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OMEROS DERISKED

|About: Omeros Corporation (OMER)
Summary

Drug Development is inherently risky.

Risk declines if/when certain benchmarks of progress are met.

Omeros has recently reported progress that derisks the company.

The fundamental risk reduction has not been reflected in the excessively discounted share price.

Drug development is risky and it is costly.

It is also replete with binary events where, suddenly, a drug candidate becomes significantly more or less likely to be eventually approved and then start bringing in revenue. Obviously, drug development companies that market approved drugs are less risky that those who do not. Not only does an approved product indicate that management can successfully navigate regulatory pathways to drug candidate approval, selling the approved drug provides cash flow to defray the cost of more drug development.

EXISTING DRUGS

Omeros (OMER) has an approved drug, OMIDRIA, that is used during cataract lens replacement surgery. The data indicates that it reduces

- the average time needed to complete the surgery

- the incidence of adverse events, such as blindness

- inflammation

- post-surgical pain and the patients’ use of painkillers

When approved, OMIDRIA was given 3 years of Pass-Through Medicare reimbursement, designating it part of the surgical supplies. Surgical bundles are reimbursed at a fixed rate, regardless of what is in the bundle. After the 3 year period, OMIDRIA became part of the surgical bundle and could not be separately reimbursed by Medicare. Revenue declined significantly until it was granted an additional 2 years of Pass Through as a result of being included in the US Government Omnibus spending bill of 2018. The added 2 year renewal carried the risk of another sharp decline after September 2020 Pass-Through reimbursement expiration..

Recently, the potential lack of OMIDRIA reimbursement after September 2020 has been at least partially derisked by recommendation of The Centers of Medicare and Medicaid Services (CMS) to give OMIDRIA a J-Code. This provides a billing code number specifically for OMIDRIA, so that it will not be part of the surgical supply bundle. The J-Code is scheduled to become effective either at the start of the next quarter (October 1, 2019) or the next year (January 1, 2020), depending upon how fast CMS implements its new Quarter-based policy.

Omeros corporate strategy is to reduce risk. Rather than sell the rights to their innovative and potentially lucrative drug candidates, they chose to develop OMIDRIA as their first product, to use the revenue to fund further drug development and minimize shareholder dilution. Continued sales of Omidria derisks the stock for shareholders by keeping a lid on share dilution. Founded in 1994, OMER still has less than 50 million shares and interests of the Founder/CEO/Chairman, the largest individual shareholder, are aligned with those of the shareholders.

DRUG CANDIDATES

The earlier the development stage of a drug, the less likely it will eventually be approved by the Regulator: in the USA, the Food and Drug Administration (FDA). Take a look at these statistics on the probability of getting a new Biologic approved by the FDA.

TRIAL STAGE CHANCE OF FDA APPROVAL

Stage 1……………………......11.5%

Stage 2………………………....17.1%

Stage 3…………………….…...50.2%

BLA submitted………………..88.0%

Omeros has a large and varied pipeline of novel and innovative drug candidates that address important patient needs. To illustrate how the pipeline has been derisked, I am going to focus only on the most advanced biologic, their human monoclonal immune system antibody. Narsoplimab (aka OMS721 or Narso) is a MASP 2 inhibitor of the lectin pathway. In the last year or so, this drug has gone from Phase 2 trials to three pivotal Phase 3 trials for separate indications.

As the data above illustrate the move from Phase 2 to Phase 3 increases the chance of ultimate FDA approval almost 300% (from 17% to 50%). That is a significant derisking, yet the share price last year was higher than this year.

BUT THERE IS MORE, MUCH MORE

The ultimate and most disastrous risk in the drug development business is that a company can spend hundreds of millions of dollars, only to have their drug /biologic approval application rejected by the FDA. Spending a fortune on research and then not getting past the gate-keeper, the FDA, is the Mother of all risks.

This means that anything that illustrates support for the drug candidate by the FDA derisks the drug candidate and the company.

There are few drug companies in history that have gotten as much help and support from the FDA, as Omeros for a single novel drug candidate with multiple indications. Before I illustrate this, I am going to tell you why I think this has happened.

The FDA actions imply that it wants to rush Narso to market because the drug saves lives, has no dangerous side-effects and helps patients with disorders that have no existing approved treatment. Isn’t rushing safe and effective life-saving drugs to market exactly what the FDA is supposed to do?

FDA DERISKING ACTIONS

The FDA has granted OMS721 (Narso)

- breakthrough therapy designation for IgA nephropathy

- breakthrough therapy designation for HSCT-TMA

- orphan drug status for the prevention (inhibition) of complement-mediated thrombotic microangiopathies,

- orphan drug status for the treatment of IgA nephropathy

- orphan drug status for the treatment of HSCT-TMA

- fast track designation for the treatment of patients with aHUS.

These multiple awards are extraordinary. These awards come with greater access to the FDA staff to help Omeros advance Narso, faster, promises a faster regulatory review and mandates a longer period of exclusivity after approval so that the drug is more profitable.

While the FDA actions above are the most obvious FDA support for narsoplimab, there are more subtle and significant ways the FDA has recently derisked narsoplimab and, therefore, Omeros.

THE REAL BIG DEAL

Omeros’s MASP 2 inhibitor is initially being developed for 3 indications. I am going to describe the actions that the FDA has already taken, for each of these indications, over and above Breakthrough Therapy and Fast Track Designations, that illustrate that the agency wants narsoplimab approved as soon as possible. Each of these actions does something to derisk Omeros by making FDA approval faster and/or more likely.

1. For aHUS, the FDA wants a competitor to Soliris on the market to reduce patient risk. Soliris has a Black Box warning due to risk of fatal infections as a result of suppression of the immune system that is not a problem with Narso. Therefore, the FDA requires

- only a 40 patients sample size needed for accelerated approval

- no control and not even a comparator even though Soliris is effectively Standard of Care.

2. For IgAN, the FDA approved a novel Surrogate Endpoint (proteinuria) for full approval. This will likely reduce the length of the trial by a year or more allowing narsoplimab to start reducing the number of people who are on, or who will need kidney dialysis; potentially dying from end stage kidney disease.

3. For HSCT-TMA, the FDA has waived a very large portion of what is normally required of sponsors of the typical drug candidate. If you would have told me the FDA was going to be so proactively supportive as they've been, I would have been sure it was wishful thinking!

The FDA has

- accepted a relatively small sample-size Proof of Concept Phase 2 trial as a PIVOTAL TRIAL

- approved the Pivotal Trial Plan that doesn't require any additional patients to be treated

- used the existing (already collected) successful Phase 2 Narso data to develop the Primary Endpoint for the HSCT-TMA indication because there has never been a drug candidate for this often-fatal complication of stem cell transplantation.

- allowed Omeros to submit a rolling BLA (submitting the parts of the BLA separately, as they are completed) so that the completion of the FDA review will take less time.

Usually, a drug candidate sponsor has a post-Phase2 meeting with the FDA and if they impress the FDA with the data, they develop a proposal for a Phase 3 design. Next, the sponsor has a meeting with the FDA to get their approval of the trial design and the endpoints. The sponsor tries to get the FDA to accept Primary Endpoint(S) that the FDA is willing to use as the crucial variable to decide whether to approve the drug/biologic.

This is NOT what happened with Omeros for Narso for HSCT-TMA. The interim data from the ongoing Phase II trial was apparently so impressive that the FDA decided that no additional patients needed to be enrolled in the Phase II trial for it to be a pivotal trial. And then, the FDA decided to use the data on the effect of narsoplimab treatment and its clinical effects, on these same Phase 2 trial patients, to define the Endpoint that would be considered success in the pivotal trial!

I feel the need to repeat that more simply because I do not believe that most observers understand that the FDA defined SUCCESS, after studying the data on the effect of narsoplimab on HSCT-TMA patients.

We can be relatively certain that the Omeros HSCT-TMA data was impressive, because the FDA is

- allowing Omeros to use this single arm, open label Phase 2 data as the basis for the BLA,

- not requiring any Phase 3 trial and

- not requiring any more patients to be tested in the Phase 2 trial

Why would the FDA approve these time-saving action unless the data made it obvious that Narso worked and saved patients’ lives?

SUMMARY: the FDA wants Narso on the market.

The evidence is overwhelming when you consider how the FDA actions have encouraged OMER's efforts . There are some obvious reasons:

1. Narso will save a lot of lives

2. Narso has no serious side-effects, much less a potentially fatal one like Soliris

3. Narso addresses unmet needs by being effective in potentially fatal disorders that have no approved treatment

4. Narso is going to save the country billions of dollars in healthcare expenditures, by

- reducing complications & treatment costs in aHUS

- reducing the number of people who end up on dialysis, the life consequences of that, and the huge cost of end-stage kidney disease to Medicare, Medicaid and the VA system.

- eliminating the $1 million+ in terminal care for a significant number of patients who now die following stem-cell transplant associated TMA, and thereby not "wasting" the cost of the anti-cancer treatment that was given prior to the transplant.

Smart public policy is to make safe & effective life-saving drugs available as soon as it is practical. This is doubly true for potentially fatal disorders/conditions with no existing treatments.

Disclosure: I am/we are long OMER.

Additional disclosure: Some of my research clients are long OMER and manage their own holdings.