Omeros Corporation — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports unaudited fourth-quarter results. Omeros is a clinical-stage biopharmaceutical company whose only FDA-approved U.S. product was OMIDRIA, used during cataract and intraocular lens surgery.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Total revenue | $41.6 million | $13.5 million |
| OMIDRIA net sales | $41.4 million | $13.3 million |
| Cost of product sales | $1.4 million | $1.0 million |
| Research and development expense | $50.7 million | $48.4 million |
| Selling, general and administrative expense | $43.8 million | $35.3 million |
| Operating loss | $54.3 million | $71.2 million |
| Net loss | $66.7 million | $75.1 million |
| Net loss per share | $1.65 | $2.00 |
| Cash used in operating activities | $51.5 million | $65.2 million |
| Cash, cash equivalents and short-term investments at year-end | $45.3 million | $28.3 million |
| Working capital at year-end | $44.2 million | $20.9 million |
| Notes payable and lease financing obligations, net, at year-end | $79.7 million | $49.8 million |
OMIDRIA product sales increased 212% year over year. Cost of product sales was about 3.4% of net product sales, implying a product gross margin of approximately 96.6% before other operating expenses. The company remained substantially loss-making. Its $5.6 million loss on early extinguishment of debt and $7.8 million interest expense weighed on FY 2016 net results.
Fourth-quarter 2016 revenue was $12.9 million, versus $6.7 million in fourth-quarter 2015. Fourth-quarter 2016 net loss was $19.6 million, compared with $19.8 million a year earlier.
At December 31, 2016, cash and cash equivalents were $2.2 million, short-term investments were $43.1 million, and restricted cash and investments were $5.8 million. The CRG loan requires at least $5.0 million of cash and cash equivalents to be maintained; the filing classifies this restricted amount separately. Omeros reported $80.0 million initially borrowed under the CRG agreement, with $80.5 million of notes payable before debt discounts and related adjustments. The loan bears 12.25% annual interest, with 4.0% potentially deferrable during the interest-only period, and is secured by substantially all assets.
Changes versus the prior comparable period
- Revenue rose substantially following OMIDRIA’s U.S. launch in 2015, attributed to broader customer adoption and increased penetration of existing accounts.
- Operating loss narrowed by $17.0 million, and net loss narrowed by $8.4 million, despite higher operating expenses; sales growth was the principal offset.
- Operating cash use improved by $13.7 million. Financing included $38.0 million net proceeds from equity sales and net additional borrowings; year-end cash and short-term investments increased by $17.1 million.
- Interest expense more than doubled, primarily reflecting additional borrowings. The company refinanced its prior loan with CRG in October 2016 and recorded a $5.6 million debt-extinguishment loss.
- SG&A increased $8.5 million, mainly due to higher legal costs related to the Par patent litigation and increased stock compensation. R&D rose $2.3 million, including higher OMS721 development and manufacturing-transfer costs.
Outlook, management commentary and key risks
- Going concern: Management concluded that substantial doubt exists about Omeros’s ability to continue as a going concern through March 16, 2018. It expected continued negative operating cash flows and at least $6.8 million of 2017 debt service. Potential mitigations—additional equity or debt, partnerships, licensing revenue, and continued separate reimbursement for OMIDRIA—were not assured.
- OMIDRIA reimbursement: Medicare transitional pass-through reimbursement was expected to end January 1, 2018. If separate or similar reimbursement is not extended, OMIDRIA may be included in the packaged procedure payment, potentially reducing the price received and sales. Gross-to-net deductions were expected to increase as a percentage of sales in 2017.
- Debt and funding: The CRG agreement includes annual OMIDRIA revenue or market-capitalization tests, restrictive covenants, a $5.0 million cash covenant, and default provisions. Up to $45.0 million of additional borrowing was conditionally available subject to milestones. Failure to obtain funding could force delays or reductions in development and commercialization activity.
- Manufacturing: Production under the prior Patheon arrangement had ceased. FDA approval of Hospira as a manufacturing site was pending, with production expected around mid-2017; the company believed existing inventory would cover needs in the interim but disclosed supply and demand uncertainty.
- Patent litigation: Par sought approval for a generic OMIDRIA product and challenged Omeros’s patents. A 30-month FDA approval stay was expected to remain in effect until late January 2018. Par stipulated to infringement of currently asserted patents, but continued to assert invalidity and enforceability defenses; the outcome was unresolved.
- Pipeline: OMS721 was in Phase 3 for aHUS and Phase 2 for HSCT-TMA and renal diseases; Omeros planned to advance HSCT-TMA and IgA nephropathy programs. OMS824 trials faced dosing limitations in Huntington’s disease and remained suspended in schizophrenia at FDA request. OMS103’s licensee had not met commercialization obligations, and Omeros was evaluating its options.
- Management outlook: The company expected 2017 SG&A to increase slightly, principally from Par-related legal costs and OMIDRIAssure administration. It did not provide clear quantitative revenue or profitability guidance; future R&D spending was described as uncertain.
Most important facts for investors to verify
- Whether OMIDRIA sales growth and demand can support operations and meet CRG’s revenue tests.
- Whether separate reimbursement for OMIDRIA continues after January 1, 2018, and the effect on realized price and sales.
- Cash runway, access to additional capital, and ability to meet debt service and covenants while the going-concern uncertainty remains.
- FDA approval and commercial readiness of the Hospira manufacturing site, and adequacy of existing OMIDRIA inventory.
- Developments and potential outcomes in the Par patent litigation and generic-entry timing.
- Clinical, regulatory, and financing milestones for OMS721 and the status of OMS824 and OMS103.