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OMER > SEC Filings for OMER > Form 10-Q on 7-Aug-2012All Recent SEC Filings

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Form 10-Q for OMEROS CORP


7-Aug-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, or Exchange Act, which are subject to the "safe harbor" created by those sections. Forward-looking statements are based on our management's beliefs and assumptions and on information currently available to our management. All statements other than statements of historical facts are "forward-looking statements". In some cases you can identify forward-looking statements by terms such as "anticipate," "believe," "could," "estimate," "expect," "goal," "intend," "may," "plan," "predict," "potential," "should," "will," "would," and similar expressions and variations thereof are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. Examples of these statements include, but are not limited to, statements regarding:

• our ability to complete the second Phase 3 trial for OMS302 during the second half of 2012;

• our ability to complete the first Phase 3 trial for OMS103HP in arthroscopic partial meniscectomy surgery during the second half of 2012;

• our ability to begin the second Phase 3 trial for OMS103HP following discussions with European regulatory authorities;

• our ability to raise capital under our equity line financing facility or otherwise access the capital markets;

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• our expectations regarding the clinical benefits of our potential products;

• our expectation that 2014 is the earliest year in which any of our potential products will be commercially available or generate revenue;

• our anticipation that we will rely on contract manufacturers to develop and manufacture our products for commercial sale;

• the extent of protection that our patents provide and our pending patent applications may provide, if patents issue from such applications, to our technologies and programs;

• our estimate regarding how long our existing cash, cash equivalents and short-term investments will be sufficient to fund our anticipated operating expenses, capital expenditures and note payments;

• our involvement in potential claims and legal proceedings, the expected course and costs of existing claims and legal proceedings, and the potential outcomes and effects of both existing and potential claims and legal proceedings on our business, prospects, financial condition and results of operations; and

• our expected financial position, performance, growth, expenses, the magnitude of our net losses and the availability of resources.

Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks, uncertainties and other factors described in Item IA of Part II of this Quarterly Report on Form 10-Q under the heading "Risk Factors" and in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011. As a result of such factors, the actual results or developments anticipated may not be realized or, even if substantially realized, they may not have the expected consequences to or effects on our company, business or operations. Also, these forward-looking statements represent our estimates and assumptions only as of the date of the filing of this Quarterly Report on Form 10-Q. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual results may materially differ from current expectations. Except as required by law, we assume no obligation to update these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

Overview

Background

We are a clinical-stage biopharmaceutical company committed to discovering, developing and commercializing products targeting inflammation, coagulopathies and disorders of the central nervous system. Our most clinically advanced potential products are derived from our proprietary PharmacoSurgery™ platform designed to improve clinical outcomes of patients undergoing arthroscopic, ophthalmological, urological and other surgical and medical procedures. Our PharmacoSurgery platform is based on low-dose combinations of therapeutic agents delivered directly to the surgical site throughout the duration of the procedure to preemptively inhibit inflammation and other problems caused by surgical trauma and to provide clinical benefits both during and after surgery. We currently have four clinical-stage development programs. In addition, we have a deep and diverse pipeline of preclinical programs as well as a platform capable of unlocking new drug targets. For each of our potential products and programs, we have retained all manufacturing, marketing and distribution rights.

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OMS302, one of our co-lead PharmacoSurgery potential products, is currently being evaluated in a Phase 3 clinical program in patients undergoing intraocular lens replacement, or ILR, surgery. We expect this clinical program to consist of two trials that will enroll both cataract surgery and refractive lens exchange patients. In the first Phase 3 clinical trial, which we completed in March 2012, OMS302 demonstrated statistically significant superiority over placebo in maintenance of intraoperative mydriasis (pupil dilation) and reduction of postoperative pain. We are now conducting the second Phase 3 clinical trial, which is evaluating the same efficacy and safety measures as the earlier successful Phase 2b and Phase 3 clinical trials. We expect to receive data from the ongoing Phase 3 clinical trial in the second half of 2012.

OMS103HP, our other co-lead PharmacoSurgery potential product, is being evaluated in a Phase 3 clinical program for its safety and ability to improve postoperative joint function and reduce pain following arthroscopic partial meniscectomy surgery. We intend this clinical program to consist of two trials and expect data from the first trial in the second half of 2012. We are preparing for discussions with European regulatory authorities regarding the second Phase 3 clinical trial and, assuming sufficient resources, plan to begin that trial following completion of those discussions. In the first quarter of 2011, we announced that OMS103HP failed to meet pre-specified efficacy endpoints in a Phase 3 clinical program in patients undergoing arthroscopic anterior cruciate ligament, or ACL, reconstruction surgery. We were unable to draw any conclusions about OMS103HP's effect in the Phase 3 ACL program due to confounding factors, and we have no plans to conduct additional ACL reconstruction trials at this time.

Our third PharmacoSurgery potential product, OMS201, is being developed for use during urological surgery, including uroendoscopic procedures. During the fourth quarter of 2010, we completed a Phase 1/Phase 2 clinical trial in patients undergoing ureteroscopic removal of ureteral or renal stones. The data showed that OMS201 was well tolerated by the patients in this trial. Based on these data, we are planning to conduct subsequent trials to evaluate the efficacy and safety of OMS201.

In addition to our PharmacoSurgery platform, we have a pipeline of other product development programs targeting inflammation, coagulopathies and disorders of the central nervous system. In our PPARg program, we are developing proprietary compositions that include PPAR g agonists for the treatment and prevention of addiction to substances of abuse, which may include opioids, nicotine and alcohol. In our PDE10 program, we are developing proprietary compounds to treat cognitive disorders, including schizophrenia and Huntington's disease. Our PDE7 program is based on our discoveries of previously unknown links between PDE7 and
(1) any movement disorder, such as Parkinson's disease, and (2) addiction and compulsive disorders, and we are developing proprietary compounds for the treatment of these and other related disorders. In our MASP-2 program, we are developing proprietary MASP-2 antibody therapies to treat disorders associated with complement-activated inflammation, and we are advancing novel antifibrinolytic agents for the control of blood loss during surgery or resulting from trauma as well as for hyperfibrinolytic states (e.g., liver disease) in our Plasmin program.

In our GPCR program, we are working to complete high-throughput surrogate de-orphanization of orphan GPCRs, or the identification of synthetic molecules that bind and functionally interact with the receptors, and to develop products that act at these new potential drug targets. We have already announced that we have identified and confirmed sets of compounds that interact selectively with, and modulate signaling of, 37 orphan GPCRs. During the fourth quarter of 2010, we entered into an agreement with Vulcan pursuant to which we received $20.0 million for our GPCR program. Also during the same quarter, we entered into an agreement with the LSDF under which we received a $5.0 million grant award that was paid to reimburse us for expenses we incurred and equipment purchases related to our GPCR program. In exchange for these payments, we agreed to pay to Vulcan and LSDF a portion of net proceeds that we receive from the GPCR program. We also issued to the Vulcan affiliate three warrants to purchase our common stock, each with a five-year term and exercisable for up to 133,333 shares, with exercise prices of $20, $30 and $40 per share, respectively. Following the receipt of the $20.0 million from Vulcan, we purchased from Patobios intellectual property assets related to an assay technology for use in the GPCR program. The purchase price for these assets was approximately $10.8 million, of which approximately $7.6 million was paid in cash and $3.2 million was paid in shares of our common stock. We have no royalty or milestone payment obligations to Patobios.

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As of June 30, 2012, our accumulated deficit was $193.6 million and total shareholders' deficit was $20.5 million. We recognized net losses of $8.5 million and $5.3 million for the three months ended June 30, 2012 and 2011, respectively, and $17.4 million and $11.8 million for the six months ended June 30, 2012 and 2011, respectively. These losses have resulted principally from expenses incurred in connection with research and development activities, consisting primarily of clinical trials, preclinical studies and manufacturing services associated with our current potential products. Compared to 2011, we expect our net losses to increase as we continue to advance our clinical trials, expand our research and development efforts, add personnel for our anticipated growth and prepare for commercial launch of OMS302, if it is approved.

Revenue

Through June 30, 2012, our revenue has consisted of grant funding from third parties and revenue recognized in connection with funding from Vulcan and LSDF. Other than grant funding, we do not expect to receive any revenue from our products until we receive regulatory approval and commercialize the products or until we potentially enter into collaborative agreements with third parties for the development and commercialization of our products. As discussed below, we do not expect any of our current potential products to be commercially available before 2014, if at all. We continue to pursue government and private grant funding as well as collaboration funding for our potential products and research programs.

Research and Development Expenses

The majority of our operating expenses to date have been for research and development activities. Research and development expenses consist of costs associated with research activities as well as costs associated with our product development efforts, which include clinical trial and third-party manufacturing services. Internal research and development costs are recognized as incurred. Third-party research and development costs are expensed at the earlier of when the contracted work has been performed or when upfront and milestone payments are made. Research and development expenses include:

• employee and consultant-related expenses, which include salaries and benefits;

• external research and development expenses incurred pursuant to agreements with third-party manufacturing organizations, CROs, clinical trial sites and collaborators or licensors;

• facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities and depreciation of leasehold improvements and equipment; and

• third-party supplier expenses including laboratory and other supplies.

Our research and development expenses can be divided into clinical research and development and preclinical research and development activities. The following table illustrates our expenses associated with these activities:

                                             Three Months Ended          Six Months Ended
                                                  June  30,                  June 30,
                                              2012          2011         2012         2011
                                                            (in thousands)
 Direct external expenses:
 Clinical research and development:
 OMS302                                    $    2,170      $   211     $   3,818     $   602
 OMS103HP                                         915          546         1,905       1,949
 Other clinical programs                           70          183            98         190

 Total clinical research and development        3,155          940         5,821       2,741
 Preclinical research and development           1,692          620         3,090       1,281

 Total direct external expenses                 4,847        1,560         8,911       4,022
 Internal, overhead and other expenses          2,426        2,307         5,040       5,022
 Stock-based compensation expense                 285          210           853         458

 Total research and development expenses   $    7,558      $ 4,077     $  14,804     $ 9,502

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Direct external clinical research and development expenses consist primarily of external research and development and regulatory expenses incurred pursuant to agreements with third-party manufacturing organizations, CROs, clinical trial sites, collaborators, licensors and consultants. Direct external preclinical research and development expenses consist primarily of our preclinical research activities, laboratory supplies and consulting. Internal, overhead and other expenses consist of personnel costs and other overhead costs such as rent, utilities and depreciation. Our internal resources, employees and infrastructure are not directly tied to any individual research project and are typically deployed across multiple clinical and preclinical projects that we are advancing in parallel.

At this time, due to the inherently unpredictable nature of preclinical and clinical development processes and given the early stage of our preclinical development programs, we are unable to estimate with any certainty the costs we will incur in the continued development of our products for potential commercialization. Clinical development timelines, the probability of success and development costs can differ materially from expectations. While we are currently focused on advancing each of our product development programs, our future research and development expenses will depend on the clinical success of each potential product, as well as on-going assessments of each product's commercial potential. In addition, we cannot forecast with any degree of certainty which potential products 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.

The lengthy process of completing clinical trials and seeking regulatory approval for our products requires expenditure of substantial resources. Any failure or delay in completing clinical trials, or in obtaining regulatory approvals, could cause a delay in generating product revenue and cause our research and development expenses to increase and, in turn, have a material adverse effect on our operations. We do not expect any of our current potential products to be commercially available before 2014, if at all. Because of the factors above, we are not able to estimate with any certainty when we would recognize any net cash inflows from our projects.

General and Administrative Expenses

General and administrative expenses consist principally of salaries and related costs for personnel in executive, legal, finance, accounting, business development, information technology and human resource functions. Other general and administrative expenses include facility costs not otherwise included in research and development expenses, patent costs and professional fees for legal, consulting and audit services.

Investment Income

Investment income consists of realized gains on sales of investments and interest earned on our cash, cash equivalents and short-term investments.

Interest Expense

Interest expense consists of interest on our notes payable and the amortization of both the related discount and debt issuance costs.

Other (Expense) Income, net

Other (expense) income, net consists primarily of rental income received under subleases for use of a portion of our vivarium and laboratory facility and warrant expense resulting from the extension in 2012 of the expiration date of certain warrants to purchase our common stock.

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Results of Operations

Comparison of Three Months Ended June 30, 2012 and June 30, 2011

Revenue. Revenue was $1.5 million for the three months ended June 30, 2012 compared to $1.2 million for the three months ended June 30, 2011. This increase was primarily due to an increase in revenue recognized in connection with preclinical research funded by grants from the NIH and an increase in revenue recognized in connection with the Vulcan agreement for our GPCR program.

Research and Development Expenses. Research and development expenses were $7.6 million for the three months ended June 30, 2012 compared to $4.1 million for the three months ended June 30, 2011. The increase in 2012 was primarily due to higher clinical trial expenses associated with enrollment in our Phase 3 clinical trials evaluating OMS302 and OMS103HP and higher expenses in connection with our PDE10 and MASP programs.

General and Administrative Expenses. General and administrative expenses were $2.2 million for the three months ended June 30, 2012 compared to $2.0 million for the three months ended June 30, 2011. The increase in 2012 was primarily due to higher patent costs.

Interest Expense. Interest expense was $453,000 for the three months ended June 30, 2012 compared to $527,000 for the three months ended June 30, 2011. The decrease was due to a lower average notes payable balance during the 2012 period.

Other Income (Expense), net. Other income, net, was $152,000 for the three months ended June 30, 2012 compared to $171,000 for the three months ended June 30, 2011. The decrease relates primarily to lower rental income received under subleases.

Comparison of Six Months Ended June 30, 2012 and June 30, 2011

Revenue. Revenue was $3.0 million for the six months ended June 30, 2012 compared to $2.4 million for the six months ended June 30, 2011. This increase was primarily due to an increase in revenue recognized in connection with preclinical research funded by grants from the NIH and an increase in revenue recognized in connection with the Vulcan agreement. This increase was partially offset by a decrease in revenue recognized in connection with our agreements with LSDF and SMRI as we recognized all remaining revenue under those agreements during the first quarter of 2012 and second quarter of 2011, respectively.

Research and Development Expenses. Research and development expenses were $14.8 million for the six months ended June 30, 2012 compared to $9.5 million for the six months ended June 30, 2011. The increase in 2012 was primarily due to higher clinical trial expenses associated with enrollment in our Phase 3 clinical trials evaluating OMS302 and OMS103HP, higher expenses in connection with our PDE10 and MASP programs and an increase in stock-based compensation expense related to company-wide options granted in the 2012 period with April 2011 vesting start dates.

General and Administrative Expenses. General and administrative expenses were $4.5 million for the six months ended June 30, 2012 compared to $4.3 million for the six months ended June 30, 2011. The increase in 2012 was primarily due to higher employee costs and higher stock-based compensation expense related to company-wide options granted in the 2012 period with April 2011 vesting start dates, partially offset by various individually insignificant decreases.

Investment Income. Investment income was $18,000 for the six months ended June 30, 2012 as compared to $31,000 for the six months ended June 30, 2011. The decrease is due primarily to lower average investment balances in 2012.

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Interest Expense. Interest expense was $947,000 for the six months ended June 30, 2012 compared to $820,000 for the six months ended June 30, 2011. The increase was due to a higher average notes payable balance during the 2012 period.

Other Income (Expense), net. Other expense, net was $189,000 for the six months ended June 30, 2012 compared to other income, net of $355,000 for the six months ended June 30, 2011. On March 28, 2012, we extended the expiration date of warrants to purchase an aggregate of 197,478 shares of our common stock. We recognized other expense of $511,000 in connection with the warrant modification.

Liquidity and Capital Resources

We have financed our operations primarily through (1) private and public placements of equity securities for proceeds totaling $171.5 million, $32.4 million of which was received, after estimated expenses, in a public offering completed on July 2, 2012 pursuant to which we sold 3,365,854 shares of common stock at a price of $10.25 per share; (2) through two debt facilities with loan proceeds totaling $37.0 million, $9.0 million of which was used to pay off the remaining balance of the first facility; and (3) our GPCR program funding agreement with Vulcan pursuant to which we received $20.0 million. Additionally, we received a $3.0 million cash lease incentive payment in the first quarter of 2012 related to our new office and laboratory lease with BMR-201 Elliott Avenue LLC, or BMR. As of June 30, 2012, we had $7.3 million in cash, cash equivalents and short-term investments, which does not include the $32.4 million in net proceeds received from our public offering completed on July 2, 2012. Our cash, cash equivalents and short-term investment balances are or were held principally in interest-bearing instruments, including money-market accounts. Cash in excess of immediate requirements is invested in accordance with established guidelines to preserve principal and maintain liquidity. As of June 30, 2012, all investments were sold and the proceeds were reinvested in cash and cash equivalents.

Comparison of Six Months Ended June 30, 2012 and June 30, 2011

Operating Activities. Net cash used in operating activities was $14.4 million and $14.2 million for the six months ended June 30, 2012 and 2011, respectively. Expenditures related to operating activities in these periods were primarily the result of costs associated with research and development expenses and general and administrative expenses in support of our operations. The increase in net cash used in operating activities was primarily due to increased research and development expenses, including higher costs to support our Phase 3 clinical trials evaluating OMS302 and OMS103HP, partially offset by the $3.0 million cash lease incentive payment received from BMR during the first quarter of 2012.

Investing Activities. Net cash provided by investing activities was $20.4 million and $4.8 million for the six months ended June 30, 2012 and 2011, respectively. Investing activities, other than the purchase and sale of short-term investments, consist primarily of purchases of property and equipment. Cash flows from investing activities primarily reflect cash used to purchase short-term investments and receipts from the sale of short-term investments. These amounts primarily relate to shifts between cash and cash equivalents and short-term investments. Because we manage our cash usage with respect to our total cash, cash equivalents and short-term investments, we do not consider these cash flows to be important to the understanding of our liquidity and capital resources.

Financing Activities. Net cash used by financing activities was $2.8 million for the six months ended June 30, 2012, primarily related to principal payments on our Oxford notes. Net cash provided by financing activities was $10.3 million for the six months ended June 30, 2011, primarily as a result of our borrowing of $10.0 million under tranche two of our loan from Oxford in March 2011, partially offset by principal payments on the Oxford notes.

Azimuth Equity Line Financing Facility

In May 2011, we entered into an equity line financing facility with Azimuth Opportunity, Ltd., or Azimuth, pursuant to which we may sell up to $40.0 million of our shares of common stock over a 24-month term. This facility replaced a prior equity line financing facility, which we entered into with Azimuth on July 28, 2010 but had not accessed. Under the

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2011 agreement with Azimuth, we may, from time to time over the 24-month term and in our sole discretion, present Azimuth with draw down notices requiring Azimuth to purchase a specified dollar amount of shares of our common stock, based on the volume-weighted average price per share on each of 10 consecutive trading days, or the draw down period, with the total dollar amount of each draw down subject to certain agreed-upon limitations based on the market price of our common stock and a limit of 2.5% of our market capitalization at the time of the draw down, which limit may be waived by our mutual agreement. The purchase price for these shares equals the daily volume-weighted average price of our common stock on each date during the draw down period on which shares are purchased, less a discount ranging from 3.00% to 6.00%, based on a minimum price that we specify. We are allowed to present Azimuth with up to 24 draw down notices . . .

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