Though virtually everything has gone well at Omeros Corporation (NASDAQ:OMER) since February 2013, the biopharmaceutical firm's stock remains speculative. There certainly are some things offered to those willing to risk money on the basis of experimental drugs, as new data on early stage products could galvanize the share price yet again. There is also the newly approved product Omidria, which almost certainly needs to gain Medicare ("CMS") reimbursement to be commercially successful. While there has been no especially important news recently, other information has led to some model revisions.
Cowen and Company's coverage of the stock goes back at least as early as 2011, though a new analyst, Vice President Yatin Suneja, is now overseeing matters. In a June 2014 report containing an Outperform rating but no price target on shares of OMER, the sell side firm provides clarity about Omidria's innovative procedural methods that are utilized during cataract surgery (An applicable term included in one of only two known and issued patents is "Perioperative").
Traditionally… a mydriatic (phenylephrine) and an NSAID (ketorolac) are used 10-15 minutes prior to lens replacement surgery in a series of drops to achieve pupil dilation and to minimize inflammation, usually three times, 3-5 minutes apart, and are not used during the surgery. Omidria, which is a mixture of these two generic drugs, is added to the solution that's used to keep the eye irrigated during the surgery, and can be delivered directly to the affected eye throughout the duration of the surgical procedure, with the goal of providing its benefit both during and after the procedure.
Perioperative treatment is one believed reason for upside, though there are questions about viability while the product is intended, if not needed, to transform the corporation into a commercial enterprise.
My previous article on the stock concludes that orphan indications of two products, OMS824 and OMS721, are their most lucrative indications. It could be a gross understatement. Reality is that each compound is still early in the developmental process. Orphan and Fast Track designations of OMS824 in Huntington's disease makes things easier, and also perhaps allow improved odds of success to sensibly be modeled. OMS824 does not have the same status for a schizophrenia indication.
Some schizophrenia drugs such as Seroquel (NYSE:AZN) and Zyprexa (NYSE:LLY) have in fact resulted in multibillion dollar annual sales figures through several years. When inputting $325/month pricing and other conservative assumptions applicable, a spreadsheet model produces a risk-adjusted Net Present Value ("NPV") of $23.37 per share for an OMS824 schizophrenia indication! While the estimation could be reasonable, important data is still non-existent.
The situation is that investors tend not to attribute value to products at such early stages. However, there may be a small, low-risk catalyst about the play out. The company has had fast track application before the FDA for a schizophrenia indication of OMS824 for several months (the 60-day review time has been exceeded previously). If approved, rolling review would be amongst the potential benefits. A drug might be marketed faster - maybe a year sooner. It would also indicate that the FDA endorses aspects of the product's development (Its New Drug Application might also be easier, Source: Form 10-K).
Meanwhile, Pfizer (NYSE:PFE) is actively developing its phosphodiesterase ("PDE") inhibitor that is intended to treat the same conditions as OMS824. For perspective, the $178 billion giant lists its product under the heading "Key programs in Phase II." It is interesting to observe and compare the specified endpoints of the two Phase II Huntington's trials. According to clinicaltrials.gov, OMS824's Phase II trial has five Primary Outcome Measures that are designated as a safety issue, and five Secondary Outcome Measures that are not. According to the same government website, Pfizer has recently updated its information; it includes one Primary Outcome Measure that is designated a safety issue, and three Secondary Outcome Measures that are not. Drawing upon memory only, safety as a primary measure is new for Pfizer's trial.
Omeros Corporation has just announced its quarterly results. Data includes financial information that is pertinent to cash burn. It and some other considerations have been incorporated into my own model, which comprises several pages of an Excel workbook.
To calculate a discount rate, a Compound Annual Growth Rate ("CAGR") of the Russell 2000 based on its closing price at the end of August over the past ten years (including the 13th of this year) is used to arrive at a market risk premium of 7.61%. The risk free rate employed is based on the 10-year US Treasury - though pipeline projections go out well beyond - and equal to 2.43%. The stock's Beta is only listed at 1.16; however, it has been volatile, and 1.5 is being used to adjust: 1.5 * (2.43% + 7.61%) = 13.84%. Incidentally, this is only slightly higher than a weighted average cost of capital ("WACC") equal to 13.55% (that is not based on a market price of debt).
After including required debt service of $2.96 million in 2014 and $9 million in 2015, 1.4 million new shares, at $14 each, are forecast to be needed in order to end the year with $20 million in cash. Further dilution is forecast in 2015. The diluted share count used is 42.3 million, higher than the recently reported 33.99 as issued and outstanding, but lower than the 2016 estimate. Debt requires high interest payments and other terms, so the method approximates the situation in consideration of the probable means to keep the lights on (Source: Form 10-K).
Pursuit of a partnership is the stated way to market Omidria in Europe. To be conservative, a very hard bargain with no upfront or milestone payments, pricing 25% lower, and a 20% royalty only is being modeled. The domestic price the product ultimately fetches has bearing; although it is secondary to CMS approval. Through time, doctors may prefer Omidria, and perhaps innovation would immediately appeal to some surgeons who have been doing things the same way for years or decades.
Here are resultant NPVs:
- OMS103, $0.22
- OMS824 Huntington's, $4.07
- OMS721 aHUS $4.13
- Omidria $12.76 (Price $250, $8.73 at price of $175) risk-adjusted worldwide; ($10.09, $6.92, USA only)
Pending approval of Omidria in Europe remains important. Though perspectives may vary, there is at least $16.93 in value without consideration of several other products in early stages of development. It is not difficult to arrive at substantially higher figures. In fact, Yahoo Finance shows a median consensus target of $24. Approval of a fast track application would perhaps cause revisions to widely-followed estimates.
If schizophrenia drugs have been important to Eli Lilly and AstraZeneca, anything comparable is off the charts here. Meanwhile, Omidria is probably worth over $10 per diluted share, though the time required to demonstrate it could be costly. There are many implicit risks to investing in the company that is attempting to accomplish incredible feats.
Disclosure: The author is long OMER. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.