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OMER > SEC Filings for OMER > Form 10-K on 18-Mar-2013All Recent SEC Filings

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Form 10-K for OMEROS CORP


18-Mar-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our audited annual consolidated financial statements and the related notes that appear elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. Actual results may differ materially from those discussed in these forward-looking statements due to a number of factors, including those set forth in the section entitled "Risk Factors" and elsewhere in this Annual Report on Form 10-K. For further information regarding forward-looking statements, please refer to the special note regarding forward-looking statements at the beginning of this Annual Report on Form 10-K. Throughout this discussion, unless the context specifies or implies otherwise, the terms "Company," "we," "us" and "our" refer to Omeros Corporation and nura, inc., its wholly owned subsidiary.

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 products are derived from our proprietary PharmacoSurgery™ platform designed to improve clinical outcomes of patients undergoing ophthalmological, arthroscopic, 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 five 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 products and programs, we have retained all manufacturing, marketing and distribution rights.

OMS302, one of our co-lead PharmacoSurgery products, successfully completed a Phase 3 clinical program that evaluated the product in patients undergoing ILR surgery. This clinical program consisted of two trials that enrolled both cataract surgery and refractive lens exchange patients. In both Phase 3 clinical trials, OMS302 demonstrated statistically significant superiority over placebo in maintenance of intraoperative mydriasis (pupil dilation) and reduction of early postoperative pain. We are now preparing to submit an NDA to the FDA during the first half of 2013 and an MAA to the EMA in mid-2013 to allow us to market and sell OMS302 in the United States and the European Union, respectively. Assuming approval of at least one of these marketing applications within approximately one year of its submission, we expect to begin marketing OMS302 in 2014.

OMS103HP, our other co-lead PharmacoSurgery product, is being evaluated in a Phase 3 clinical program for its safety and ability to reduce pain following arthroscopic partial meniscectomy surgery. In December 2012, we completed a Phase 3 clinical trial in which the pre-specified primary endpoint was the Symptoms Subscale of the KOOS - a patient-reported measure that is comprised of questions about knee swelling, clicking, catching and stiffness. In addition, pain measured in the early postoperative period was a pre-specified secondary endpoint. Although the Symptoms Subscale of the KOOS did not reach statistical significance, OMS103HP achieved statistically significant reduction of postoperative pain. We are preparing to conduct a second Phase 3 clinical trial with reduction of early postoperative pain as the primary endpoint. We expect to begin enrolling patients in this second clinical trial in the first half of 2013.

In addition to OMS302 and OMS103HP, we have a pipeline of other product development programs targeting inflammation, coagulopathies and disorders of the central nervous system. We have the following three clinical-stage programs in our pipeline: (1) our PharmacoSurgery product OMS201 for use during urological surgery, including uroendoscopic procedures, that has completed a Phase 1/Phase 2 clinical trial, (2) our PDE10 program lead compound OMS824 for the treatment of cognitive disorders, including schizophrenia and Huntington's disease, that is currently being evaluated in healthy subjects in a Phase 1 clinical trial and
(3) in our


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PPARg program two Phase 2 clinical trials are being conducted by our collaborators to evaluate a PPARgagonist, alone or in combination with other agents, for treatment of addiction to opioids and to nicotine. Our preclinical programs include: (1) our MASP-2 program in which we are developing proprietary MASP-2 antibody therapies to treat disorders associated with complement-activated inflammation (2) our PDE7 program in which we are developing proprietary compounds to treat movement disorders and addiction and compulsive disorders and (3) our Plasmin program in which we are advancing novel antifibrinolytic agents for the control of blood loss during surgery or resulting from trauma as well as for other hyperfibrinolytic states (e.g., liver disease).

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. As of February 28, 2013, we had announced that we have identified and confirmed sets of compounds that interact selectively with, and modulate signaling of, 46 Class A 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 any 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.

We recognized net losses of $38.4 million, $28.5 million, and $29.3 million for the years ended December 31, 2012, 2011 and 2010, 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 products. Compared to 2012, 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 the commercial launch of OMS302, if it is approved. As of December 31, 2012, our accumulated deficit was $214.6 million and total shareholders' deficit was $6.5 million.

Revenue

Our revenue to date 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 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 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;


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• 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:

                                                      Years Ended December 31,
                                                   2012         2011         2010
                                                           (in thousands)
       Direct external expenses
       Clinical research and development
       OMS302                                    $  8,622     $  4,663     $  2,837
       OMS103HP                                     2,773        3,558        5,581
       PDE10                                          990            -            -
       Other clinical programs                         52           72          248

       Total clinical research and development     12,437        8,293        8,666

       Preclinical research and development         6,019        5,005        4,054
       Total direct external expenses
       Internal, overhead and other expenses       11,275        9,601        9,774
       Stock-based compensation expense             2,191          819          971

       Total research and development expenses   $ 31,922     $ 23,718     $ 23,465

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 product, as well as on-going assessments of each product's commercial potential. In addition, we cannot forecast with any degree of certainty which 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 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.


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Results of Operations

Comparison of Years Ended December 31, 2012 and December 31, 2011

Revenue. Revenue was $6.0 million and $4.5 million for the years ended December 31, 2012 and 2011, respectively. The increase was primarily due to higher revenue that we recognized from both the Vulcan agreement and NIH grants for preclinical research. This increase was partially offset by a decrease in revenue recognized under our agreements with LSDF and SMRI given that all remaining revenue under those agreements was recognized during the first quarter of 2012 and second quarter of 2011, respectively.

Research and Development Expenses. Research and development expenses were $31.9 million and $23.7 million for the years ended December 31, 2012 and 2011, respectively. The increase in 2012 was primarily due to higher expenses related to our OMS302 Phase 3 clinical program, advancing our PDE10 and MASP-2 programs into and toward the clinic, respectively, our GPCR program, and increased legal costs and employee compensation, including non-cash stock-based compensation. These increases were partially offset by lower expenses in our OMS103HP program and in several of our preclinical programs, including our PDE7 and Plasmin programs.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $11.0 million and $8.2 million for the years ended December 31, 2012 and 2011, respectively. The increase was primarily due to higher legal costs, marketing expenses tied to the planned 2014 commercial launch of OMS302 and employee compensation, including non-cash stock-based compensation.

Interest Expense. Interest expense was $1.7 million and $1.9 million for the years ended December 31, 2012 and 2011, respectively. Interest expense decreased in 2012 due to a lower average notes payable balance.

Other Income, net. Other income, net was $130,000 and $697,000 for the years ended December 31, 2012 and 2011, respectively. On March 28, 2012, we extended the expiration date of warrants to purchase up to an aggregate of 197,478 shares of our common stock and recognized other expense of $511,000 in connection with the warrant modification. The remaining decrease relates primarily to lower rental income received under our subleases.

Comparison of Years Ended December 31, 2011 and December 31, 2010

Revenue. Revenue was $4.5 million and $2.1 million for the years ended December 31, 2011 and 2010, respectively. The increase was primarily due to higher revenue that we recognized from our agreements with Vulcan and LSDF, partially offset by a decrease in revenue recognized in connection with the completion of preclinical research funded by NIH grants.

Research and Development Expenses. Research and development expenses were $23.7 million and $23.5 million for the years ended December 31, 2011 and 2010, respectively. The increase in 2011 was primarily due to higher expenses associated with our OMS302 Phase 3 clinical program and higher GPCR program expenses. These increases were partially offset by lower expenses associated with the completion of our Phase 3 program evaluating OMS103HP in arthroscopic anterior cruciate ligament reconstruction and lower one-time licensing fees.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $8.2 million and $8.7 million for the years ended December 31, 2011 and 2010, respectively. The decrease was primarily due to lower costs associated with the replacement of our initial 2010 committed equity line financing facility with Azimuth and lower employee expenses.

Investment Income. Investment income was $51,000 and $167,000 for the years ended December 31, 2011 and 2010, respectively. The decrease is due primarily to lower average investment balances in 2011.


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Interest Expense. Interest expense was $1.9 million and $1.5 million for the years ended December 31, 2011 and 2010, respectively. Interest expense increased in 2011 due to a higher average notes payable balance.

Loss on Extinguishment of Debt. The loss on extinguishment of debt was $296,000 for the year ended December 31, 2010 and relates entirely to losses incurred as a result of the refinancing of our debt with Oxford.

Other Income, net. Other income, net was $697,000 and $2.5 million for the years ended December 31, 2011 and 2010, respectively. The increase in 2011 was primarily due to income received from the U.S. Qualifying Therapeutic Discovery Project Program.

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, $32.3 million of which we received, net of expenses, from the sale of 3,365,854 shares of common stock at a price of $10.25 per share in a public offering completed on July 2, 2012; (2) two debt facilities with loan proceeds totaling $44.2 million, with $9.0 million of proceeds from the second facility 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, for The Omeros Building. As of December 31, 2012, we had $22.4 million in cash, cash equivalents and short-term investments. Our cash, cash equivalents and short-term investment balances are 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. We believe that our existing cash, cash equivalents and short-term investments and capital that we may be able to raise under our agreements with MLV or Azimuth will be sufficient to fund our anticipated operating expenses, capital expenditures and note payments for at least the next 12 months.

Comparison of Years Ended December 31, 2012 and December 31, 2011

Operating Activities. Net cash used in operating activities was $34.6 million and $25.7 million for the years ended December 31, 2012 and 2011, respectively. Expenditures related to operating activities in these periods were primarily related to research and development expenses and selling, general and administrative expenses in support of our operations. The increase was primarily due to higher costs to support our Phase 3 OMS302 clinical program, our MASP-2, GPCR and PDE10 programs as well as higher employee costs. These increases were partially offset by the $3.0 million cash lease incentive payment that we received from BMR during the first quarter of 2012.

Investing Activities. Net cash used in investing activities was $907,000 for the year ended December 31, 2012 compared to cash provided by investing activities of $16.9 million for the year ended December 31, 2011. Investing activities, other than purchases and sales 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, thus causing a shift between our cash and cash equivalent 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 these cash flows to be important to the understanding of our liquidity and capital resources.

Financing Activities. Net cash provided by financing activities was $33.0 million and $9.5 million for the years ended December 31, 2012 and 2011, respectively. Net cash provided from financing activities in 2012 was due primarily to $32.3 million in net proceeds from the sale of common stock in our public offering in July 2012 and $6.4 million in net proceeds from our debt refinancing in December 2012. Net cash provided by financing activities in 2011 was primarily the result of our borrowing $10.0 million under the second tranche of our loan from Oxford in March 2011. In both periods, net cash provided by financing activities was partially offset by principal payments on our notes payable.


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Comparison of Years Ended December 31, 2011 and December 31, 2010

Operating Activities. Net cash used in operating activities was $25.7 million and $14.5 million for the years ended December 31, 2011 and 2010, respectively. Expenditures related to operating activities in these periods were primarily related to research and development expenses and selling, general and administrative expenses in support of our operations. Cash used to fund operating activities was lower for the year ended December 31, 2010, primarily due to the cash received from our Vulcan agreement, which was recorded as deferred revenue in 2010 and is being amortized to revenue as research is performed.

Investing Activities. Net cash provided by investing activities was $16.9 million and $19.9 million for the years ended December 31, 2011 and 2010, respectively. Investing activities, other than purchases, sales and maturities of short-term investments, consist primarily of purchases of property and equipment. In 2010, investing activities also included our acquisition of intellectual property assets from Patobios and our subsequent reimbursement of the purchase price by Vulcan. Cash flows from investing activities primarily reflect cash used to purchase short-term investments and receipts from the sale and maturity of short-term investments, thus causing a shift between our cash and cash equivalent 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 these cash flows to be important to the understanding of our liquidity and capital resources.

Financing Activities. Net cash provided by financing activities was $9.5 million for the year ended December 31, 2011, primarily as a result of our borrowing of the second $10.0 million tranche from Oxford in March 2011, partially offset by principal payments to Oxford, which began in November 2011. Net cash used in financing activities was $3.0 million for the year ended December 31, 2010 and was primarily due to the payoff of our loan from BlueCrest Venture Finance Master Fund Limited, partially offset by proceeds received from the first $10.0 million tranche of our Oxford loan.

MLV At-the-Market Agreement

In December 2012, we entered into an at-the-market issuance sales agreement, or the Sales Agreement, with MLV pursuant to which we may issue and sell shares of our common stock having an aggregate offering price of up to $60.0 million directly on The NASDAQ Global Market or sales made to or through a market maker other than on an exchange. With our prior written consent, sales may also be made in negotiated transactions and/or any other method permitted by law. MLV will receive a 2.0% commission from the gross proceeds of any sales. Subject to the terms and conditions of the Sales Agreement, MLV will use its commercially reasonable efforts to sell the shares of our common stock from time to time, based upon our instructions (including any price, time or size limits or other parameters or conditions that we may impose). We are not obligated to make any sales of common stock under the Sales Agreement and no assurance can be given that we will sell any shares under the Sales Agreement, or, if we do, as to the price or amount of shares that we will sell, or the dates on which any such sales will take place. The Sales Agreement may be terminated by either party at any time upon 10 days' notice to the other party, or by MLV at any time in certain circumstances, including the occurrence of a material adverse effect to Omeros. In addition, the Sales Agreement will automatically terminate upon the sale of all common stock subject to the Sales Agreement.

Azimuth Committed Equity Line Financing Facility

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


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certain agreed-upon limitations based on the market price of our common stock at the time of the draw down. 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 during the 24-month term, with only one such draw down notice allowed per draw down period and a minimum of five trading days required between each draw down period. We may not issue more than 4,427,562 shares in connection with the committed equity line financing facility, although this limitation does not apply if the average purchase price of all shares issued to Azimuth, taking into account all discounts, equals or exceeds $5.02 per share, which amount is subject to adjustment in certain circumstances specified in the facility. We have not drawn down funds under this facility to date and it will expire on June 1, 2013 unless we and Azimuth mutually agree to extend it. Because the facility will expire on June 1, 2013, taking into account its limitations described above, we believe that the amount of committed proceeds that we could raise before June 1, 2013 would be significantly less than $40.0 million. We are unable to estimate the actual amount as it depends on the price of our stock at the time we use the facility.

In connection with this facility, we entered into a placement agent agreement with Reedland Capital Partners, an Institutional Division of Financial West Group, member FINRA/SIPC, or FWG/Reedland. We have agreed to pay FWG/Reedland, upon each sale of our common stock to Azimuth under the facility, a fee equal to 0.5% of the aggregate dollar amount of common stock purchased by Azimuth.

Stanley Medical Research Institute Funding Agreement

In December 2006, we entered into a funding agreement with SMRI to develop a . . .

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