Omeros' Pipeline Starting To Get The Recognition It Deserves
- Omeros rallied more than 30% in June as the market finally started to give the pipeline some recognition.
- Art Doyle short report is full of false claims and the main two claims have been negated in the meantime. The two-part short report has since disappeared.
- IgA nephropathy data de-risk OMS721 away from aHUS.
Omeros' (NASDAQ:NASDAQ:OMER) valuation has been depressed for quite some time despite Omidria sales growing and, more importantly, the pipeline making significant progress. The stock rallied more than 30% in June and the market seems to be waking up to OMS721's potential. OMS721 is targeting several orphan indications, two of which (and maybe even three) should be in phase 3 trials before the year is over. Omeros remains one of my highest conviction holdings and the stock is trading around the levels I thought were attractive two years ago with a less advanced pipeline.
Art Doyle Research short report
Before talking about the recent fundamental developments, I want to address the short report that was published by Art Doyle Research. I wrote a detailed rebuttal of the two-part short report - the articles are available to Growth Stock Forum subscribers - part 1 and part 2, and I will address what I believe were two key accusations (both of which have since been negated):
- Claim that the phase 3 aHUS trial of OMS721 didn't even start - the claim was supported by the fact that the trial was not posted on ClinicalTrials.gov. The protocol has been posted in the meantime and shows that the trial has been active since February 2017.
- Claim that OMS721 will only be administered intravenously and not subcutaneously. The above-linked protocol contains the following information about administration (emphasis added): "Intravenous loading dose followed by daily subcutaneous injections" which effectively killed that point as well.
I noted these two claims as two main concerns from the report that relate to fraud or misleading investors in my articles and both concerns are now gone. Art Doyle did note some legitimate risks - like Omidria's pass-through status expiring in January 2018 and generic threats, but these are business risks and have nothing to do with fraud or with misleading investors. It is also worth noting that the two-part short report has since disappeared from Art Doyle's SCRIBD account. Omeros has responded to the report:
"This report is replete with falsehoods, misleading statements and incorrect analyses and conclusions. “Art Doyle” states that it stands to profit in the event that Omeros’ share price declines. The report is actionable and the company is pursuing legal remedies. Omeros intends to hold all responsible parties accountable."
The importance of OMS721's IgAN data - de-risking from aHUS/Soliris
Omeros reported positive phase 2 data in IgA nephropathy in late March and mid-May.
Four IgAN patients were treated with OMS721 and all showed:
- Significant reduction in uACR from mean baseline of 1,457 mg/g to 332 mg/g at the end of follow-up period, representing a 77% decrease with a p-value of 0.026 - highly statistically significant data in just four patients (94%, 86%, 47% and 89% reductions for patients 1-4).
- 24-hour urine protein excretion, reduction from a mean baseline of 3,935 mg/day to 1,067 mg/day at the end of follow-up period, representing a 73% decrease, p=0.013. All patients achieved partial remission based on proteinuria and one patient with nephrotic range proteinuria achieved a 95% reduction, reaching reference laboratory established normal urine protein levels. The reductions in other three patients were 54%, 81%, and 63%.
- All patients were able to eliminate or greatly reduce their corticosteroid dosing - 89% mean reduction (100%, 88%, 75% and 100% reduction for patients 1-4).
- No significant safety concerns have been observed, with most common reported adverse events being fatigue and anemia.
Based on these very solid results, Omeros asked for and received Breakthrough Therapy Designation by the FDA, which was seemingly enough to push the stock 50%+ in mid-June. The estimated patient population in the U.S. is between 120,000 and 180,000 patients and 40% of patients develop end-stage renal disease.
So, what is the annual price OMS721 could fetch for this particular indication? I believe that the MS market is a good indicator of a minimum price - it is a highly competitive market and annual prices are mostly in the $65,000 to $85,000 range. MS is not an orphan disease and it affects more than 400,000 patients in the U.S. or between 2-3 times the IgAN population. I believe that the minimum annual price should be around $100,000 given the more favorable market dynamics (no approved competing products for now and inadequate current standard of care). This translates to a $12 billion to $18 billion addressable market in the U.S. alone. My peak sales estimates for IgAN are in the $500 million to $1 billion range, which I believe is a very conservative estimate - even assuming a $50K price tag, this translates to 10,000 to 20,000 patients being treated per year, or 8% to 16% peak U.S. market share (or 4-8% market share with a $100K annual price tag). And if we include the rest of the world, we only get low to mid-single digit worldwide market share.
WBB Securities reiterated its buy rating and $75 price target last week and analyst Steven Brozak commented (emphasis added):
The IgAN population is a multiple of the aHUS population. In our opinion, we believe that a treatment price of $100,000 is well within the pharmacoeconomic tolerance of the insurance companies. This raises an issue in a cost-conscious drug environment that we believe will only become more problematic. With this careful reflection, this is one area where off-label use must be taken as a serious consideration. We believe OMS721 could potentially become a global treatment for proteinuria, opening a huge market for this drug.
If Brozak is proven right, the market for OMS721 could be significantly larger, and perhaps Omeros could err on the side of caution regarding pricing to make the drug more widely available as obtaining reimbursement for off-label use could be harder if the price tag is higher.
I believe that the positive data in IgAN is very important as it de-risks OMS721 from aHUS in a significant way, which many investors believe will remain dominated by an entrenched player - Alexion's (NASDAQ:ALXN) Soliris. There are other companies that are developing potential treatments for IgAN, but none are as advanced as OMS721 at this point and none have generated data as strong as OMS721 did. Two companies that I know of are developing treatments for IgAN - Rigel Pharmaceuticals (NASDAQ:RIGL) and ChemoCentrix (NASDAQ:CCXI).
Rigel's fostamatinib showed a 54% reduction in proteinuria in a phase 2 trial compared to a 36% reduction in the placebo arm after 24 weeks of treatment. OMS721 achieved more than a 70% reduction after only 12 weeks of treatment. I haven't seen fostamatinib's safety data in IgAN, but if we look at the data from the phase 3 trial in ITP, OMS721 could prove to have a superior safety profile as well. Rigel is currently enrolling a second cohort of IgAN patients in its phase 2 trial, while OMS721 should enter phase 3 before the end of 2017.
Source: Rigel presentation
ChemoCentryx recently announced some phase 2 data of avacopan in IgAN. Seven patients received avacopan and all seven completed the study. At the end of 12 weeks, reduced levels of protein in the urine were seen in 6 of 7 patients, with 3 of the 7 patients showing significant improvement to UPCR below 1,000 mg/g. At the end of the 12-week period following treatment, the protein ratio in 2 of these 3 patients returned to baseline levels, while the improvement was maintained in the third patient. ChemoCentryx noted that longer treatment duration may be indicated for maximal benefit. Although we don't have numerical data here, we have in another disease - ANCA-associated vasculitis where two arms of avacopan achieved 44% and 56% decreases in proteinuria after 12 weeks of treatment (though this may not be indicative of same efficacy levels in IgAN). Based on the available data, avacopan also appears inferior to OMS721, which not only showed substantial decreases in UPCR in all patients, it also had a sustained effect following the end of treatment. But I should note that efficacy and safety of all these candidates remains to be determined in a phase 3 trial.
Source: ChemoCentrix presentation
The potential advantages of both fostamatinib and avacopan are more convenient dosing - both are oral treatments, but I believe efficacy/safety are far more important than convenience in this patient population and both seem to be going in OMS721's favor for now.
Going back to the importance of IgAN data - I believe this trial will finish ahead of the aHUS trial and that it could be the first approved indication for OMS721. The main reason is the speed of enrollment - aHUS trial enrollment is likely to be challenging due to limitations in the total number of patients and a large number of diagnosed patients receiving Soliris. If the IgAN phase 3 trial enrollment starts in Q4 2017, I believe it could by fully enrolled in 1H 2018 or even in Q1 2018.
Aside from aHUS and IgAN, OMS721 could also begin a phase 3 trial in HSCT-TMA later this year (no updates on this trial yet), and depending on financial constraints, we could also see OMS721 in one or two additional phase 3 trials - lupus nephritis and/or membranous nephropathy, though data generated in membranous nephropathy are mixed and I haven't heard management talk about it recently. I am maintaining a view that success in just one of these three (or five) indications warrants a higher valuation.
A good time to raise cash?
As mentioned on several occasions, I would like to finally see the financing overhang resolved. Omeros had $33.7 million in cash and equivalents at the end of Q1 and Omidria net sales are still not near a level that allows the company to fund its expanding pipeline. There are two reasons why I believe the use of the $50 million ATM or an underwritten offering would be very positive for the company:
- Like I said, it would eliminate the financing overhang which has plagued the stock for more than a year. This is especially important considering the upcoming pass-through status expiration for Omidria in 2018 and the question will it be bundled at a lower price or will the company be able to retain separate reimbursement.
- A $50 million raise would allow the company to speed up the pipeline development efforts. I believe that cash constraints are having a negative impact on pipeline timelines and that a stronger balance sheet would enable increased R&D spending and accelerated development of certain pipeline programs, including late-stage OMS721 trials.
The company does have access to the $25 million loan tranche from CRG, but I don't think it would be enough if Omidria is bundled in 2018 - it wouldn't threaten the company's existence as Omidria's growth trajectory would just be lower in 2018 and beyond (but a lower price could potentially speed up its uptake), but clinical programs are likely to slow down as Omeros would be forced to cut costs to preserve cash.
The market is finally starting to give Omeros' pipeline the recognition I believe it deserves. The stock has doubled since the start of the year, but is coming off of really depressed levels and is at a level I thought was attractive when I initiated coverage two years ago - and we only had initial OMS721 data in aHUS back then and Omidria was about to launch. On the other hand, this could be a great time to raise cash and eliminate the financing overhang for good - either through the $50 million ATM the company has in place or through an underwritten offering.
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