Omeros Corporation: Elucidating Formulary Expansion At The VA

Summary

• Omnibus bill was passed to extend the reimbursement rate for Omidria. Omidria recently gained placement at the Veteran Affairs National Formulary to boost for the significant sales increase.
• Credit facility amendment to deepen the cash position for further pipeline innovation.
• Crown Jewel (OMS-721) is advancing aggressively with the earliest data reporting for the lupus nephritis franchise in December this year.

Live within your income and save so that you can invest. Learn what you need to learn. - Charlie Munger

Subsequent to the tumultuous trading due to the concerns re the Center for Medicare and Medicaid Services (“CMS”) pass-through expiration of Omidria, Omeros Corporation (NASDAQ:NASDAQ:OMER) is witnessing the light at the end of the tunnel. Several months prior, the stock traded as high as $27.09. Nevertheless, it lost most value in the past three months, as shares depreciated over 25%. As alluded, Omeros has been on a rallied lately with 34% appreciation in the past 4-week. Accordingly, the renewed optimism is backed by various catalyst in developments. In this research, we’ll elucidate the latest event - Omidria’s addition to the Veteran Administration (“VA”) formulary - and to reaffirm the overall investing thesis in this highly promising grower.

Figure 1: Omeros stock chart. (Source: StockCharts).

Fundamental Analysis

Operating out of Seattle WA, Omeros is focused on the innovation and launch of medicines to manage inflammation, complement-mediated diseases, and central nervous system disorder (as presented in figure 2). We noted in the previous research,

Omidria (phenylephrine and ketorolac 1%/0.3%) is an approved medicine to maintain pupil size during cataract surgery and to reduce postoperative pain. There was a recent controversy that Omeros will falter due to the loss of the pass-through status that, in and of itself, enables surgeons to charge $492 (on top of the $992 standard reimbursement for the said procedure). Consequently, the stock lost roughly half of its value due to such concerns. Shareholders who did not sell out have been enjoying a drastic comeback. As alluded, the underlying catalyst for the share price appreciation is the approval of the Omnibus bill that granted the two-year extension of the pass-through status reimbursement for Omidria by CMS.

Figure 2: Therapeutic pipeline (Source: Omeros).

Asides from the Omnibus bill catalyst, Omeros recent amended the credit facilitywith its lender - a healthcare-focused investment firm (“CRG LP”). The new terms enabled Omeros to borrow $45M (on or before May 20 this year). Moreover, the changes lowered the loan requirements that are applicable to 2019 and beyond. In specific, the minimum market cap was reduced from 6.4X to 3.0X the total loans outstanding. Furthermore, the amendment allowed Omeros to issue warrants to CRG (exercisable for 200K common shares up to 5-year) at $23 per share - a 70% premium to than the closing price on April 06, 2018. Hence, this signifies that the true (or intrinsic) value of Omeros is much higher than current valuation.

Figure 3: Omidria (Source:Omidria.com)

As mentioned, Omeros announced that Omidria was recently added to the VA National Formulary - a listing of drugs and supplies that must be available at all VA-associated facilities for the benefits of U.S. military veterans. Consequently, the drug is now available immediately to countless vets. And, the facilities within the VA - America’s largest integrated healthcare system - can purchase the said drug directly through wholesale channels.

What enabled Omiria to be added to the formulary was the stellar efficacy and safety data analysis. A review was made by stakeholders, which included data from publications in peer-reviewed journals - that support the overall benefits to harms, the reduction in damages associated with pupil-dilating devices, as well as post-op pain reduction and improved surgical outcomes.

In addition, the VA takes a cautiously optimistic approach and approved Omidria for the use in high-risk patients. Such patients include those having a history of panretinal photocoagulation, eyes trauma, pseudoexfoliation, peripheral iridotomy, the alpha-1 antagonist as well as pilocarpine use. Patients receiving the tonic intraocular lens are also considered high-risk. Interestingly, most vets fit into the aforesaid category and are able to receive Omidria.

It’s estimated that roughly 65K to 80K cataract surgeries are performed in the VA. Moreover, the VA hosts the largest medical education and training for our healthcare system: most U.S.-trained physicians received some form of training through the agency. Enthused with the recent development, Dr. Gregory Demopulos (CEO and Chairman) commented,

We are pleased that the VA is allowing veterans access to Omidria, and we appreciate the opportunity to participate in their care. The VA is committed to providing high-quality treatments as evidenced by the use of innovative technologies in cataract surgery, including multifocal IOLs, femtosecond lasers and, now, Omidria. We also look forward to contributing to the training of ophthalmic surgery residents, allowing them to experience first-hand the benefits of Omidria.

Final Remarks

In all, there are multiple powerful catalysts to stimulate corporate growth. The pass-through status for Omidria reimbursement was extended via the Omnibus bill. Moreover, the credit facility was amended to provide the cash needed for further pipeline advancement. Furthermore, the placement on the VA National Formulary to boost annual revenues of Omidria by $35M for the aggregate figure of roughly $100M. Most importantly, the ongoing pipeline development of four OMS-721 franchises to deliver robust data and blockbuster sales that is highly likely to trump the $3B of Soliris.

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