Omeros: Undervalued And Underloved, Shares Could Shine In 2019

Originally published 11/19/2018 on seekingalpha.com

Summary

  • Following a 20% decline after the Q3 earnings release, Omeros offers a significant opportunity for investors.

  • Shares have been volatile this year as the company works through issues surrounding its marketed drug Omidria, however 2019 could be a transformative year.

  • The company’s recent convertible debt offering removes funding concerns and advantageous terms allow for minimal dilution.

Omeros (OMER) may be one of the best kept secrets in biotech. The Seattle firm, with a market cap of approximately $640 million, has a marketed drug with $120 million in potential 2019 sales, a leading drug in multiple late-stage clinical trials with Orphan Drug Designation, as well as a deep early-stage clinical pipeline. Shares have had a rocky 2018, but with several catalysts on the horizon, 2019 could be a stellar year for Omeros.

Founded in 1994 by Chairman and CEO, Greg Demopulos, Omeros has focused on small-molecule and protein therapeutics. Omeros’ current clinical pipeline is largely centered around the company’s extensive database of MASP-2 and MASP-3 inhibitors. With one drug already marketed, Omeros looks poised to develop its extensive pipeline without needing to significantly dilute shareholders, leading to outsized returns for investors.

Omidria: Clinical Results

Approved in June 2014, and marketed towards eye surgeries in both adults and children, Omidria is the only FDA-approved intraocular product to prevent miosis and reduce post-operative pain. Omidria has proven to provide a better experience for both the surgeon and the patient.

Miosis is a condition that occurs approximately 45% of the time during surgery, leading to a constricted pupil. Small pupils can increase the risk of complications multiple-fold during surgery. As an example, a reduction in eye diameter from 8mm to 6mm (the threshold used for inter-operative miosis), can result in an approximate 50% reduction in the operative field. Omidria has shown to have a significant anti-miotic effect, reducing the incidence rate to just 6%, a measurement that has been substantiated by multiple independent studies.

Omidria showed significant post-operative pain reduction as well.

  • Patients experiencing moderate-to-severe pain was reduced by 50% to 7%

  • Patients reporting that they were pain-free increased from 17% to 26%

  • Patients using pain medication was reduced by approximately 30%

Studies conducted since the launch of Omidria have validated the efficacy of Omidria with statistically significant reduction in complications due to small pupils, decrease in use of pupil-expanding devices, and reduced surgical times.

Omidria: Sales Uptake

Omidria, priced at $466 a dose, can represent a significant portion of the medical expenses incurred during surgery, and in some cases can increase the cost of the procedure in excess of 40%. Due to its efficacy, Omidria was awarded Pass-Through Status by the CMS (Centers for Medicare & Medicaid Services) on January 1, 2015. Pass-Through was initially granted for two years and would allow for full reimbursement of Omidria by patients with Medicare in the United States.

Gaining Pass-Through Status was a critical win for Omeros as it allowed Omidria to be cost-competitive with the current standard of care. Despite that, initial sales of Omidria proved disappointing as management claimed that surgeons were reluctant to use a new drug in such a commonplace surgery. Since then, Omidria experienced accelerating growth, reaching an annualized run rate of more than $100 million by Q4 2017.

As noted by Dr. Demopulos on the Q2 2017 Conference Call:

"With expanding utilization of OMIDRIA, more and more surgeons, nurses, administrators and patients are experiencing firsthand, the clinical benefits that the drug provides. The growing enthusiasm for OMIDRIA within the ophthalmic surgery community is palpable.

At recent ophthalmology conferences, including the annual meetings of the American Society of Cataract and Refractive Surgery and of the American European Congress of Ophthalmic Surgery, surgeons and administrators who even recently were overtly critical of the product became strong advocates after using OMIDRIA, speaking publicly of its importance to their practices and to their patients."

Omidria had hit its inflection point, and sales were accelerating, however, with Pass-Through Status expiring at the end of 2017, all that recent progress was thrown into jeopardy.

Omidria: The Pass-Through Calamity

Omeros had been intent on securing continued CMS reimbursement to continue to take share in Omidria’s target market and to fund the development of its pipeline. However, the company was unable to do so by the expiration on December 31, 2017, prompting worries over the sustainability of sales. During the fourth quarter earnings release, fears were confirmed as sales collapsed and management projected minimal sales unless Pass-Through Status could be reattained.

From the expiration of Pass-Through Status to the fourth quarter earnings release, the share price of Omeros had been decimated by approximately 50% prompting liquidity concerns as well as a possible breach of Omeros’ loan covenants with CRG Capital (More on that below).

Despite that, Omeros was able to secure Pass-Through Extension beginning October 1, 2018, for a further two years. In addition to that, Greg Demopulos reaffirmed his optimism to securing Permanent Separate Payment by October 2020, when the Pass-Through Extension would expire. Omeros has argued that the drug qualifies as a part of the CMS Permanent Separate Payment for FDA-approved non-opioid pain relief drugs.

Omidria: Future Growth

Following the Q3 2018 earnings release, Omeros stated that uptake of Omidria in October (the first month the drug was available under CMS Pass-Through Extension) had reached 81% of October 2017 sell-through volume, which was the highest monthly volume to date. Based on the strong results, sales will likely be similar to 2017, however Omeros has directed significant marketing efforts towards spreading awareness of Omidria and the Pass-Through Extension to reinvigorate product growth.

Omidria’s patents expire in 2033, and Omeros has favorably resolved all litigation from generic manufacturers. Under the terms of agreements, generic manufacturers cannot produce generic versions of Omidria prior to the final expiration of Omidria’s patents in 2033.

In a third-party survey conducted in Q1 2017, it was estimated that Omeros had approximately 8% market share of cataract procedures in the United States, at a run rate of approximately $65 million annually, implying a total market potential of $800 million for cataract procedures in the United States. If Omeros can secure Permanent Separate Payment, that market share will likely significantly increase as hospitals and medical staff will gain further visibility into having reimbursement available for the use of Omidria. If that were to happen, there is a strong possibility for Omidria to eventually reach several hundred million in sales per year in the United States as the drug becomes standard-of-care.

Omeros has also secured approval for Omidria by the EMA, though sales to Europe remain minimal. Europe offers a significant opportunity for future growth, however, with Omeros’ focus on rebuilding volumes in the United States and OMS721, sales growth will likely not come until several years in the future when the company can focus on international opportunities, or Omeros partners with an international firm to grow sales volumes.

OMS721: The Crown Jewel

OMS721, a MASP-2 Antibody, is Omeros’ crown jewel. The drug binds to and inhibits a MASP-2 enzyme in the Lectin pathway, which has been shown to contribute to significant tissue injury. OMS721 is currently in late stage clinical trials for 3 different indications: Stem Cell TMA, IgA Nephropathy, and Atypical Hemolytic Uremic Syndrome.

OMS721 has also been granted numerous designations by both the FDA and EMA across all indications, helping to de-risk the pipeline, while also streamlining the approval process. The table below shows the different designations awarded to OMS721 for their respective indications.

IndicationExpedited ApprovalOrphan Drug Designation

HSCT-TMAFDAFDAEMA

IgA NephropathyFDAFDAEMA

aHUSFDAFDA

(Please note that expedited approval consists of both Breakthrough Designation and Fast Track Designation)

It is important to note that Omeros owns worldwide exclusivity on all MASP-2 inhibition. This means that only Omeros has the ability to develop and market drugs which use the MASP-2 enzyme within the Lectin Pathway, offering significant potential for further discoveries.

OMS721: HSCT-TMA

Hematopoietic stem cell transplantation (HSCT)-associated thrombotic microangiopathy (TMA) is a severe and potentially fatal complication of stem cell transplantation and has an incidence rate as high as 40% of recipients. This is typically caused by endothelial injury due to stem cell transplant, similar to conditions that can lead to Graft vs Host Disease. In 2015, more than 20,000 stem cell transplants were performed in the U.S., with another approximate 40,000 performed in Europe.

Mortality in patients that contract TMA can be over 90%, often occurring within only a few months. There are no currently approved treatments for HSCT-TMA, however Omeros has received Breakthrough Therapy Designation for high-risk patients, those who have persistent TMA despite immunosuppressive therapy. OMS721 has also received Orphan Drug Designation from both the FDA and EMA for the treatment of TMA.

Omeros’ ongoing Phase 2 study results from 19 patients showed an order-of-magnitude increase in median overall survival, with 100-day survival of 53% compared to a historical control of 10%. In addition to that, OMS721 showed strong improvement in a range of biomarkers, with no safety concerns identified. These are quite impressive results, especially given the background of the disease. With current cost of care often exceeding $1 million per patient, and $3 million for high-risk patients, OMS721 offers the potential to significantly extend the life expectancy of patients at a much lower cost.

Omeros has met multiple times with the FDA and EU to discuss conditional, accelerated, and full approval. Based on the strong findings, Dr. Demopulos revealed that the EMA has asked Omeros to apply for full approval of OMS721 for HSCT-TMA. From the Q3 earnings release, Omeros stated their intent to file a marketing application for full approval, with the non-clinical portion of the submission to be complete by year-end 2018. If the company files their application in Q1 2019, full approval would likely be granted by the EMA by Q3 2019.

In the United States, Omeros has met multiple times with the FDA to discuss Conditional and Full Approval. While the timeline for filing is less clear than with the EMA, I estimate it will likely not be far behind, and will probably be complete by Q2 2019.

As a reminder, OMS721 for HSCT-TMA has been granted both Orphan Drug Designation and Breakthrough Designation, granting OMS721 a 7-year marketing exclusivity for the indication upon approval. I want to emphasize that it is highly unusual to see such positive commentary from multiple medical agencies and helps to greatly de-risk the HSCT-TMA approval process.

OMS721: IgA Nephropathy

IgA Nephropathy (IgAN) is a condition that cause inflammation and progressive kidney disease. It is estimated to currently be responsible for 10% of all patients on dialysis. Up to 40% of patients that have IgA Nephropathy will develop end-stage renal disease and require dialysis. There are currently no approved treatments for IgAN, and it affects approximately 175,000 across both the United States and EU. Interestingly, IgA Nephropathy has been seen to have a higher incidence rate in Asian populations, though there has been no direct to study to examine patient population size.

Omeros has completed a Phase 2 trial and a secondary cohort study for IgA Nephropathy and is currently enrolling for their Phase 3 trial.

The initial results from the Phase 2 trial showed a significant treatment effect in IgAN in reduction of both uACR and Proteinuria. uACR, a measurement of urine albumin, showed an average decrease of 77% across the 4 patients, with sustained reductions being seen in follow-up periods. Proteinuria, a measurement of urinary protein, saw a significant decline across all patients. In addition, steroids were able to be eliminated for all patients.

IgA Nephropathy: Confusion over Second Cohort Results

Omeros shares fell significantly after the release of the second cohort results, however, this reaction was unwarranted, and instead, improved the thesis behind the treatment of OMS721 for IgA Nephropathy. The second cohort of the Phase 2 trial was designed as an exploratory study comparing safety and efficacy in patients taking OMS721 without steroid treatment, compared to the first cohort which included treatment with steroids. Patients were randomized between OMS721 or placebo for 12 weeks, and then at physician discretion, were given a further 12 weeks of OMS721 dosing following a 6-week follow-up period.

Results continued to show the strength of OMS721, as Proteinuria saw an 18% decline after the initial 18-week period (12-week treatment followed by 6-week follow up). Interestingly, the placebo group showed a similar reduction in Proteinuria of 18%. Out of the initial 12 patients in the second cohort, 8 patients, a mix of placebo and OMS721, were enrolled in the 12-week follow-up treatment. Results showed a median reduction of 56%, similar to the magnitude of reduction seen in the first cohort.

More importantly, the study was not built to directly compare the results between the placebo and treatment groups. In addition, the results showed the efficacy of OMS721 both with and without additional steroid treatment. There were also significant population differences between the placebo and treatment groups. On average, the treatment group had patients that were significantly older (50 years old vs 33 in the placebo group), a longer time since diagnosis (19 years vs 9 years) and had a higher Proteinuria level (2.9g/day vs 2.5g/day). Since IgA Nephropathy steadily degrades kidney function over time, it is remarkable to see such a significant response level from the OMS721 treatment.

Shares likely fell due to the headline numbers of similar reduction in Proteinuria levels between the placebo and treatment groups. Investors likely saw this as a signal that OMS721 had no efficacy in IgA Nephropathy, or that it was not as strong as the first cohort had led them to believe. However, based on the findings, as well as the circumstantial evidence, results were much stronger than they appeared, and continued to support the efficacy of OMS721.

Omeros had received clearance from the FDA to proceed with a Phase 3 trial prior to the release of the findings from the second cohort, based solely off the data of the first cohort. In addition, Omeros has been granted Breakthrough Designation from the FDA, as well as Orphan Drug Designation from both the FDA and EMA for IgA Nephropathy. The trial is currently enrolling and offers multiple paths to full approval.

Omeros can obtain full and accelerated approval based solely off Proteinuria reduction, a measurement that OMS721 showed significant efficacy in from both cohorts. The trial also includes a high-proteinuria sub-group and allows for full approval if robust efficacy is shown in either the sub-group or full population. Simplified, OMS721 could show robust efficacy only in the high-proteinuria sub-group and still receive full approval.

OMS721: aHUS

OMS721 has been approved for a Phase 3 trial in Atypical Hemolytic Uremic Syndrome, a genetic disorder that leads to blood-clot kidney failure and high blood pressure. The Phase 2 trial showed improvements across a range of markers and three patients were able to discontinue dialysis.

Omeros has been granted fast track and orphan designation from the FDA, and the Phase 3. Both the FDA and EMA have agreed to allow the trial design to use a single-arm open-label study, without the need for a control group. 40 patients are needed for EMA full and US accelerated approval, with 80 patients needed for full US approval.

aHUS is currently treated by Alexion’s (ALXN) Soliris, a drug which has the notoriety of being the most expensive drug ever marketed in the United States. Soliris offers a poor treatment compared to the potential of OMS721 as it leads to anemia, destroying red blood cells, which can lead to a weakened immune system and increase in blood complications. OMS721, on the other hand, has been well tolerated and offers a good safety profile, and would likely be priced at a significant reduction to Soliris.

Omeros will likely follow a similar filing package to that which was used as the basis for approval of Soliris in the United States. Even though the Phase 2 trial was presented in April 2017, trial enrollment has been slow. This is likely due to difficulty in recruiting patients from such a small population, as well as Omeros focusing on its other two OMS721 programs which are significantly closer to approval and would allow for Omeros to have market exclusivity in those indications. Omeros will initiate a Phase 3 trial in aHUS in the future, but the timeline is unclear.

OMS527: Combating Addiction

Omeros recently began Phase 1 trials for addiction using its OMS527 PDE7 inhibitor drug. PDE7 inhibition has been shown to reduce both craving and relapse within the dopamine system. The operative mechanism has been shown to be highly conserved between both humans and rodents, with significant effects observed in models of nicotine, cocaine, alcohol, and opioid addiction. Models have shown significant decreases in the self-administration, stress-induced relapse, and reduced effect from nicotine-induced increased dopamine levels. OMS527 has the potential to reduce relapse and self-administration from addiction, without dampening overall dopamine levels, a critical factor behind ensuring compliance.

The Phase 1 trial is designed to assess the safety and behavior of OMS527 across a range of formulations and doses. Dosing has been completed in all six cohorts and the trial is expected to be complete in the first half of 2019. Initial data indicates the potential for once-daily dosing and has been well tolerated so far.

Depending on the results from the Phase 1 trial, Nicotine addiction was selected as the initial indication for the Phase 2 trial based on prevalence of the condition and existing studies in the space. Pfizer’s (PFE) Chantix provides a roadmap for clinical developments and Omeros is targeting Phase 2a trials to begin in the second half of 2019. For example, Chantix showed an abstinence rate of less than 15% at 1 year, offering OMS527 significant opportunity to show efficacy.

MASP-3 Program

Behind OMS721 and OMS527, Omeros has a deep exploratory pipeline. Omeros has identified MASP-3 as a key activator of the alternative pathway, and similar to MASP-2, Omeros has exclusive intellectual property ownership surrounding MASP-3 inhibition. Omeros’ lead MASP-3 drug, OMS906 has been shown to have robust effects in paroxysmal nocturnal hemoglobinuria (PNH) and is targeting clinical trials to begin in late 2019 or early 2020.

Alexion’s Soliris is the only approved drug for PNH, and Omeros expects that OMS906’s method of activation will be able to show improvements in safety, dosing, and efficacy, over that of Soliris.

GPCR Program

Omeros believes that it exclusively controls 54 different GPCRs (G protein-coupled receptors) with broad-ranging applications. Omeros is initially targeting two GPCRs, GPR161 and GPR 174. GPR161 is believed to play a critical role in tumor formation in triple-negative breast cancer and sarcomas, and by regulating GPR161, tumor risk can be reduced or eliminated.

GPR174 is believed to be a unique target for cancer immunotherapy. In human tissue, inhibition of GPR174 increases tumor-killing cytokine (proteins that are important in cell signaling) levels, while also suppressing tumor-protecting T cells and molecules. Omeros is currently assessing the impact in animal models on colon cancer and melanoma.

Management

Dr. Greg Demopulos has been at the helm of Omeros since its inception and owns approximately 8.6% of the total shares outstanding. All told, management owns just over 12% of shares outstanding, ensuring their interests align with those of shareholders.

The most recent change to the management team was the hiring of Sanofi’s Global Head of Development, Eckhard Leifke, to replace Steven Whitaker as Omeros’ Chief Medical Officer. Whitaker will focus on the development of OMS721, whereas Leifke’s diverse background positions him well to direct Omeros’ clinical efforts.

Funding

Omeros, and by extension, Greg Demopulos, have been reluctant to dilute shareholders unlike many other clinical-stage pharmaceutical companies, allowing Omeros to keep its share count low. In addition, Omeros has been reluctant to seek or engage in partnerships, preserving the economic interests with Omeros, but sacrificing the international validation and funding that a partnership can bring.

Until now, Omeros has been relying on Omidria, occasional share offerings, and a loan from CRG Capital to sustain its clinical efforts and ultimately bring OMS721 to market. Given the potential markets for OMS721, once sales begin to grow, Omeros will not need to dilute shareholders any further. As of September 30, Omeros had $55.2 million in cash with another $5.8 million in restricted investments tied to the company’s CRG Loan.

The CRG Loan currently stands at just over $132 million, carrying a hefty 12.25% interest rate, and matures in September 2022. With $61 million in cash, quarterly operating expenses at $35 million and rising, and an interest expense of $4.5 million, Omeros was relying on Omidria sales growing significantly enough to be able to carry the company until OMS721 was approved. At the current cash burn rate, and even if Omidria sales averaged $25 million per quarter, a higher level than reached in Q4 2017, Omidria’s best quarter, there would still be only enough cash to sustain the company for another three quarters. Since the share price has been hammered over the past two months, and Greg’s reluctance to dilute shareholders, a share offering was unlikely though may have been necessary. Luckily for Omeros, a solution was revealed with the Q3 earnings release.

The Convertible Debt Financing Deal

On November 9, Omeros announced a $210 million convertible debt offering due 2023. On the Q3 conference call, Greg revealed that Omeros was approached by the group of lenders, a strong vote of confidence that Omeros can secure attractive financing options. Under the terms of the agreement, the convertible debt carries an interest rate of 6.25% and a conversion price of $19.22. At first glance, this deal looks to significantly cap the upside of the stock as there would potentially be a 22% dilution if the stock crossed $19, however, Omeros built in several factors to minimize dilution.

Following the closing of the convertible debt offering, Omeros received net proceeds of $203.2 million. Of that amount, $146.0 million was used to repay the CRG Loan and all associated fees, with another $33.2 million used for the "capped call" transaction.

The beauty of the deal comes from the repayment terms. Omeros entered into a “capped call” transaction with RBC (RY) effectively increasing the conversion price from $19.22 to $28.84, more than 100% higher from recent prices. In addition, Omeros has sole discretion and ability to repay the debt beginning November 15, 2019 and can choose when to redeem the notes either in cash or stock. Omeros now has an additional $25 million, cut the interest expense by 30%, and can choose to repay at will beginning November 2019 in cash or stock.

Valuation

Omeros carries an Enterprise Value of approximately $765 million following the Convertible Debt Offering. This is comprised of 49 million shares at $13.00, $85 million in cash, and $210 million in debt. Quarterly operating expenses are running at $35 million and will likely climb closer to $40 million over the next year as the company focuses on clinical development and begins production of OMS721.

I project Omidria revenues to be approximately $20 million for the fourth quarter. Following that, I estimate that Omidria revenue will grow approximately 10-15% Q/Q and accelerate closer to its historical growth rate of 20% as Omidria becomes reestablished. Those estimates are based off comments stating that October 2018 Omidria volume was 81% of October 2017 and using a reduced growth rate from that exhibited prior to Pass-Through expiry to reflect any possible challenges rebuilding the revenue base.

Using those estimates, Omeros will likely continue to burn approximately $15-20 million per quarter. With the new financing provided by the convertible debt deal, the company will have approximately $85 million in cash, following repayment of the CRG Loan and the "capped call" transaction. This would provide enough funding through the end of 2019 before Omeros would need to seek additional financing.

The table below shows potential cash burn through 2019 following the Convertible Debt Offering. This assumes that OMS721 will not be marketed in 2019, even if it receives regulatory approval in 2019.

 

(Source: Author; Please note revenue and cash are skewed in Q3 2018 due to Convertible Debt Offering and Pass-Through Extension beginning October 1, 2018)

If operating expenses can be kept to a similar level as Q3 2018 over the next year, Omeros has the potential to become cash flow breakeven in early 2020 solely off of Omidria. If OMS721 can begin to be marketed in 2019, then that breakeven point moves much closer.

Potential Market Size

On the Q3 earnings conference call, Dr. Demopulos stated that he approximates the market potential for high-risk HSCT-TMA between 6,000 and 9,000 patients. With Orphan Drug Designation and current cost of care running in the millions, OMS721 could reasonably be priced in the $200k to $300k range and not face significant backlash from insurers. Using an average estimate of 7,500 patients at approximately $250,000, the potential market size is $1.9 billion. Given the lack of alternative options, sales growth would likely be quite rapid. In addition, during clinical trials, OMS721 was seen to improve the condition of other endothelial injuries, potentially opening the market to include other conditions such as Graft-vs-Host Disease.

It is harder to estimate potential market size for IgA Nephropathy given that there are approximately 300,000 people between the United States and Europe, not including Asia which has a higher incidence rate. Given that there is no currently approved treatment, there would be ample room for OMS721 to be used in a significant portion of patients. If we assume that only 10% of patients will use OMS721, that leads to approximately 30,000 individuals between the United States and Europe. If we take the same pricing from HSCT-TMA, $250,000, that would yield a potential market of $7.5 billion. Keep in mind that that number does not include the market potential in Asia, and estimates could be significantly higher as the company comes closer to filing for approval.

aHUS would likely have a market potential around $1 billion based off current sales by Soliris and using the previous $250,000 price point. This would likely be the slowest growing indication as Omeros would have to compete against Soliris, which has a much longer history of treatment than OMS721 for aHUS.

The company’s early stage pipeline, OMS527, MASP-3, and GPCR programs carry significant potential value, however given how far they are from marketing, minimal value can be currently assigned to them.

Source: Author

Based solely off OMS721, Omeros has potentially $10.4 billion in market potential, a number which could prove to be very conservative if the drug is approved for additional indications or see expanded use to lower risk patients. If Omidria can garner Permanent Pass-Through Reimbursement, the market potential could be in the hundreds of millions before the arrival of any generic competition, bringing the total market potential closer to $11.5 billion.

All told, Omeros offers a significant value proposition for investors if the company execute across its portfolio. Based on sum-of-the-parts, I believe that the current fair value is approximately $60/share, and could be significantly higher if the dilution risk can be negated as well as accelerating the timeline to bring OMS721 to market.

$60/share would give Omeros a market cap of approximately $3 billion, and is based on:

4x 2019 Omidria Sales: $120 million$480 Million

0.4x HSCT-TMA Peak Potential Sales$760 Million

0.2x IgA Nephropathy Peak Potential Sales$1.5 Billion

0.1x aHUS Peak Potential Sales$100 Million

OMS527$50 Million

Early Stage Pipeline$50 Million

Total$2,900 Million

Shares Outstanding (9/30/2018)49 Million

Price Target

$60.00

Source: Author

I view the above target to be quite conservative, as a higher multiple on OMS721 sales could easily be unlocked if Omeros is able to secure approval. It would not be unreasonable to value OMS721 at 8-10x sales once the drug secures approval given the Orphan Drug Designation, as well as two of the three indications having no approved treatments. All told, there are several routes to a significantly higher valuation.

Risks

The primary risk to the thesis is if OMS721 is unable to secure approval or one of its late stage studies fails. That could seriously impact the potential earnings power of the company, as well as financial flexibility in the short-term.

As my cash burn estimates from above showed, there is little room for error. If Omidria sales fail to garner the growth they have been previously, Omeros could be looking at needing an additional $100-200 million in financing to secure their operational ability over the next several years. At current prices, that could represent a 20% dilution to current shareholders, not including likely price declines if the company fails to execute.

Greg has shown a reluctance to enter into any agreements which could be seen as potential dilution to shareholders, including partnership agreements and share offerings. While this ensures that the economic benefits stay concentrated with Omeros’ existing shareholders, one could argue that his behavior is somewhat reckless given the large funding requirements of the pipeline. While Omeros has successfully navigated bringing OMS721 to the final stages of clinical trials with minimal dilution, any additional financing deals could prove a difficult pill to swallow.

The company will likely view themselves as being close to approval, and will abstain from further dilution unless absolutely necessary. However, this could backfire if the market punishes Omeros knowing the company will be seeking additional funding, which could lead to outsized dilution.

Omeros was able to secure a large financing deal which would provide adequate funding through 2019 and approval for HSCT-TMA by my estimates, and if Omeros needed additional financing at that point, a favorable deal could be reached.

My final qualm with Omeros comes from an operational perspective. The company is pursuing many different fronts, and while each holds the potential to be a blockbuster for Omeros, there is concern over Omeros having the adequate resources, both in manpower and financing, to pursue all the different indications it has been.

The company appears to be relying on OMS721 to provide the needed funding to supercharge the rest of the pipeline, but that could prove disastrous if any negative event befalls OMS721. I will note that Omeros has been prudent in its capital allocation, by focusing on HSCT-TMA as it became clear that that indication had a quicker path to market than IgAN, as well as waiting on aHUS until more funding can be secured.

Conclusion

Omeros is one of the rare companies that checks off many boxes in the biotech space; secured financing, minimal dilution, an already marketed drug, blockbuster late-stage drug candidate, and a deep potential pipeline. The company has been executing on all fronts and appears ready to charge into 2019 on the backs of resumed sales for Omidria as well as favorable commentary surrounding its lead drug candidate, OMS721. A recent financing deal has removed any need for addition funding through the end of 2019, and with shares down 50% from their recent highs, there is tremendous opportunity for shares to climb higher.

I expect 2019 to be another great year for the development of Omeros, and the company truly appears to be a diamond in the rough.

Disclosure: I am/we are long OMER. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.