What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2022-03-01 compared with 2021-03-01 · 180 added, 141 removed, 145 unchanged (69% of the section changed)

5 unchanged sentences

Throughout this discussion, unless the context specifies or implies otherwise, the terms “Company,” “we,” “us” and “our” refer to Omeros Corporation and our wholly owned subsidiaries.

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.

Our drug candidate narsoplimab is the subject of a rolling biologics license application (“BLA”) under priority review by the U.S.

We are a clinical-stage biopharmaceutical company committed to discovering, developing and commercializing small-molecule and protein therapeutics for large-market as well as orphan indications targeting immunologic diseases, including complement-mediated diseases and cancers related to dysfunction of the immune system, as well as addictive and compulsive disorders.

Our drug candidate narsoplimab is the subject of a biologics license application (“BLA”) that, following receipt of a CRL, is pending before the the U.S.

Food and Drug Administration (“FDA”) for the treatment of hematopoietic stem cell transplant-associated thrombotic microangiopathy (“HSCT-TMA”).

We also have multiple Phase 3 and Phase 2 clinical-stage 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.

We also have multiple Phase 3 and Phase 2 clinical-stage development programs, which are focused on complement-mediated disorders, including immunoglobulin A (“IgA”) nephropathy, atypical hemolytic uremic syndrome (“aHUS”), and COVID-19.

We have successfully completed a Phase 1 clinical trial in healthy subjects and are initiating a Phase 1b clinical trial in PNH patients for our MASP-3 inhibitor OMS906 targeting the alternative pathway of complement.

We also 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.

We are also advancing other related cancer therapeutics as well as CAR T-cell and adoptive T-cell therapies.

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 possess 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.

Financial Summary

We recognized net losses of $138.1 million, $84.5 million, and $126.8 million for the years ended December 31, 2020, 2019 and 2018, respectively and our OMIDRIA revenues were $73.8 million, $111.8 million, and $29.9 million

respectively.

Historically, OMIDRIA revenues were impacted by the reimbursement status for OMIDRIA under Medicare Part B, as well as the COVID-19 pandemic.

Fiscal quarters without pass-through reimbursement

Fiscal quarters with reduced cataract procedures due to COVID-19

Pass-through reimbursement expired on October 1, 2020.

In December 2020, separate payment was confirmed for OMIDRIA, effective retroactively as of October 1, 2020.

During the period from January 1, 2018 to September 30, 2018, OMIDRIA was not reimbursed separately when used for procedures involving patients covered by Medicare Part B, and our revenues decreased significantly.

After reinstatement of pass-through reimbursement for OMIDRIA in the fourth quarter of 2018, our revenues quickly returned to levels seen in prior periods during which pass-through reimbursement was available and subsequent quarter-over-quarter revenue growth approximated historical rates.

Pass-through status for OMIDRIA allowed for separate reimbursement payment (i.e., outside the packaged procedural payment) to ASCs and hospitals using OMIDRIA in procedures involving patients covered by Medicare Part B.

Pass-through reimbursement for OMIDRIA under Medicare Part B expired on October 1, 2020, and consequently, our net revenues for September and the fourth quarter of 2020 were significantly reduced.

In December 2020, the Centers for Medicare & Medicaid Services (“CMS”) confirmed that OMIDRIA, as an otherwise policy packaged drug following OMIDRIA’s expiration of pass-through status on October 1, 2020, qualifies for separate payment when used on Medicare Part B patients in the ambulatory surgery center (“ASC”) setting under CMS’ policy for non-opioid pain management surgical drugs.

CMS made separate payment for OMIDRIA under this policy effective retroactively as of October 1, 2020.

CMS’ non-opioid separate payment policy and, as a result, separate payment for OMIDRIA thereunder, like other CMS policies in the OPPS and ASC systems, can be changed by CMS through its annual rulemaking and comment process for its outpatient prospective payment and ASC payment systems.

We believe that CMS will continue its separate payment policy for non-opioid pain management surgical drugs, which has been in effect since 2019, and that OMIDRIA will continue to be separately reimbursed when used in the ASC setting.

See Part 1, Item 1, “Business—Commercial Product—OMIDRIA” for additional details regarding the pass-through reimbursement status for OMIDRIA.

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.

As of December 31, 2020, we had $135.0 million in cash and cash equivalents and short-term investments available for general corporate use and $3.8 million in accounts receivable, net.

On December 23, 2021, we closed on an Asset Purchase with Rayner Surgical, Inc.

(“Rayner”) for the sale of our commercial product OMIDRIA and certain related assets including inventory and prepaid expenses (the “Transaction”).

Rayner paid us $126.0 million in cash at closing, and we retained all outstanding accounts receivable as of the closing date.

We will receive a royalty on world-wide sales of OMIDRIA and potentially a $200.0 million milestone payment if separate payment for OMIDRIA is secured in the U.S.

for a continuous period of at least four years before January 1, 2025.

As a result of the OMIDRIA divestiture, the results of OMIDRIA operations have been reclassified to net income from discontinued operations, net of tax in our consolidated statements of operations and comprehensive loss and excluded from continuing operations for all periods presented (See Net Income from Discontinued Operations, Net of Tax below for additional information).

As of December 31, 2021, we had $157.3 million in cash and cash equivalents and short-term investments available for general corporate use and $38.2 million in accounts receivable, which we expect to collect in full by March 31, 2022.

Results of Operations

Our revenue consists of OMIDRIA product sales to ASCs, and hospitals in the U.S.

Our product sales, net are as follows:

Year Ended December 31,

(In thousands)

Product sales, net

We launched OMIDRIA in the U.S.

in the second quarter of 2015 and sell OMIDRIA primarily through wholesalers which, in turn, sell to ASCs and hospitals.

In 2020, OMIDRIA revenue decreased $38.0 million, or 34%, as compared to the year ended December 31, 2019.

The decrease in revenue during 2020 compared to 2019 was due to COVID-19-related reductions in the number of elective cataract procedures from mid-March 2020 through late June 2020.

The additional decrease in revenue during 2020 compared to 2019 was due to a slowdown in orders from wholesalers during September and the fourth quarter following expiration of pass-through reimbursement for OMIDRIA on October 1, 2020.

In December 2020, CMS confirmed that OMIDRIA qualifies for separate payment when used in the ASC setting.

In 2019, OMIDRIA revenue increased $81.9 million, or 274%, as compared to the year ended December 31, 2018.

Th e increase in revenue in 2019 compared to 2018 was due to significantly increased demand for OMIDRIA by ASCs and hospitals following the reinstatement of pass-through reimbursement status for OMIDRIA on October 1, 2018.

During the nine-month period from January 1, 2018 to September 30, 2018, OMIDRIA was not reimbursed separately when used for procedures involving patients covered by Medicare Part B.

Given the uncertainty and local variances in the severity and response to the COVID-19 pandemic across the U.S., and whether CMS will continue its separate payment policy for non-opioid pain management surgical drugs, which has been in effect since 2019, we may experience significant fluctuations in period-over-period OMIDRIA revenues.

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 provisions for the years ended December 31, 2020, 2019 and 2018 were 31.2%, 27.7% and 28.1%, respectively, of gross OMIDRIA product sales.

Our gross-to-net provision and payments for the years ended December 31, 2020, 2019 and 2018 are summarized below:

(In thousands)

Balance as of December 31, 2017

Balance as of December 31, 2018

Balance as of December 31, 2019

Balance as of December 31, 2020

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 340B prime vendor agreement, a Medicaid drug rebate agreement and an off-invoice discount to our customers.

We also record a provision for our OMIDRIAssure® patient assistance and reimbursement services program and our 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 customer.

Research and Development Expenses

3 unchanged sentences

and stock-based compensation expense.

Direct external expenses consist primarily of expenses incurred pursuant to agreements with third-party manufacturing organizations prior to receiving regulatory approval for a product candidate, contract research organizations (“CROs”), clinical trial sites, collaborators, and licensors and consultants.

Direct external expenses consist primarily of expenses incurred pursuant to agreements with third-party manufacturing organizations prior to receiving regulatory approval for a drug candidate, contract research organizations (“CROs”), clinical trial sites, collaborators, and licensors and consultants.

Costs are reported in preclinical research and development until the program enters the clinic.

Internal, overhead and other expenses consist of personnel costs, overhead costs such as rent, utilities and depreciation and other miscellaneous costs.

We do not generally allocate our internal resources, employees and infrastructure to any individual research project because we deploy them across multiple clinical and preclinical projects that we are advancing in parallel.

The discontinued operations of OMIDRIA relates to the costs of drug manufacturing stability and quality control testing and costs of employees and consultants.

The following table illustrates our expenses associated with these activities:

1 unchanged sentence

(In thousands)

Continuing research and development expenses:

Direct external expenses:

2 unchanged sentences

MASP-3 program - OMS906

OMIDRIA - Ophthalmology

PDE7 - OMS527

4 unchanged sentences

Stock-based compensation expense

Total continuing research and development expenses

Discontinued research and development expense

Total research and development expenses

Clinical research and development expenses decreased by $0.5 million between 2020 and 2019 due to timing of narsoplimab drug manufacturing activities and reduced OMS527 toxicology spending.

During 2020, OMS906 clinical research and development expenses were $7.2 million, and embedded within pre-clinical research and development costs

were $3.5 million of OMS906-related expenditures.

These total expenditures of $10.7 million represent an increase of $1.8 million over the prior year.

The decrease in preclinical research and development expenses in 2020 compared to 2019 is primarily due to the migration of OMS906 from preclinical to clinical research and development beginning in the third quarter of 2020.

The increases in internal, overhead and other expenses in all years presented are primarily due to additional employee-related costs and buildout of expanded laboratory facilities in 2020 to support our research and development activities.

We expect overall research and development costs to increase in 2021 as we continue our ongoing Phase 3 clinical programs for narsoplimab and manufacture commercial drug substance in anticipation of the drug’s FDA approval for the treatment of HSCT-TMA.

Our accounting policy is to expense all manufacturing costs incurred until regulatory approval is obtained in either the U.S.

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 the potential impact of the COVID-19 pandemic.

Clinical research and development expenses increased $2.3 million between 2021 and 2020 primarily due to increased narsoplimab drug manufacturing costs partially offset by reduced OMS527 toxicology study costs.

The change in clinical research and development costs between 2020 and 2019 is primarily due to the migration of OMS906 from preclinical to clinical research and development beginning in the third quarter of 2020 offset by reduced MASP-2 costs.

Preclinical research and development expenses increased $4.4 million in 2021 compared to 2020, primarily due to drug substance, stability and toxicology work on OMS1029 offset by the migration of OMS906 from preclinical to clinical research and development beginning in the third quarter of 2020.

The $3.6 million decrease in preclinical research and development expenses in 2020 compared to 2019 was primarily due to the advancement of OMS906 to clinical research and development in the third quarter of 2020.

The increases in internal, overhead and other expenses in all years presented are primarily due to additional employee-related costs and buildout of expanded laboratory facilities to support our research and development activities.

We expect overall continued research and development costs to increase in 2022 as we continue our ongoing Phase 3 clinical programs for narsoplimab and the manufacturing of narsoplimab drug substance to meet our clinical supply needs as well as our commercial requirements should we receive FDA approval for the use of narsoplimab for the treatment of HSCT-TMA.

Our accounting policy is to expense all manufacturing costs related to drug candidates until regulatory approval is reasonably assured in either the U.S.

At this time, we are unable to estimate with certainty the longer-term costs we will incur in the continued development of our drug candidates due to the inherently unpredictable nature of our preclinical and clinical development activities as well as the potential impact of the COVID-19 pandemic.

Clinical development timelines, the probability of success and development costs can differ materially as new data become available and as expectations change.

Our future research and development expenses will depend, in part, on the preclinical or clinical success of each product candidate as well as 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.

Our future research and development expenses will depend, in part, on the preclinical or clinical success of each drug candidate as well as ongoing assessments of each program’s commercial potential.

In addition, we cannot forecast with precision which drug 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 drug 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.

4 unchanged sentences

(In thousands)

Continuing selling, general and administrative expense:

Selling, general and administrative expenses, excluding stock-based compensation expense

Stock-based compensation expense

Total continuing selling, general and administrative expenses

Discontinued selling, general and administrative expenses

Total selling, general and administrative expenses

The increase in selling, general and administrative expenses, excluding stock-based compensation during both years ended December 31, 2020 and 2019 was primarily due to increased pre-commercialization activities for narsoplimab for the treatment of HSCT-TMA.

We expect that our selling, general and administrative expenses in 2021 will increase from 2020, primarily due to planned U.S.

commercialization activities related to narsoplimab.

The increase in continuing selling, general and administrative expenses, excluding stock-based compensation, during both years ended December 31, 2021 and 2020 was primarily due to increased pre-commercialization activities for narsoplimab for the treatment of HSCT-TMA.

Our continuing selling, general and administrative expenses for 2022 are highly dependent on the approval of narsoplimab as we have not yet hired the narsoplimab field sales force or initiated various commercial launch activities.

If narsoplimab is approved in 2022, our continuing selling, general and administrative expenses will increase as we hire the field sales team and initiate commercial launch activities.

If narsoplimab is not approved, our continuing selling, general and administrative expenses are expected to be less than in 2021.

Interest Expense

3 unchanged sentences

Interest expense is primarily comprised of contractual interest and amortization of debt issuance and debt discount related to our 6.25% Convertible Senior Notes (the “2023 Notes”) and 5.25% Convertible Senior Notes (the “2026 Notes”) as well as interest on our finance leases .

Non-cash interest expense for 2020, 2019 and 2018 was $11.6 million, $9.2 million and $5.6 million, respectively.

Interest expense increased for each of these periods due to increases in total debt outstanding for each period.

For more information regarding our debt and our unsecured convertible notes, see Part II, Item 8, “Note 7—Debt” and “Note 8—Unsecured Convertible Senior Notes” to our Consolidated Financial Statements in this Annual Report on Form 10-K.

Interest expense decreased $7.1 million compared to 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 previously allocated to equity.

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 regarding our debt and our unsecured convertible notes (see Part II, Item 8, “Note 9—Unsecured Convertible Senior Notes”).

Loss on Early Extinguishment of Debt

2 unchanged sentences

Loss on early extinguishment of debt

In August and September 2020, we issued the 2026 Notes and repurchased $115.0 million of our 2023 Notes.

We recorded a $13.4 million loss on early extinguishment of debt related to expensing the unamortized discount and issuance costs associated with the repurchased 2023 Notes.

In November 2018, we issued the 2023 Notes and repaid all previously outstanding loan amounts.

We incurred a loss on early extinguishment of debt of $13.0 million associated with the unamortized lender facility fee, debt issuance costs, debt discount and prepayment fees in connection with the repayment.

In August 2020, we repurchased $115.0 million of the 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 repurchase.

Year Ended December 31,

6 unchanged sentences

Income tax benefit

The income tax benefit in 2020 and 2018 is related to the issuance of the 2026 and 2023 Notes, respectively.

See Part II, Item 8, “Note 13—Income Taxes” for additional information.

The income tax benefit in 2020 relates to the issuance of the 2026 Notes respectively (see Part II, Item 8, “Note 14—Income Taxes”).

In December 2019, the Financial Accounting Standards Board issued ASU 2019-12, Income Taxes (Topic 740), which is intended to simplify various aspects of the income tax accounting guidance.

ASU 2019-12 eliminates the exception to the incremental approach of intra-period tax allocation when there is a loss from continuing operations and income or gain from other items.

As the Company prospectively adopted ASU 2019-12 January 1, 2021, we did not apply any intraperiod allocation rules to 2021.

However, we reclassified the tax benefit of income from discontinued operations in prior periods to offset losses from continuing operations.

During 2020, we recorded an income tax benefit of $23.3 million from continuing operations comprising $12.0 million related to the issuance of our 2026 and 2023 Notes, and an additional $11.2 million income tax benefit related to the sale of OMIDRIA assets to Rayner into income from continuing operations.

During 2019, we recorded $19.7 million of income tax benefit into continuing operations related to OMIDRIA assets sold to Rayner.

Net Income from Discontinued Operations, Net of Tax

On December 23, 2021, we sold our commercial drug, OMIDRIA, to Rayner.

As a result of the OMIDRIA divestiture, the results of OMIDRIA operations have been reclassified to discontinued operations in our consolidated statements of operations and comprehensive loss and excluded from continuing operations for all periods presented.

Net income from discontinued operations, net of tax is as follows:

Year Ended December 31,

(In thousands)

Net income from discontinued operations, net of tax

Net income from OMIDRIA operations and the gain recognized on disposition of the asset is shown below:

Year Ended December 31,

(In thousands)

Product sales, net

Royalty income

OMIDRIA income

Costs and expenses:

Cost of product sales

Research and development

Selling, general and administrative

Total costs and expenses

Income before income tax expense

Income tax expense

Net income from discontinued operations, net of tax

Gain on sale of OMIDRIA, net

Net income from discontinued operations, net of tax

Product Sales, Net and Royalty Income

The fluctuation in 2020 product sales, net, reclassed to discontinued operations, was due to COVID-19-related reductions in the number of elective cataract procedures from mid-March 2020 through late June 2020.

Additionally OMIDRIA pass-through reimbursement under Medicare Part B expired on October 1, 2020 and OMIDRIA revenues were significantly reduced.

In December 2020, CMS confirmed that OMIDRIA qualifies for separate payment when used in the ASC setting, and sales normalized during the first half of 2021.

After the sale of OMIDRIA to Rayner, we receive royalty payments of 50% of U.S.

domestic net sales.

We will continue to earn royalties at this rate until the earlier of January 1, 2025 or when separate payment for OMIDRIA is secured in the U.S.

for a continuous period of at least four years.

Should separate payment be achieved during this time, the Company would receive a $200.0-million milestone payment from Rayner.

Upon the earlier of qualifying for the milestone payment or January 1, 2025, the royalty rate will be reduced to 30% (the “U.S.

base royalty rate”) until the expiration or termination of the last issued and unexpired U.S.

base royalty rate is reduced to 10% upon the occurrence of certain events such as OMIDRIA no longer being eligible for separate payment.

We will also receive a royalty of 15% on OMIDRIA net sales outside the U.S.

on a country-by-country basis until the expiration or termination of the last issued and unexpired OMIDRIA patent in such country.

OMIDRIA sales have historically been highly dependent on separate payment under Medicare Part B.

Given that OMIDRIA reimbursement might be dependent on CMS’ annual renewals and policy, we would likely experience

significant fluctuations in period-over-period OMIDRIA royalty earnings should CMS change its non-opioid separate payment policy, which likely would effect CMS’ reimbursement of OMIDRIA.

Deductions to OMIDRIA sales consist of chargebacks, rebates, distribution fees and product return allowances (see Part II, Item 8, “Note 2—Significant Accounting Policies”).

The overall percentage deductions to OMIDRIA sales were as follows:

Year Ended December 31,

Deductions percentage to OMIDRIA sales

The gain on the sale of OMIDRIA included in discontinued operations for the year ended December 31, 2021 is as follows:

(In thousands)

Cash proceeds

OMIDRIA contract royalty asset

Gain on sale of OMIDRIA, gross

Transaction and closing costs

Restricted Stock Units ("RSUs") granted to transferred employees

Prepaid assets and inventory at cost

Gain on sale of OMIDRIA, net

OMIDRIA Royalties and OMIDRIA Contract Royalty Assets

Upon the closing of the Transaction, we have rights to receive from Rayner future royalties on OMIDRIA net sales at royalty rates that vary based on geography and certain regulatory contingencies.

Therefore, future OMIDRIA royalties are treated as variable consideration.

The sale of OMIDRIA qualifies as an asset sale.

To measure the OMIDRIA contract royalty asset, we used the expected value approach which is the sum of the discounted probability-weighted royalty payments, net of tax, we would receive using a range of potential outcomes, to the extent that it is probable that a significant reversal in the amount of cumulative income recognized will not occur.

The contract royalty asset excludes the achievement of the $200.0-million milestone payment and any foreign royalties to the extent it is probable that a significant reversal in the amount of cumulative income recognized will not occur.

Royalties earned will be recorded as a reduction to the OMIDRIA contract royalty asset.

The amount recorded in discontinued operations in future periods will reflect interest earned on the outstanding OMIDRIA contract royalty asset and any amounts received different from the expected royalties recorded at closing.

The OMIDRIA contract royalty asset will also be re-measured periodically using the expected value approach based on actual results and future expectations Any required adjustment to the OMIDRIA contract royalty asset will be recorded into discontinued operations.

On December 22, 2021, the Company granted and expensed RSUs to employees who accepted offers to work for Rayner as a retention incentive to help drive sales of OMIDRIA.

The RSUs vest over a two-year period contingent on continued employment at Rayner.

Financial Condition - Liquidity and Capital Resources

As of December 31, 2021, we had $157.3 million in cash, cash equivalents and short-term investments available for general corporate use held primarily in money-market accounts, as compared to $135.0 million at December 31, 2020.

As of December 31, 2021, we also had accounts receivable of $38.2 million.

We have historically generated net losses and incurred negative cash flows.

For the year ended December 31, 2020, we incurred net losses of $138.1 million and incurred negative cash flows from operations of $100.1 million.

The net loss and the negative cash flows from operations were significantly affected by (1) reduced OMIDRIA revenues due to uncertainties regarding the reimbursement status of OMIDRIA following expiration of the drug’s pass-through status and associated separate payment by CMS on October 1, 2020 and (2) the impact of COVID-19 on the number of cataract surgeries performed nationally.

In December 2020, CMS confirmed that OMIDRIA qualifies for separate payment when used in the ASC setting.

See Part 1, Item 1, “Business — Commercial Product — OMIDRIA” for additional details regarding the reimbursement status for OMIDRIA.

FDA accepted our BLA for narsoplimab in HSCT-TMA for priority review and has indicated a Prescription Drug User Fee Act (“PDUFA”) date of July 17, 2021.

We expect to launch narsoplimab commercially for HSCT-TMA in the U.S.

very soon following FDA approval, and preparations to execute our sales and marketing strategies for launch are underway.

These plans include various milestones at which we commit to incremental activities, such as field sales hiring, and provide for flexibility in the timing of costs incurred should the approval of narsoplimab occur in advance or after the current PDUFA date.

If warranted, we will adjust the timing and associated costs of our HSCT-TMA launch activities as we advance through the BLA review and approval process.

We plan to continue to fund our operations for at least the next twelve months with our cash and investments on hand, from sales of OMIDRIA and, if FDA approval is granted, from sales of narsoplimab for HSCT-TMA.

There is also the possibility that narsoplimab will generate revenues in the treatment of COVID-19.

In addition, we may utilize funds available under our accounts receivable-based line of credit, which allows us to borrow up to 85% of our available accounts receivable borrowing base less certain reserves or $50.0 million, whichever is less.

We may also sell shares of our common stock through our “at the market” equity offering program.

For additional information regarding this program, see Part II, Item 9B, “Other Information.” Should it be necessary or determined to be strategically advantageous, we also could pursue debt financings, public and private offerings of our equity securities similar to those we have completed previously, or other strategic transactions, which may include licensing all or a portion of any of our existing technologies.

Should it be necessary to manage our operating expenses, we would reduce our projected cash requirements through reduction of our expenses by delaying clinical trials, reducing selected research and development efforts, or implementing other restructuring activities.

With the sale of OMIDRIA to Rayner, we had net income of $194.2 million and negative cash flows from operations of $109.7 million as compared to negative cash flows of $100.1 million in the prior year.

We plan to continue to fund our operations with our cash and investments, our outstanding accounts receivable, OMIDRIA royalties and potentially the $200.0 million milestone related to achieving long-term OMIDRIA separate payment.

If FDA approval is granted for narsoplimab for HSCT-TMA within the next twelve months, sales of narsoplimab will also provide funds for our operations.

In addition, we have 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.

Should it be 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.

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.

We have $95.0 million of 2023 Notes due in November 2023.

We plan to fund the repayment of the 2023 Notes through cash from operations, including narsoplimab HSCT-TMA revenues should approval be granted by FDA, the $200.0 million milestone related to OMIDRIA, strategic transactions, sale of stock or through issuance of additional debt.

Cash Flow Data

8 unchanged sentences

Net cash used in operating activities increased for the year ended December 31, 2021 by $9.6 million compared to the same period in 2020.

The change in net income adjusted for non-cash items increased by $12.1 million.

In addition, we had a $65.7 million increase in the change in operating receivables due to timing of OMIDRIA Medicare Part B reimbursement and a $34.4 million decrease in the change in accounts payable.

Net cash used in operating activities increased for the year ended December 31, 2020 by $40.0 million compared to the same period in 2019.

The difference largely resulted from the $53.6 million increase in our net loss from 2019, a $33.0 million increase in cash used in accounts payable and accrued expense, and a $3.6 million increase in cash used for prepaid and other assets.

These uses were partially offset by a $43.7 million increase in cash provided from collections of accounts receivable and an increase in non-cash charges of $5.6 million.

Net cash used in operating activities decreased for the year ended December 31, 2019 by $43.7 million as compared to the same period in 2018.

The decrease largely resulted from the $42.3 million decrease in our net loss from 2018 due to an increase in OMIDRIA product sales of $81.9 million, partially offset by a $33.1 million increase in total cost and expenses.

In addition, increases in non-cash charges of $6.1 million in 2019 compared to 2018 also positively impacted the change in our cash used in operating activities.

The net change in operating assets and liabilities of $5.1 million also reduced our net cash used in operations for the year ended December 31, 2019 compared to the same period in 2018.

These increases were partially offset by a $43.7 million increase in cash provided from collections of accounts receivable and an increase in non-cash charges of $5.6 million.

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 cash, cash equivalents and short-term investments, we do not consider the fluctuations in cash flows from investing activities to be important to the understanding of our liquidity and capital resources.

Net cash used in investing activities during 2020 was $67.0 million, an increase of $63.6 million from the $3.4 million net cash used in investing activities for the same period in 2019, driven by an increase in purchases of investments of $133.2 million offset by proceeds from sale and maturities of investments of $66.4 million.

Net cash used investing activities during 2019 was $3.4 million, a decrease of $28.6 million from the $25.2 million net cash provided by investing activities for the same period in 2018.

The net change in our investments sold compared to purchased decreased by $28.8 million providing cash to fund our operations.

Net cash provided by investing activities increased $260.7 million during 2021 compared to the same period in 2020.

This was driven by t he $126.0 million payment made as part of the OMIDRIA asset sale and an increase of $134.7 million in net proceeds from the purchase and sale of investments.

Net cash used in investing activities increased $63.6 million during 2020 compared to the same period in 2019, driven by an increase in purchases of investments of $133.2 million offset by proceeds from sale and maturities of investments of $66.4 million.

Financing Activities.

Net cash provided by financing activities in the year ended December 31, 2020 was $174.5 million, a net increase of $113.8 million over the same period in 2019.

The increase compared to the prior year was due to receiving cash proceeds of $76.9 million, net, from the issuance of our 2026 Notes, which includes the payments for partial repurchase of our 2023 Notes, payments for debt issuance costs, proceeds from termination of our 2023 capped call, and purchases of capped calls related to our 2026 Notes.

Net cash provided by financing activities during 2021 decreased $168.2 million from the prior year.

The decrease was due to receiving cash proceeds of $76.9 million, net, in the prior year, from the issuance of our 2026 Notes, which includes the payments for partial repurchase of our 2023 Notes, payments for debt issuance costs, proceeds from termination of our 2023 capped call, and purchases of capped calls related to our 2026 Notes.

In addition, we received net proceeds of $93.7 million from our August 2020 public offering of our common stock.

Net cash provided by financing activities in the year ended December 31, 2019 was $60.7 million, a net decrease of $20.4 million over the same period in 2018, In December 2019, we received $54.2 million net proceeds from a public offering of our common stock.

Convertible Notes

For more information regarding the 2023 and 2026 Notes, see Part II, Item 8, “Note 8—Unsecured Convertible Senior Notes” to our Consolidated Financial Statements in this Annual Report on Form 10-K.

For more information regarding the 2023 and 2026 Notes see (Part II, Item 8, “Note 8—Unsecured Convertible Senior Notes”).

Line of Credit

We have a Line of Credit Agreement, under which we may draw, on a revolving basis, up to the lesser of $50.0 million and 85.0% of our eligible accounts receivable, less certain reserves.

The Line of Credit Agreement is secured by all our assets excluding intellectual property and development program inventories and matures on August 2, 2022.

We have a Line of Credit Agreement that is secured by all our assets excluding intellectual property and development program inventories and matures on August 2, 2022.

The Line of Credit is based upon maintaining a certain amount of accounts receivables including royalty receivables from Rayner.

As of December 31, 2021, we had no outstanding borrowings under the Line of Credit Agreement and we were in compliance with all covenants.

F or more information regarding the Line of Credit Agreement , s ee Part II, Item 8, “Note 7—Debt” to our Consolidated Financial Statements in this Annual Report on Form 10-K.

F or more information regarding the Line of Credit Agreement (s ee Part II, Item 8, “Note 8—Line of Credit”).

Contractual Obligations and Commitments

The following table presents a summary of our contractual obligations and commitments as of December 31, 2020.

Payments Due Within

(In thousands)

Operating Leases

Finance leases (principal and interest)

Unsecured convertible senior notes

Goods & services

Operating Leases

We lease our office and laboratory space in The Omeros Building under a lease agreement with BMR - 201 Elliott Avenue LLC.

5 unchanged sentences

Goods & Services

We have certain non-cancelable obligations under other agreements for the acquisitions of goods and services associated with the manufacturing of our product candidates, which contain firm commitments.

We have certain non-cancelable obligations under other agreements for the acquisitions of goods and services associated with the manufacturing of our drug candidates, which contain firm commitments.

As of December 31, 2021, our aggregate firm commitments are $32.0 million.

12 unchanged sentences

● revenue recognition;

● research and development expenses, primarily related to the manufacturing of drug product;

● OMIDRIA royalties and contract asset accounting;

● research and development expenses related to clinical trials;

● accounting for lease agreements, primarily related to our computation of incremental borrowing rate;

4 unchanged sentences

Product Sales, Net:

W e typically record revenue from product sales when the product is delivered to our wholesalers which is generally when we satisfy all performance obligations.

W e record revenue from product sales when the product is delivered to our wholesalers which is generally when we satisfy all performance obligations.

Product sales are recorded net of wholesaler distribution fees and estimated chargebacks, rebates, returns and purchase-volume discounts.

4 unchanged sentences

Chargebacks are generally settled within four weeks of recording product sales revenue.

We provide reimbursement support services and financial assistance in the form of a rebate to patients whose commercial insurance is inadequate to cover the full cost of OMIDRIA.

We provide reimbursement support services and financial assistance in the form of a rebate to patients whose commercial insurance is inadequate to cover the full cost of our drug product.

We apply an experience ratio based on historical and projected patient claims.

This experience ratio is applied to product sales to determine the patient rebate accrual and is reviewed and updated periodically to reflect actual results.

We provide rebate payments for which ASCs qualify by meeting or exceeding purchase volumes of OMIDRIA under our purchase volume-discount program.

We calculate rebate payment amounts due under this program based on actual qualifying purchase volumes and apply a contractual discount rate.

For purchases of OMIDRIA not yet reported as sold-through to the ASC by our wholesalers, we apply an experience ratio to product sales to determine the rebate accrual.

This experience ratio is reviewed and updated periodically to reflect actual results.

Distribution Fees and Product Return Allowances :

We pay our wholesalers a distribution fee for services that they perform for us based on the wholesaler average cost value of their purchases of OMIDRIA.

We pay our wholesalers a distribution fee for services that they perform for us based on the wholesaler average cost value of their purchases.

We record a provision against product sales for these charges at the time of sale to the wholesaler.

1 unchanged sentence

In estimating product returns, we take into consideration our return experience to date, the remaining shelf-life of product we have previously sold, inventory in the wholesale channel and our expectation that product is typically not held by the health care providers based on the frequency of their reorders.

OMIDRIA Royalties and OMIDRIA Contract Royalty Asset

Upon the closing of the Transaction, we have rights to receive future royalties from Rayner on OMIDRIA net sales at royalty rates that vary based on geography and certain regulatory contingencies.

Therefore, future OMIDRIA royalties are treated as variable consideration.

To measure the OMIDRIA contract royalty asset, we used the expected value approach which is the the discounted sum of probability-weighted royalty payments, net of tax, we would receive using a range of potential outcomes, to the extent that it is probable that a significant reversal in the amount of cumulative income recognized will not occur.

Our calculations take the net present value of the sum to arrive at the OMIDRIA contract royalty asset stated on the balance sheet.

The contract royalty asset excludes the achievement of the $200.0- million milestone payment and any foreign royalties to the extent it is probable that a significant reversal in the amount of cumulative income recognized will not occur.

Royalties earned will be recorded as a reduction to the OMIDRIA contract royalty asset.

The OMIDRIA contract royalty asset is subject to changes in net sales of OMIDRIA.

A 10% change in net sales results in an $18.4 million change in value of the OMIDRIA contract royalty asset, resulting in a potential contract royalty asset valued within the range of $166.7 million to $203.5 million, all else being equal.

Changes in net sales could occur due to various risks such as competitors entering the market, technology change as to how cataracts are treated and loss of separate payment status.

In determing the value of the OMIDRIA contract royalty asset, we have considered all these factors.

The OMIDRIA contract royalty asset will be re-measured periodically using the expected value approach based on actual results and future expectations.

Any required adjustment to the OMIDRIA contract royalty asset will be recorded into discontinued operations.

We receive monthly royalty payments based on Rayner’s OMIDRIA product sales in accordance with the Asset Purchase Agreement.

Upon the closing of the Transaction, we determined the expected minimum net present value of future OMIDRIA royalty payments and recognized the amount as a gain on the sale of OMIDRIA in discontinued operations on our income statement and as OMIDRIA contract royalty asset on our balance sheet.

To determine the OMIDRIA contract royalty asset, we used the expected value approach which is based on the sum of probability-weighted payments we would receive using a range of potential outcomes using a double digit discount rate and the statutory federal income tax rate.

The contract royalty asset excludes any revenue which potentially may be reversed in the event of an over estimation.

Therefore, we did not include any expectation of receiving the $200.0-million milestone payment or any foreign royalties as we could not judge the probability of those events with certainty.

Royalties earned will be recorded as a reduction to the OMIDRIA contract royalty asset.

The amount recorded through earnings in discontinued operations will reflect the time value of money on the outstanding OMIDRIA contract royalty asset.

The OMIDRIA contract royalty asset will be evaluated periodically and adjusted using the expected value approach based on actual results and future expectations.

Any required adjustments will be recorded into discontinued operations.

Research and Development Expenses

6 unchanged sentences

● other expenses incurred to sustain our overall research and development programs.

Contracted research and manufacturing costs are primarily incurred in the development and production of our drug substance and drug product candidates.

Contracted research and manufacturing costs are primarily incurred in the development and production of our drug substance and drug candidates.

Prior to approval, our estimates are based on the timing of services provided.

4 unchanged sentences

Right-of-Use Assets and Related Lease Liabilities

On January 1, 2019, we adopted Accounting Standards Update (ASU) 2016-02, Leases , (Topic 842) using a modified retrospective approach versus recasting the prior periods presented.

For a summary of the adoption of this critical accounting policies, See Part II, Item 8, “Note 2—Significant Accounting Policies” to our Consolidated Financial Statements in this Annual Report on Form 10-K.

We record operating leases on our Consolidated Balance Sheet as right-of-use assets and recognize the related lease liabilities equal to the fair value of the lease payments using our incremental borrowing rate when the implicit rate in the lease agreement is not readily available.

1 unchanged sentence

A change in the calculated incremental borrowing rate of 100 basis points would not be material to our consolidated financial statements.

Convertible Debt Issuances

On January 1, 2021, we adopted Accounting Standards Update (“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.

ASU 2020-06 removes the separate liability and equity accounting for our convertible senior notes.

As of January 1, 2021, we account for our convertible senior notes wholly as debt.

Prior to January 1, 2021, we accounted for convertible debt that may be settled wholly or partially in cash upon conversion as having both a liability component (debt) and an equity component (conversion option).

The cash conversion guidance applies as the embedded conversion features meet the requirements for a derivative scope exception for instruments that are both indexed to an entity’s own stock and classified in stockholders’ equity in the balance sheet.

Principal cash proceeds from the instrument are allocated first to the liability component based on the fair value of non-convertible debt using the income and market-based approaches to determine an effective interest rate for present valuing the cash proceeds.

For the income-based approach, we use a convertible bond pricing model that includes several assumptions such as volatility and a risk-free rate.

For the market-based approach, we observe the price of derivative price instruments purchased in conjunction with our convertible senior note issuances or evaluate issuances of convertible debt securities by other companies with similar credit risk ratings at the time of issuance.

The amount of the equity component is then calculated by deducting the fair value of the liability component from the principal amount of the instrument.

Issuance costs from the instrument are then allocated to the liability and equity components in the same proportion as the proceeds.

The equity component of the cash principal proceeds and the liability component of the issuance costs represent a debt discount.

which we amortized in prior years as non-cash interest expense over the term of the notes method.

Transactions involving contemporaneous exchanges of cash between the same debtor and creditor in connection with the issuance of a new debt obligation and satisfaction of an existing debt obligation by the debtor are evaluated as a modification or an exchange transaction depending on whether the exchange is determined to have substantially different terms.

The 2023 Notes repurchase and issuance of the 2026 Notes) were deemed to have substantially different terms due to the significant difference between the value of the conversion option immediately prior to and after the exchange.

Therefore, the repurchase of the 2023 Notes was accounted for as a debt extinguishment.

Stock-Based Compensation

6 unchanged sentences

Please refer to Part II, Item 8, “Note 2 -- Significant Accounting Policies” to our Consolidated Financial Statements in this Annual Report in Form 10-K for information regarding recent accounting pronouncements.

Off-Balance Sheet Arrangements

We have not engaged in any off-balance sheet arrangements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis