Omeros: Payoffs Beckon, Risks Abound

Jun. 25, 2018 3:44 PM ETOmeros Corporation (OMER)37 Comments
Out of Ignorance profile picture
Out of Ignorance
6.65K Followers

Summary

  • Payoffs beckon - OMIDRIA.
  • Risks abound - OMIDRIA.
  • Payoffs beckon - OMS721 for stem cell TMA.
  • Risks abound - OMS721 for stem cell TMA.

I am always on the lookout for a reasonably priced clinical stage biotech stock that has near to midterm multi-bagger potential. Omeros (NASDAQ:OMER) presents just such an opportunity. As goes with the territory, Omeros carries significant risk.

This posting will focus on the interplay of payoff and risk for Omeros' two highest priority assets, OMIDRIA and OMS721 for stem cell TMA.

Payoffs beckon - OMIDRIA

Back in 2014, Omeros achieved FDA approval for OMIDRIA, an irrigation solution which is used during cataract surgery and certain other surgeries of the eye. Up to Q4, 2017, sales of OMIDRIA were generally positive, leading to the prospect of imminent profitability for Omeros. OMIDRIA's days of wine and roses have been interrupted by sunsetting of a special pass-through reimbursement protocol at the end of Q4, 2017.

This termination of pass-through status has been most destructive to OMIDRIA's revenue trajectory. During its Q1, 2018 earnings CC, Omeros reported that its revenues from OMIDRIA, which had generally been trending upwards, dropped to $1.6 million. This was down nearly 90% from $13.8 million OMIDRIA revenues in Q4, 2017. As a result, Omeros more than trebled its cash burn in Q1, 2018, to $10.9 million compared to $3.1 million for its previous quarter.

At the current time, Omeros is in OMIDRIA purgatory. To Omeros's great relief, Congress substantially relieved its OMIDRIA's concerns with a reinstatement of pass-through billing. It does not begin until October 1, 2018 (H.R. 1625, Title XIII).

In the interim, last April 2018, Omeros announced that the VA had added OMIDRIA to its national formulary. This will make OMIDRIA available for all ophthalmic procedures in the VA. The initial recommendation applicable to use of OMIDRIA in the VA is that it be limited to high risk patients at the discretion of the surgeon.

For the time being, it is devilishly hard to get a bead on OMIDRIA's revenues, and by extension, Omeros's cash needs. It will take time to even parse out the impact of the VA formulary addition. Omeros will not have a full quarter's experience of how this plays out in fact, until Q3, 2018. Nonetheless, there is cause for optimism.

In early 2019, when Omeros reports results for Q4, 2018, we can anticipate a significant recovery for its first full quarter of revenue under the restored pass-through regimen. Gradually, through the balance of 2019, the prospect of zero cash burn should come back into view as 2019 comes to a close.

Optimists have fashioned a likely OMIDRIA revenue boost from an imminent European deal. In Omeros's Q1, 2018 earnings CC, CEO Demopulos gave the following assurance:

...we are required to make a sale of OMIDRIA in the EU by July 28, to maintain our current European marketing authorization for the drug. Here again, we expect that we will meet that deadline.

It is unclear what form marketing revenues in Europe might take. However, it offers a clear potential for a significant incremental enhancement.

Risks abound - OMIDRIA

Unfortunately, the reinstatement of pass-through was not a clean win for Omeros. The new law included its own new sunset provision. The pass-through reinstatement took effect for two years only. As 2020 unfolds, pass-through will potentially re-raise its horny head, with attendant risks to Omeros's OMIDRIA revenues.

A second OMIDRIA concern exists arising out the European situation mentioned above. In July 2015, when the European Commission granted Omeros permission to market OMIDRIA in the European Economic Area (EEA) for certain eye surgeries, it did so with a proviso. The permission is dependent upon being placed on the market in at least one EEA country by July 28, 2018.

Bulls see this as a wonderful opportunity. Omeros maintained during its earnings CC and its Q1, 2018 10-Q, that it expects to satisfy this requirement. However, the 10-Q also provides (p. 13-14):

Decisions about price and reimbursement for OMIDRIA are made on a country-by-country basis and may be required before marketing may occur in a particular country. We do not expect to see sales of OMIDRIA in any countries within the EEA and other international territories if we are unable to either enter into partnerships for the marketing and distribution of OMIDRIA or complete an independent launch in such countries. Timing of any such partnerships or independent launch depends on numerous factors, including completion of mutual diligence exercises and domestic sales of OMIDRIA or entry into suitable agreements with contract service vendors, respectively.

In July 2015, July 28, 2018, was in the far future. As I write in late June 2018, it is becoming quite close. Omeros will presumably meet this requirement, per its stated expectation. Should it fail to do so, it will lose substantial credibility. Depending on how the news breaks, it could cause an unpleasant near-term stock hit.

Payoffs beckon - OMS721 for stem cell TMA

OMS721, Omeros's lead clinical asset, provides exciting potential in several indications. During Omeros's Q1, 2018 earnings CC, CEO Demopulos summarized OMS721 collection of FDA (and EMA) special designations, noting:

OMS721 has received multiple designations from FDA across those three current indications. For stem cell TMA OMS721 is breakthrough therapy and orphan drug designation in the U.S. and we are pursuing orphan designation in Europe. For IgA nephropathy, OMS721 has breakthrough therapy and orphan drug designations in the U.S. together with orphan drug designation in Europe and we are pursuing priority medicines or PRIME designation from EMA. For aHUS, OMS721 has received Fast Track in orphan drug designations in the U.S. In every OMS721 clinical trial to date the drug has been well tolerated with no safety concerns identified.

The three listed conditions for which OMS721 has received FDA recognition are extremely dangerous ones that are quite rare. The first, stem cell thrombotic microangiopathy (TMA), which received breakthrough therapy and orphan drug designations, is a potentially lethal complication of stem cell transplantation.

As it has developed, OMS721 to treat stem cell TMA has managed to leapfrog the others so that it is currently the condition management sees as its best chance for near-term approval. During its Q4, 2017 earnings CC, CEO Demopulos noted that a cohort of 18 patients treated with OMS721 had a response demonstrating a 16-fold improvement in median overall survival over the best matched control group.

Also on its Q4, 2017 CC, CEO Demopulos described the following progression:

...we have three Phase 3 programs running in OMS721. aHUS, IgA nephropathy and now stem-cell associated TMA. We began with the aHUS program I think we've been pretty clear that we expect both IgA and stem-cell TMA to leapfrog aHUS in the development process. Based on our data with stem cell TMA, I think there's actually a reasonable possibility that stem cell could in fact also leapfrog IgA. We've been pretty clear about the data that we've put out. We are very excited about the data that we have put out on stem cell TMA. Whether you look at the median overall survival data, whether you look at the transfusion data; whether you look at the biomarker data; whether you look at the patient's clinical course. What you see I think is based on those studies clear evidence that support our contention that OMS721 is having a positive effect and frankly is saving lives. ...There is no treatment for stem cell TMA...

At the time, he went on to note:

...the data are consistent and compelling and we look forward to discussing them with regulatory authorities both in the US and in Europe. As in every OMS721 clinical trial to date, the drug has been well tolerated in the TMA Phase 2 trial with no safety concerns identified.

Fast forward to Omeros's Q1, 2018 earnings CC. Now, after initial talks with the FDA, the path forward is a bit clearer. During Omeros's Q1, 2018 earnings CC, CEO Demopulos indicated that discussions with the FDA are ongoing. Omeros is targeting these discussions so that it can proceed with a rolling Biologics License Application for OMS721 in stem cell TMA for later in 2018. According to FDA published data, it would take an additional 8-10 months following such an application for review.

The possible financial implications of a quick FDA approval of OMS721 for stem cell TMA are staggering. Although stem cell TMA is rare it is still a significant recurring problem. During Omeros's Q3, 2017 earnings CC, CEO Demopulos advised on the prevalence of stem cell TMA, noting:

More than 20,000 stem cell transplant procedures are performed annually in the U.S. and about 40,000 each year in Europe. TMA is reported to occur in approximately 10% to 25% of all stem cell transplant patients. Enrolment in the open-label Phase II trial has continued and additional data are being collected.

Whatever projections Omeros has for revenues from an FDA approval of OMS721 for stem cell TMA are private. During Omeros's Q4, 2017 earnings CC, CEO Demopulos did share the following when asked about Omeros's commercialization plans:

With respect to the pre-commercialization activities, at this point, we – the standard pre-commercialization activities that you would expect, we’re looking at markets sizes, we’re assessing costs of management of these patients [Audio Dip] to manage a severe or high-risk stem cell transplant TMA patient is about $3 million a year, and those are rough numbers, but it’s an extensive amount of effort that’s required and costs associated with that.

Risks abound - OMS721 for stem cell TMA

The first risk is that an investor bite on management's enthusiasm without attention to the details. Omeros's breakthrough therapy designation for stem cell TMA applies to high risk TMA.

Omeros's Q1, 2018 10-Q sets out its opportunity and its limitations as follows. I have broken the text, which appears in one solid paragraph at pg. 14 of the 10-Q, into four sections with brief follow-up discussions:

Section 1:

The FDA recently granted breakthrough therapy designation to OMS721 for the treatment of HSCT-TMA in patients who have persistent TMA despite modification of immunosuppressive therapy, or high-risk HSCT-TMA. We recently met with the FDA to discuss requirements for approval of OMS721 in high-risk HSCT-TMA. Based on that meeting, we believe that we have clear paths to both accelerated and full approval of OMS721 in this indication.

Importantly, this section 1 defines the high-risk cohort of stem cell TMA patients for which breakthrough therapy has been granted and as to which accelerated approval will be sought.

Section 2:

In addition to the data provided to the FDA, the Agency requested that we further characterize the patients treated with OMS721 - all of whom had high-risk TMA - and compile and submit additional information on the historical control population for the purpose of further comparing outcomes across corresponding patients.

Omeros and the FDA are in the process of parsing out the overall prevalence and characteristics of patients with stem cell TMA. Until this work has been completed and becomes publicly available, it will be impossible to judge the true nature and extent of Omeros's potential stem cell TMA market.

Section 3:

The FDA also requested an analysis plan to assess our biomarker data. Should the FDA grant OMS721 accelerated approval for the treatment of high-risk stem cell-TMA patients, the drug would be made commercially available for stem-cell patients with this disorder.

Initially, any stem cell TMA approval will have an expressly limited label to a defined group of those with high-risk stem cell TMA.

Section 4:

Concurrently, we would conduct a confirmatory trial for subsequent full approval. We intend to continue working closely with the FDA as we further compile all required information with the objective of initiating a rolling BLA submission later this year. In Europe, we are scheduling meetings with regulatory authorities to discuss plans for submission of an application for conditional marketing authorization for OMS721 in HSCT-TMA.

While any early approval will be circumscribed, Omeros expects to have a clear path for a more expansive approval.

During Omeros's Q1, 2018 earnings CC Q&A, CEO Demopulos walked back an analyst's assumption that no additional clinical trial requirements stood in the way of filing a BLA for stem cell TMA. He noted that discussions with the FDA as to its requirements were ongoing and as yet unformed. This is a critical subtlety that investors must recognize.

Conclusion

Omeros's two lead therapies, OMIDRIA and OMS721 for stem cell TMA, easily support its current market cap of ~$1 billion.

I see OMIDRIA as an adjunct, available as a potential, uncertain source to contribute cash. The real gem, in terms of potential high value catalysts, is OMS721 for stem cell TMA. It offers a significant possibility for an accelerated approval in high risk stem cell TMA that may yet be granted in 2018 with an actual approval to follow as early as mid-2019.

Under such a scenario we will be treated to elaborate models estimating revenue potential. Omeros's press release following the stem cell breakthrough therapy designation for OMS721 included the following:

Persistent thrombotic microangiopathy is a life-threatening complication of HSCT. Approximately 20,000 HSCT procedures are performed in the U.S. annually, and TMA is reported to occur in approximately 10 to 25 percent of HSCT patients. Reported mortality in high-risk patients is greater than 90%.

This suggests that OMS721 will find a significant recurring pool of patients with stem cell TMA. Frustratingly, it falls short of providing a number for those qualifying as persistent which is the group for which any accelerated approval would apply and for which it will present the most value.

Investors can accept whatever numbers fall out for the high risk group. If the high risk group is smaller than one imagines, one has only to consider the prospect of an ensuing general approval. A population of 2,000 (10% of 20,000) to 5,000 (25% of 20,000) patients in the US, with a much larger number in Europe, assures that a therapy with even a conventional price tag in the area of some tens of thousands of dollars per treatment will be meaningful.

Omeros's rocky OMIDRIA issues are disconcerting; nonetheless, they should not control investors' evaluation of this stock. At the close of Q1, 2018, Omeros had unrestricted cash and cash equivalents of $72.8 million. It intended to draw loan proceeds of $45 million which would add to this total, effectively providing it $117.8 million of cash and cash equivalents.

If one makes the conservative assumption of an $11 million quarterly cash burn for Q's 2 and 3 of 2018, this would see cash and equivalents on hand of >$90 million likely to be reported at close of Q3, 2018.

With the potential blockbuster in the wings of OMS721 for stem cell TMA, not to mention Omeros's OMIDRIA and its pipeline, Omeros has excellent potential to grow its sales price to significantly higher levels. The fact that it will likely face the need to seek one or more additional cash infusions before an anticipated OMS721 approval is disappointing but does not destroy the thesis.

This article was written by

Out of Ignorance profile picture
6.65K Followers
Writing under the pseudonym "out of ignorance", I very much regard investing as a learning process. Investing failures are tuition paid. Investing successes enter the trove of lessons learned. In my Seeking Alpha articles I share my experience from decades of investing and from ~5 years of focused research on a variety of stocks, in recent years with a primary emphasis on healthcare stocks. I greatly appreciate those who take the time to share their reactions to articles, particularly those who share relevant anecdotes and experiences.

Disclosure: I am/we are 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.

Additional disclosure: I may buy or sell shares of Omeros over the next 72 hours.

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