Omeros Rising: Prospects, Income, Expenses Spell Risk Overmatched By Opportunity

|
About: Omeros Corporation (OMER)
by: Out of Ignorance
Summary

Omeros' pipeline has significant near-to-midterm revenue potential.

Omeros' expenses are growing across the board.

OMIDRIA is coming into its own as a reliable revenue generator.

Omeros never has quite enough cash to satisfy any comfortable margin of safety.

Omeros (OMER) is a clinical stage biotech that is in the midst of a pullback. I expect it to recover and will be watching for healthy returns once one of its Phase 3 candidates hauls in an FDA or EMA approval. In the meantime, Omeros presents a highly attractive speculative acquisition as I discuss below.

Omeros' pipeline has significant near-to-midterm revenue potential.

Omeros' lead compound (OMS721), as a generic recently named narsoplimab, is the lure that draws attention to this stock for those hoping for a big payday in the not too distant future. It boasts three ongoing pivotal trials, each having garnered a nice collection of special designations.

Omeros' pipeline as currently (3/6/19) appearing on its website shows narsoplimab's (OMS721) Phase 3 trials along with a strong backup cast as follows:

Omeros Its lead narsoplimab indication treats stem cell transplant associated TMA, a particularly vicious, occasional by-product of stem cell transplants. This important therapy is needed even more in Europe than it is in the United States. The salient attributes of this therapy are set out in the following slide from Omeros' October 2018 Cantor Fitzgerald presentation.

OMS 721 in treatment of HSCT-Associated TMA The question that must always hang in the air when a pivotal study for a dreaded condition comes to the fore is "when?" When will OMS721 for stem cell TMA have its shot for approval in the US or of particular importance for this indication, in Europe?

The answer is shrouded with mystery as is always true for future events. In the case of OMS721 in this indication that seems particularly applicable. When I try honing my nascent clinical trial research skills in this regard I come up with no return. The closest study I could find was NCT02222545 a Phase 2 study on "Safety and Efficacy Study of OMS721 in Patients With Thrombotic Microangiopathies."

The status of this study is shown as "recruiting." The first posting for this study was in 2014, its most recent 2019. The detailed description of the study is:

This is a Phase 2, uncontrolled, three-stage, dose-escalation cohort study in subjects with three forms of TMA: atypical hemolytic uremic syndrome (aHUS), thrombotic thrombocytopenia (TTP), and hematopoietic stem cell transplant -associated TMA (HSCT-associated TMA). In the first stage, OMS721 will be administered to escalating dose cohorts of three subjects per cohort to identify the optimal dosing regimen. In the second stage, the dose selected in the first stage will be administered to expanded cohorts of 40 subjects per cohort with distinct etiologies (aHUS alone in one cohort and TTP or HSCT-TMA in the other cohort). Subjects completing the second stage may be eligible for continued treatment in the third stage if the investigator believes the subject is at risk for relapse of TMA, the subject tolerated OMS721 treatment, and the subject has no conditions that increase the risk of OMS721 treatment.

In order to understand OMS721's Phase 3 listing and its road to potential licensure one must review Omeros' Q4 2018 earnings CC. During this call, in response to a question from Steve Brozak, CEO Demopulos prioritizes OMS721's approval pathway as first, stem cell TMA, second IgA, and third aHUS.

Demopulos sidestepped a direct request from Liana Moussatos to time Omeros' stem cell TMA BLA application in either 2019 or 2020, stating:

...our objective is to get it filed as quickly as possible. And clearly the entire team is focused on that. The elimination of the need for an historical control not only really reduces the risk, we were ready to do an historical control and we were quite confident how that would end up, but there's always risk, with the unknown that unknown risk has now been eliminated. Not only does it eliminate the risk, it compresses the timeline, saves time, saves cost. So all of that I think bodes well for an earlier submission of our BLA.

He points to the FDA's agreement to bypass historical controls in connection with approval of OMS721 for stem cell TMA. Earlier in the ECC, he described the situation as follows:

We agreed with FDA that a response-based analysis for narsoplimab in stem cell TMA is the most appropriate and expeditious assessment for approval, eliminating the need to conduct a chart review-based historical control. This means that patient data from our existing Phase 2 single arm stem cell TMA trial will form the clinical basis for the BLA.

As for the other two indications for OMS721 in pivotal trials, next to the plate in treatment of IgA has a particularly convoluted history.

The slide below from Omeros' October 2018 Cantor Fitzgerald presentation sets out the characteristics and prevalence of this condition:

The interrelated progress of the three outstanding cohorts of Omeros' ongoing Phase 2 (NCT02682407) and its Phase 3 Artemis (NCT03608033) clinical trials exceed my narrational skills. Rather than further confuse an already complicated situation I will reiterate that management expects that its IgA licensure applications will lag that for stem cell TMA.

During Omeros' Q4 2018 presentation, CEO Demopulos set the following as OMS721's path to approval:

The ARTEMIS-IGAN trial continues to enroll. Narsoplimab has clear paths to accelerated and full approvals in both the entire patient population, which includes patients with baseline proteinuria greater than 1 gram per day and in the high risk subpopulation which includes those patients with baseline proteinuria of at least 2 grams per day.

There is a separate conventional Phase 3 trial for OMS721 in treatment of aHUS listed as NCT03205995. It began in 2017. It has a target enrollment of 80 patients with an interim analysis after the first cohort of 40 patients to support potential registration.

For a discussion of the salutary prospects for the balance of the Omeros pipeline see "Omeros' Deck Full Of Aces."

Omeros' expenses are growing across the board.

The date by which Omeros can achieve approval for OMS721 matters. Its expenses are on rising trajectories in both research and development [R&D] and selling, general and administrative [SG&A].

The primary driver for expected R&D increases relates to clinical and manufacturing costs for Omeros' three pivotal OMS721 programs discussed above. The expected increases are on top of ongoing expenses for Omeros' OMS527, OMS906 and GPCR programs. These other programs underpin Omeros' significant longer-term value.

The driver for the SG&A expense increase relates to the pre-commercialization expenses for OMS721. This is on top of significant SG&A expenses supporting Omeros' growing OMIDRIA sales.

Expected growth in expenses mount on top of significant base expenses as shown in Omeros' 2018 10-K (p. 43). R&D expenses for 2018 were ~$89.8 million compared to ~$55.6 million for 2017. SG&A expenses for 2018 were ~$51.7 million compared to ~$50 million for 2017.

Significant and growing interest expenses help to round out the picture. Interest expenses for 2018 were ~$16.2 million compared to ~$11 million for 2017. With 2019 expenses expected to grow beyond its aggregate expenses >$150 million for 2018, it is clear that Omeros' financial situation requires close attention.

OMIDRIA is coming into its own as a reliable revenue generator.

Omeros has shown little interest in monetizing its pipeline with partnerships. Its 2018 10-K financial data shows but a single source of revenue going back to 2014 per excerpt (p. 43) below:

Its sole FDA approved product is OMIDRIA. Rather than repeat the lengthy sojourn of OMIDRIA to its current renewed prominence, I will refer readers to "Omeros Gets Serious About Omidria" and supplement the tale with tidbits from Omeros' Q4 2018 earnings CC.

Unless there would be an unexpected breakthrough, it is unlikely that Omeros will have any other product revenues until at least 2021. Omeros has shown no appetite for partnering its assets. Accordingly, OMIDRIA needs to achieve revenues upward from $150 million in order for Omeros to achieve cash flow break-even.

Omeros has not been willing to provide any proper guidance on OMIDRIA revenues. Instead, CEO Demopulos indicates that he expects 2019 net sales of OMIDRIA to substantially exceed its annualized pace of $100 million from 2018.

Omeros never has quite enough cash to satisfy any comfortable margin of safety.

Assuming in rough numbers that OMIDRIA revenues exceed $100 million by an amount that matches Omeros' annual growth in expenses over the $150 million, then Omeros will have a ~$50 million annual deficit for 2019.

CEO Demopulos reported during its Q4 2018 ECC that Omeros had initial approval of an accounts receivable program that would allow it up to $50 million on its accounts receivable base. The difference in accessible OMIDRIA revenues compared to expenses is tantalizingly close to the $60.5 million cash that Omeros reported at the end of Q4 2018.

Given Omeros' aversion to dilutive financings this suggests to me that Omeros is unlikely to call for a secondary stock offering in 2019, particularly with its current uninspiring stock price.

I do not necessarily consider that a good thing. Omeros has too much potential across its pipeline to be living hand-to-mouth as it is. We have already seen that OMIDRIA revenues can be fragile. Even if no new competition arrives to threaten it, OMIDRIA still has its passthrough billing sunset coming in Q4 2020.

While I am optimistic about OMS721, it is still several years shy of earning reliable revenues.

Conclusion

As I write on 3/11/19, Omeros' value proposition far exceeds any that it has carried to date. We are still dealing with the vagaries of a clinical stage biotech. However, it has reached a point where its substantial risks seem to be over-matched by its prospects for outsized gains.

OMIDRIA, which was gasping for revenue during the first few quarters of 2018, looks as if it will fully live up to its potential for the balance of 2019 and beyond. There is a degree of uncertainty about whether OMIDRIA's upward revenue trajectory will survive the Q4 2020 sunsetting of passthrough billing.

However, in response to a Q4 2018 ECC question, again from Liana Moussatos, CEO Demopulos provides a lengthy and convincing case for why this issue is falling in Omeros' favor. One possible solution is in place described as follows:

We believe that the 2019 OPPS [Outpatient Prospective Payment System] final rule really again here provided two paths to permanent separate payment for OMIDRIA. The first is the non-opioid provision and by that I know you know, what I mean, but just so that others understand it. That is the provision by which CMS will pay separately or otherwise package non-opioid pain medications used during surgery.

Clearly, OMIDRIA fits that definition, OMIDRIA is a non-opioid and it has an FDA approved indications for postoperative pain reduction. The other approach or avenue that was potentially laid out by the 2019 OPPS final rule was the statement by CMS that they would consider the separate payment for ophthalmic drugs that have a postoperative benefit. Again here OMIDRIA clearly meets that definition.

CEO Demopulos continues to work to get a legislative solution, however, the OPPS rule offers a significant fallback. As such this puts the reliability of future OMIDRIA revenues on firmer setting than they have been in the past.

That, coupled with understandings Omeros has reached with the FDA on requisites for submitting OMS721 BLA applications, put Omeros in a far more solid condition than it has ever been previously.

With peak sales potential for OMIDRIA easily reaching $0.5 billion, one can visualize it alone supporting a market cap nearly double Omeros' current $0.775 billion. Under such a scenario, investors get three potential blockbusters in pivotal trials at no cost, not to mention the balance of Omeros' pipeline.

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 in Omeros over the next 72 hours.