Omeros: 2 Major Catalysts On The Horizon by Bret Jensen on Feb. 10, 2020
Omeros Corporation has had positive news regarding its late-stage candidate OMS721 counterbalanced by concerns that its product Omidria may lose its separate reimbursement after September 30th, 2019.
The company used the good news (solid HSCT-TMA data) as an opportunity to shore up its balance sheet, raising net proceeds of $54.5 million in early December 2019.
With a BLA expected to be fully submitted for the HSCT-TMA indication in 1H20 and pivotal trials for two other OMS721 indications ongoing, Omeros merited revisiting.
Back in the thirties we were told we must collectivize the nation because the people were so poor. Now we are told we must collectivize the nation because the people are so rich.”― William F. Buckley Jr.
Today, we revisit a 'Tier 3' biotech stock whose stock has been under some recent pressure. However, it has two potential significant catalysts on the horizon. We update our investment case on this intriguing small-cap concern in the paragraphs below.
Omeros Corporation (OMER) is a Seattle based commercial-stage biopharmaceutical concern focused on the development of small molecule and protein therapeutics for the treatment of inflammation, complement-mediated diseases, central nervous system disorders, and immune-related diseases, including cancer. The company has one commercial asset, one late-stage candidate being evaluated for three indications, and several early and preclinical compounds. Omeros was formed in 1994 and went public in 2009, raising net proceeds of $61.8 million at $10 a share. The company completed a secondary offering at $13.10 in December 2019 following the release of positive data on its late-stage candidate, OMS721 (narsoplimab). The current market capitalization of OMER is just under $700 million.
Omidria. Omeros’ revenue is generated from Omidria, a phenylephrine and ketorolac intraocular solution that is approved for use during cataract surgery or intraocular lens replacement to maintain pupil size by preventing intraoperative miosis (pupil constriction) and reducing postoperative pain. Omidria was launched in 2015 and in 2017 generated net revenue of $64.8 million. However, the Centers for Medicare and Medicaid Services (CMS) determined to let its separate reimbursement under Medicare Part B expire on January 1, 2018, causing sales to plummet ~90%. Fortunately for Omeros, an act of Congress circumvented the CMS and reinstated its pass-through status for two years starting October 1, 2018. Omidria sales rebounded, likely eclipsing $110 million in 2019.
The reason for the pushback from the CMS regarding Omidria has to do with the fact that its active ingredients (phenylephrine and ketorolac) have been around for decades and a similar solution can be prepared by surgeons at a fraction of Omidria’s cost. Omeros continues to pursue permanent separate reimbursement for Omidria and the CMS left the door open, indicating a need to find non-opioid alternatives. However, despite the company providing evidence demonstrating Omidria use reduced the need for fentanyl by nearly 80%, the CMS’ own study suggested otherwise, and it declined to grant Omidria separate payment status. News of this rejection sent shares 16% lower on November 4, 2019.
The CMS continues to “analyze and monitor” Omidria, and Omeros will exhaust all legislative and administrative avenues to secure permanent or similar status before the September 2020 expiration, including bipartisan anti-opioid legislation that could grant Omidria separate payment status for up to an additional five years. Management remains confident in its ability to gain permanent or similar status beyond September 2020. If it does not prevail, the blow to its top line will be harsh but not likely as severe as in 2018, owing to Omidria receiving its own J-Code in October 2019, which expands separate payment across commercial Med Advantage and Medicaid insurers, as well as in the office setting.
It goes without saying that Omidria’s “status” will alter by a number of years how fast the company will achieve cash-flow positive levels.
OMS721. In the meantime, Omeros has initiated a rolling BLA for OMS721, its monoclonal antibody (MAB) targeting mannan-binding lectin-associated serine protease-2 (MASP-2), a protein involved in the activation of the complement system, a branch of the body’s immune system that destroys and removes foreign particles and is engaged in the body’s inflammatory response. OMS721 is currently being evaluated in the treatment of three diseases that are all the result of complement system dysfunction.
The indication for which Omeros is filing a BLA is hematopoietic stem cell transplant-associated thrombotic microangiopathy (HSCT-TMA), a multifactorial disorder induced by systemic vascular endothelial injury that can be triggered by several mechanisms during the transplant process. It occurs in ~40% of the ~60,000 patients undergoing allogenic HSCT in the U.S. and EU annually and is characterized by aggressive blood clotting usually resulting in acute renal failure. Severe cases have a mortality rate north of 90%. There are currently no approved therapies for HSCT-TMA.
That may change as the FDA was impressed enough with February 2018 interim data from OMS721’s Phase 2 HSCT-TMA trial, in which median overall survival in 19 patients improved to 347 days versus the historical norm of 21 days (p<0.0001), to treat the small proof-of-concept study as registrational. Omeros released additional data on December 4, 2019, showing OMS721 demonstrated a 68% complete responder rate and a 100-day mortality rate of 19% versus the historical norm of 53% in HSCT-TMA patients who received at least four weeks of dosing. This prompted a 6% rally in shares of OMER, the trading session before the secondary offering was announced.
It should be noted that there are other candidates in the clinic for the HSCT-TMA indication, including Alexion’s (ALXN) already approved (for other indications) C5 inhibitor Ultomiris. However, Alexion is well behind, planning to initiate a Phase 3 trial (pending FDA feedback) in 1H20. The same can be said regarding Akari Therapeutics’ (AKTX) nomacopan, which plans to initiate a Phase 3 pediatric study in 1Q20. These schedules should give OMS721 a significant jump on any competition, which should have its BLA completed in 1H20. In addition to Breakthrough Therapy designation from FDA, OMS721 has Orphan drug status in both the U.S. and Europe and will likely receive a priority review from the FDA for HSCT-TMA.
OMS721's second most advanced indication is Immunoglobulin A (IGA) nephropathy, an ailment characterized by inflammation and kidney damage due to a buildup of the IgA antigen that affects 130,000–150,000 people in the US and ~200,000 people in Europe with no approved remedies. After positive data from a very small Phase 2 study in which OMS721 reduced proteinuria in IgA nephropathy patients by 50-90%, Omeros finalized the particulars of a Phase 3 trial with the FDA in January 2019. The trial’s primary endpoint is the same: the relatively novel reduction in proteinuria levels at week 36. By obtaining approval on this endpoint (versus say renal function as measured by estimated glomerular filtration rate), it could potentially shorten the approval process by several years. Enrollment in the ~280-patient study is ongoing and accelerating. For this indication, OMS721 has received Breakthrough Therapy designation from the FDA and Orphan status in both the U.S. and EU.
To date, OMS721 has not been menaced by any significant safety or tolerability issues, which will help it in its pursuit of approval in the treatment of atypical hemolytic uremic syndrome (aHUS), a very rare disorder characterized by uncontrolled activation of the body’s complement system, manifesting itself in strokes, heart attacks, and kidney failures. Approximately 65% of patients diagnosed with aHUS die, require dialysis, or incur permanent renal damage within one year after diagnosis. The only approved treatment on the market is Alexion’s mAb Soliris, which has a Black Box warning due to risk of fatal infections as a result of suppression of the immune system. In most instances, patients must be immunized with a meningococcal vaccine at least two weeks prior to first administration of Soliris.
Armed with Fast Track and Orphan designations, Omeros only needs to conduct a 40-patient, single-arm (i.e., no control group), open-label Phase 3 trial to satisfy both the FDA and EMA for accelerated and full approvals, respectively. To achieve full approval in the U.S., OMS721 will need to add ~40 patients to the study. The issue confronting Omeros is that the trial began enrollment in 4Q16 and three years later management has not provided any definitive timetable regarding the trial’s progress, providing a frustrating connotation of “accelerated” approval for investors.
OMS527. Omeros’ other clinical asset is OMS527, which is being investigated in patients with addictions and compulsive disorders. After a successful Phase 1 study readout in 3Q19, OMS527 is expected to enter a Phase 2a trial in 2020 with a focus on nicotine addiction.
OMS906 and GPR174. The company also has assets that have demonstrated promise in the pre-clinic. OMS906 is a MASP-3 inhibitor for paroxysmal nocturnal hemoglobinuria and other alternative pathway disorders. Pre-clinical research on GPR174 inhibition has displayed promise in immuno-oncology. OMS906 is expected to enter the clinic in 1H20; GPR174 inhibitors will see the clinic when the company has more resources.
Balance Sheet & Analyst Commentary
On that front, Omeros raised net proceeds of $54.5 million in a December 2019 secondary, which should leave it with ~$70 million at YE19. It has convertible debt with a face value of $210 million ($155 million carrying value) due 2023. The company also has an untapped vehicle through which it can borrow 85% of its receivables up to $50 million. Its cash runway will be contingent on securing separate payment status for Omidria post-September 2020 and the cadence of its development programs.
Like the investment community, Street analysts are somewhat split on Omeros’ prospects with one outperform rating sandwiched in between two buys and two holds. Their median twelve-month price target, however, is around $25 a share.
There are some unknowns regarding Omeros. Besides Omidria’s status, the timing surrounding the completion of two of its pivotal OMS721 trials is still unclear – in one instance, after three years. What does seem clear is that the FDA wants to approve OMS721. Given the lack of approved remedies for these complement systems diseases, OMS721 has relatively low hurdles to jump. If eventually approved for all three indications, OMS721 has blockbuster potential. If Omidria obtains five years of separate payment status, it will pave the way for Omeros to finance its own R&D without any more trips to the capital markets. With many shots on goal and what appears to be a helping hand from the FDA, continued investment in the shares of OMER is merited.
Idealism is fine, but as it approaches reality, the costs become prohibitive.”― William F. Buckley