OMEROS CORP 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. Overview Omeros Corporation (“Omeros,” the “Company” or “we”) is 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. Complement Programs: Lectin Pathway / MASP-2 ​ The lead drug candidate in our pipeline of complement-targeted therapeutics is narsoplimab (OMS721), a proprietary, patented human monoclonal antibody targeting mannan-binding lectin-associated serine protease 2 (“MASP-2”), the key activator of the lectin pathway of complement. Clinical development of narsoplimab is currently focused primarily on hematopoietic stem cell transplant-associated thrombotic microangiopathy (“HSCT-TMA”) and immunoglobulin A (“IgA”) nephropathy. ​ We expect to read out 36-week 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 the U.S. Food and Drug Administration (“FDA”) a biologics licensing application (“BLA”) seeking marketing approval for narsoplimab in this indication. In late 2021, FDA issued a complete response letter (“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 data and survival data from the completed pivotal trial versus a historical control group, with or without an independent literature analysis. We have submitted to the review division at FDA a proposed plan to assess already existing clinical trial data and external data on both response rate and survival and are scheduled to meet with the division to confirm the additional information required to be included in the resubmission to support approval of the BLA. There can be no guarantee that the specific requirements for resubmission, when determined through interaction with the FDA review division, will be satisfactory in terms of the time and/or expenditure required, and there can be no guarantee that any resubmission will result in approval of narsoplimab for HSCT-TMA. ​ We are also developing OMS1029, a long-acting, next-generation antibody targeting MASP-2 and the lectin pathway. Dosing of all cohorts in a single-ascending dose Phase 1 clinical trial of OMS1029 was successfully completed in early 2023. OMS1029 was well tolerated with no safety concerns identified. Preliminary pharmacokinetic (“PK”) and pharmacodynamic (“PD”) data show dose-proportional exposure and sustained lectin pathway inhibition, consistent with potentially quarterly intravenous or subcutaneous dosing. We expect to initiate this summer a Phase 1 multiple-ascending-dose study of OMS1029 in healthy subjects. Complement Programs: Alternative Pathway / MASP-3 ​ Our pipeline of clinical-stage complement-targeted therapeutic candidates also includes OMS906, a proprietary, patented monoclonal antibody targeting mannan-binding lectin-associated serine protease 3 (“MASP-3”), the key activator of 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 complement 3 glomerulopathy -21- Table of Contents (“C3G”), a rare chronic kidney disease, and paroxysmal nocturnal hemoglobinuria (“PNH”), a rare and life-threatening hemolytic blood disorder. ​ In April 2023, we announced positive results from a pre-specified interim analysis of our Phase 1b clinical trial of OMS906 in complement-inhibitor-naïve adults with PNH and, in May 2023, we announced updated data from the ongoing trial. Statistically significant and clinically meaningful improvements were observed in all measured markers of hemolysis, including hemoglobin and lactate dehydrogenase. No patients were reported to have had a clinical breakthrough of PNH or a thrombotic event, and none were reported to require a transfusion while receiving OMS906 treatment. Based on pharmacokinetic data from a successful Phase 1 single-ascending-dose study of OMS906 in healthy subjects and the interim data from our Phase 1b clinical trial in treatment-naïve PNH patients, we are planning a dosing frequency of once quarterly, either intravenously or subcutaneously. ​ We have two additional Phase 1b clinical programs ongoing. One, evaluating OMS906 in PNH patients who have had an unsatisfactory response to the C5 inhibitor ravulizumab, is enrolling and dosing of OMS906 has inititated. The second, also underway, is evaluating OMS906 in patients with C3G. ​ PDE7 Inhibitor Program ​ Our development pipeline also includes OMS527, our phosphodiesterase 7 (“PDE7”) inhibitor program focused on addiction and movement disorders. In April 2023, we were awarded a grant from the National Institute on Drug Abuse, part of the National Institutes of Health, to develop our lead orally administered PDE7 inhibitor compound, for which we have successfully completed a Phase 1 study, for the treatment of cocaine use disorder (“CUD”). The grant amount, a total of $6.69 million over three years, is intended to support preclinical cocaine interaction/toxicology studies to assess safety of the therapeutic candidate in the presence of concomitant cocaine administration, as well as an in-patient, placebo-controlled clinical study evaluating the safety and effectiveness of OMS527 in adults with CUD who receive concurrent intravenous cocaine. Investigators at Emory University are also evaluating OMS527 in a clinically predictive primate model of levodopa-induced dyskinesias, a common and debilitating side effect of long-term levodopa dosing in patients with Parkinson’s disease. Data will be publicly disclosed after the filing of patent applications, as appropriate. ​ Pre-clinical Programs ​ 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. ​ OMIDRIA ​ We previously developed and commercialized OMIDRIA ® (phenylephrine and ketorolac intraocular solution) 1%/0.3%, which is approved by FDA for use during cataract surgery or intraocular lens (“IOL”) replacement to maintain pupil size by preventing intraoperative miosis (pupil constriction) and to reduce postoperative ocular pain. We marketed OMIDRIA in the United States (the “U.S.”) from the time of its commercial launch in 2015 until December 2021. ​ On December 23, 2021, we sold our commercial product OMIDRIA and certain related assets, including inventory and prepaid expenses to Rayner Surgical Inc. (“Rayner”). Rayner paid us $126.0 million in cash at the closing and we retained all outstanding accounts receivable, accounts payable, and accrued expenses as of the closing date. ​ Under the Asset Purchase Agreement with Rayner (the “Asset Purchase Agreement”), we were entitled to receive a milestone payment of $200.0 million (the “Milestone Payment”) within 30 days following an event (the “Milestone Event”) that establishes separate payment for OMIDRIA for a continuous period of at least four years when furnished in the ambulatory surgery center (“ASC”) setting. The Milestone Event occurred in December 2022 and we recorded a $200.0 million milestone receivable. We received the Milestone Payment together with accrued interest in February 2023. -22- Table of Contents ​ Under the Asset Purchase Agreement, the occurrence of the Milestone Event in December 2022 triggered a reduction in the U.S. royalty rate from 50% to 30% on OMIDRIA net sales until the expiration or termination of the last issued and unexpired U.S. patent, which we expect to occur no earlier than 2033. 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 separate payment (i.e., included in the packaged payment rate for the surgical procedure) under Medicare Part B, the U.S. base royalty rate would be reduced to 10%. Pursuant to legislation enacted in late 2022, we expect separate payment for OMIDRIA under Medicare Part B to extend until at least January 1, 2028. On September 30, 2022, we sold to DRI Healthcare Acquisitions LP (“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 condensed 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. As of March 31, 2023, the maximum future payout that DRI is entitled to receive through the remaining term of the agreement is $183.5 million. The term of the agreement with DRI runs through December 31, 2030, and our payments to DRI will not total $125.0 million until August 2028 at the earliest. Financial Summary Our loss for the quarter ended March 31, 2023 was $33.7 million. As of March 31, 2023, we had cash, cash equivalents and short-term investments of $371.4 million and outstanding accounts receivable of $10.0 million available to fund operations and debt service. We have a $95.0 million principal payment due on our 2023 Notes which we expect -23- Table of Contents either to pay from our existing funds or to refinance. Our cash provided by operations for the quarter ended March 31, 2023 was $174.5 million which includes the collection of our $200.0 million Milestone Payment. Results of Operations Research and Development Expenses Our research and development expenses can be divided into three categories: direct external expenses, which include clinical research and development and preclinical research and development activities; internal, overhead and other expenses; 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. Costs are reported in preclinical research and development until the program enters the clinic. Internal, overhead and other expenses primarily consist of costs for personnel, overhead, rent, utilities and depreciation. The following table illustrates our expenses associated with these activities: ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ March 31, ​ 2023 2022 ​ ​ (In thousands) Continuing research and development expenses: ​ ​ ​ ​ ​ ​ Direct external expenses: ​ ​ ​ ​ ​ ​ Clinical research and development: ​ ​ MASP-2 program - OMS721 (narsoplimab) ​ $ 8,953 ​ $ 9,244 MASP-3 program - OMS906 ​ ​ 2,511 ​ ​ 1,302 MASP-2 program - OMS1029 ​ 1,320 ​ — Other ​ 44 ​ 127 Total clinical research and development ​ 12,828 ​ 10,673 Preclinical research and development ​ 909 ​ 2,744 Total direct external expenses ​ 13,737 ​ 13,417 Internal overhead and other expenses ​ 9,601 ​ 8,955 Stock-based compensation expenses ​ 1,272 ​ 1,715 Total continuing research and development expenses ​ $ 24,610 ​ $ 24,087 ​ Clinical research and development expenses increased $2.2 million for the three months ended March 31, 2023 compared to the prior year primarily due to bioanalytical laboratory, proof-of-concept and investigational site start-up expenses related to OMS906, and transitioning of OMS1029 from preclinical research and development to clinical research and development upon the initiation of human trials during the third quarter of 2022. The $1.8 million decrease in our preclinical research and development expenses for the three months ended March 31, 2023 as compared to the same period in 2022 is due primarily to the transitioning of OMS1029 from preclinical research and development to clinical research and development during the third quarter of 2022. Internal overhead and other expenses increased $0.6 million for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 due to additional employee-related costs. This increase was partially offset by the recognition of an employee retention tax credit from the Internal Revenue Service resulting from the passage and implementation of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act. The $0.4 million decrease in stock-based compensation for the three months ended March 31, 2023 compared to the same period in the prior year is due to the valuation and timing of the vesting of employee stock options. ​ We expect overall research and development costs will increase in the second quarter of 2023 compared to the first quarter of 2023 due to the timing of certain clinical and manufacturing activities. ​ -24- Table of Contents 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. Clinical development timelines, the probability of success and development costs can change 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 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. Selling, General and Administrative Expenses ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ March 31, ​ 2023 2022 ​ ​ (In thousands) Continuing selling, general and administrative expenses: ​ ​ ​ ​ ​ ​ Selling, general and administrative expenses, excluding stock-based compensation expense ​ $ 9,381 ​ $ 8,782 Stock-based compensation expense ​ 1,722 ​ 2,177 Total continuing selling, general and administrative expenses ​ $ 11,103 ​ $ 10,959 ​ Total selling, general and administrative expenses, excluding stock-based compensation, increased by $0.6 million for the three months ended March 31, 2023 compared to the same period in the prior year primarily due to additional employee-related costs. This increase was partially offset by recognition of an employee retention tax credit from the Internal Revenue Service resulting from the passage and implementation of the CARES Act. The $0.5 million decrease in stock-based compensation for the three months ended March 31, 2023 compared to the same period in the prior year is due to the valuation and timing of the vesting of employee stock options. We expect selling, general and administrative expenses in the second quarter of 2023 to be similar to the first quarter of this year. -25- Table of Contents Interest Expense ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ March 31, ​ 2023 2022 ​ ​ (In thousands) Interest expense ​ $ 7,933 ​ $ 4,941 Interest expense is primarily comprised of interest and amortization of debt discount and issuance costs related to our 2023 Notes and 2026 Notes and interest on our DRI royalty obligation (see “Note 7 - Unsecured Convertible Senior Notes” and “Note 8 – OMIDRIA Royalty Obligation” in the Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q). The $3.0 million increase in interest expense between the three months ended March 31, 2023 and 2022 is primarily due to interest earned on our OMIDRIA royalty obligation, which we entered into September 2022. We expect that interest expense for the second quarter of 2023 will be similar to that of the first quarter of this year. Interest and Other Income ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ March 31, ​ 2023 2022 ​ ​ (In thousands) Interest and other income ​ $ 3,963 ​ $ 493 ​ The $3.5 million increase in interest and other income is due to higher average cash and investment balances available to invest and higher market interest rates in the current year quarter. ​ The receipt of the $200.0 million Milestone Payment in February 2023 increases our average cash balance. We expect interest and other income for the second quarter will be similar to those of the first quarter of this year. Discontinued operations and OMIDRIA contract royalty asset Net income from OMIDRIA discontinued operations, net of tax is shown below: ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ March 31, ​ 2023 2022 ​ ​ (In thousands) Interest earned on OMIDRIA contract royalty asset ​ $ 3,925 ​ $ 4,838 Remeasurement adjustments ​ ​ 1,677 ​ ​ 2,158 Other income (expense), net ​ ​ 380 ​ ​ (513) Net income from discontinued operations, net of tax ​ $ 5,982 ​ $ 6,483 Interest is earned on the OMIDRIA contract royalty asset at at implied effective interest rate of 11.0%. The $0.9 million reduction in interest earned is due to the decrease in the balance of the OMIDRIA contract royalty asset. The $0.9 million decrease in the remeasurement adjustment between the three months ended March 31, 2023 and 2022 reflects the amount of royalties earned in excess of projections for the period and any change in discounted future royalty expectations. ​ -26- Table of Contents The following schedule presents a rollforward of the OMIDRIA contract royalty asset (in thousands): ​ ​ ​ ​ OMIDRIA contract royalty asset at December 31, 2022 ​ $ 152,222 Royalties earned ​ ​ (9,203) Interest earned on OMIDRIA contract royalty asset ​ ​ 3,925 Remeasurement adjustments ​ ​ 1,677 OMIDRIA contract royalty asset at March 31, 2023 ​ $ 148,621 ​ The occurrence of the Milestone Event in December 2022 triggered a reduction in the U.S. royalty rate from 50% to 30% on OMIDRIA net sales until the expiration or termination of the last issued and unexpired U.S. patent which we expect to occur no earlier than 2033. Financial Condition - Liquidity and Capital Resources As of March 31, 2023, we had cash, cash equivalents and short-term investments of $371.4 million and outstanding accounts receivable of $10.0 million. Our loss for the quarter ended March 31, 2023 was $33.7 million and our cash provided by operations was $174.5 million. Included in our cash provided by operations was the $200.0 million collection of the 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 and sales of stock or through issuance of additional debt . From time to time, we may repurchase our outstanding notes in the 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 the next twelve months with our existing cash and investments and our accounts receivable. If FDA approval is granted for narsoplimab for treatment of 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 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 ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ March 31, ​ 2023 2022 ​ ​ (In thousands) Selected cash flow data ​ ​ ​ ​ ​ ​ Cash provided by (used in): ​ ​ ​ ​ ​ ​ Operating activities ​ $ 174,539 ​ $ (15,193) Investing activities ​ $ (181,331) ​ $ (76,813) Financing activities ​ $ (388) ​ $ 161 ​ -27- Table of Contents Operating Activities. Net cash provided by operating activities for the three months ended March 31, 2023 increased by $189.7 million as compared to the same period in 2022. The increase was primarily due to a $181.3 million decrease in receivables due to the collection of our $200.0 million Milestone Payment and a $16.4 million change in accounts payables and accrued expenses. This was offset by $4.6 million decrease in cash received from royalty earnings, a $1.2 million increase in prepaids and $1.5 million of non-cash charges. ​ Investing Activities. Cash flows from investing activities primarily reflect cash used to purchase short-term investments and proceeds from the sale of short-term investments, thus causing a shift between our cash and cash equivalents and short-term investment balances. Because we manage our cash usage with respect to our total cash, cash equivalents and short-term investments, we do not consider fluctuations in cash flows from investing activities to be important to the understanding of our liquidity and capital resources. Net cash used in investing activities increased $104.5 million during the three months ended March 31, 2023 as compared to the same period in the prior year due to net purchases of short-term investments upon the receipt of the $200.0 million Milestone Payment. In the prior year quarter, net purchases of short-term investments included investing the proceeds from the sale of OMIDRIA. Financing Activities. Net cash used in financing activities during the three months ended March 31, 2023 increased $0.5 million compared to the same period in 2022 due to principal payments on our contract royalty obligation, partially offset by decreases in our principal payments on finance lease obligations and by stock option exercises in the prior year period. Contractual Obligations and Commitments Our future minimum contractual commitments and obligations were reported in our Annual Report on Form 10-K for the year ended December 31, 2022. Other than the following, our future minimum contractual obligations and commitments have not changed materially from the amounts previously reported. Operating Leases Our lease for our office and laboratory space ends in November 2027. We have two options to extend the lease term by five years each. In addition, we carry various finance lease obligations for laboratory equipment. As of March 31, 2023, the remaining aggregate non-cancelable rent payable under the initial term of the lease, excluding common area maintenance and related operating expenses, is $32.0 million. Convertible Notes See “Note 7 – Unsecured Convertible Senior Notes” in the Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q. OMIDRIA Royalty Obligation ​ See “Note 8 – OMIDRIA Royalty Obligation” in the Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q. Goods and Services We have certain other non-cancelable obligations under various agreements that relate to goods and services. As of March 31, 2023, our aggregate firm commitments were $26.1 million. We may be required, in connection with in-licensing or asset acquisition agreements, to make certain royalty and milestone payments. We cannot, at this time, determine when or if the related milestones will be achieved or whether the events triggering the commencement of payment obligations will occur. Therefore, such payments are not included in the amounts described above. -28- Table of Contents Critical Accounting Policies and Significant Judgments and Estimates Aside from using the catch-up method to account for our OMIDRIA royalty obligation (see “Note 2 – Significant Accounting Policies – OMIDRIA Royalty Obligation” in the Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q), there have not been any material changes in our critical accounting policies and significant judgments and estimates as disclosed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on March 13, 2023.