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OMER > SEC Filings for OMER > Form 10-Q on 9-May-2013All Recent SEC Filings

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Form 10-Q for OMEROS CORP


9-May-2013

Quarterly Report


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

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, which we refer to as 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 intraocular lens replacement, or 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 second quarter of 2013 and an MAA to the European Medicines Agency, or 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 second 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 PDE10 program lead compound OMS824 for the treatment of cognitive disorders, including schizophrenia and Huntington's disease, is in a Phase 1 clinical program, (2) our PPAR g program, in which two Phase 2 clinical trials are being conducted by our collaborators to evaluate a PPARg agonist, alone or in combination with other agents, for treatment of addiction to opioids and to nicotine and (3) our PharmacoSurgery product OMS201 for use during urological surgery, including uroendoscopic procedures, that has completed a Phase 1/Phase 2 clinical trial and which is currently dormant. 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). We currently expect to initiate Phase 1 clinical trials for our MASP-2 and PDE7 programs in 2013.

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 May 9, 2013, we have identified and confirmed sets of compounds that interact selectively with, and modulate signaling of, 46 Class A orphan GPCRs.

Financial Summary

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;

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• external research and development expenses incurred pursuant to agreements with third-party manufacturing organizations, clinical research organizations, or 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.

We recognized net losses of $10.5 million and $8.9 million for the three months ended March 31, 2013 and 2012, 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 March 31, 2013, our accumulated deficit was $225.1 million and total shareholders' deficit was $15.9 million.

Results of Operations

Revenue

Our revenue to date has consisted of grant funding from third parties and revenue recognized in connection with funding received under our agreements with Vulcan and LSDF, which are described in Note 7 to our consolidated financial statements. Other than grant funding, we do not expect to receive any revenue from our products until we receive regulatory approval and commercialize our products or until we potentially enter into collaborative agreements with third parties for the development and commercialization of our products. 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.

Three Months Ended March 31, 2013 2012

(In thousands)

Revenue $ 1,095 $ 1,496

The decrease during the three months ended March 31, 2013 was primarily due to lower total revenue recognized from our GPCR program funding agreements with Vulcan and LSDF. We recognized the remaining revenue in connection with the Vulcan and LSDF agreements during the first quarters of 2013 and 2012, respectively. No further revenue remains to be recognized under these agreements as of March 31, 2013.

Research and Development Expenses

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
                                                          March  31,
                                                       2013          2012
                                                        (In thousands)
          Direct external expenses:
          Clinical research and development:
          OMS302                                    $      887      $ 1,647
          OMS103HP                                         266          991
          PDE10                                            374            7
          Other clinical programs                           11           14

          Total clinical research and development        1,538        2,659
          Preclinical research and development           1,600        1,405

          Total direct external expenses                 3,138        4,064
          Internal, overhead and other expenses          3,408        2,614
          Stock-based compensation expense                 581          568

          Total research and development expenses   $    7,127      $ 7,246

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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.

The decrease in research and development expenses during the three months ended March 31, 2013 was due primarily to lower clinical trials expenses related to the completion of both our OMS302 Phase 3 clinical program in January 2013 and the first OMS103HP Phase 3 clinical trial for meniscectomy in December 2012. These two clinical programs were ongoing during the three months ended March 31, 2012. These decreases were partially offset by higher expenses related to advancing our MASP-2 program toward the clinic, employee costs and non-cash rent expense associated with the amortization of our BMR lease incentives. We expect our research and development expenses to increase in subsequent periods as we continue to advance our OMS103HP and OMS824 products through the clinic and initiate clinical trials for our MASP-2 and PDE7 programs, which we expect to do later in 2013.

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 the 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, financial condition and liquidity. 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.

Selling, General and Administrative Expenses



                                                                  Three Months Ended
                                                                      March  31,
                                                                  2013            2012
                                                                    (In thousands)
Selling, general and administrative, excluding stock-based
compensation expense                                           $    3,476        $ 1,759
Stock-based compensation expense                                      512            563

Total selling, general and administrative expenses             $    3,988        $ 2,322

The increase in selling, general and administrative expenses during the three months ended March 31, 2013 was primarily due to legal matters, including expenses in connection with our settled lawsuit with our former chief financial officer and related NIH matter and patent filings and legal fees related to our products, as well as higher expenses associated with the preparation for our planned commercial launch of OMS302 in 2014.

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Interest Expense

Three Months Ended
March 31,
2013 2012
(In thousands)

Interest expense $ 587 $ 494

The increase in interest expense during the three months ended March 31, 2013 was due primarily to a higher interest rate and a higher average balance on our Oxford notes during the 2013 period.

Other Income (Expense), Net

Three Months Ended
March 31,
2013 2012
(In thousands)

Other income (expense), net $ 112 $ (341 )

Other income (expense) principally includes rental income and costs associated with warrant modifications. Warrant modification expenses decreased from $511,000 in 2012 to $41,000 in 2013.

Liquidity and Capital Resources

As of March 31, 2013, we had $13.3 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 agreement with MLV, should we decide to do so, will be sufficient to fund our anticipated operating expenses, capital expenditures and note payments for at least the next 12 months. We may also consider other funding alternatives such as corporate partnerships, debt and equity financing.

                                                Three Months Ended
                                                     March 31,
                                                2013           2012
                                                  (In thousands)
                Selected cash flow data
                Cash provided by (used in):
                Operating activities          $  (8,968 )    $ (5,505 )
                Investing activities              8,707        19,678
                Financing activities                 22        (1,376 )

Operating Activities. Expenditures related to operating activities in these periods were primarily for research and development and selling, general and administrative expenses in support of our operations. Net cash used in operating activities increased for the three months ended March 31, 2013 primarily due to higher expenses related to advancing our MASP-2 program toward the clinic, increased marketing expenses tied to the planned commercial launch of OMS302 in 2014 and higher legal and employee costs. In addition, cash used in operating activities was reduced in the 2012 period by a $3.0 million cash lease incentive payment that we received from BMR. The increases in 2013 were partially offset by lower clinical trial expenses related to the completion of Phase 3 clinical trials for our OMS302 and OMS103HP programs in January 2013 and December 2012, respectively.

Investing Activities. Investing activities, other than the 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 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 these cash flows to be important to the understanding of our liquidity and capital resources.

Financing Activities. During the 2012 period, cash used in financing activities primarily related to principal payments on our Oxford notes. In December 2012, we amended the Oxford notes to provide for interest-only payments through December 31, 2013, resulting in decreased cash used in financing activities during the 2013 period.

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Funding Requirements

Because of the numerous risks and uncertainties associated with the development and commercialization of our products, and to the extent that we may or may not enter into collaborations with third parties to participate in development and commercialization, we are unable to estimate the amounts of increased capital requirements and operating expenditures required in the future. Our future operating and capital requirements will depend on many factors, including:

• the progress and results of our preclinical and clinical programs;

• costs related to manufacturing services;

• whether the hiring of a number of new employees to support our continued growth will occur at salary levels consistent with our estimates;

• the terms and timing of payments of any collaborative or licensing agreements that we have or may establish;

• the cost, timing and outcomes of the regulatory processes for our products;

• the costs of commercialization activities, including product manufacturing, marketing, sales and distribution;

• the cost of preparing, filing, prosecuting, defending and enforcing patent claims and other intellectual property rights;

• the extent to which we acquire or invest in businesses, products or technologies, although we currently have no commitments or agreements relating to these types of transactions;

• whether we receive grant funding for our programs;

• the extent to which we raise capital by selling our stock through our at-the-market equity facility with MLV, under which MLV is required to use its commercially reasonable efforts to sell our stock in accordance with our instructions;

• the extent to which we otherwise access the capital markets;

• the outcomes of our existing claims and legal proceedings; and

• the amount of revenue we generate from the sale of our products, which revenue we do not expect until at least 2014.

We expect our continued operating losses to result in an increase in the total amount of cash used in operations over the next several years. To meet our future capital requirements, we will need to finance our future cash needs through public or private equity offerings, debt financings or corporate collaboration and licensing arrangements. If we do not raise additional capital through equity or debt financings and/or one or more corporate partnerships, we may be required to delay, reduce the scope of or eliminate our research and development programs or reduce our planned commercialization efforts. We currently do not have any commitments for future external equity or debt funding other than our committed equity line financing facility described below that we do not expect to use before it expires on June 1, 2013. Additional equity or debt financing or corporate collaboration and licensing arrangements may not be available on acceptable terms, if at all, and any future equity funding will dilute the ownership of our equity investors.

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 direct MLV to sell shares of our common stock having an aggregate offering price of up to $60.0 million directly on The NASDAQ Global Market or through or to 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 Opportunity, Ltd., or 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 certain agreed-upon limitations based on the market price of our common stock at the time of the draw

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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.

Oxford Loan and Security Agreement

In October 2010, we entered into the Loan Agreement with Oxford pursuant to which Oxford agreed to lend us up to $20.0 million in two tranches of $10.0 million each. We borrowed the first tranche in October 2010, or Tranche 1, and the second tranche in March 2011, or Tranche 2. In December 2012, we entered into an amendment to the Loan Agreement pursuant to which we borrowed an additional $7.2 million, or Tranche 3, and amended the repayment terms of the existing outstanding indebtedness under Tranche 1 and Tranche 2. We had $20.0 million in principal outstanding indebtedness under the Loan Agreement as of March 31, 2013. Interest accrues at an annual fixed rate of 9.25%. The Loan Agreement provides for interest-only payments through December 31, 2013. In connection with the Loan Agreement, we agreed to pay Oxford a final payment fee equal to 7.0% of the borrowed $20.0 million, or $1.4 million, which we recorded as a discount on the outstanding debt. The final payment fee will be due upon the last payment date of the amounts we borrowed, whether upon maturity on December 1, 2016, or on the date of any prepayment of such amounts or in the event of acceleration upon a default. We also capitalized in other assets $168,000 in debt issuance costs that we incurred. Both of these amounts are being amortized to interest expense using the effective-interest method over the amended repayment term.

We may prepay the outstanding principal balance under the Loan Agreement in its entirety, plus accrued and unpaid interest, at any time upon delivery of prior notice to Oxford and the payment of a prepayment fee equal to 1.0% of the then-outstanding principal amount, which prepayment fee would be waived if we refinance the indebtedness with Oxford. As security for its obligations under . . .

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