec. 31, 2016 |
OMIDRIA’s reported net sales less product cost imply an approximate 97.8% product gross margin; the filing does not present this as a separately stated margin. Cash flow from investing activities was $10.7 million provided, primarily reflecting investment maturities and purchases; financing activities provided $1.1 million. Cash and cash equivalents alone were $1.3 million at quarter-end.
Material changes versus comparable periods
- Revenue increased 65% year over year; OMIDRIA sales rose 69.2%, which management attributed to broader customer adoption and increased penetration within existing accounts. Q1 revenue nevertheless declined 5.0% from Q4 2016, primarily due to wholesaler inventory destocking and the first full quarter of purchase-volume discounts. Wholesalers bought $2.1 million of net product in the first week of April, restoring inventory to traditional levels, according to management.
- Net loss narrowed by $5.5 million year over year, reflecting higher revenue and lower R&D costs, partly offset by increased SG&A and interest expense. R&D declined to $12.2 million from $15.4 million; SG&A increased to $12.5 million from $11.1 million; interest expense rose to $2.7 million from $1.4 million.
- Operating cash use improved by $3.9 million year over year. Available cash, equivalents and short-term investments declined $11.6 million from December 31, 2016. Accumulated deficit reached $485.0 million.
Outlook, risks and unusual items
- Going concern and funding: Management concluded substantial doubt exists about Omeros’s ability to continue as a going concern through May 10, 2018. The company expects continued negative cash flows; debt service is expected to be at least $6.9 million through that date. Potential funding includes partnerships, licensing, equity issuance and a $25 million CRG loan tranche available through September 19, 2017, but management states other funding sources are not assured.
- Debt: CRG debt carries 12.25% annual interest, with 4.00% potentially deferrable during the interest-only period. The company deferred $805,000 of interest into principal in Q1. The loan is secured by substantially all assets, including intellectual property, and includes revenue or market-capitalization covenants. Potential access to a further $20 million depends on specified sales or market-capitalization milestones.
- Reimbursement and sales: OMIDRIA’s Medicare pass-through reimbursement was expected to expire January 1, 2018. Omeros was seeking continued separate or equivalent reimbursement; absent that, the product may be included in a bundled payment, potentially reducing price and revenue. Uncertainty could also delay customer purchases. No numerical revenue or earnings guidance is provided.
- Development spending: Management expected R&D costs to rise during the rest of 2017, including planned Phase 3 programs in IgA nephropathy and HSCT-related TMA and expanded OMS721 manufacturing. Phase 3 enrollment in aHUS had opened. OMS824 Huntington’s trials remained subject to dosing limits; schizophrenia trials were suspended at FDA request.
- Patent and commercial risks: Par had stipulated infringement of asserted OMIDRIA patents, subject to its invalidity and enforceability defenses; the FDA approval stay for Par’s ANDA was expected to run until late January 2018. On May 10, 2017, after quarter-end, Omeros disclosed receiving a Paragraph IV notice from Sandoz concerning an ANDA referencing six OMIDRIA patents. Litigation outcomes are uncertain.
- Manufacturing and other items: Omeros relied on third parties to manufacture OMIDRIA; approval of Hospira as a manufacturing site was incomplete, and the filing said an approved facility was not expected before mid-2017 at the earliest. Contract termination fees were $2.7 million at quarter-end. Omeros also reported that Fagron had not met diligence obligations under the OMS103 license, including initiating sales.
Important facts for investors to verify
- Whether Omeros secures continued separate reimbursement for OMIDRIA after January 1, 2018, and the resulting effect on pricing, demand and net sales.
- Cash burn, financing availability, use and terms of the available CRG tranche, debt covenant compliance, and the company’s stated going-concern uncertainty.
- Progress and outcomes in the Par and Sandoz patent matters, including any implications for generic entry and OMIDRIA exclusivity.
- Hospira manufacturing-site approval, product supply continuity, and whether planned OMS721 trials and manufacturing expansion proceed on schedule and budget.
- OMIDRIA sales quality and sustainability, including wholesaler inventory normalization, discount and rebate levels, and the impact of gross-to-net deductions.