Omeros Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Omeros is a biopharmaceutical company whose only U.S.-approved commercial product was OMIDRIA, launched broadly in April 2015 for cataract surgery and intraocular lens replacement.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Total revenue | $7.419 million | $0.388 million |
| OMIDRIA net product sales | $7.246 million | $0.238 million |
| Research and development expense | $15.434 million | $9.318 million |
| Selling, general and administrative expense | $11.110 million | $8.989 million |
| Operating loss | $19.452 million | $17.930 million |
| Net loss | $20.539 million | $18.669 million |
| Net loss per share | $0.54 | $0.51 |
| Net cash used in operating activities | $16.628 million | $17.476 million |
Cost of product sales was $0.327 million, implying a product gross margin of approximately 95.5% before other operating expenses. The filing does not provide a consolidated gross-margin measure.
At March 31, 2016, cash, cash equivalents and short-term investments available for general use totaled $13.2 million; restricted cash and investments totaled $10.7 million. Total assets were $36.0 million, and shareholders’ deficit was $40.7 million. Notes payable were approximately $50.0 million net of discount and issuance costs. The $50.0 million loan bears 9.25% annual interest, with interest-only payments through July 1, 2017 and maturity on January 1, 2020.
Material changes versus Q1 2015
- Revenue rose substantially as OMIDRIA sales followed the 2015 broad launch. Sequentially, OMIDRIA net sales grew 9% from Q4 2015; management attributed slower growth to sales-force transition and training, seasonality in cataract procedures, and a 10–12 week sales cycle. March generated nearly half of Q1 sales.
- R&D expense increased primarily from OMS721 clinical manufacturing and development activity; SG&A rose with legal, administrative and commercial costs. Interest expense increased with the debt balance.
- Operating cash use improved year over year, but the company continued to incur substantial losses. Cash and short-term investments available for general use fell from $28.3 million at year-end 2015 to $13.2 million at quarter-end, partly reflecting use of investments to fund operations.
- Shares outstanding increased from 38.0 million at December 31, 2015 to 39.1 million at March 31, 2016, largely reflecting exercises of options and pre-funded warrants.
Outlook, risks and unusual items
- Liquidity and going concern: Management said it expects to use available cash, future OMIDRIA revenue and additional financing or partnering to meet projected funding needs through March 31, 2017. The filing states that recurring losses and funding needs raise substantial doubt about the company’s ability to continue as a going concern. Management may delay trials, reduce R&D or take other cost actions if needed.
- Debt covenant: The loan requires at least $70 million in OMIDRIA net revenue for calendar 2016, plus quarterly revenue minimums in 2017 and 2018, or alternatively restricted cash and eligible investments equal to 50% of outstanding debt. The loan also requires maintaining $10 million in restricted funds. No default was reported at quarter-end.
- Management expectations: R&D costs were expected to remain steady or increase slightly during the rest of 2016, mainly due to OMS721 activity; SG&A was expected to increase slightly, including sales commissions and patent-litigation costs. No specific revenue or profitability guidance was provided.
- OMIDRIA access and competition: Medicare transitional pass-through reimbursement was expected to continue until January 1, 2018; future reimbursement after that date is uncertain. Par’s generic application litigation triggered a stay of FDA final approval expected to last until late January 2018. Omeros stated it intended to vigorously pursue its patent claims.
- Supply: Manufacturing at the prior OMIDRIA facility had ceased at the end of 2015. Validation and approval of the replacement Hospira manufacturing site were incomplete, with commercial supply expected in early 2017. Omeros said it had built inventory to bridge the transition but could not assure supply or timing.
- Pipeline: Omeros had initiated a Phase 3 OMS721 program for aHUS and was conducting Phase 2 programs in other TMAs and complement-related renal diseases. OMS824 trials remained subject to dosing limitations or suspension; a redesigned Huntington’s trial was in preparation. Fagron had not met OMS103 diligence obligations, and Omeros was evaluating its options.
- Other: Gross-to-net deductions were 7.1% of gross OMIDRIA sales in Q1; management expected the percentage to rise with government discounts, rebates and program use. The company had a $100 million at-the-market equity facility, which could dilute shareholders if used. Disclosure controls were reported effective.
Important facts for investors to verify
- Whether OMIDRIA sales can grow enough to support the $70 million 2016 loan covenant and improve cash runway.
- Available financing, cash burn and restricted-cash requirements, including the basis for management’s projected funding needs through March 31, 2017.
- Progress on Hospira validation, manufacturing approval and inventory sufficiency during the supply transition.
- Medicare and other payer reimbursement after pass-through status ends, and the effect of rising gross-to-net deductions.
- Developments in the Par patent litigation, the generic-approval stay and related legal costs.
- OMS721 trial progress and funding requirements, and resolution of OMS824 and OMS103 program uncertainties.