Omeros: Upside/Risk With Orphan Drug Strategy

| About: Omeros Corporation (OMER)

Summary

Omeros' orphan drug strategy reduces risk of clinical failure.

High prescription costs in orphan drug market support blockbuster potential for OMS721.

Risk of dilution typical to small cap pharma may be mitigated by Omidria revenue.

Picking a winner in small cap pharma is about answering two questions: Will the drug make it through the FDA approval process and is there a market for the approved drug? Omeros' (NASDAQ: OMER) clinical trial strategy for OMS721 greatly reduces risk of failure in clinical trials. It targets indications with little to no competition that will bear extremely high prescription costs to drive big revenues.

Rare Diseases, Orphan Drug Status, and Surviving the FDA

In the US, a rare disease is defined as impacting less than 200,000 patients. These diseases are generally also considered severe and incurable. The need for treatment options is, therefore, dire for individuals afflicted with these conditions and the FDA has responded with enhanced support for new drug applications targeting rare conditions.

The big hurdle for every biotech company is satisfying the FDA. Naturally, additional support from the organization is huge in mitigating the risk in developmental stage pharma sector speculation. The commonly quoted figure is over 90% of early stage pharma fails. Even those companies that survive early studies and successfully complete Phase III trials fall short of FDA approval.

Rare disease indications, however, beat the odds. Approval rates for these clinical candidates are over 30% higher than rates for overall submissions. Success rates from inception through the entire clinical process are even better at 25.3% compared to 9.6% of drugs overall. And there are other positives.

Time is critical for drug makers. Each day of delay in clinical trials can carry an opportunity cost of between $600k-8M depending upon the success of the drug. Fortunately, drugs targeting rare diseases where there is no existing treatment nearly always receive fast track, breakthrough, or accelerated approval designation shaving nearly 40% of the time off of the review process.

Furthermore, these orphan drugs receive additional protection over what would be conveyed by traditional IP mechanisms like patents. In short, this protection entails a 7-year runway where no other company may produce any drug of the same general chemical composition to treat the disease in any way. Such protection is highly important for biologics like antibodies where patent protection is weak and orphan designation blocks any other antibody-based therapy from entering the market.

So what does this mean for Omeros' antibody drug candidate OMS721? Omeros is pursuing not one, but six rare disease indications for OMS721. With the exception of aHUS, a clotting disorder, all of these indications fall under, or will likely fall under, orphan designation.

Breaking $1B with a small patient population?

You'd normally think, "reduce risk, reduce upside." The road to market through the FDA is safer for rare diseases, but with patient populations less than 200,000, it seems we're again trading risk and reward. That would be true if it weren't for soaring prescription costs for these drugs. The average price per year per patient for drugs designed to treat rare diseases is $137,000.

In small patient populations this can climb much higher. These per patient prices support robust markets for these drugs in spite of small patient groups. Novartis' (NYSE: NVS) Gleevec, a treatment for certain rare forms of leukemia, raked in revenues of $4.65B in 2015. Alexion's (NASDAQ: ALXN) Soliris, a treatment for Paroxysmal Nocturnal Hemoglobinuria (PNH) and Atypical hemolytic-uremic syndrome (aHUS) is another example of a blockbuster.

OMS721 will seek to unseat Soliris in the aHUS market and has substantial other opportunity to achieve blockbuster status from sales under other indications related to kidney failure.

aHUS

aHUS is an ultra-rare clotting disorder with only 14,000 cases estimated worldwide. It is mediated by a disorder within a compartment of the immune system known as the complement cascade. In addition to playing a role in clotting disorders, traditionally, the complement cascade is a critical component of the innate immune system, which provides quick, early responses to infection.

Complement is composed of two pathways known as classical and alternative complement pathways. The classical pathway is absolutely necessary for normal immune defense against many invading viruses and bacteria. However, deficits in the alternative pathway are not associated with compromised host defense.

Soliris, is the currently prescribed treatment for aHUS. It blocks the complement cascade by neutralizing C5, a component of the classical complement cascade. Before approval of Soliris, aHUS was fatal in 79% of all patients. Now, aHUS survival rates are substantially improved. Like treatment for most rare diseases, Soliris doesn't come cheap. Per year per patient costs for this therapy exceeds $600,000 annually driving total worldwide revenues for this drug exceeding $2B.

OMS721 blocks a different component of the complement cascade called MASP-2. MASP-2 acts within the alternative complement cascade rather than interfering with classical complement. Remember how classical complement is critical for normal immune function? Not surprisingly, one of the main safety issues associated with Soliris is increased susceptibility to a variety of infections.

In fact, prescription is contraindicted in patients that are at risk for meningococcal infection. OMS721 circumvents these issues by working through the alternative complement pathway. Mitigation of these safety concerns may prove a significant advantage for OMS721 in treating aHUS.

Kidney Disorders

The recent Phase II data released by Omeros were from its examination of OMS721 in four complement mediated kidney diseases. Data were positive and Omeros is on track to move further into clinical trials for these indications. All together, these represent a huge opportunity.

OMS721 targets four complement mediated renal diseases including IgA nephropathy, membranous nephropathy, systemic lupus nephritis, and c3 glomerular nephropathy. In total, an estimated 155,000 patients are impacted by these various conditions. Although pricing for these therapies is long from being set, a quick top down analysis based upon the average cost per patient per year of $137000 yields a market size of around $21B.

Of course, some of these patients (30%) can be successfully treated with immunosuppressive therapies and many patients will have difficulty paying for the therapy, but the bottom line is that there is a sizable revenue stream available for the first available therapy to treat these diseases.

The story is similar for OMS721 as treatment for a final indication impacting an estimated 2500 to 5000 patients, hematopoietic stem cell transplant-associated thrombotic microangiopathy (HSCT-TMA). OMS721 has already been approved for orphan status for HSCT-TMA.

The Wrap Up

The upside potential for Omeros' OMS721 should be clear, but does the company have what it takes to weather the remaining clinical trials? Management has a track record for successful clinical programs. Their approved drug candidate, Omidria is gaining steam and revenues broke $10M in the most recent quarter. Cash on hand is $21.2M with a burn rate of approximately $9M per quarter.

Revenue is growing at a rate of 38% per quarter and should be sufficient to cover development expenses prior to depletion of all cash. This would circumvent further dilution of Omeros shares, which is rare in small drug development companies. The bottom line is Omeros is a good place to go long in the usually unpredictable small cap pharma market.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.