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Omeros (NASDAQ:OMER) is a biopharmaceutical company that does not earn money and is financing itself through dilution and borrowing. There are plenty of things to like about the enterprise; however, the risks for investors are not easily overstated. Its drug candidates involve years of research and testing before potentially being approved for use, and after that questions would need to be addressed on their commercial viability. Overall, it is exciting that two of Omeros's PharmacoSurgery products are near the stage in which submission to the U.S. Food and Drug Administration ("FDA") for approval is more likely.

There have been other articles on Seeking Alpha that summarize several of the business's strengths. All listed analysts recommend it, with Yahoo! showing four strong buys and three buys for a mean of 1.4. (Deutsche Bank's status is not clear to me, and they might have the most important rating). Three of the company's directors have made insider purchases within months at prices very close to today's. Also, Omeros's pipeline is better than a lot of other speculative drug companies'.

OMS103HP, intended to treat arthroscopic knee surgery patients, has recently gotten mixed results, failing to meet the primary endpoint for its evaluation. A second round of testing is being scheduled for later this year. While some of the enthusiasm is gone from this particular candidate's story, the stock price and option volatility appear to have declined commensurately. Though implied volatility of the company's options is lower, it is still elevated in comparison to its historical figures. Here is a one year chart with a drop in option volatility visible on December 27, 2012, when results became publicly known.


(Click to enlarge)

OMS302 has had fairly unqualified success thus far, and according to a November 8, 2012 press release, a New Drug Application is planned for the First Quarter of 2013, which should mean now through March. The FDA would have 60 days to decide on filing it, and I am not sure how material that process can be expected to be to OMER. According to FDA.gov, it reviews and acts on 90% of drugs within 10 months once the application is received. While there currently are no options after August, I am looking for them to be expensive when available because of this candidate.

There is at least one other product that should have new information available in the near future, OMS824, a Phase 1 PDE10 inhibitor being tested for psychiatric conditions.

Anyhow, there are two candidates that have made it toward the end of clinical trials, and yet there is no foreseeable reason for the stock's price to move appreciably in the next few months because of them. This is not to say that it is a safe situation for shareholders. Unpredictable things can happen, and negative data or results on other products in the pipeline could adversely--or favorably--affect the stock price.

Omeros is mostly reliant on increasing its share count through dilution in order to finance itself. A December 14, 2012 Form 424B5 describes an arrangement in which they are selling $60 million worth of stock that is to be terminated when the program is exhausted. Thus, the company is able to raise needed cash. It may be perceived as a buying opportunity, signaled through the recent insider buying. The dilution, in combination with mixed results for OMS103HP, appears to help keep the share price below $6.

As far as using options, there are at least two sensible choices for taking advantage of the ongoing volatility skew. Buying 100 shares of stock and writing a March $6 covered call involves a very similar risk to just selling a naked $6 March put. At a share price of $5.55, subtracting $0.35 proceeds from selling a call results in a cost of $5.20; $0.80 in proceeds from sale of a put results in the same $5.20 price if stock is assigned. To me, there are two key differences: (1) purchasing stock helps the company, whereas a naked put ties up margin; and (2) if for some reason the share price gets above $6, then the call writer shoulders risk far beyond an option holder's, whereas a short put is less likely to be exercised. However, if something causes the stock price to drop, to say, under a dollar, each would be wiped out the same. Shares of OMER currently trade at approximately $5.55. Writing a March $6 call for $0.35 can easily result in appreciation as high as $35/$555 = 6.3% in under two months!

There is a background situation that, as an Omeros shareholder, I am reluctant to discuss and am rather confessing to thinking about. The euro has risen sharply against the dollar and the Swiss franc is up too. Many European firms have buying power and they must be considering how to use it. Foreign acquisition of businesses with exceptional personnel and an array of products is not out of the question. A domestic purchaser cannot be ruled out either: big corporations are sitting on record amounts of cash--and evidently are not using it to hire. A $20 per share offer seems worthy of consideration to the Board of Directors. If such an agreement is announced, profits for stock held against a covered call would be capped at the difference between the strike price and the cost for shares, about $0.80 for a $6 March call, minus commissions and assignment fees.

To summarize, it appears to me to be worthwhile to risk placing capital under Omeros's control until March. At that time, there should be a better indication of OMS302's potential success or problems. Also, additional information on the next phase of tests for OMS103HP can be anticipated soon after. In the meantime, following the company is enjoyable. Hopefully investment in it proves to be quite profitable! It is easy to be a proud owner of equity in Omeros.

Source: Omeros May Be A Wonderful, Albeit Speculative, Biopharmaceutical Opportunity