Omeros Corporation — Form 10-Q summary
Reporting period: Three and nine months ended September 30, 2011. Omeros is a clinical-stage biopharmaceutical company with no approved products and describes itself as a development-stage company. Financial amounts below are in millions of dollars unless stated otherwise.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $0.987 | $0.254 | $3.381 | $1.129 |
| Research and development expense | $5.321 | $5.316 | $14.823 | $16.518 |
| General and administrative expense | $1.830 | $2.428 | $6.121 | $6.160 |
| Net loss | $(6.512) | $(7.555) | $(18.345) | $(22.020) |
| Net loss per share, basic and diluted | $(0.29) | $(0.35) | $(0.83) | $(1.03) |
- Revenue and margins: Revenue chiefly reflects grant and program funding, not product sales. Q3 2011 revenue included $0.936 million recognized under the Vulcan and Life Sciences Discovery Fund (LSDF) agreements. The filing does not report a conventional gross margin; product candidates were not commercially available.
- Cash flow: Nine-month operating cash use was $18.307 million, versus $21.124 million in 2010. Investing activities provided $9.550 million and financing activities provided $10.367 million, including the second $10 million Oxford loan tranche. Cash and cash equivalents increased to $4.888 million from $3.278 million at year-end 2010.
- Liquidity: Cash, cash equivalents and short-term investments totaled $32.853 million at September 30, 2011, down from $41.993 million at December 31, 2010. Current assets were $33.839 million and current liabilities $15.815 million; shareholders’ equity was $4.077 million, down from $20.470 million.
- Debt: Notes payable totaled approximately $20.367 million, compared with $10.255 million at year-end 2010. Oxford loans carry fixed rates of 8.55% and 8.56%; scheduled principal-and-interest payments began November 1, 2011, with maturity on October 21, 2014. Debt is secured by substantially all assets other than intellectual property and includes restrictive covenants.
Material changes versus prior comparable periods
- Nine-month revenue rose to $3.381 million from $1.129 million, primarily from Vulcan and LSDF GPCR-program funding; recognition of NIH grant revenue declined as funded preclinical work concluded.
- Nine-month R&D expense fell 10% to $14.823 million, mainly due to lower clinical-trial expenses and one-time licensing fees in 2010. Q3 R&D expense was essentially unchanged year over year.
- Nine-month net loss narrowed to $18.345 million from $22.020 million. In Q3, lower G&A expense and increased revenue contributed to a narrower loss, partly offset by higher interest expense.
- In March 2011, Omeros borrowed the second $10 million Oxford tranche. The Azimuth equity line, which permits up to $40 million in share sales over 24 months subject to terms and a share cap, had not been drawn by September 30.
Outlook, commentary and risks
- Management said existing cash, cash equivalents and short-term investments were expected to fund anticipated operating expenses, capital expenditures and note payments for at least the next 12 months. It cautioned that assumptions could prove wrong, expected continued losses, and said product-sales revenue was not anticipated before 2013, if at all. Additional financing may be needed and may not be available on acceptable terms.
- Management expected initial Phase 3 data for OMS302 in Q1 2012 and for OMS103HP in mid-2012. A second Phase 3 trial for each program depended on discussions with European regulators and sufficient resources. OMS103HP had failed prespecified efficacy endpoints in a Phase 3 ACL-reconstruction program; the company cited confounding factors and said it had no plans for further ACL trials. OMS201’s completed Phase 1/2 trial assessed safety and tolerability, not efficacy.
- The company reported identifying compounds that interact with 14 orphan GPCRs. Funding agreements with Vulcan and LSDF impose GPCR research commitments and provide for sharing a portion of program net proceeds; Omeros also granted Vulcan a security interest in certain GPCR-related personal property.
- Key risks include clinical-trial failure or delay, regulatory approval and combination-drug requirements, dependence on third-party manufacturers and research organizations, ongoing cash burn and financing needs, debt covenants, potential dilution from future equity financing, and uncertain commercialization, reimbursement and patent protection.
- Contingency: Former CFO Richard Klein’s lawsuit includes employment-related claims and a qui tam claim concerning NIH grants totaling $1.3 million. The U.S. government declined to intervene in the qui tam claim in October 2011, but Klein may continue it. Omeros disputes the allegations; the company said the outcome and potential exposure could not be assessed with certainty.
- Management concluded disclosure controls were effective at the reasonable-assurance level as of September 30, 2011; no material change in internal control over financial reporting was identified during the quarter.
Investor verification priorities
- Check subsequent trial results, regulatory interactions, and whether the OMS103HP and OMS302 Phase 3 timelines and second-trial plans were achieved.
- Reconcile cash burn, available liquid investments, debt service beginning November 2011, and the stated minimum 12-month funding runway.
- Review the Oxford loan covenants, collateral and default provisions, and the potential dilution and pricing limitations of the undrawn Azimuth facility.
- Track Vulcan/LSDF funding reimbursements, GPCR obligations and net-proceeds sharing, and any changes to the company’s funding assumptions.
- Monitor developments in the Klein litigation and any changes in the company’s assessment of potential costs or exposure.