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Item 7. Management’s Discussion and Analysis

2023-03-13 compared with 2022-03-01 · 179 added, 167 removed, 158 unchanged (69% of the section changed)

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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 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, 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.

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.

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 disorders including complement-mediated diseases, cancers, and addictive and compulsive disorders.

The lead drug candidate in our pipeline of complement-targeted therapeutics is narsoplimab (OMS721), a proprietary, patented human monoclonal antibody targeting MASP-2, the key activator of the lectin pathway of complement.

Clinical development of narsoplimab is currently focused primarily on HSCT-TMA and IgA nephropathy.

We expect to read out 36-month proteinuria data from our Phase 3 clinical trial evaluating narsoplimab for the treatment of IgA nephropathy, ARTEMIS-IGAN, later this year.

We successfully completed a pivotal clinical trial for narsoplimab in HSCT-TMA and previously submitted to FDA a BLA seeking marketing approval for narsoplimab in this indication.

In late 2021, FDA issued a CRL with respect to the BLA in which the agency indicated that additional information would be needed to support regulatory approval.

We appealed FDA’s decision to issue the CRL through a formal dispute resolution process that concluded in late 2022.

Although our appeal was denied, the decision identified potential paths for resubmission of the BLA based on both response and survival data from the completed pivotal trial versus a historical control group, with or without an independent literature analysis.

We have requested a meeting with the review division at FDA to confirm the additional information required to be included in the resubmission to support approval of the BLA.

A Phase 1 single-ascending-dose clinical trial of OMS1029, our long-acting, next-generation antibody targeting MASP-2 and the lectin pathway was completed successfully in early 2023.

We expect to begin dosing in a Phase 1 multiple-ascending-dose study of OMS1029 in summer 2023.

Our pipeline of clinical-stage complement-targeted therapeutic candidates also includes OMS906, a proprietary, patented monoclonal antibody targeting MASP-3 and the alternative pathway of complement.

We believe OMS906 has the potential to treat a wide range of alternative pathway-related diseases and that its attributes favorably differentiate OMS906 from other marketed and in-development alternative pathway inhibitors.

Clinical development of OMS906 is currently focused on rapidly obtaining proof-of-concept data in multiple alternative pathway-related disorders, including PNH and C3G.

Following the successful completion of a Phase 1 single-ascending-dose study of OMS906 in healthy subjects, we initiated clinical programs evaluating OMS906 in PNH and C3G.

In late 2022 we began enrollment in a Phase 1b clinical trial evaluating OMS906 for the treatment of PNH.

The first treatment-naïve PNH patients in this trial were dosed with OMS906 in early 2023.

We have also begun enrolling a Phase 1b clinical trial evaluating OMS906 in PNH patients who have had an unsatisfactory response to the C5 inhibitor ravulizumab.

We have completed several regulatory and ethics committee submissions for a Phase 1b clinical trial evaluating OMS906 in patients with C3G and expect to begin enrolling patients next month following receipt of regulatory and ethics committee approvals.

We have successfully completed a Phase 1 study in our PDE7 inhibitor program focused on addiction and movement disorders.

We also 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.

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 are also developing novel adoptive T cell/CAR-T therapies and novel immunotherapeutics and cancer vaccines as part of our immuno-oncology platform.

On December 23, 2021, we completed the sale of OMIDRIA and certain related assets, including inventory and prepaid expenses, to Rayner.

We received $126.0 million in cash at the closing and retained all outstanding accounts receivable, accounts payable, and accrued expenses as of the closing date.

Under the Asset Purchase Agreement, we are entitled to receive royalties of 50% of the net sales of OMIDRIA in the U.S.

between the closing date and the earlier of January 1, 2025 or the occurrence of an event triggering a milestone payment from Rayner.

The milestone-triggering

event occurred in December 2022 and resulted in recognition of a $200.0 million Milestone Payment from Rayner.

We recorded a $200.0 million receivable in December 2022 and in February 2023 received from Rayner the Milestone Payment together with accrued interest.

After receipt of the Milestone Payment, we will receive a royalty of 30% of the U.S.

net sales until the expiration or termination of the last issued and unexpired patent, which is expected to be no earlier than 2033.

base royalty rate is subject to a reduction down to 10% upon the occurrence of certain events described in the Asset Purchase Agreement, including during any specific period in which OMIDRIA is no longer eligible for certain separate payment (i.e., included in the packaged payment rate for the surgical procedure) under Medicare Part B.

Pursuant to legislation enacted in late 2023, we expect separate payment for OMIDRIA under Medicare Part B to extend through at least December 31, 2027.

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 income (loss) and excluded from continuing operations for all periods presented.

On September 30, 2022, we sold to DRI an interest in a portion of our future OMIDRIA royalty receipts and received $125.0 million in cash consideration which we recorded as a liability on our consolidated balance sheet.

The liability is being amortized over the term of the arrangement using the implied effective interest rate of 9.4%.

Interest expense is recorded as a component of continuing operations.

The maximum future payout DRI is entitled to receive as of December 31, 2022 is $186.8 million.

The term of the agreement with DRI runs through December 31, 2030 and the amount payable to DRI each year during the term is subject to annual caps.

Our payments to DRI will not total $125.0 million at least until August 2028.

(see Part II, Item 8, “Note 9 – OMIDRIA Royalty Obligation” for additional information).

As of December 31, 2022, we had cash, cash equivalents and short-term investments of $194.9 million and outstanding accounts receivable of $213.2 million, comprised principally of the Milestone Payment.

Substantially all of the receivables balance at December 31, 2022 has since been collected.

Results of Operations

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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 drug 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, CROs, clinical trial sites, collaborators, 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.

Internal, overhead and other expenses primarily consist of costs for personnel, overhead, rent, utilities and depreciation.

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

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MASP-3 program - OMS906

PDE7 - OMS527

MASP-2 program - OMS1029

Total clinical research and development

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Internal, overhead and other expenses

Stock-based compensation expense

Stock-based compensation expenses

Total continuing research and development expenses

Discontinued research and development expense

Discontinued research and development expenses

Total research and development expenses

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.

Clinical research and development expenses increased $3.5 million between 2022 and 2021 primarily due to the advancement of OMS1029 from preclinical to clinical research and development on initiation of the Phase 1 clinical trial in the third quarter of 2022.

Additionally, we incurred increased narsoplimab drug manufacturing costs in 2022 compared to the prior year.

These costs were partially offset by reduced costs in our OMS906 program resulting from the completion of OMS906 toxicology study work in the second quarter of 2022.

The $2.3 million increase in clinical research and development costs between 2021 and 2020 was primarily due to increased narsoplimab drug manufacturing costs and were partially offset by reduced OMS527 toxicology study costs.

Preclinical research and development expenses decreased $7.8 million in 2022 compared to 2021, primarily due to the migration of OMS1029 from preclinical to clinical research and development during the third quarter of 2022.

The $4.4 million increase in preclinical research and development expenses in 2021 compared to 2020 was 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.

Internal, overhead and other expenses decreased $1.1 million between 2022 and 2021 due to reduction in leased space at our corporate headquarters.

The increases in internal, overhead and other expenses between 2021 and 2020 were primarily due to increased employee-related costs and buildout of expanded laboratory facilities to support our research and development activities.

The changes in stock-based compensation expense between the three covered years were due to the valuations and timing of the vesting of employee stock options.

We expect overall continued research and development costs in 2023 to be similar to 2022 as we continue our ongoing Phase 3 clinical programs of narsoplimab and manufacture drug substance to meet our clinical supply needs and commercial requirements should we receive FDA approval for the use of narsoplimab to treat 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.

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Selling, General and Administrative Expenses

Our selling, general and administrative expenses are comprised primarily of salaries, benefits and stock-compensation costs for sales, marketing and other personnel who are not directly engaged in research and development.

Our selling, general and administrative expenses are comprised primarily of salaries, benefits and stock-based compensation costs for sales, marketing and administrative personnel who are not directly engaged in research and development.

Costs also include marketing and selling expenses, professional and legal services, general corporate costs and an allocation of our occupancy costs.

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(In thousands)

Continuing selling, general and administrative expense:

Continuing selling, general and administrative expenses:

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

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Total selling, general and administrative expenses

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.

The decrease of $4.2 million in continuing selling, general and administrative expenses, excluding stock-based compensation, in 2022 compared to the prior year was primarily related to reduced spending on pre-commercialization sales and marketing activities associated with the potential approval and commercial launch of narsoplimab for the treatment of HSCT-TMA.

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

The changes in stock-based compensation expense between the three covered years were due to the valuations and timing of the vesting of employee stock options.

Our continuing selling, general and administrative expenses for 2023 will be highly dependent on the approval of narsoplimab because we have not yet hired the narsoplimab field sales force or initiated various commercial launch activities.

If narsoplimab is approved in the next twelve months, we expect our continuing selling, general and administrative expenses to 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 or equal to those in 2022.

Interest Expense

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Interest expense

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 .

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.

Interest expense is primarily comprised of interest and amortization of debt discount and issuance costs related to our 2023 Notes and 2026 Notes.

For the year ended December 31, 2022, interest on our DRI royalty obligation of $2.9 million also contributed to the total .

Interest expense decreased $7.1 million in 2021 compared to 2020 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 that previously had been allocated to equity.

This decrease was partially offset by the increase in interest incurred related to the issuance of the 2026 Notes in August and September 2020.

For more information regarding our debt and our unsecured convertible notes (see Part II, Item 8, “Note 8 - Unsecured Convertible Senior Notes”).

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We recorded a $13.4 million loss on early extinguishment of debt related to the unamortized discount and issuance costs related to the repurchase.

Interest and other income

Year Ended December 31,

(In thousands)

Other income principally includes sublease rental income and interest earned on our cash and investments.

The variations between years is primarily due to $0.8 million of expenses incurred in 2020 in connection with terminating the portion of the capped call related to the 2023 Notes that we repurchased.

Interest and other income

The $2.3 million increase in interest and other income between 2022 and the prior year was primarily attributable to obtaining significantly higher interest rates on our cash and investments in 2022.

Overall interest earned in 2021 and 2020 related to our investments were comparable;

however, in 2020, we incurred $0.8 million of expenses in connection with terminating the portion of the capped call related to the 2023 Notes that we repurchased.

Income Tax Benefit

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Income tax benefit

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.

In January 2021, the Company prospectively adopted ASU 2019-12, Income Taxes (Topic 740), which 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.

We reclassified the tax benefit of income from discontinued operations in periods prior to 2021 to offset losses from continuing operations.

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:

As a result of the OMIDRIA divestiture, the results of OMIDRIA operations have been reclassified to discontinued operations.

Net income from OMIDRIA discontinued operations, net of tax is shown below:

Year Ended December 31,

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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

Gain on sale of OMIDRIA

Milestone income

Interest on OMIDRIA contract royalty asset

Remeasurement adjustments

Income before income tax

Income tax expense (1)

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.

(1) For further discussion of income tax expense, please refer to Part II, Item 8, “Note 14 – Income Taxes ” to our Consolidated Financial Statements in this Annual Report on Form 10-K.

Product Sales, Net

Product sales, net increased $36.9 million between 2021 and the prior year.

Cataract surgery procedures were severely limited during the second quarter of 2020 due to COVID-19.

Additionally, Medicare Part B separate payment for OMIDRIA expired on October 1, 2020 and was not reinstated until December 2020.

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)

The overall percentage deductions to OMIDRIA sales were 29.9% and 31.2% for the years ended December 31, 2021 and 2020, respectively.

Gain on the sale of OMIDRIA

Discontinued operations in 2021 included a gain on the sale of OMIDRIA comprised as follows (in thousands):

Cash proceeds

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Transaction and closing costs

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

Restricted Stock Units 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.

Gain on sale of OMIDRIA

On December 23, 2021, we completed the sale of OMIDRIA to Rayner and received $126.0 million in cash at the closing.

Additionally, we recorded an OMIDRIA contract royalty asset of $184.6 million for the rights to receive future royalties from Rayner on OMIDRIA net sales.

The sale of OMIDRIA qualified as an asset sale under GAAP.

Milestone Income

The milestone event, as defined in the Asset Purchase Agreement, occurred in December 2022, entitling us to receive a Milestone Payment of $200.0 million from Rayner.

As a result of this triggering event, we recognized $200.0 million of OMIDRIA milestone income in discontinued operations in December 2022.

We received from Rayner the Milestone Payment together with accrued interest in February 2023.

Interest Income

During the year ended December 31, 2022, we recorded $18.6 million of income in discontinued operations, representing interest income on the outstanding OMIDRIA contract royalty asset at an implied interest rate of 11.0%.

Remeasurement Adjustments

The $14.5 million remeasurement adjustment was primarily due to reducing the royalty rate applicable to U.S.

net sales of OMIDRIA from 50% to 30% on the occurrence of the milestone-triggering event and to an increase in the OMIDRIA net sales assumptions.

Income Tax Expense

For the year ended December 31, 2022, we recorded state income tax expense of $4.0 million, which could not be offset by prior period net operating losses and tax credit carryforwards.

OMIDRIA Contract Royalty Asset

The following schedule presents a rollforward of the OMIDRIA contract royalty asset (in thousands):

OMIDRIA contract royalty asset at December 31, 2021

Royalties earned

Interest on OMIDRIA contract royalty asset

Remeasurement adjustments

OMIDRIA contract royalty asset at December 31, 2022

Rayner’s U.S.

net sales of OMIDRIA for the year ended December 31, 2022 were $130.9 million.

We earned royalties of $65.4 million on OMIDRIA net sales which we recorded as a reduction from the OMIDRIA contract royalty asset.

On the occurrence of the milestone event in December 2022, the royalty rate on U.S.

net sales of OMIDRIA was reduced from 50% to 30%.

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.

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.

As of December 31, 2022, we had cash, cash equivalents and short-term investments of $194.9 million and outstanding accounts receivable of $213.2 million, substantially all of which have since been collected .

For the year ended December 31, 2022, our cash used in operations was $86.5 million and our net income was $47.4 million, which includes the $200.0 million Milestone Payment.

We have $95.0 million of 2023 Notes that will mature and become due in November 2023.

Unless the debt is repurchased or converted to equity at or prior to maturity, we plan to fund the repayment of the 2023 Notes through a combination of cash on hand, cash generated from operations, strategic transactions, sales of stock or through issuance of additional debt .

From time to time, we may repurchase our outstanding notes in open market or through privately-negotiated transactions.

Historically, we have incurred net losses from continuing operations and negative operating cash flows.

We have not yet established an ongoing source of revenue sufficient to cover our operating costs and, therefore, we could need to continue to raise additional capital to accomplish our business plan and to retire our outstanding convertible senior notes due in 2026.

We plan to continue to fund our operations for at least the next twelve months with our existing cash and investments and our accounts receivable.

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

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 equaling an aggregate amount 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.

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

Cash Flow Data

Year Ended December 31,

(In thousands)

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Operating Activities.

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.

Net cash used in operating activities for the year ended December 31, 2022 decreased by $23.2 million compared to the same period in 2021.

This change was primarily due to a decrease in net income of $146.8 million as we recognized $310.6 million of non-cash gain from the sale of OMIDRIA in the prior year and to a change in cash collections of $124.7 million through accounts receivables and royalty earnings.

This was offset by a $200.0 million milestone receivable recognized in 2022 as well as $35.6 million in non-cash charges and $29.7 million of accounts payable, accrued expenses and other.

N et 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 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.

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.

Net cash provided by investing activities decreased $321.3 million during 2022 compared to 2021.

This was driven by a $194.5 million decrease in net proceeds from the purchase and sale of investments and recognizing $126.0 million in proceeds from the sale of OMIDRIA in 2021 .

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

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

Financing Activities.

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.

Convertible Notes

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 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 8—Line of Credit”).

Net cash provided by financing activities increased $117.9 million during 2022 compared to the prior year.

The increase was primarily due to receiving cash proceeds of $125.0 million in connection with the sale of a portion of our OMIDRIA royalties to DRI, which was partially offset by a reduction in stock option exercises of $8.0 million during 2022.

Net cash provided by financing activities during 2021 decreased $168.2 million as compared to 2020.

The decrease was due to receiving cash proceeds during 2020 of $76.9 million, net, from the issuance of our 2026 Notes, which included payments for the 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, in August 2020, we received net proceeds of $93.7 million from our public offering of our common stock.

Contractual Obligations and Commitments

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The initial term of the lease ends in November 2027 and we have two options to extend the lease term, each by five years.

As of December 31, 2022, the remaining aggregate non-cancelable rent payable under the initial term of the lease, excluding common area maintenance and related operating expenses, was $33.7 million.

We lease office and laboratory equipment under various operating and finance lease agreements with initial terms of five years or less.

As of December 31, 2021, the remaining aggregate non-cancelable rent payable under the initial term of the lease, excluding common area maintenance and related operating expenses, is $42.9 million.

Convertible Notes

Refer to “Financial Condition—Liquidity and Capital Resources—Convertible Notes” above.

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

OMIDRIA Royalty Obligation

For more information regarding the OMIDRIA Royalty Obligation, see Part II, Item 8, “Note 9 - OMIDRIA Royalty Obligation”.

Goods & Services

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.

As of December 31, 2022, our aggregate firm commitments were $24.2 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.

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● OMIDRIA royalties and contract asset accounting;

● OMIDRIA royalty obligation accounting;

● research and development expenses related to clinical trials;

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If actual results or events differ materially from those contemplated by us in making these estimates, our reported financial condition and results of operations for future periods could be materially affected.

Revenue Recognition

Product Sales, Net:

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.

Accruals or allowances are established for these deductions in the same period when revenue is recognized, and actual amounts incurred are offset against the applicable accruals or allowances.

We reflect each of these accruals or allowances as either a reduction in the related accounts receivable or as an accrued liability depending on how the amount is expected to be settled.

Chargebacks and Rebates:

Provisions for chargebacks are determined utilizing historical and projected payer mix and information regarding sell-through and inventory on-hand received directly from wholesalers.

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 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.

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.

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

We allow for the return of product up to 12 months past its expiration date or for product that is damaged.

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.

Product Revenue Recognition

Prior to the December 23, 2021 sale of OMIDRIA to Rayner, we recorded revenue from product sales when the product was delivered to our wholesalers and title for the product was transferred.

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

Accruals or allowances were established for these deductions in the same period when revenue was recognized, and actual amounts incurred were offset against the applicable accruals or allowances.

We reflected each of these accruals or allowances as either a reduction in the related accounts receivable or as an accrued liability depending on how the amount was expected to be settled.

OMIDRIA Royalties, Milestones and Contract Royalty Assets

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.

To measure the OMIDRIA contract royalty asset, we used the expected value approach which is the discounted sum of probability-weighted royalty payments, 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.

We revalued the contract royalty asset to reduce the applicable royalty percentage from 50% to 30%, as required under the Asset Purchase Agreement following the occurrence of the December 2022 event triggering the $200.0 million Milestone Payment.

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

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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.

All else being equal, a 10% increase or decrease in net sales results in a $15.2 million change in value of the OMIDRIA contract royalty asset, resulting in a potential contract royalty asset valued within the range of $137.0 million to $167.4 million.

Changes in net sales could occur due to various risks such as competitors entering the market, changes in the standard of care for cataract patients and loss of separate payment status for OMIDRIA.

In determining the value of the OMIDRIA contract royalty asset, we have considered all of 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.

Any required adjustment to the OMIDRIA contract royalty asset will be recorded in 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.

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

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.

OMIDRIA Royalty Obligations

The sale of any portion of our OMIDRIA royalty receipts is treated as a liability on our consolidated balance sheet to the extent that any of our royalties are capped, as this does not result in the transfer of a participating interest.

We amortize royalty obligation liabilities over the term of the arrangement using the effective interest method and classify interest expense as a component of continuing operations.

To the extent our estimates of future royalties are less than previous estimates, we will adjust the carrying amount of the royalty obligation to the present value of the revised estimated cash flows, discounted at the original effective interest rate of 9.4% utilizing the cumulative catch-up method.

The adjustment would be recognized as a component of net income (loss) from continuing operations.

Research and Development Expenses

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● 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 candidates.

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

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

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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.

We derived our incremental borrowing rate by assessing rates in recent market transactions, as adjusted for security interests and our credit quality.

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

We derive our incremental borrowing rate by assessing rates in recent market transactions, as adjusted for security interests and our credit quality.

Convertible Debt Issuances

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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.

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.

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Stock-based compensation expense is recognized for all share-based payments made to employees, directors and non-employees based on estimated fair values.

The fair value of our stock options is calculated using the Black-Scholes option valuation model, which requires assumptions, including volatility, forfeiture rates and expected option life.

The fair value of our stock options is calculated using the Black-Scholes valuation model, which requires assumptions regarding volatility, risk-free rates, forfeiture rates and expected option life.

We estimate forfeitures for expense recognition based on our historical experience.

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Recent Accounting Pronouncements

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.

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

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