Omeros: On Death's Door

Jun. 02, 2022 12:47 AM ETOmeros Corporation (OMER)42 Comments2 Likes
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Out of Ignorance
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Summary

  • Omeros shareholders have watched with dismay as its share price languishes ever lower.
  • Omeros' $200 million OMIDRIA milestone is cloaked in uncertainty.
  • Omeros' decision to battle the FDA over its narsoplimab in treatment of HSCT-TMA is a good call, however, it speaks to rough times for shareholders.
  • Omeros should survive and may yet thrive.

Door to heaven in the sky. Spiritual, life after death concept

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Omeros (NASDAQ:OMER) has been a favorite of mine over the years since my 03/2018 article "Omeros: Beauty And The Beast". Recent comments to my most recent Omeros article, "Omeros: The Weight Of The Wait, A Conundrum" have tended to the apocalyptic as reflected by the recent comment below:

comment to Omeros: The Weight Of The Wait, A Conundrum

comment to Omeros: The Weight Of The Wait, A Conundrum (seekingalpha.com)

In this article, I address this critical question head on with recourse to Omeros latest Q1, 2022 earnings call (the "Call").

Omeros has run its shareholders through the ringer in recent weeks.

Omeros' share chart turned from sawtooth jagged to just plain ragged following its 10/2021 advice from the FDA that it had found deficiencies in Omeros' narsoplimab BLA for HSCT-TMA. The chart below shows the damage:

Chart
Data by YCharts

Since 10/2021 the market has essentially ignored any positive Omeros news. Omeros managed to monetize its troublesome OMIDRIA asset in a 12/2021 deal which provides Omeros significant ongoing revenues. It made no dent in Omeros relentless downward slide.

Omeros latest available information comes from its Q1, 2022 earnings which generated releases on 05/10/2022 reporting as of 03/31/2022. In the Call Omeros reported $142.2 in cash and investments available to support ongoing activities as of 3/31/2022. Additionally, it reported $16.3 million in OMIDRIA receivables retained as part of the Rayner Surgical deal which it expected to collect in 05/2022.

In addition to its OMIDRIA receivable, Omeros will be entitled to 50% royalties on Rayner's OMIDRIA revenues for Q2, 2022. It did not guide for an expected amount of such revenue that it expects to recognize in Q2, 2022. OMIDRIA net sales were $27.8 million for Q1, 2022; a year's first quarter has the least volume of cataract surgeries.

This suggests that once the ball starts rolling OMIDRIA royalties could contribute >$15 million a quarter. This 50% royalty continues until the earlier of Omeros' receipt of its $200 million milestone or 01/01/2025.

The bigger cash benefit would come if Omeros qualified for this $200 million OMIDRIA milestone as discussed below; thereafter its US royalty runs at 30% until at least 2033, the expiration of its relevant OMIDRIA patents. Omeros is also in line for a 15% royalty on foreign net sales.

Omeros's $200 million OMIDRIA milestone is a potential bonus that ought not be relied up on.

As long as I have followed Omeros, the twinkling potential of OMIDRIA has been obfuscated by the vagaries of its Medicare reimbursement status described in detail at the "Risks abound - OMIDRIA" section of "Omeros: Payoffs Beckon, Risks Abound".

Frustratingly, Omeros Rayner Surgical deal has carried this issue forward, by providing a $200 million milestone:

... if before 2025, separate payment for OMIDRIA is secured for a continuous period of at least four years.

After attempting to unravel the exact meaning of the above "milestone event" entitling Omeros to its $200 million as set out in the Asset Purchase Agreement, Exhibit 10.1 to Omeros latest 10-K, I admit defeat. Instead of focusing on the text of the agreement, I am instead reliant on management.

During the Call there were several discussions on this point. CEO Demopulos advised:

One vehicle through which the $200 million milestone could be achieved is the enactment of the NOPAIN Act, which has been introduced in both chambers of commerce, and would provide separate payment for a renewable period of five years for non-opioid pain management drugs like OMIDRIA in ambulatory surgery centers or ASCs, as well as in hospital outpatient departments or HOPDs.

...

...the 98 member new Democrat Coalition one of the largest and most influential caucuses in the House of Representatives has endorsed the NOPAIN Act, making it a key part of the coalition's legislative agenda for this summer.

JP Morgan analyst Joseph asked if there was another path to the milestone aside from the NOPAIN Act. As is the case for all aspects of this milestone, the answer was responsive, but unhelpful.

With elections looming between now and 2025, the likelihood of passage for the NOPAIN Act is an unanswerable riddle.

Omeros' appeal of the FDA decision was a good decision.

Initially when Omeros filed its BLA for narsoplimab in treatment of HSCT-TMA, I was optimistic. The filing was duly accepted with PDUFA date set. Everything seemed on course. As reflected by the share chart above nothing has gone according to plan.

As I write on 06/01/2022, Omeros has had its post-CRL Type A meeting with the FDA. The meeting was a disaster. CEO Demopulos described the situation in the Call:

In our briefing package and during the meeting, we addressed all of FDA's stated concerns. FDA was delayed in providing their final meeting minutes to us. When we finally received them, there were no new requests. Yet we found that the division had repeated a number of critiques that we feel had not only been adequately addressed, but also some that we view as demonstrably inaccurate based on FDA's own minutes and other official communications.

In essence no meaningful communication took place. As a result, Omeros decided to cut off any further efforts at this level and instead it plans to move directly to the FDA's dispute resolution process. In doing so, it advised that less than half of such efforts fail in their stated goals.

However, such failures open up new channels of communication. Demopulos characterized Omeros' case as laying:

...out a very strong case across all components: our data, the documented regulatory history not only FDA precedent, but precedent established by our specific division, and the literature.

If its ADR appeal fails, its advisors have found that the process is a positive path forward with good prospects insofar:

...the good majority of ...[such] appeals even if formally denied result in a favorable outcome for the sponsor.

By my lights this leaves Omeros in much better shape than what its share price implies. It had 03/31/2022 cash and receivables expected to be collected aggregating $158.5 million. During the Call CFO advised as follows on its expenses:

...Continuing operating costs and expenses for the first quarter were $35 million. This is a decrease of $10 million from the first quarter last year after reclassifying first quarter 2021 OMIDRIA operating expenses of $6.4 million to discontinued operations.

The decrease in continuing operating cost was primarily due to reduced narsoplimab manufacturing activities and reduced narsoplimab prelaunch marketing activities. We continue to gate our narsoplimab sales and marketing spend until the timing of the FDA approval is clear. Additionally, we continue to expense any narsoplimab manufacturing costs until timing of approval in the US is certain. Interest expense for the first quarter was $5 million and consistent with the previous year quarter.

Omeros has ample liquidity to take it to Q3, 2023. During the Call, Demopulos stated:

We believe that this is the most expeditious route to approval. Dispute resolution by design is rapid. Our request is clear and that is regular approval based on the data in our existing BLA.

With respect to timing we're incorporating comments from our advisers and have begun the process of regulatory publishing required prior to submission. We expect to submit within the next couple of weeks.

We are requesting a meeting with the Office of New Drugs. That meeting according to FDA's PDUFA commitments should be held within 30 days of the request. A decision is then to be rendered within 30 days following the meeting.

As I write on 06/01/2022, it is already several weeks beyond the Call which took place on 05/10/2022. Accordingly, the appeal should be submitted soon. Once submitted, the process calls for a decision within 60 days. After a decision is reached the application gets resubmitted. According to Omeros' CRO Melfi, a reapplication at that stage would take another two months for a decision.

Moving ahead to Q3, 2022, there is a good chance that Omeros will have a clear answer on narsoplimab in treatment of HSCT-TMA. Depending on how Omeros plays its financial cards it will have nearly $100 million in liquidity.

Conclusion

Omeros current market cap of <$150 million is a reflection of a broken biotech market, not of Omeros' true prospects. I have not discussed Omeros' fabulous pipeline in any detail in recent articles. I am not scoring Omeros with any value for its $200 million milestone.

Absent a turnaround for its narsoplimab in treatment of HSCT-TMA, all indications are that Omeros will continue to slide in value. "Pipeline and benchmark be damned" is how the market views the situation these days.

A healthy biotech environment could easily support a nice multiple of Omeros' market cap without regard its narsoplimab HSCT-TMA indication. The current market is anything but healthy, nor is it showing signs of recovery.

In today's market environment, the whole deal is whether Omeros can right its narsoplimab ship. Doing so would allow it to start selling narsoplimab to dying transplant patients instead of giving it away under its compassionate use program.

As a current Omeros shareholder, I am well aware of Mr. Market's abject disregard for Omeros. I believe that the odds favor narsoplimab in treatment of HSCT-TMA and rate Omeros a buy for those who still have an appetite for speculative biotech opportunities with a favorable risk reward ratio.

I am not dissuaded in this view by the lack of insider buying in this name as was noted with concern by a recent cautionary comment to the The Weight Of The Wait.

This article was written by

Out of Ignorance profile picture
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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.
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Disclosure: I/we have a beneficial long position in the shares of OMER either through stock ownership, options, or other derivatives. 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 interests in any company mentioned in this article.

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