Omeros Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Omeros is a commercial-stage biopharmaceutical company; OMIDRIA, used during cataract and intraocular-lens procedures, was its only FDA-approved U.S. commercial product.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $17.2 million | $10.0 million | $29.4 million | $17.4 million |
| Operating loss | $11.9 million | $10.9 million | $24.7 million | $30.4 million |
| Net loss | $14.4 million | $12.6 million | $29.4 million | $33.2 million |
| Basic and diluted loss per share | $0.33 | $0.32 | $0.67 | $0.86 |
| Operating cash flow | Not reported by quarter | $(20.9) million | $(29.4) million |
Product sales accounted for nearly all revenue. Q2 sales rose 71.4% year over year; management attributed growth to more purchasing customers and greater sales to existing accounts. Net loss widened in Q2, while the six-month net loss narrowed. The reported cost of product sales was $0.2 million in Q2 and $0.4 million for the six months; the resulting reported product gross margin was approximately 99% in both periods.
At June 30, cash and cash equivalents were $3.4 million and short-term investments were $26.3 million, or $29.7 million in unrestricted cash, equivalents and investments available for general use. Restricted cash and investments were $5.8 million. Current assets were $53.1 million versus current liabilities of $24.8 million. Notes payable and lease financing obligations, net, were $81.5 million; notes payable principal was $82.1 million. Accumulated deficit was $499.3 million.
Changes and notable items
- Six-month revenue increased 68.8% year over year. Q2 revenue also rose 39.9% from Q1 2017, though lower wholesaler inventory at the end of Q1 and its return to historical levels early in Q2 contributed to the sequential increase.
- Gross-to-net deductions rose to 25.4% of gross product sales in Q2 2017 from 8.1% a year earlier, mainly due to rebates and discounts through OMIDRIAssure and the purchase-volume program.
- Q2 R&D expense increased to $13.1 million from $10.2 million, primarily reflecting OMS721 manufacturing and clinical costs and an OMIDRIA pediatric-study filing fee. Six-month R&D expense was nearly flat at $25.4 million.
- Q2 SG&A rose to $15.8 million from $10.4 million, primarily due to patent-litigation costs and employee costs. Six-month SG&A was $28.3 million versus $21.5 million.
- Operating cash use improved by $8.6 million year over year for the first half, but receivables increased $7.0 million, largely with higher OMIDRIA sales. Financing cash inflow was $5.5 million, mainly from option exercises; investing activities provided $16.5 million, primarily reflecting investment maturities net of purchases.
Outlook, liquidity risks and contingencies
- Going concern: Management concluded substantial doubt existed about the company’s ability to continue as a going concern through August 8, 2018. Omeros cited recurring losses, operating cash outflows, limited available liquidity, debt service and uncertainty over OMIDRIA reimbursement. It expects negative cash flows until product sales or other revenue sources provide sufficient funding. Financial statements were prepared on a going-concern basis.
- Funding and debt: Omeros stated debt service would be at least $6.8 million through August 8, 2018. It could elect to draw a further $25 million under its CRG facility through September 2017; an additional $20 million was conditional on sales or market-capitalization milestones. The loan bears 12.25% annual interest, requires minimum revenue or market-capitalization thresholds, and is secured by substantially all company assets, including intellectual property. Management said other potential funding sources were not assured.
- OMIDRIA reimbursement: Medicare pass-through reimbursement was expected to expire January 1, 2018. Omeros was seeking continued separate or equivalent reimbursement, or an extension. If unsuccessful, management expected the product could be included in the bundled procedural payment, potentially reducing unit pricing and revenue significantly. Customer purchases could also be deferred while reimbursement remained uncertain.
- Patent litigation: A bench trial against Par took place July 5–7, 2017; the court decision was pending. The FDA approval stay on Par’s generic application was expected to run until late January 2018 absent an earlier decision. Omeros also sued Sandoz and Lupin; their application stays were expected to run until November 2019. Outcomes are uncertain and could affect OMIDRIA sales.
- Development and operating outlook: Management expected R&D costs to rise during the rest of 2017, principally for planned Phase 3 OMS721 programs and manufacturing capacity. It anticipated lower SG&A later in the year as patent-related legal costs declined. OMS721 Phase 3 enrollment in aHUS had opened; an IgA nephropathy Phase 3 trial was expected by year-end, and the company expected to initiate an HSCT-TMA Phase 3 program before year-end. OMS824 schizophrenia trials remained suspended pending FDA clearance; Huntington’s trials were subject to dosing limitations.
- Other risks and obligations: OMIDRIA manufacturing depended on third parties, and FDA approval of the Hospira manufacturing site was still pending; the company said it believed existing supply would meet demand during the transition. Contract termination fees were $3.7 million. The filing also described the risk of generic competition, clinical and regulatory setbacks, and possible dilution if additional equity were issued.
Key facts for investors to verify
- Whether OMIDRIA maintains separate or comparable reimbursement after January 1, 2018, and the resulting effect on pricing, demand and gross-to-net deductions.
- Cash runway and funding execution, including whether the available CRG tranche was drawn, additional milestone-based borrowing became available, or new capital or partnership funding was secured.
- Results and timing of the Par litigation decision, and progress and outcomes in the Sandoz and Lupin cases.
- OMIDRIA sales trends and the extent to which Q2 growth reflected sustained customer demand versus wholesaler inventory timing.
- Progress of OMS721 clinical programs, manufacturing readiness and the expected increase in development spending.