OMEROS CORPORATION The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q.
Overview
We are a commercial-stage biopharmaceutical company committed to discovering, developing and commercializing small-molecule and protein therapeutics for large-market as well as orphan indications targeting inflammation, complement-mediated diseases, disorders of the central nervous system, and immune-related diseases, including cancers.
Our drug product OMIDRIA® is marketed inthe United States for use during cataract surgery or intraocular lens replacement for adult and pediatric patients. We have multiple Phase 3 and Phase 2 clinical-stage development programs in our pipeline, which are focused on: complement-mediated disorders, including hematopoietic stem cell transplant-associated thrombotic microangiopathy ("HSCT-TMA"), Immunoglobulin A ("IgA") nephropathy and atypical hemolytic uremic syndrome ("aHUS"), as well as 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 recently discovered. Small-molecule inhibitors of GPR174 are part of our proprietary G protein-coupled receptor ("GPCR") platform through which we control 54 new GPCR drug targets and their corresponding compounds. We also exclusively possess a novel antibody-generating platform. We have retained control of all commercial rights for OMIDRIA and each of our product candidates and programs.
Impact of Global Pandemic
The outbreak of the novel strain of coronavirus ("SARS-CoV-2") that causes the
Coronavirus Disease 2019 ("COVID-19") and the responses to the global pandemic
by various governmental authorities, the medical community and others continue
to have a significant impact on our business. In March 2020 , ambulatory surgery
centers ("ASCs") and hospitals using OMIDRIA postponed nearly all cataract
surgery in response to recommendations from government and medical
organizations. As a result, we did not record any sales of OMIDRIA to our
wholesalers from March 25 to May 19, 2020 . Beginning in the second half of May
2020 , cataract surgery resumed to varying degrees in locations throughout the
country, generally under strict safety protocols. By the end of June 2020 , the
run rate of weekly OMIDRIA sales had recovered to levels approximating those
seen prior to the pandemic. COVID-19 and the corresponding government response
could have a continuing adverse impact on our business, operations and financial
results. If the number of cataract procedures continues to be limited, either by
a need for time-consuming safety protocols, reduction in patient demand, or
prohibition on elective surgical procedures in some localities, then there may
be a corresponding reduction in demand for OMIDRIA. Additionally, continued
restrictions on visits to customer facilities by our field sales representatives
could lead to a further reduction in our OMIDRIA revenues. Due to the unknown
magnitude, duration and outcome of the COVID-19 pandemic, especially in light of
the variances both in the severity of and in the local governmental responses to
the COVID-19 pandemic across the U.S. , it is not possible to estimate precisely
its impact on our business, operations or financial results; however, the impact
could be material.
Commercial Product - OMIDRIA® (phenylephrine and ketorolac intraocular solution) 1%/0.3%
OMIDRIA is approved by the FDA for use during cataract surgery or intraocular lens replacement to maintain pupil size by preventing intraoperative miosis (pupil constriction) and to reduce postoperative ocular pain. Outside theU.S. , we have received approval from theEuropean Commission ("EC") to market OMIDRIA in the European Economic Area ("EEA") for use during cataract surgery and other IOL replacement procedures for maintenance of intraoperative mydriasis (pupil dilation), prevention of intraoperative miosis and reduction of acute postoperative ocular pain.
OMIDRIA is a proprietary drug product containing two active pharmaceutical ingredients: ketorolac, an anti-inflammatory agent, and phenylephrine, a mydriatic, or pupil dilating, agent. Cataract and other lens replacement surgery
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involves replacement of the original lens of the eye with an artificial
intraocular lens. OMIDRIA is added to standard irrigation solution used during
cataract and lens replacement surgery and is delivered intracamerally, or within
the anterior chamber of the eye, to the site of the surgical trauma throughout
the procedure. Preventing pupil constriction is essential for these procedures
and, if miosis occurs, the risk of damaging structures within the eye and other
complications increases, as does the operating time required to perform the
procedure.
We launched OMIDRIA in the U.S. in the second quarter of 2015 and sell OMIDRIA
primarily through wholesalers which, in turn, sell to ASCs and hospitals. The
Centers for Medicare & Medicaid Services ("CMS"), a part of the Department of
Health and Human Services ("HHS") and the federal agency responsible for
administering the Medicare program, granted transitional pass-through
reimbursement status for OMIDRIA in 2014, effective from January 1, 2015 through
December 31, 2017 . Pass-through status allows for separate payment (i.e.,
outside the packaged payment rate for the surgical procedure) under Medicare
Part B. In March 2018 , Congress extended pass-through reimbursement status for a
small number of drugs, including OMIDRIA, used during procedures performed on
Medicare Part B fee-for-service patients for an additional two years, running
from October 1, 2018 through September 30, 2020 .
We are continuing to pursue permanent separate reimbursement for OMIDRIA beyond
the currently scheduled expiration of pass-through reimbursement on September
30, 2020 , but we can provide no assurance that these efforts will be successful.
In its 2021 outpatient prospective payment system ("OPPS") proposed rule, CMS
confirmed the September 30, 2020 expiration of pass-through reimbursement for
OMIDRIA and indicated an intention to package payment for OMIDRIA with payment
for the associated surgical procedure in both the hospital outpatient department
and ASC settings.
However, CMS is required under the Substance Use-Disorder Prevention that
Promotes Opioid Recovery and Treatment for Patients and Communities Act to
review OPPS payments for opioids and evidence-based non-opioid alternatives for
pain management with a goal to ensure that there are not financial incentives to
use opioids instead of non-opioid alternatives, and in 2019 it codified
revisions to the ASC payment system pursuant to its policy to "unpackage and pay
separately at ASP+6 percent for the cost of non-opioid pain management drugs
that function as surgical supplies when they are furnished in the ASC setting."
CMS continued this policy, without change, in 2020 and has proposed to extend it
again in 2021. During the time that these revisions to the ASC payment system
have been in force, they have not applied to OMIDRIA because OMIDRIA has had
pass-through status and, accordingly, has not been packaged. OMIDRIA does not
contain an opioid, has an FDA-approved label indication for postoperative pain
reduction and CMS considers the drug to function as a surgical supply. Based on
these criteria, we believe that OMIDRIA will satisfy the criteria for separate
payment when provided in the ASC setting once it again becomes packaged
following expiration of its pass-through status, and that CMS is required to
apply this policy to OMIDRIA as it has to another drug meeting these criteria.
We intend to meet with HHS to seek separate payment for OMIDRIA when used in the
ASC setting for the fourth quarter of 2020. Although we can provide no assurance
regarding whether or when separate payment for OMIDRIA in the ASC setting will
be effective, if we are successful in securing separate payment for OMIDRIA for
the fourth quarter of 2020, we expect that OMIDRIA will receive similar separate
payment in the ASC setting throughout 2021. We also are continuing to pursue
other administrative and legislative avenues to secure permanent separate
payment or similar reimbursement for OMIDRIA beyond September 30, 2020 ; however,
we cannot provide assurance that these efforts will be successful. If these
efforts are not successful we expect to implement an alternative market
approach, however we are likely to have significantly reduced sales of OMIDRIA
until we are able to implement such strategy. For more information regarding
OMIDRIA reimbursement, see "Financial Summary" below.
In July 2018 , we placed OMIDRIA on the market in the European Union ("EU"), on a
limited basis, which maintained the ongoing validity of the EMA for OMIDRIA. At
this time, we do not expect to see significant sales of OMIDRIA in any countries
within the EEA or other international territories.
Narsoplimab Developments
InMarch 2020 , in response to a request from physicians at thePapa Giovanni XXIII Hospital inBergamo, Italy , we initiated a compassionate use program for narsoplimab, our investigational human monoclonal antibody targeting mannan-binding lectin-associated serine protease-2 (MASP-2), to treat COVID-19 patients with ARDS, a severe and life-threatening symptom of COVID-19. -19-
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The study included a total of six COVID-19 patients treated with narsoplimab under compassionate use, all with ARDS and requiring continuous positive airway pressure (CPAP) or intubation. At baseline, circulating endothelial cell (CEC) counts and serum levels of interleukin-6 (IL-6), interleukin-8 (IL-8), C-reactive protein (CRP), lactate dehydrogenase (LDH), D-dimer and aspartate aminotransferase (AST) were markedly elevated. During the course of the study institutional guidelines at the treating hospital were updated to require that all COVID-19 patients in the hospital receive steroids. One patient treated with narsoplimab did not receive steroids. Of the five narsoplimab-treated patients who received steroids, two initiated them after already improving such that CPAP was no longer required or was discontinued the following day. The study evaluated CEC counts in a separate group of four patients receiving only steroids for a short duration, and the counts were found to be unaffected by steroid administration. This suggests that any beneficial effect of steroids on COVID-19-associated endothelial damage may be delayed and had little effect on the recovery course of the patients who initiated steroid treatment after improving. Narsoplimab treatment was associated with rapid and sustained reduction across all of these markers of endothelial damage and inflammation. In addition, massive bilateral pulmonary thromboses, seen in two of the patients, resolved while on narsoplimab. All six narsoplimab-treated patients recovered and survived. Narsoplimab was well tolerated in the study and no adverse drug reactions were reported. Two control groups with similar baseline characteristics were used for retrospective comparison, both showing substantial mortality rates (ranging from 32% to 53%). A manuscript detailing the results of a study evaluating narsoplimab in patients with severe COVID-19 has been accepted for publication in the peer-reviewed journal of Immunobiology. Endothelial damage and resultant thromboses are significant to the pathophysiology of COVID-19, and we believe these data illustrate the importance of inhibiting the lectin pathway to treat ARDS associated with the disease. As we know through our work in HSCT-TMA, an endothelial injury syndrome, endothelial damage activates the lectin pathway of complement. We believe the results observed following narsoplimab treatment in severe COVID-19 patients with ARDS at Papa Giovanni were consistent with those seen in HSCT-TMA and underscore the mechanistic similarities between these two disorders. Narsoplimab has been shown to inhibit lectin pathway activation and block microvascular injury-associated thrombus formation as well as MASP-2-mediated activation of kallikrein and factor XII. We believe such anticoagulant effects may provide therapeutic benefits in both HSCT-TMA and COVID-19. We currently are in discussions with agencies within theU.S. federal government regarding potential funding to accelerate large-scale manufacturing of narsoplimab to enable broader availability of narsoplimab for COVID-19 patients and for other COVID-19-related programmatic activities.
Clinical Development Programs
Our clinical stage development programs include:
MASP-2 - narsoplimab (OMS721) - Lectin Pathway Disorders. Narsoplimab, also
referred to as OMS721, is our lead human monoclonal antibody targeting MASP-2,
a novel pro-inflammatory protein target involved in activation of the
complement system. The complement system plays a role in the body's
inflammatory response and becomes activated as a result of tissue damage or
trauma or microbial pathogen invasion. Inappropriate or uncontrolled activation
? of the complement system can cause diseases characterized by serious tissue
injury. MASP-2 is the effector enzyme of the lectin pathway of the complement
system, and the current development focus for narsoplimab is diseases in which
the lectin pathway has been shown to contribute to significant tissue injury
and pathology. When not treated, these diseases are typically characterized by
significant end organ injuries, such as kidney or central nervous system
injury.
We have completed our pivotal clinical trial for narsoplimab in HSCT-TMA, and Phase 3 clinical programs are in process for narsoplimab in IgA nephropathy
and
aHUS.
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Narsoplimab has received multiple designations from the FDA and from the EMA across the three current indications. These include:
HSCT-TMA: In the
designation in patients who have persistent TMA despite modification of
immunosuppressive therapy, (2) orphan drug designation for the prevention
? (inhibition) of complement-mediated TMAs, and (3) orphan drug designation for
the treatment of HSCT-TMA.
orphan medicinal product for treatment in hematopoietic stem cell transplantation. IgA nephropathy: In theU.S. , narsoplimab has received from the FDA
(1) breakthrough therapy designation for the treatment of IgA nephropathy and
? (2) orphan drug designation in IgA nephropathy. In
received from the EC designation as an orphan medicinal product for the
treatment of primary IgA nephropathy.
aHUS: In the
? designation for the treatment of patients with aHUS and (2) orphan drug
designation for the prevention (inhibition) of complement-mediated thrombotic
microangiopathies.
InOctober 2019 , we initiated the rolling submission to FDA of our BLA for narsoplimab for the treatment of HSCT-TMA, a frequently lethal complication of HSCT. A rolling submission enables us to submit sections of the BLA as they are completed, which can accelerate the time to approval by allowing FDA to review completed sections of the application as they are submitted rather than waiting for the entire BLA to be submitted before beginning its review. The initial submission to FDA included all of the nonclinical (i.e., pharmacology, pharmacokinetics and toxicology) data, study reports, overview and summaries for the nonclinical sections of the BLA. Following the successful completion of manufacturing of the required process validation lots of narsoplimab, we submitted inApril 2020 the second part of the BLA containing information related to the chemistry, manufacturing and controls ("CMC") for narsoplimab. The remaining CMC information for the BLA was submitted to FDA in earlyAugust 2020 . The clinical sections of the BLA are being prepared for submission and, once all analyses are complete and compiled, these remaining parts of the BLA will be submitted. InMarch 2020 , we reported clinical data from our pivotal trial of narsoplimab in HSCT-TMA. The single-arm, open-label trial included safety and efficacy endpoints that were previously agreed to with FDA. These endpoints were assessed for (1) all 28 patients who received at least one dose of narsoplimab and (2) patients who received the protocol-specified dosing of at least four weeks of narsoplimab. The primary efficacy endpoint in the trial was the proportion of patients who achieved designated "responder" status based on improvement in HSCT-TMA laboratory markers and clinical status. This is referred to as the "complete response rate." The primary laboratory markers that were evaluated were platelet count and LDH, levels, while improvement in clinical status was evaluated based on organ function and transfusions. Patients who did not fully meet these criteria were considered "non-responders." The FDA-agreed efficacy threshold for the primary endpoint is a complete response rate of 15%. Among patients who received at least one dose of narsoplimab, the complete response rate was 54% (p<0.0001), while the complete response rate among patients who received the protocol-specified narsoplimab treatment of at least four weeks of dosing was 65% (p<0.0001). Secondary endpoints in the trial were survival rates and change from baseline in HSCT-TMA laboratory markers. Among the responder population, 93% of patients survived for at least 100 days following HSCT-TMA diagnosis, while 83% of patients who received treatment for at least four weeks and 68% of the total treated population achieved this endpoint. Results also included statistically significant improvements in platelet count, LDH and haptoglobin. The treated population had multiple high-risk features that portend a poor outcome, including the persistence of HSCT-TMA despite modification of immunosuppression (which was a criterion for entry into the trial), graft-versus-host disease, significant infections, non-infectious pulmonary -21-
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complications and neurological findings. Patients in the trial had a high expected mortality rate, with 93% of them having multiple risk factors. The most common adverse events observed in the trial were nausea, vomiting, diarrhea, hypokalemia, neutropenia and fever, which are all common in stem-cell transplant patients. Six deaths occurred during the trial. These were due to sepsis, progression of the underlying disease, and graft-versus-host disease. All of these are common causes of death in this patient population. InEurope , EMA has confirmed narsoplimab's eligibility for EMA's centralized review of a single MAA that, if approved, authorizes the product to be marketed in all EU member states and EEA countries. We plan to complete the submission of an MAA after our BLA submission has been filed with FDA. We are targeting to complete our MAA submission in the first half of 2021. InOctober 2019 we received a positive opinion from EMA on our pediatric investigation plan ("PIP") for narsoplimab in the treatment of HSCT-TMA. A PIP outlining a development program for the investigational product in the pediatric population must be agreed with EMA as a prerequisite to EMA's acceptance of an MAA. The narsoplimab PIP provides a study plan to evaluate the safety and effectiveness of the drug for HSCT-TMA in patients from one month through 17 years of age. We received a deferral for completion of our PIP until after approval of the narsoplimab MAA. In our IgA nephropathy program, patient enrollment continues in the narsoplimab Phase 3 clinical trial, ARTEMIS-IGAN. The single Phase 3 trial design is a randomized, double-blind, placebo-controlled multicenter trial in patients at least 18 years of age with biopsy-confirmed IgA nephropathy and with 24-hour urine protein excretion greater than one gram per day at baseline on optimized renin-angiotensin system blockade. This trial includes a run-in period. Initially, patients are expected to receive an IV dose of study drug each week for 12 weeks; additional weekly dosing can be administered to achieve optimal response. The primary endpoint, which we believe could suffice for full or accelerated approval depending on the effect size, is reduction in proteinuria at 36 weeks after the start of dosing. The trial is designed to allow intra-trial adjustment in sample size. For the purposes of safety and efficacy assessments, the initial sample size for the proteinuria endpoint is estimated at 140 patients in each of the treatment and placebo groups. This will include a subset of patients with high levels of proteinuria (i.e., equal to or greater than 2 g/day) at baseline, and a substantial improvement at 36 weeks in this subset of patients alone could potentially form the basis for approval. We believe that the trial design will allow assessment for either full or accelerated approval at 36 weeks based on proteinuria results either (1) across the general population of study patients or (2) in the high-proteinuria subset of patients. The Phase 3 clinical program in patients with aHUS, in which patient enrollment is ongoing, consists of one Phase 3 clinical trial - a single-arm (i.e., no control arm), open-label trial in patients with newly diagnosed or ongoing aHUS. This trial is targeting approximately 40 patients for full approval inEurope and accelerated approval in theU.S. with approximately 80 total patients required by FDA for full approval in theU.S.
PDE7 - OMS527. In our phosphodiesterase 7 (PDE7) program, we are developing
proprietary compounds to treat addiction and compulsive disorders as well as
? movement disorders. In
Phase 1 single-ascending- and multiple-ascending-dose clinical trial designed
to assess safety, tolerability and pharmacokinetics of our lead compound in
healthy subjects.
In the double blind, randomized Phase 1 study, the study drug, referred to as OMS182399, met the primary endpoints of safety and tolerability and showed a favorable and dose-proportional pharmacokinetic profile supporting once-daily dosing. There was no apparent food effect on plasma exposure to OMS182399. Our focus is nicotine addiction, and we are planning our Phase 2 development program.
MASP-3 - OMS906 - Alternative Pathway Disorders. As part of our MASP program,
we have identified mannan-binding lectin-associated serine protease-3
("MASP-3"), which has been shown to be the key activator of the complement
system's alternative pathway ("APC"), and we believe that we are the first to
make this and related discoveries associated with the APC. The complement
? system is part of the immune system's innate response, and the APC is
considered the amplification loop within the complement system. MASP-3 is
responsible for the conversion of pro-factor D to factor D; converted factor D
is necessary for the activation of the APC. Based on our alternative
pathway-related discoveries, we have expanded our intellectual property
position to protect our inventions stemming from these discoveries beyond
MASP-2-associated inhibition of the
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lectin pathway to include inhibition of the alternative pathway. Our current
primary focus in this program is developing MASP-3 inhibitors for the treatment
of disorders related to the APC. We believe that MASP-3 inhibitors have the
potential to treat patients suffering from a wide range of diseases and
conditions, including: paroxysmal nocturnal hemoglobinuria ("PNH"); C3
glomerulopathy; multiple sclerosis; arthritis; traumatic brain injury;
neuromyelitis optica; pauci-immune necrotizing crescentic glomerulonephritis;
disseminated intravascular coagulation; age-related macular degeneration;
asthma; dense deposit disease; Bechet's disease; aspiration pneumonia; TMA;
ischemia-reperfusion injury; Guillain Barre syndrome; Alzheimer's disease;
amylotrophic lateral sclerosis; systemic lupus erythematosus; diabetic
retinopathy; uveitis; chronic obstructive pulmonary disease; transplant
rejection; acute respiratory distress syndrome; antineutrophil cytoplasmic
antibody-associated vasculitis; anti-phospholipid syndrome; atherosclerosis;
myasthenia gravis and others. Our OMS906 monoclonal antibody program has
generated positive data in a well-established animal model associated with PNH,
as well as strong pharmacodynamic activity in non-human primates. The program
has also generated positive data in a well-established animal model of
arthritis.
InJune 2020 we submitted a Clinical Trial Application ("CTA") to European regulators to initiate clinical trials evaluating OMS906, the company's lead human monoclonal antibody from its MASP-3 program. For maximum flexibility in the conduct of our OMS906 clinical trials and to ensure timely progress of our OMS906 program, we also submitted an IND application to FDA to initiate clinical trials evaluating OMS906 inthe United States . Assuming positive regulatory review of the CTA or IND, as applicable, we plan to initiate the Phase 1 clinical trial evaluating OMS906 in eitherthe United States orEurope , based on the earliest availability of clinical testing sites. We currently expect to begin enrollment in the Phase 1 trial in September. The Phase 1 clinical trial will be a placebo-controlled, double-blind, single-ascending-dose and multiple-ascending-dose study to evaluate the safety, tolerability, pharmacodynamics and pharmacokinetics of OMS906 administered subcutaneously and intravenously to healthy subjects. Following adequate collection and analysis in the Phase 1 study data, the initial Phase 2 study for OMS906 is expected to be conducted in patients with paroxysmal nocturnal hemoglobinuria (PNH), a rare, acquired, life-threatening disease of the blood.
Preclinical Development Programs and Platforms
Our preclinical programs and platforms include:
Other MASP Inhibitor Preclinical Programs. We have generated positive
preclinical data from MASP-2 inhibition in in vivo models of age-related
macular degeneration, myocardial infarction, diabetic neuropathy, stroke,
ischemia-reperfusion injury, and other diseases and disorders. We are also
? developing a longer-acting second generation antibody targeting MASP-2, which
we are targeting for initiation of clinical trials in 2022. This program is
designated as "OMS1029." Development efforts are also directed to a
small-molecule inhibitor of MASP-2 designed for oral administration, as well as
small-molecule inhibitors of MASP-3 and bispecific small- and large-molecule
inhibitors of MASP-2/-3. GPR174 and GPCR Platform. We have developed a proprietary cellular
redistribution assay which we use in a high-throughput manner to identify
synthetic ligands, including antagonists, agonists and inverse agonists, that
bind to and affect the function of orphan GPCRs. We have screened Class A
orphan GPCRs against our small-molecule chemical libraries using the cellular
redistribution assay and have identified and confirmed compounds that interact
with 54 of the 81 Class A orphan GPCRs linked to a wide range of indications
including cancer as well as metabolic, cardiovascular, immunologic,
inflammatory and central nervous system disorders. One of our priorities in
this program is GPR174, which is involved in the modulation of the immune
? system. In ex vivo human studies, our small-molecule inhibitors targeting
GPR174 upregulate the production of cytokines, block multiple checkpoints and
tumor promoters, and suppress regulatory T-cells. Based on our data, we believe
that GPR174 controls a major pathway in cancer and modulation of the receptor
could provide a seminal advance in immuno-oncologic treatments for a wide range
of tumors. Our studies in mouse models of melanoma and colon carcinoma found
that GPR174-deficiency resulted in significantly reduced tumor growth and
improved survival of the animals versus normal mice. Our recent discoveries
suggest a new approach to cancer immunotherapy that targets inhibition of
GPR174 and can be combined with and significantly improve the tumor-killing
effects of adenosine pathway inhibitors. These discoveries include (1)
identification of cancer-
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immunity pathways controlled by GPR174, (2) the identification ofphosphatidylserine as a natural ligand for GPR174, (3) a collection of novel
small-molecule inhibitors of GPR174 and (4) a synergistic enhancement of
"tumor-fighting" cytokine production by T cells following the combined
inhibition of both GPR174 and the adenosine pathway (e.g., A2A and/or A2B),
another key metabolic pathway that regulates tumor immunity. We continue to
focus on GPR174 and several other of our GPCR targets with the objective of
moving compounds targeting them into human trials.
Financial Summary
We recognized net losses of$33.3 million and$14.5 million for the three months endedJune 30, 2020 and 2019, respectively, and our OMIDRIA revenues were$13.5 million and$26.8 million for the same periods. As ofJune 30, 2020 , we had$16.1 million in cash and cash equivalents and short-term investments available for general corporate use and$15.8 million in accounts receivable, net. We expect our net losses will continue until such time as we derive sufficient revenues from sales of OMIDRIA and/or other sources, such as licensing, product sales and other revenues from our product candidates, that are sufficient to cover our operating expenses and debt service obligations. [[Image Removed: Graphic]] *Fiscal quarters without pass-through reimbursement.
** Fiscal quarters with reduced cataract procedures due to COVID-19
During the period fromJanuary 1, 2018 toSeptember 30, 2018 , OMIDRIA was not reimbursed separately when used for procedures involving patients covered by Medicare Part B, and our revenues decreased significantly. After reinstatement of separate reimbursement for OMIDRIA in Q4 2018, our revenues quickly returned to levels when separate reimbursement was available and quarter-over-quarter revenue growth approximated historical rates. Due to the postponement of elective surgical procedures, including cataract surgery, we did not make any sales of OMIDRIA to our wholesalers fromMarch 25 to May 19, 2020 . Beginning in the second half ofMay 2020 , cataract procedures resumed to varying degrees in locations throughout the country. By the end ofJune 2020 , the run rate of weekly OMIDRIA sales approximated those seen prior to the pandemic. In its 2021 OPPS proposed rule, CMS confirmed theSeptember 30, 2020 expiration of pass-through reimbursement for OMIDRIA. However, in 2019 CMS codified revisions to the ASC payment system pursuant to its policy to "unpackage and pay separately at ASP+6 percent for the cost of non-opioid pain management drugs that function as surgical supplies when they are furnished in the ASC setting." CMS continued this policy, without change, in 2020 and has proposed to extend it again in 2021. During the time that these revisions to the ASC payment system have been in force, they have not applied to OMIDRIA because OMIDRIA has had pass-through status and, accordingly, has not been packaged. OMIDRIA does not contain an opioid, has an FDA-approved label indication for pain reduction and CMS considers it to function as a surgical supply. Based on these criteria, we believe that OMIDRIA will satisfy the criteria -24-
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for separate payment when provided in the ASC setting once it again becomes packaged following expiration of its pass-through status. We are also continuing to pursue other administrative and legislative avenues to secure permanent separate payment or similar reimbursement for OMIDRIA beyondSeptember 30, 2020 . If these efforts are not successful, we expect to implement an alternative market approach, however we are likely to have significantly reduced sales of OMIDRIA until we are able to implement such strategy. We may face difficulties or delays in implementing such a strategy and, even if successfully implemented, we cannot predict whether, or to what extent, our customers would maintain or increase their utilization of OMIDRIA. See "Commercial Product - OMIDRIA" earlier in this section for additional details regarding the pass-through reimbursement status for OMIDRIA. COVID-19 and uncertainty around pass-through status for OMIDRIA could have a continuing adverse impact on our business, operations and financial results, limiting the number of cataract procedures which may be performed and reducing demand for our commercial drug product, OMIDRIA. COVID-19 and the corresponding governmental response has and may continue to lead to disruptions in commercial sales activities, delays in our clinical trials or in the submission or review of regulatory applications. Due to the ongoing impact of the global pandemic on OMIDRIA sales, as well as the uncertain reimbursement status for OMIDRIA following the scheduled expiration of pass-through status onSeptember 30, 2020 , we are unable to predict future OMIDRIA product sales, net.
Results of Operations
Revenue
Our revenue consists of OMIDRIA product sales to ASCs and hospitals in the
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
(In thousands) (In thousands)
Product sales, net
During the three and six months endedJune 30, 2020 , OMIDRIA revenue was$13.5 million and$37.1 million as compared to$26.8 million and$48.5 million for the three and six months endedJune 30, 2019 . The decrease in revenue during the three and six months endedJune 30, 2020 compared to the same period in the prior year was due to COVID-19-related closings of ASCs and hospitals to elective cataract procedures beginning inmid-March 2020 . In early May, a large number of states began re-opening, and, by the end ofJune 2020 the weekly run rate of OMIDRIA sales had returned to levels approaching those seen prior to the pandemic. Given the uncertainty and local variances in the severity and response to the COVID-19 pandemic across theU.S. , and the future of pass-through reimbursement, we are not able to predict future OMIDRIA revenue.
Gross-to-Net Deductions
We record OMIDRIA product sales net of estimated chargebacks, rebates, distribution fees and product returns. These deductions are generally referred to as gross-to-net deductions. Our total gross-to-net provision for the three and six months endedJune 30, 2020 was 14.6% and 26.8% of gross OMIDRIA product sales. This compares to 28.2% and 27.7% for the three and six months endedJune 30, 2019 . The decrease in gross-to-net deductions as a percentage of sales compared to the three months endedJune 30, 2019 is primarily due to the reversal of$2.4 million of product return allowances which were originally recorded in Q1 2020 to account for potential product returns due to the postponement of elective surgical procedures, including cataract surgery due to the COVID-19 pandemic. The reserve was eliminated in Q2 2020 due to the resumption of cataract procedures inmid-May 2020 . -25-
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A summary of our gross-to-net related accruals for the six months endedJune 30, 2020 is as follows: Distribution Fees and Product Chargebacks Return and Rebates Allowances Total (In thousands) Balance as of December 31, 2019$ 10,240 $ 2,237 $ 12,477 Provisions 11,534 2,022 13,556 Payments (16,086) (3,147) (19,233) Balance as of June 30, 2020$ 5,688 $ 1,112 $ 6,800 Chargebacks and Rebates
We record a provision for estimated chargebacks and rebates at the time we recognize OMIDRIA product sales revenue and reduce the accrual when payments are made or credits are granted. Our chargebacks are related to a pharmaceutical pricing agreement, a federal supply schedule agreement, a 340B prime vendor agreement, a Medicaid drug rebate agreement and an off-invoice discount to our ASC and hospital customers. We also record a provision for our OMIDRIAssure® patient assistance and reimbursement services program and our rebates under our purchase volume-discount programs.
Distribution Fees and Product Return Allowances
We pay our wholesalers a distribution fee for services they perform for us based on the dollar value of their purchases of OMIDRIA. We record a provision for these charges as a reduction to revenue at the time of sale to the wholesaler and make payments to our wholesalers based on contractual terms. We allow for the return of product up to 12 months past its expiration date, or for product that is damaged or not used by our customers. We record a provision for returns upon sale of OMIDRIA to our wholesaler. When a return or claim is received, we issue a credit memo to the wholesaler against its outstanding receivable to us or we reimburse the customer. Additionally, if separate reimbursement for OMIDRIA does not last beyondSeptember 30, 2020 , it is possible that wholesalers, ASCs and hospitals may return a portion of their OMIDRIA on hand for a full refund of the purchase price. If a reserve is required, we would record the reserve during our third quarter of 2020.
Research and Development Expenses
Our research and development expenses can be divided into three categories:
direct external expenses, which include clinical research and development,
preclinical research and development activities; internal, overhead and other
expenses; and stock-based compensation expense. Direct external expenses consist
primarily of expenses incurred pursuant to agreements with third-party
manufacturing organizations prior to receiving regulatory approval for a product
candidate, contract research organizations, clinical trial sites, collaborators,
consultants, and licensors consultants. Costs are reported in preclinical
research and development until the program enters the clinic. Internal, overhead
and other expenses consist of personnel costs, overhead costs such as rent,
utilities and depreciation and other miscellaneous costs. We do not generally
allocate our internal resources, employees and infrastructure to any individual
research project because we deploy them across multiple clinical and preclinical
projects that we are advancing in parallel.
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The following table illustrates our expenses associated with these activities:
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
(In thousands) (In thousands)
Direct external expenses:
Clinical research and development:
MASP-2 Program - OMS721 (narsoplimab) $ 9,720 $ 5,058 $ 22,935 $ 19,495
OMIDRIA - Ophthalmology 433 379 884 1,087
PDE7 - OMS527 259 603 1,596 1,179
Total clinical research and development 10,412 6,040 25,415 21,761
Preclinical research and development 3,144 2,102 6,834 3,617
Total direct external expenses 13,556 8,142 32,249 25,378
Internal, overhead and other expenses 8,945 9,320 17,716 16,845
Stock-based compensation expense 1,631 1,646
3,078 3,140
Total research and development expenses
Total direct clinical research and development expenses increased$4.4 million and$3.7 million for the three and six months endedJune 30, 2020 compared to the same periods in 2019. The$4.4 million increase for the three months endedJune 30, 2020 is due to higher narsoplimab manufacturing costs and increased costs supporting the preparation of our rolling BLA for HSCT-TMA in theU.S. The increase for the six months endedJune 30, 2020 is due to increased IgA nephropathy clinical trial costs as well as higher costs supporting the preparation of our rolling BLA in HSCT-TMA and the increased medical affairs activities. The$1.0 million and$3.2 million increase in our preclinical research and development expense for the three and six months endedJune 30, 2020 as compared to the same periods in 2019 reflects additional third-party manufacturing scale up costs related to our OMS906 program as well as development and analytical activities related our MASP-2 long-acting second-generation antibody program. We expect the majority of our research and development expenses for the remainder of 2020 to be related to our narsoplimab program. We expect research and development costs to increase in 2020 as we incur incremental manufacturing costs in preparation for the anticipated commercial launch of narsoplimab in HSCT-TMA in theU.S. At this time, we are unable to estimate with certainty the longer-term costs we will incur in the continued development of our product candidates due to the inherently unpredictable nature of our preclinical and clinical development activities, as well as the potential impacts of the COVID-19 pandemic. Clinical development timelines, the probability of success and development costs can differ materially as new data become available and as expectations change. Our future research and development expenses will depend, in part, on the preclinical or clinical success of each product candidate as well as ongoing assessments of each program's commercial potential. In addition, we cannot forecast with precision which product candidates, if any, may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements. We are required to expend substantial resources in the development of our product candidates due to the lengthy process of completing clinical trials and seeking regulatory approval. 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. -27-
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Selling, General and Administrative Expenses
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
(In thousands) (In thousands)
Selling, general and administrative
expenses, excluding stock-based
compensation expense $ 14,740 $ 14,976 $ 30,747 $ 27,727
Stock-based compensation expense 2,191 1,952 4,220 3,833
Total selling, general and administrative
expenses $ 16,931 $ 16,928 $ 34,967 $ 31,560 The increase in selling, general and administrative expenses during the
six months ended
We expect that our selling, general and administrative expenses will increase in the remaining quarters of 2020 compared to current levels, primarily due to increased pre-commercialization activities for narsoplimab.
Interest Expense
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
(In thousands) (In thousands)
Interest expense $ 5,978 $ 5,530 $ 11,880 $ 11,130 Interest expense is comprised of interest related to our$210.0 million of 6.25% Convertible Senior Notes due 2023 (the "Convertible Notes"). Non-cash interest expense for the three and six months endedJune 30, 2020 was$2.6 million and$5.2 million , respectively. For more information regarding our Convertible Notes, see Part II, Item 8, "Note 8--Convertible Senior Notes" in our Annual Report on Form 10-K for the year endedDecember 31, 2019 .
Financial Condition - Liquidity and Capital Resources
As ofJune 30, 2020 , we had$16.1 million in cash, cash equivalents and short-term investments available for general corporate use held primarily in money-market accounts as compared to$60.8 million atDecember 31, 2019 . In addition, as ofJune 30, 2020 , we had$15.8 million in accounts receivable, net. We have historically generated net losses and incurred negative cash flows from operations and debt service. For the six months endedJune 30, 2020 , we incurred net losses of$62.3 million and incurred negative cash flows from operations of$46.7 million . We expect to continue to incur losses from operations until our revenues exceed operating costs and debt service obligations. In the second quarter of 2020, our business operations and liquidity continued to be negatively affected by the reduction in demand for OMIDRIA caused by restrictions on the number of elective surgical procedures which could be performed. The continued increase in the number of COVID-19 cases within theU.S. may lead to further restrictions on elective surgeries going forward. This may continue to negatively impact our ability to cover our expenses in future periods, with the magnitude being dependent on the duration and extent of applicable limitations placed on the operations of our ASC and hospital customers. In mid-May, a large number of states began re-opening ASCs and hospitals to cataract surgery with a number of our customers re-ordering OMIDRIA from our wholesalers. We cannot yet predict with certainty the levels of OMIDRIA product sales we will achieve. In addition, pass-through reimbursement for OMIDRIA is currently scheduled to expire onSeptember 30, 2020 . We are pursuing legislative and administrative means to extend permanent reimbursement but have not yet received such an extension. However, regardless of whether we secure continued pass-through treatment for OMIDRIA, our working capital needs are likely to continue to increase, particularly if the disruption to our operations caused by the COVID-19 pandemic continues. Consequently, we are unable to include these factors in the determination regarding our prospects as a going concern. -28-
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OMIDRIA revenues and amounts available under the Line of Credit Agreement withSilicon Valley Bank , are determined based on eligible OMIDRIA accounts receivable, less certain reserves. As ofAugust 7, 2020 , we were eligible to borrow approximately$6.6 million under the Line of Credit Agreement. We have also not included any proceeds from debt transactions or other financing instruments in our analysis of our ability to continue as a going concern, despite our successful track record in accessing capital through each of these avenues nor any potential partnerships related to our products or product candidates. The conditions described above when evaluated within the constraints of the accounting literature raise substantial doubt with respect to our ability to meet our obligations throughAugust 10, 2021 and, therefore, to continue as a going concern. We plan to continue to fund our operations through proceeds from sales of OMIDRIA, and we may utilize funds available under our receivable-based line of credit to the extent it is available to us. Should it be necessary or determined to be strategically advantageous, we may pursue debt financings, public and private offerings of our equity securities similar to those we have completed previously, or other strategic transactions, which may include licensing a portion of our existing technology. If these capital sources, for any reason, are needed but inaccessible, it would have a significantly negative effect on our financial condition. Should it be necessary to manage our operating expenses, we would reduce our projected cash requirements through reduction of our expenses by delaying clinical trials, reducing selected research and development efforts, or implementing other restructuring activities. Cash Flow Data Six Months Ended June 30, 2020 2019 (In thousands) Selected cash flow data Cash provided by (used in): Operating activities$ (46,738) $ (29,537) Investing activities$ 43,370 $ 26,499 Financing activities$ 2,248 $ 1,163 Operating Activities. Net cash used in operating activities for the six months endedJune 30, 2020 increased by$17.2 million as compared to the same period in 2019. The net increase is primarily due to an increase in our net loss of$23.5 million and an increase of$20.1 million in cash used in accounts payable and accrued expense offset by a$25.1 million increase in cash provided from collections of accounts receivable. Investing Activities. Cash flows from investing activities primarily reflect cash used to purchase short-term investments and proceeds from the sale of short-term investments, thus causing a shift between our cash and cash equivalents and short-term investment balances. Because we manage our cash usage with respect to our total cash, cash equivalents and short-term investments, we do not consider fluctuations in cash flows from investing activities to be important to the understanding of our liquidity and capital resources. Net cash provided by investing activities during the six months endedJune 30, 2020 was$43.4 million , an increase of$16.9 million for the same period in 2019 driven by an increase in proceeds from sale and maturities of investments of$19.5 million offset by purchases of$2.7 million . Financing Activities. Net cash provided by financing activities during the six months endedJune 30, 2020 was$2.2 million , an increase of$1.1 million compared to the same period in 2019. The increase for the six months endedJune 30, 2020 compared to the prior year was due to incremental proceeds from exercises of stock options. Line of Credit Agreement. Our Line of Credit Agreement withSilicon Valley Bank provides for a$50.0 million revolving line of credit facility. Under the Line of Credit Agreement we may draw, on a revolving basis, up to the lesser of$50.0 million or 85.0% of our eligible accounts receivable, less certain reserves. The Line of Credit Agreement is secured by all our assets excluding intellectual property and development program inventories and matures onAugust 2, 2022 . As ofJune 30, 2020 , we had no outstanding borrowings under the Line of Credit
Agreement, and we were in
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compliance with all covenants in all material respects. See earlier discussion under "Liquidity and Capital Resources" for further detail regarding the availability of the line of credit.
Contractual Obligations and Commitments
The following table presents a summary of our contractual obligations and
commitments as of
Payments Due Within
More than
1 Year 2-3 Years 4-5 Years 5 Years Total
(In thousands)
Operating leases $ 3,210 $ 13,214 $ 13,795 $ 19,590 $ 49,809 Finance leases (principal and interest) 697 1,693 152 - 2,542 Unsecured convertible senior notes 6,563 26,250 223,125 - 255,938 Goods & services 17,621 429 54 - 18,104 Total$ 28,091 $ 41,586 $ 237,126 $ 19,590 $ 326,393 Lease Agreements We lease our office and laboratory space inThe Omeros Building under a lease agreement with BMR - 201Elliott Avenue LLC . The initial term of the lease ends inNovember 2027 , and we have two options to extend the lease term, each by five years. As ofJune 30, 2020 , the remaining aggregate non-cancelable rent payable under the initial term of the lease, excluding common area maintenance and related operating expenses, is$49.8 million .
Convertible Notes
For more information regarding our Convertible Notes, see Part II, Item 8,
"Note 8--Convertible Senior Notes" in our Annual Report on Form 10-K for
the year ended
Goods and Services
We have certain other non-cancelable obligations under various agreements that
relate to goods and services. As of
We may be required, in connection with in-licensing or asset acquisition agreements, to make certain royalty and milestone payments and we cannot, at this time, determine when or if the related milestones will be achieved or whether the events triggering the commencement of payment obligations will occur. Therefore, such payments are not included in the amount above.
Critical Accounting Policies and Significant Judgments and Estimates
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
Off-Balance Sheet Arrangements
We have not engaged in any off-balance sheet arrangements.
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