Short Sellers Pay Up For Omeros After New Wedbush Research

| About: Omeros Corporation (OMER)

There are some things that can be expected from Omeros Corporation (NASDAQ:OMER). There is a steady stream of press releases that are predominantly about its pipeline products. The company also has volatile stock, which exhibited itself in a pleasing manner yesterday.

How often, or when does a share price change 68%? Something significant probably tends to occur in such instances, such as a buyout, approval of a new drug, or court decision. Ordinarily, The Wall Street Journal would list a movement similar to OMER's under its heading for "Stocks in the News," with an accompanying rationale. However, in today's issue there is no mention of any change greater than Allegheny Technologies (NYSE:ATI) 8.10%; which it attributes to the sale of its tungsten materials business for $605 million.

The only thing that is obviously different from Friday for OMER (when fortunately a September call could be cheaply closed out) is an optimistic report from Wedbush Securities that can be viewed as bolstering a case for its product intended for eye surgery, OMS302.

Upon reviewing the research, let me say that I am impressed by the biography of lead analyst Dr. Liana Moussatos, as presented on paper. In addition to having earned a competitive Ph.D. degree, she has had a lengthy career in equities, cancer research, and biotech funds. She and Richard Lau reiterate the firm's Outperform rating on OMER, which has been in place since March, 2011 while the price has been over $12.50 and under $5. Shareholders are likely to enjoy her analysis.

As has been published elsewhere, as of September 16th, Wedbush is increasing its

Fair value to $28 due to [a] view that increased FDA pressure against "Homebrew" and splitting bottles of topical solutions is likely to increase use of OMS302 during intraocular lens replacement surgeries.

This is pursuant to a recent conversation with an unnamed "High volume cataract surgeon," about the changing regulatory landscape.

The FDA is physically sending regulators into surgical suites to monitor [use of homebrews]...According to the surgeon, a typical 5ml bottle of topical phenylephrine mydriatic agent costs about $20 - $25, while NSAIDs can cost around $150 - $250.

This is encouraging to some investors; however, it does not seem to account for the incredible, over-the-weekend gains we have witnessed.

Let's see what else Wedbush is saying about Omeros and the stock, particularly its pipeline. Here is a graphic:

(Click to enlarge)

$22.50 of the valuation is based on OMS302, using numbers higher than they have been in the past. It is notable that $5.38 is assigned to OMS103, which remains in Phase 3 after two setbacks. After that, OMS824 is worth $6.55 a share in a future indication for Huntington's disease. Wedbush also projects $3.01 for De-orphanization of GPCRs, something discussed during several recent company presentations, through a partnership.

Here is the model:

(Click to enlarge)

Sales revenues in 2017 are mostly attributed to OMS302. There are smaller amounts assigned to OMS103 and OMS824. Weighted Shares Outstanding is projected to remain essentially unchanged until then, with the company eventually earning GAAP EPS of $4.11. A consistent share count would be remarkable.

Everything presented is quite optimistic, and probably illuminating to many who follow the stock. It may have helped to trigger a squeeze while an abundance of short sellers remained in a dangerous situation. According to, just under 6.2M shares have been borrowed and sold as of August 30th. Over one month, or 33 days are required to cover. It seems that we have a short squeeze here that may evoke the envy of Herbalife (NYSE:HLF) followers, as they know that Bill Ackman has placed a $1 billion bet on the company's failure. Regardless of whether or not the fundamentals have changed, a remarkable number of shares may need to be bought back at prices around $8.25 after having traded below $6 for several months.

The only other known, recent occurrence that may have sensibly led up to this situation is the company's Thursday presentation at the Stifel Healthcare Conference 2013. There is a chance that an important party or fund became familiar with the stock at the event and bought in. However, an SEC search is not yielding such a result. Having already reviewed the presentation, I cannot think of anything disclosed that could be attributed to the stock's run up.

It does sound like a stronger case can now be made for OMS302. If so, Omeros may enjoy better profitability than had been allowed for in the past. Whether or not a raised price target can be attributed to share appreciation in excess of 2/3rds remains to be learned.

Disclosure: I am long OMER. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. I have a $7 October call sold against 100 shares.