OMEROS CORP 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. Overview We are a commercial-stage biopharmaceutical company committed to discovering, developing and commercializing small-molecule and protein therapeutics for large-market as well as orphan indications targeting inflammation, complement-mediated diseases, disorders of the central nervous system, and immune-related diseases, including cancers. Our drug product OMIDRIA ® is marketed in the United States for use during cataract surgery or intraocular lens replacement for adult and pediatric patients. On October 18, 2021, we announced the receipt of a Complete Response Letter (“CRL”) from the U.S. Food and Drug Administration (“FDA”) regarding the biologics license application (“BLA”) for our drug candidate narsoplimab for treatment of hematopoietic stem cell transplant-associated thrombotic microangiopathy (“HSCT-TMA”). Our BLA remains pending and we are engaged in discussions with FDA regarding the CRL and the path to approval of narsoplimab in HSCT-TMA. We also have multiple late-stage clinical development programs in our pipeline, which are focused on complement-mediated disorders, including immunoglobulin A (“IgA”) nephropathy, atypical hemolytic uremic syndrome (“aHUS”) and COVID-19. We have also initiated a Phase 1 clinical program for our MASP-3 inhibitor OMS906 targeting the alternative pathway of complement and have successfully completed a Phase 1 study in our phosphodiesterase 7 (“PDE7”) program focused on addiction. In addition, we have a diverse group of preclinical programs including GPR174, a novel target in immuno-oncology that modulates a new cancer immunity axis that we discovered. Small-molecule and antibody inhibitors of GPR174 are part of our proprietary G protein-coupled receptor (“GPCR”) platform through which we control 54 GPCR drug targets and their corresponding compounds. We also have a proprietary-asset-enabled antibody-generating technology. We have retained control of all commercial rights for OMIDRIA and each of our product candidates and programs. Impact of Global Pandemic The COVID-19 pandemic had a significant impact on OMIDRIA revenues in 2020. In March 2020, ambulatory surgery centers (“ASCs”) and hospitals using OMIDRIA postponed nearly all cataract surgery in response to recommendations from government and medical organizations. As a result, we did not record any sales of OMIDRIA to our wholesalers from March 25 to May 19, 2020. However, by the end of June 2020, the run rate of weekly OMIDRIA sales had recovered to levels approximating those seen prior to the pandemic. We are optimistic about the future of OMIDRIA as sales revenues continue to increase. The pandemic has also resulted in delays or disruptions in our clinical and preclinical activities. It is not possible to estimate precisely the future impact of the COVID-19 pandemic on our business, operations or financial results due to the unknown magnitude, duration and outcome of the pandemic, especially in light of the severity and transmissibility of virus variants and possible governmental responses across the U.S. Commercial Product - OMIDRIA ® (phenylephrine and ketorolac intraocular solution) 1%/0.3% OMIDRIA is approved by FDA for use during cataract surgery or intraocular lens replacement to maintain pupil size by preventing intraoperative miosis (pupil constriction) and to reduce postoperative ocular pain. Outside the U.S., we maintain authorization from the European Commission (“EC”) to market OMIDRIA in the European Economic Area (“EEA”) for use in adults during cataract surgery and other IOL replacement procedures for maintenance of intraoperative mydriasis (pupil dilation), prevention of intraoperative miosis and reduction of acute postoperative ocular pain. Sales of OMIDRIA within the EEA or other international territories have not been significant. OMIDRIA is a proprietary drug product containing two active pharmaceutical ingredients: ketorolac, an anti-inflammatory agent, and phenylephrine, a mydriatic, or pupil dilating, agent. Cataract and other lens replacement surgery -21- Table of Contents involves replacement of the original lens of the eye with an artificial intraocular lens. OMIDRIA is added to standard irrigation solution used during cataract and lens replacement surgery and is delivered intracamerally, or within the anterior chamber of the eye, to the site of the surgical trauma throughout the procedure. Preventing pupil constriction is essential for these procedures and, if miosis occurs, the risk of damaging structures within the eye and other complications increases, as does the operating time required to perform the procedure. We sell OMIDRIA primarily through wholesalers which, in turn, sell to ASCs and hospitals. The Centers for Medicare & Medicaid Services (“CMS”), the federal agency responsible for administering the Medicare program, granted transitional pass-through reimbursement status for OMIDRIA from January 1, 2015 through December 31, 2017. Pass-through status allows for separate payment (i.e., outside the packaged payment rate for the surgical procedure) under Medicare Part B. In March 2018, Congress extended pass-through reimbursement status for OMIDRIA through September 30, 2020 when used during procedures performed on Medicare Part B fee-for-service patients. Pass-through reimbursement for OMIDRIA under Medicare Part B expired on October 1, 2020. In December 2020, in its calendar year 2021 Outpatient Prospective Payments System (“OPPS”) and ASC Payments System final rule, CMS determined that, under its policy applicable to certain non-opioid pain management surgical drugs, OMIDRIA qualifies for separate payment when used on Medicare Part B patients in the ASC setting. CMS’ policy of separately reimbursing non-opioid pain management surgical drugs was first adopted in 2019 and became applicable to OMIDRIA upon the expiration of the drug’s pass-through reimbursement on October 1, 2020. In November 2021, CMS issued its final OPPS and ASC Payments Systems rule for calendar year 2022. The 2022 final rule reconfirmed CMS’ policy regarding non-opioid pain management surgical drugs and states that OMIDRIA will continue to receive separate payment when used on Medicare Part B patients in the ASC setting. Clinical Development Programs Our clinical stage development programs include: ● MASP-2 - narsoplimab (OMS721) - Lectin Pathway Disorders . Narsoplimab, also referred to as OMS721, is our lead fully human monoclonal antibody targeting mannan-binding lectin-associated serine protease-2 (“MASP-2”), a novel pro-inflammatory protein target involved in activation of the lectin pathway of complement. The lectin pathway plays an important role in the body’s inflammatory response and becomes activated as a result of tissue damage or microbial pathogen invasion. Inappropriate or uncontrolled activation of the lectin pathway can cause serious diseases and disorders. MASP-2 is the effector enzyme of the lectin pathway, and the current development focus for narsoplimab is diseases that are strongly associated with activation of the lectin pathway. In October 2020, we reported final clinical data from our pivotal trial of narsoplimab in HSCT-TMA, a frequently lethal complication of HSCT. In November 2020, we completed the rolling submission of our BLA for narsoplimab for the treatment of HSCT-TMA, and FDA accepted the BLA for filing in January 2021 under its Priority Review program. In October 2021, we received a complete response letter (“CRL”) from FDA regarding the BLA. FDA expressed difficulty in estimating the treatment effect of narsoplimab in HSCT-TMA and asserted that additional information will be needed to support regulatory approval. We intend to request a Type A meeting with FDA to discuss the CRL and determine the most expeditious path forward for the approval of narsoplimab in the treatment of HSCT-TMA. Phase 3 clinical programs are also ongoing for narsoplimab in IgA nephropathy and aHUS. In addition, narsoplimab is being evaluated for treatment of COVID-19 in a nationwide, late-stage adaptive platform trial and has been administered under compassionate use to treat COVID-19 patients in Italy and in the U.S. Narsoplimab has received multiple designations from FDA and from the EMA across three current indications. These include: ● HSCT-TMA: In the U.S., the FDA has granted narsoplimab (1) breakthrough therapy designation in patients who have persistent TMA despite modification of immunosuppressive therapy and (2) orphan -22- Table of Contents drug designation for the treatment of HSCT-TMA. In the EU, narsoplimab has been granted designation as an orphan medicinal product for treatment in hematopoietic stem cell transplantation. ● IgA nephropathy: In the U.S., narsoplimab has received from the FDA (1) breakthrough therapy designation for the treatment of IgA nephropathy and (2) orphan drug designation in IgA nephropathy. In the EU, narsoplimab has been granted designation as an orphan medicinal product for the treatment of primary IgA nephropathy. ● aHUS: In the U.S., narsoplimab has received from the FDA (1) fast-track designation for the treatment of patients with aHUS and (2) orphan drug designation for the prevention (inhibition) of complement-mediated thrombotic microangiopathies. In the EU, the EMA has confirmed narsoplimab’s eligibility for EMA’s centralized review of a single marketing authorization application (“MAA”) that, if approved, would authorize the product to be marketed in all EU member states and EEA countries. We are targeting to complete our MAA submission in early 2022. In our IgA nephropathy program, patient enrollment continues in the narsoplimab Phase 3 clinical trial, ARTEMIS-IGAN. The single Phase 3 trial design is a randomized, double-blind, placebo-controlled multicenter trial in patients at least 18 years of age with biopsy-confirmed IgA nephropathy and with 24-hour urine protein excretion greater than one gram per day at baseline on optimized renin-angiotensin system blockade. This trial includes a run-in period. Initially, patients are expected to receive an IV dose of study drug each week for 12 weeks; additional weekly dosing can be administered to achieve optimal response. The primary endpoint, which we believe could suffice for full or accelerated approval depending on the effect size, is reduction in proteinuria at 36 weeks after the start of dosing. The trial is designed to allow intra-trial adjustment in sample size. For the purposes of safety and efficacy assessments, the initial sample size for the proteinuria endpoint is estimated at 140 patients in each of the treatment and placebo groups. This will include a subset of patients (78 per arm) with high levels of proteinuria (i.e., equal to or greater than 2 g/day) at baseline, and a substantial improvement at 36 weeks in this subset of patients alone could potentially form the basis for approval. We believe that the trial design will allow assessment for either full or accelerated approval at 36 weeks based on proteinuria results either (1) across the general population of study patients or (2) in the high-proteinuria subset of patients. The Phase 3 clinical program in patients with aHUS, in which patient recruitment is ongoing, consists of one Phase 3 clinical trial – a single-arm ( i.e. , no control arm), open-label trial in patients with newly diagnosed or ongoing aHUS. This trial is targeting approximately 40 patients for full approval in the EU and accelerated approval in the U.S. and, as required by FDA, approximately 80 total patients for full approval in the U.S. The trial includes multiple sites in the U.S., Asia and Europe; however, enrollment has been slow in part due to prioritizing the use of resources within our narsoplimab programs on HSCT-TMA, COVID-19 and IgA nephropathy. ● MASP-2 - narsoplimab (OMS721) - COVID-19 . In March 2020, in response to a request from physicians at the Papa Giovanni XXIII Hospital in Bergamo, Italy, we initiated a compassionate use program for narsoplimab to treat patients with severe COVID-19 requiring mechanical ventilation. The initial cohort treated under this compassionate use program included a total of six COVID-19 patients treated with narsoplimab, all with acute respiratory distress syndrome (“ARDS”) and requiring continuous positive airway pressure (“CPAP”) or intubation. At baseline, circulating endothelial cell (“CEC”) counts and serum levels of interleukin-6 (“IL-6”), IL-8, C-reactive protein (“CRP”), LDH, D-dimer and aspartate aminotransferase (“AST”) were markedly elevated. During the course of the compassionate use program, institutional guidelines at the treating hospital were updated to require that all COVID-19 patients in the hospital receive steroids. One patient treated with narsoplimab did not receive steroids. Of the five narsoplimab-treated patients who received steroids, two initiated them after already improving such that CPAP was no longer required or was discontinued the following day. The study evaluated CEC counts in a separate group of four patients receiving only steroids for a short duration, and the counts were found to be unaffected by steroid administration. This suggests that any beneficial effect of steroids on COVID-19-associated endothelial damage -23- Table of Contents may be delayed and had little effect on the recovery course of the narsoplimab-treated patients who initiated steroid treatment after improving. Narsoplimab treatment was associated with rapid and sustained reduction across all of the above-named markers of endothelial damage and inflammation. In addition, massive bilateral pulmonary thromboses, seen in two of the patients, resolved while on narsoplimab. All six narsoplimab-treated patients recovered, survived and were discharged. Narsoplimab was well tolerated and no adverse drug reactions were reported. Two control groups with similar baseline characteristics were used for retrospective comparison and showed substantial mortality rates of 32% and 53%. A manuscript detailing the results of the initial cohort of Bergamo patients treated with narsoplimab was published in the peer-reviewed journal Immunobiology . All six patients were evaluated five to six months after cessation of narsoplimab treatment. None of them showed any clinical or laboratory evidence of long-term effects of COVID-19, such as cognitive impairment or cardiac, pulmonary or other organ disorder, commonly seen following resolution of initial COVID-19 symptoms. Following treatment of the initial six patients under the compassionate use program in Italy, we continued compassionate-use treatment in the U.S. and have provided treatment for an additional ten critically ill COVID-19 patients in Italy. Prior to receiving narsoplimab, all of the patients in this second cohort were severely ill, mechanically ventilated, had multiple comorbidities, and had failed other therapies, including anti-virals, targeted anti-inflammatory therapeutics, convalescent plasma and steroids. Following treatment with narsoplimab, the laboratory improvements and clinical outcomes of these patients were similar to those seen in the initial cohort of Bergamo patients. Endothelial damage and resultant thromboses are significant to the pathophysiology of COVID-19, and we believe these data illustrate the importance of inhibiting the lectin pathway to treat critically ill COVID-19 patients. Endothelial damage activates the lectin pathway of complement. We believe the results observed following narsoplimab treatment in critically ill COVID-19 patients at Papa Giovanni were consistent with those seen in HSCT-TMA and underscore the pathophysiologic similarities between these two disorders. Narsoplimab has been shown to inhibit lectin pathway activation and to block the MASP-2-mediated conversion of prothrombin to thrombin, microvascular injury-associated thrombus formation and the activation of factor XII as well as the MASP-2-mediated activation of kallikrein. We believe that the anticoagulant effects of narsoplimab may provide therapeutic benefits in both HSCT-TMA and COVID-19. Narsoplimab is also the only complement inhibitor included in the I-SPY COVID-19 platform trial sponsored by Quantum Leap Healthcare Collaborative, which is evaluating investigational therapies for the treatment of critically ill COVID-19 patients. The trial utilizes Quantum Leap Healthcare Collaborative's adaptive platform trial design, which is intended to increase trial efficiency by minimizing the number of participants and time required to evaluate potential treatments. ​ Discussions are ongoing regarding the use of narsoplimab in COVID-19 with leaders across various government agencies, both in the U.S. and internationally. ​ ● MASP-3 - OMS906 - Alternative Pathway Disorders . As part of our MASP program, we have identified mannan-binding lectin-associated serine protease-3 (“MASP-3”), which has been shown to be the key activator of the complement system’s alternative pathway (“APC”), and we believe that we are the first to make this and related discoveries associated with the APC. The complement system is part of the immune system’s innate response, and the APC is considered the amplification loop within the complement system. MASP-3 is responsible for the conversion of pro-factor D to factor D; converted factor D is necessary for the activation of the APC. Based on our alternative pathway-related discoveries, we have expanded our intellectual property position to protect our inventions stemming from these discoveries beyond MASP-2-associated inhibition of the lectin pathway to include inhibition of the alternative pathway. Our current primary focus in this program is developing MASP-3 inhibitors for the treatment of disorders related to the APC. We believe that MASP-3 inhibitors have the potential to treat patients suffering from a wide range of diseases and conditions, including: -24- Table of Contents paroxysmal nocturnal hemoglobinuria (“PNH”); multiple sclerosis; neuromyelitis optica; age-related macular degeneration; Alzheimer’s disease; systemic lupus erythematosus; diabetic retinopathy; chronic obstructive pulmonary disease; antineutrophil cytoplasmic antibody-associated vasculitis; anti-phospholipid syndrome; atherosclerosis; myasthenia gravis and others. Our OMS906 monoclonal antibody program has generated positive data in well-established animal models of PNH and rheumatoid arthritis as well as strong pharmacodynamic activity in non-human primates. In September 2020 we began enrollment and dosing in a placebo-controlled, double-blind, single-ascending-dose and multiple-ascending-dose Phase 1 clinical trial to evaluate the safety, tolerability, pharmacodynamics and pharmacokinetics of OMS906. We have dosed subjects across all dosing cohorts in the single-ascending dose study and reported preliminary data from the Phase 1 trial in June 2021. OMS906 has been well tolerated at all doses tested and preliminary human pharmacokinetic and pharmacodynamic are consistent with once-monthly subcutaneous dosing and recent data show high level suppression of alternative pathway activity. We have determined to forego the multiple-ascending dose portion of our Phase 1 trial in healthy subjects and plan to move directly into patients with paroxysmal nocturnal hematuria, or PNH, who have an unsatisfactory response to the C5 inhibitor ravulizumab. We expect that this will accelerate our overall clinical development program for OMS906 in PNH. ● PDE7 - OMS527 . In our PDE7 program, we are developing proprietary compounds to treat addiction and compulsive disorders as well as movement disorders. In September 2019 we reported positive results from our Phase 1 single-ascending- and multiple-ascending-dose clinical trial designed to assess safety, tolerability and pharmacokinetics of our lead compound in healthy subjects. In the double blind, randomized Phase 1 study, the study drug, referred to as OMS182399, met the primary endpoints of safety and tolerability and showed a favorable and dose-proportional pharmacokinetic profile supporting once-daily dosing. There was no apparent food effect on plasma exposure to OMS182399. A manuscript detailing the mechanism of action of PDE7 inhibition in nicotine addiction was published in the peer-reviewed Journal of Neuroscience in July 2021. Continued clinical development in our PDE7 program is subject to allocation of financial and other resources, which are currently prioritized for other programs. Preclinical Development Programs and Platforms Our preclinical programs and platforms include: ● Other MASP Inhibitor Preclinical Programs . We have generated positive preclinical data from MASP-2 inhibition in in vivo models of age-related macular degeneration, myocardial infarction, diabetic neuropathy, stroke, traumatic brain injury, ischemia-reperfusion injury, and other diseases and disorders. We are also developing a longer-acting second generation antibody targeting MASP-2 for which we expect to initiate clinical trials in 2022. This program is designated “OMS1029.” Development efforts are also directed to a small-molecule inhibitor of MASP-2 designed for oral administration as well as to small-molecule inhibitors of MASP-3 and bispecific small- and large-molecule inhibitors of MASP-2/-3. ● GPR174 and GPCR Platform . We have developed a proprietary cellular redistribution assay which we use in a high-throughput manner to identify synthetic ligands, including antagonists, agonists and inverse agonists, that bind to and affect the function of orphan GPCRs. We have screened Class A orphan GPCRs against our small-molecule chemical libraries using the cellular redistribution assay and have identified and confirmed compounds that interact with 54 of the 81 Class A orphan GPCRs linked to a wide range of indications including cancer as well as metabolic, cardiovascular, immunologic, inflammatory and central nervous system disorders. One of our priorities in this program is GPR174, which is involved in the modulation of the immune system. In ex vivo human studies, our small-molecule inhibitors targeting GPR174 upregulate the production of cytokines, block multiple checkpoints and tumor promoters, and suppress regulatory T-cells. Based on our data, we believe that GPR174 controls a major, previously unrecognized pathway in cancer and modulation of the receptor could provide a seminal advance in immuno-oncologic treatments for a wide range of tumors. O ur studies in mouse models of melanoma and colon carcinoma found that GPR174-deficiency resulted in -25- Table of Contents significantly reduced tumor growth and improved survival of the animals versus normal mice. Our discoveries suggest a new approach to cancer immunotherapy that targets inhibition of GPR174 and can be combined with and significantly improve the tumor-killing effects of other oncologic agents, including radiation, adenosine pathway inhibitors and checkpoint inhibitors. These discoveries include (1) identification of cancer-immunity pathways controlled by GPR174, (2) the identification of phosphatidylserine as a natural ligand for GPR174, (3) a collection of novel small-molecule inhibitors of GPR174 and (4) a synergistic enhancement of “tumor-fighting” cytokine production by T cells following the combined inhibition of both GPR174 and the adenosine pathway, another key metabolic pathway that regulates tumor immunity. We are developing both small-molecule and antibody inhibitors of GPR174 with the objective of moving compounds into human trials. We are also exploring several of our other GPCR targets. Financial Summary We recognized net losses of $22.7 million and $38.5 million for the three months ended September 30, 2021 and 2020, respectively, and our OMIDRIA net revenues were $30.0 million and $26.1 million for the same periods. As of September 30, 2021, we had $50.4 million in cash and cash equivalents and short-term investments available for general corporate use and $33.9 million in accounts receivable, net. ​ ​ ​ ​ * Fiscal quarters with significantly reduced cataract procedures due to the COVID-19 pandemic ** Pass-through reimbursement expired on October 1, 2020. In December 2020, separate payment was confirmed for OMIDRIA, effective retroactively as of October 1, 2020. ​ Pass-through reimbursement for OMIDRIA under Medicare Part B expired on October 1, 2020, which negatively affected our net revenues for the period September 2020 through the first quarter of 2021. In December 2020, CMS determined that OMIDRIA qualifies for separate payment when used on Medicare Part B patients in ASCs under its policy of separately reimbursing non-opioid pain management surgical drugs. In November 2021, CMS issued its final OPPS and ASC Payments Systems rule for calendar year 2022. The 2022 final rule reconfirmed CMS’ policy regarding non-opioid pain management surgical drugs and states that OMIDRIA will continue to receive separate payment when used on Medicare Part B patients in the ASC setting. We expect our net losses will continue until such time as we derive sufficient revenues from sales of OMIDRIA and/or other sources, such as licensing, product sales and other revenues from our product candidates, that are sufficient to cover our operating expenses and debt service obligations. -26- Table of Contents Results of Operations Revenue Our revenue consists of OMIDRIA product sales to ASCs and hospitals in the U.S. Our product sales, net are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ ​ September 30, ​ September 30, ​ 2021 2020 2021 2020 ​ ​ (In thousands) Product sales, net ​ $ 30,004 ​ $ 26,114 ​ $ 79,889 ​ $ 63,181 ​ During the three months and nine months ended September 30, 2021, OMIDRIA net revenue was $30.0 million and $79.9 million as compared to $26.1 million and $63.2 million for the three months and nine months ended September 30, 2020. The $3.9 million increase in revenue during the three-months ended September 30, 2021 compared to the same period in the prior year was due to the change in status of OMIDRIA reimbursement under Medicare Part B following expiration of the pass-through extension period for OMIDRIA. Specifically, on October 1, 2020, OMIDRIA lost separate payment and this negatively affected our revenues for the three months ended September 30, 2020 as customers significantly reduced their purchases late in the third quarter. In December 2020, separate payment for OMIDRIA was reinstated for cataract procedures performed in the ASC setting. ​ The increase in revenue for the nine months ended September 30, 2021 compared to the prior year period is due to separate payment for OMIDRIA being available under Medicare Part B throughout the current year whereas in the prior year customers reduced purchases late in the third quarter due to the impending loss of Medicare Part B reimbursement on October 1, 2020. Additionally, during the current year period, we did not experience a shut-down of elective surgical procedures due to the COVID-19 pandemic, which occurred during the first two quarters of 2020. Gross-to-Net Deductions We record OMIDRIA product sales net of estimated chargebacks, rebates, distribution fees and product returns. These deductions are generally referred to as gross-to-net deductions. Our total gross-to-net provision for the three and nine months ended September 30, 2021 was 29.3% and 29.7% of gross OMIDRIA product sales, respectively. This compares to 46.8% and 36.6% for the three and nine months ended September 30, 2020, respectively. The decrease in gross-to-net deductions as a percentage of sales in 2021 compared to 2020 is largely due to the OMIDRIA return provision recorded in the third quarter of 2020 related to the temporary loss of OMIDRIA separate payment on October 1, 2020. ​ A summary of our gross-to-net related accruals for the nine months ended September 30, 2021 is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Distribution ​ ​ ​ ​ ​ ​ ​ Fees and ​ ​ ​ ​ ​ ​ ​ ​ Product ​ ​ ​ ​ ​ Chargebacks ​ Return ​ ​ ​ ​ ​ and Rebates ​ Allowances ​ Total ​ ​ (In thousands) Balance as of December 31, 2020 ​ $ 3,740 ​ $ 948 ​ $ 4,688 Provisions ​ 29,523 ​ ​ 4,178 ​ ​ 33,701 Payments ​ (25,335) ​ ​ (3,427) ​ ​ (28,762) Balance as of September 30, 2021 ​ $ 7,928 ​ $ 1,699 ​ $ 9,627 ​ Chargebacks and Rebates We record a provision for estimated chargebacks and rebates at the time we recognize OMIDRIA product sales revenue and reduce the accrual when payments are made or credits are granted. Our chargebacks are related to a pharmaceutical pricing agreement, a federal supply schedule agreement, a Medicaid drug rebate agreement and an -27- Table of Contents upfront discount to our ASC and hospital customers. We also record a provision for our OMIDRIAssure patient assistance and reimbursement program and for rebates under our purchase volume-discount programs. Distribution Fees and Product Return Allowances We pay our wholesalers a distribution fee for services they perform for us based on the dollar value of their purchases of OMIDRIA. We record a provision for these charges as a reduction to revenue at the time of sale to the wholesaler and make payments to our wholesalers based on contractual terms. We allow for the return of product up to 12 months past its expiration date or for product that is damaged or not used by our customers. We record a provision for returns upon sale of OMIDRIA to our wholesaler. When a return or claim is received, we issue a credit memo to the wholesaler against its outstanding receivable to us or we reimburse the ASC or hospital customer. Research and Development Expenses Our research and development expenses can be divided into three categories: direct external expenses, which include clinical research and development, preclinical research and development activities; internal, overhead and other expenses; and stock-based compensation expense. The following table illustrates our expenses associated with these activities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ ​ ​ September 30, ​ September 30, ​ ​ 2021 2020 2021 2020 ​ ​ ​ (In thousands) ​ Direct external expenses: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Clinical research and development: ​ ​ ​ ​ ​ MASP-2 program - OMS721 (narsoplimab) ​ $ 10,056 ​ $ 10,624 ​ $ 36,652 ​ $ 33,559 ​ MASP-3 program - OMS906 ​ ​ 1,582 ​ ​ 6,172 ​ ​ 4,743 ​ ​ 6,172 ​ OMIDRIA - Ophthalmology ​ 983 ​ 206 ​ 2,168 ​ 1,090 ​ PDE7 - OMS527 ​ 200 ​ 134 ​ 463 ​ 1,730 ​ Total clinical research and development ​ 12,821 ​ 17,136 ​ 44,026 ​ 42,551 ​ Preclinical research and development ​ 1,998 ​ 2,012 ​ 10,091 ​ 8,846 ​ Total direct external expenses ​ 14,819 ​ 19,148 ​ 54,117 ​ 51,397 ​ Internal overhead and other expenses ​ 9,767 ​ 10,532 ​ 31,874 ​ 28,248 ​ Stock-based compensation expense ​ 2,477 ​ 1,636 ​ 5,367 ​ 4,714 ​ Total research and development expenses ​ $ 27,063 ​ $ 31,316 ​ $ 91,358 ​ $ 84,359 ​ ​ Clinical research and development expenses decreased $4.3 million for the three months ended September 30, 2021 compared to the same period in 2020 as the prior year included a $5.0 million license fee related to OMS906. This decrease was partially offset by a $0.7 million increase in OMIDRIA costs related to establishing a second drug product manufacturing site. Clinical research and development expenses for the nine months ended September 30, 2021 compared to the same period in 2020 increased $1.5 million due to higher costs associated with narsoplimab manufacturing and medical affairs. In addition, OMS906 expenses were included in preclinical research and development costs until the third quarter of 2020 when we initiated a Phase 1 clinical trial . Preclinical research and development expenses were similar for the three months ended September 30, 2021 and the same period in 2020. The $1.2 million increase in preclinical research and development expenses for the nine months ended September 30, 2021 as compared to the same period in 2020 reflect increased manufacturing costs related to our OMS1029 program, partially offset by the migration of OMS906 program expenses in the third quarter of 2020 to clinical research and development following initiation of a Phase 1 clinical trial. -28- Table of Contents Internal overhead and other expenses increased for the nine months ended September 30, 2021 compared to the same period in 2020 due to additional employee-related costs and additional leased laboratory facilities to support our research and development activities. The increases in stock-based compensation for the three and nine months ended September 30, 2021 compared to the prior year period are due to the increase in the overall number of employees between the periods and the timing of annual stock option grants to employees. ​ We expect overall research and development costs will remain relatively unchanged in the fourth quarter of 2021 compared to the third quarter of 2021. ​ At this time, we are unable to estimate with certainty the longer-term costs we will incur in the continued development of our product candidates due to the inherently unpredictable nature of our preclinical and clinical development activities as well as to the potential impacts of the COVID-19 pandemic. Clinical development timelines, the probability of success and development costs can differ materially from expectations as new data become available or unforeseen difficulties emerge. Our future research and development expenses will depend, in part, on the preclinical or clinical success of each product candidate as well as on ongoing assessments of each program’s commercial potential. In addition, we cannot forecast with precision which product candidates, if any, may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements. We are required to expend substantial resources in the development of our product candidates due to the lengthy process of completing clinical trials and seeking regulatory approval. Any failure or delay in completing clinical trials, or in obtaining regulatory approvals, could delay our generation of product revenue and increase our research and development expenses. Selling, General and Administrative Expenses ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ ​ ​ September 30, ​ September 30, ​ ​ 2021 2020 2021 2020 ​ ​ (In thousands) ​ Selling, general and administrative expenses, excluding stock-based compensation expense ​ $ 17,644 ​ $ 17,637 ​ $ 53,759 ​ $ 48,384 ​ Stock-based compensation expense ​ 3,217 ​ 2,188 ​ 6,715 ​ 6,408 ​ Total selling, general and administrative expenses ​ $ 20,861 ​ $ 19,825 ​ $ 60,474 ​ $ 54,792 ​ ​ Total selling, general and administrative expenses increased by $1.0 million for the three months ended September 30, 2021 compared to the prior period primarily due to the timing of annual stock option grants to employees. Total selling, general and administrative expenses increased $5.7 million for the nine months ended September 30, 2021 compared to the prior year period due to increased marketing activities and employee-related costs in preparation for the anticipated U.S. commercial launch of narsoplimab. We expect that our selling, general and administrative expenses will be similar during the fourth quarter of 2021 as compared to the third quarter of 2021. Interest Expense ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ ​ ​ September 30, ​ September 30, ​ ​ 2021 2020 2021 2020 ​ ​ (In thousands) ​ Interest expense ​ $ 4,911 ​ $ 6,882 ​ $ 14,719 ​ $ 18,763 ​ ​ -29- Table of Contents Interest expense is comprised of contractual interest and amortization of debt issuance and debt discount related to our 2023 and 2026 Notes as well as interest on our finance leases. Interest expense decreased $2.0 million and $4.0 million for the three and nine months ended September 30, 2021 compared to the same periods in the prior year due to the January 1, 2021 adoption of ASU 2020-06, which eliminated the amortization of the non-cash debt discount on the 2023 and 2026 Notes. This decrease was partially offset by the increase in interest related to our 2026 Notes, which were issued in August and September 2020 (for more information, see “Note 7—Unsecured Convertible Senior Notes”). Loss on Early Extinguishment of Debt ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ Nine Months Ended ​ ​ September 30, ​ ​ September 30, ​ 2021 ​ 2020 ​ 2021 2020 ​ ​ (In thousands) ​ ​ (In thousands) Loss on early extinguishment of debt ​ $ — ​ $ (13,374) ​ ​ $ — ​ $ (13,374) ​ In August 2020, we repurchased $115.0 million of the previously outstanding 2023 Notes. We recorded a $13.4 million loss on early extinguishment of debt related to the unamortized discount and issuance costs related to the repurchased 2023 Notes in the three and nine months ended September 30, 2020. Income Tax Benefit ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ ​ September 30, ​ September 30, ​ 2021 2020 2021 2020 ​ ​ (In thousands) Income tax benefit ​ $ — ​ $ 7,854 ​ $ — ​ $ 7,854 ​ In August 2020, we issued the 2026 Notes which created an income tax benefit of $7.9 million. Financial Condition - Liquidity and Capital Resources As of September 30, 2021, we had cash, cash equivalents and short-term investments of $50.4 million and an accounts receivable-based line of credit that allows us to borrow up to the lesser of $50.0 million or 85% of our accounts receivable borrowing base, less certain reserves. For the nine months ended September 30, 2021, we incurred losses from operations of $72.9 million, including non-cash charges of $14.4 million. For the three months ended September 30, 2021, we incurred losses from operations of $18.3 million, including non-cash charges of $6.4 million. Cash used in operating activities was $91.5 million for the nine months ended September 30, 2021. We will continue to incur losses from operating activities until our revenues exceed operating costs and debt service obligations. ​ We are unable to include in the determination regarding our prospects as a going concern amounts available under our accounts receivable-based line of credit or any proceeds from debt transactions or other financing instruments despite our successful track record in accessing capital through these avenues. We also have not included any potential partnerships related to our products or product candidates. The conditions described above, when evaluated within the constraints of the accounting literature, raise substantial doubt with respect to our ability to meet our obligations through November 9, 2022 and, therefore, to continue as a going concern. We plan to continue to fund our operations for the next twelve months with our cash and investments, from sales of OMIDRIA and potentially from sales of narsoplimab for HSCT-TMA, if FDA approval is granted within that timeframe. In addition, we may utilize funds available under our line of credit which matures August 2, 2022. As of September 30, 2021, the amount available under our line of credit was approximately $30.0 million. Should it be necessary or determined to be strategically advantageous, we could pursue debt financings as well as public and private offerings of our equity securities, similar to those we have previously completed, or other strategic transactions, which may include licensing a portion of our existing technology. In this regard, in March 2021 we entered into a sales agreement to sell shares of our common stock, from time to time, in an “at the market” equity offering facility through which we may offer and sell shares of our common stock having an aggregate amount of up to $150.0 million. In -30- Table of Contents addition, should it be necessary to manage our operating expenses, we would reduce our projected cash requirements by delaying clinical trials, reducing selected research and development efforts, or implementing other restructuring activities. Cash Flow Data ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended September 30, ​ 2021 2020 ​ ​ (In thousands) Selected cash flow data ​ ​ ​ ​ ​ ​ Cash provided by (used in): ​ ​ ​ ​ ​ ​ Operating activities ​ $ (91,507) ​ $ (81,679) Investing activities ​ $ 81,292 ​ $ (75,027) Financing activities ​ $ 7,129 ​ $ 174,697 ​ Operating Activities. Net cash used in operating activities for the nine months ended September 30, 2021 increased by $9.8 million as compared to the same period in 2020. The net increase is primarily due to a $27.9 million increase in accounts receivable due to the reinstatement of OMIDRIA separate payment by CMS in December 2020 following expiration of the pass-through extension and temporary loss of separate payment on October 1, 2020. We are also seeing the impact of net loss adjusted for non-cash charges of $12.5 million due to the adoption of ASU 2020-06, Debt—Debt with Conversion Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) and prior year effects related to the repurchase of the 2023 Notes and the issuance of the 2026 Notes. These uses of cash are partially offset by a $13.5 million increase in accounts payable and accrued expenses as well as a $1.6 million decrease in prepaid expenses. ​ Investing Activities. Cash flows from investing activities primarily reflect cash used to purchase short-term investments and proceeds from the sale of short-term investments, thus causing a shift between our cash and cash equivalents and short-term investment balances. Because we manage our cash usage with respect to our total cash, cash equivalents and short-term investments, we do not consider fluctuations in cash flows from investing activities to be important to the understanding of our liquidity and capital resources. Net cash provided by investing activities during the nine months ended September 30, 2021 was $81.3 million compared to a $75.0 million use of cash for the same period in the preceding year. The $156.3 million change between years is primarily due to purchasing short-term investments with the net proceeds from 2020 debt and equity financing activities. In both years, sales of investments were used to fund operating activities. Financing Activities. Net cash provided by financing activities during the nine months ended September 30, 2021 was $7.1 million, a decrease of $167.6 million compared to the same period in 2020. The decrease from the prior year period was primarily due to receiving net cash proceeds of $218.2 million in August 2020 from the issuance of our 2026 Notes and $7.5 million from the termination of the 2023 Capped Call contract offset by $125.6 million to repurchase a portion of our 2023 Notes and $23.2 million to purchase the 2026 Capped Call. In conjunction with the issuance of the 2026 Notes, we sold 6.9 million shares of our common stock in a public offering and received net proceeds of $93.7 million. At the Market Sales Agreement. On March 1, 2021, we entered into a sales agreement to sell shares of our common stock, from time to time and having an aggregate offering price of up to $150.0 million, through an “at the market” equity offering program. As of September 30, 2021, we have not sold any shares under this agreement. Line of Credit Agreement. Our Line of Credit Agreement with Silicon Valley Bank provides for a $50.0 million revolving line of credit facility. Under the Line of Credit Agreement, we may draw, on a revolving basis, up to the lesser of $50.0 million or 85.0% of our eligible accounts receivable, less certain reserves. The Line of Credit Agreement is secured by all of our assets, excluding intellectual property and development program inventories, and matures on August 2, 2022. As of September 30, 2021, we had no outstanding borrowings under the Line of Credit Agreement, and we were in compliance with all covenants in all material respects. -31- Table of Contents Contractual Obligations and Commitments Our future minimum contractual commitments and obligations were reported in our Annual Report on Form 10-K for the year ended December 31, 2020. Other than the following, our future minimum contractual obligations and commitments have not changed materially from the amounts previously reported. Lease Agreements Our lease for our office and laboratory space ends in November 2027. We have two five-year options to extend the lease term. As of September 30, 2021, the remaining aggregate non-cancelable rent payable under the initial term of the lease, excluding common area maintenance and related operating expenses, is $51.3 million. Goods and Services We have certain other non-cancelable obligations under various agreements that relate to goods and services. As of September 30, 2021, our aggregate firm commitments were $34.8 million. We may be required, in connection with in-licensing or asset acquisition agreements, to make certain royalty and milestone payments and we cannot, at this time, determine when or if the related milestones will be achieved or whether the events triggering the commencement of payment obligations will occur. Therefore, such payments are not included in the amounts described above. Critical Accounting Policies and Significant Judgments and Estimates On January 1, 2021, we adopted ASU 2020-06, Debt—Debt with Conversion Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) on a modified retrospective basis (for more information, see “ Note 2—Significant Accounting Policies, Recently Adopted Pronouncements ”). Other than the adoption of ASU 2020-06, there have not been any material changes in our critical accounting policies and significant judgments and estimates as disclosed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2020. Off-Balance Sheet Arrangements We have not engaged in any off-balance sheet arrangements.