Omeros (NASDAQ:OMER) Management shared that Omidria's net sales are annualizing north of $55 million in early November, which implies a significant improvement over Q3. I was worried about the growth trends after seeing the stark difference in management remarks in the first and second quarter and especially after the recent pipeline data barrage. And while the company did miss the consensus, it did so just barely and the growth trends in Q4 are really encouraging. However, the pipeline remains the real value driver and getting OMS721 approved in just one of the five targeted indications could unlock significant shareholder value in the following years.
Q3 overview and Q4 2016 and 2017 outlook for Omidria
Omidria sales were up 13% sequentially to $11.3 million (sell-in) and were up 18% on a sell-through basis. The company did miss the analyst consensus by $0.3 million, but sales came near the top of my conservative $8.5-11.5 million range (which I recently revised down from a $10-12 million range). According to CEO Demopulos, there was some seasonal weakness in July and in the first half of August, but growth accelerated in the second half of August and in the following months. September sales showed a 21% increase over June and the company said that Omidria's net sales are annualizing north of $55 million in early November, which translates into around $14 million on a quarterly basis. If we see more growth throughout November and the first half of December (I assume the number of surgeries goes down significantly during the holidays), we could see Q4 sales in the $15-16 million range. Some of the initiatives Omeros has recently initiated are yet to have a significant effect on sales:
• The consignment program was launched in June and the first customers were on board at the end of July. Utilization has increased 50% in those accounts. Utilization across all customers should improve as they sign up for the program. This program alone could add a few million in net sales a quarter in 2017. Assuming we get similar results in the majority of accounts and that 20-30% of accounts sign up in early 2017, revenues could increase by $1.5 million to $2 million a quarter based on the recent annualized run rate of $55 million. This would add $6-8 million in net sales in 2017, or even more if we assume a higher percentage of participants in the program.
• The company did not pursue the hospital opportunity as aggressive as it should because it takes longer to get them on board (getting through the P&T committee). But once a hospital is on board, it tends to stick around and become a regular customer. The company has put more emphasis on this opportunity in Q3 and vials sold to hospitals grew 41% over Q2. The impact on net sales was not as high due to increased discounts to hospitals, but sales have nonetheless increased. Aside from increased stickiness, the company noted another positive long-term impact of hospital penetration - residents. A hospital is a learning hub and once residents leave, they tend to use what they are familiar with. And if they were trained to use Omidria in cataract surgery, they will tend to use it when they move on (especially when they see the many clinical benefits of using Omidria).
• Omeros has ramped up the efforts around Omidria's clinical benefit message and management claims it has led to a nationwide increase in sales. Five manuscripts underscoring the real world benefits of Omidria were recently submitted for publication in peer-reviewed journals (independent studies) and an additional one is in preparation and these publications should have a positive effect on Omidria's uptake in the following quarters. These manuscripts include results from independent studies and ...describe a host of clear clinical advantages of Omidria compared to the use of epinephrine. Reduced complication rates, reduced use of costly and iris-damaging pupil expanding devices, faster surgical times allowing increased patient throughput, greater ease of performing femtosecond laser cases and better visual acuity following surgery, all of these difference meeting statistical significance.
The company's clinical efforts are also focused on the importance of the anti-inflammatory effect of Omidria and not only during surgery but postoperatively (from the Q3 call, emphasis mine):
The message that the ketorolac and Omidria prevent intraoperative pupil constriction and postoperative pain is well understood and accepted. Now, additional data have been generated that further underscore the importance of the anti-inflammatory action of Omidria and experts are proposing that use of Omidria can obviate the need for pre- and postoperative topical NSAID drops in patients undergoing cataract surgery.
These topical drops can be expensive and compliance is always a challenge. We have learned that a letter to the editor is currently in press in the Journal of Ocular Pharmacology and Therapeutics, discussing Omidria versus topical NSAID drops and a full manuscript detailing the data is being finalized for submission.
This could become another major selling point for Omidria and could positively affect uptake in 2017 and beyond.
So, Omeros is not wasting time and is doing everything it can to drive sales higher. Granted, it did not meet this year's objective of getting to a cash flow breakeven point, but the recent growth trends are very positive and cash flow breakeven is not out of reach in late 2017. Sales trends have been volatile and it is hard to predict where quarterly sales will be in 2017, but if Q4 sales are at least $14-15 million, a quarterly run rate north of $20 million seems achievable by Q4 2017. Based on the growth trends since last year's launch, Q1 and Q3 seem like seasonally weak quarters and I assume Q1 2017 sales will be flat or just slightly above or below Q4 sales. A solid increase should occur in Q2 and we should then see a flat or slightly higher Q3, followed by a strong Q4
So, my preliminary 2017 sales estimate is between $64 million and $74 million. The current analyst consensus for 2017 is $91.6 million and I think it needs to come down. The numbers are probably skewed higher because of the highest estimate of $140 million, which seems out of touch with reality.
Omeros' Middle East partner should start selling Omidria in the following weeks. I do not expect much in terms of revenue contribution, but it could be a nice addition in 2017 and beyond. Omidria's 2017 revenues from the Middle East (Omeros' part) will probably be in the low to mid-single digits.
There is still no word on the EU partnership as the company wants to leverage its success in the U.S. to get a better deal in Europe. Since Omidria hasn't really ramped up in a significant way, I do not expect a partnership announcement in the near-term, but this becomes a realistic possibility if/when sales exceed $20-25 million a quarter. Partnerships in other regions are also possible in the 2017/2018 timeframe.
Financial review
Omeros guided for higher R&D spending in Q4 and in 2017 but did not say anything specific. I assume cash expenses will rise to at least $25 million and probably $26-27 million a quarter, or $100-110 million for the FY2017. Based on my revenue estimates, the company should burn around $10 million in Q4 2016 and $26-46 million in 2017, for a total burn rate between $36 million and $56 million over the next five quarters.
At the end of Q3, Omeros had $58.2 million in cash (including restricted cash). The new credit facility has reduced the restricted cash by $5 million and added $3 million to the balance sheet, which means that Omeros had around $56 million in available funds on a proforma basis ($61 million including restricted cash). Based on the high end of my cash burn estimate, the company would have just $2 million left by the end of 2017 (or $7 million including the restricted cash), while it could have around $20 million based on the more optimistic scenario.
Omeros has the option to draw an additional $25 million if it satisfies one of these two conditions: $18 million a quarter in Omidria sales or a market cap exceeding $700 million. The company can draw an additional $20 million if Omidria net sales reach $25 million a quarter or if the market cap is north of $1 billion. Based on my estimates for 2017 sales, Omeros could satisfy the first condition in either Q2 or Q4 2017 (Omidria sales above $18 million) and it could draw the funds even sooner if the share price goes higher in the following months. And we should not forget the $40 million ATM the company has in place and which it could use if the stock heads higher. So, it's certainly not smooth sailing from here, but based on the recent growth trends, I think that the financial situation is quite manageable.
Pipeline update
I covered the recent pipeline developments in several articles and daily updates in the Growth Stock Forum, but some things are worth repeating:
• Omeros announced positive phase 2 data in renal diseases in mid-October. The most promising results were achieved in IgA nephropathy and to some extent in membranous nephropathy. The results were based on just two patients in each indication, but are promising nonetheless. Key efficacy measures (urine albumin to creatinine ratios, or uACRs and change in 24-hour urine protein levels from baseline to the end of treatment) associated with improved renal survival were met with statistical significance in IgA nephropathy (p=0.011 for uACR and p=0.017 for 24-hour urine protein levels) while the combined efficacy effects did not reach statistical significance in membranous nephropathy, but the results were promising. Daily steroid doses in both trials were significantly reduced as well, which is another positive sign. It is estimated that there are around 8,000 IgA patients and more than 3,000 membranous nephropathy patients in the U.S.
• Omeros announced positive data from OMS721 phase 2 trial in patients with hematopoietic stem cell transplant-associated microangiopathy, or HSCT-TMA. Three patients completed treatment and mean TMA markers improved over time. The mean LDH level was cut in half (p<0.01) while mean haptoglobin increased over 1.54 g/L from baseline of 0.33 g/L (barely missing statistical significance, p<0.06,). The mean platelet count increased as much as 57,000/µL from a baseline of 18,000/µL but did not reach statistical significance in this small patient population. There are between 2,000 and 5,000 new HSCT-TMA patients in the U.S. every year.
• Steroid-dependent C3 glomerulopathy is another indication Omeros is targeting. On the Q3 call, the company revealed: "findings from kidney biopsies in one patient demonstrated substantial improvement with markedly reduced renal C3 deposits following treatment with OMS721." The company also noted that this particular patient "is significant as well for the fact that he had accelerated progression of his disease while being treated with Soliris." The incidence of C3 glomerulopathy is double that of aHUS and a large number of patients advance to end-stage renal disease.
The positive results have further validated OMS721's potential in these rare diseases (in addition to aHUS). What is important to note here is that, unlike aHUS, which is dominated by Alexion's Soliris, there are no approved treatments for these other indications, meaning that Omeros will have these markets for itself. Omeros bears are arguing that the company will not be able to take market share from Soliris in aHUS (and as stated in my earlier articles, I disagree), and since there is no competition in these other diseases and given their severity, substantial market penetration is all but certain if OMS721 is approved.
I think that Omeros' pipeline still doesn't receive the credit it deserves. Getting just one of these indications approved translates to significant upside potential in the following years. It is also important to note that Omeros is pursuing accelerated approval in all five OMS721 indications, meaning that they should get approved much faster. We could see OMS721 generating sales as soon as 2018 assuming positive phase 3 data in aHUS. The combined addressable market in the U.S. alone for the three indications mentioned in this article (IgA and membranous nephropathy and HSCT-TMA) is at least $4 billion (assuming a $300,000 a year price tag, which is half the price tag of Soliris) at the low end of the patient number estimates and I believe that market penetration rates will be high considering the lack of treatment options and OMS721's promising efficacy and safety profile.
Aside from OMS721, the company announced positive preclinical data of OMS906 in PNH. A single dose of OMS906 resulted in "sustained ablation of systemic APC (alternative pathway of complement) activity for approximately 16 days… The primate data are consisted with recently reported results from well-established animal models in which OMS906 reduced the incidence and severity of arthritis by 86% (p<0.005) and 90% (p<0.01) respectively and significantly improved the survival of PNH-like red blood cells approximately four-fold better (p=0.029) than did a complement factor 5 (C5) inhibitor." It's still early days for OMS906, but I think it has the potential to threaten Alexion's dominance in PNH.
Omeros also announced some promising phase 2 data in addiction (cocaine and heroin), but we can't actually judge the results without proper quantification.
The OMS824 trial is still on hold. Omeros is waiting for Pfizer's PDE10 inhibitor phase 2 data in Huntington's disease before deciding what to do with OMS824. Pfizer has completed enrollment in its phase 2 study and while there is no specified timeline, I think we should see the data sometime in 2017. Positive data from the Pfizer trial could positively affect Omeros' share price as the company will likely decide to proceed with the OMS824 trial.
And finally, Omeros intends to further expand its pipeline with its GPCR program. The company is advancing preclinical programs on a number of targets (source: Q3 earnings call): triple negative breast cancer, demyelinating diseases such as multiple sclerosis, appetite and eating disorders, osteoporosis and seasonal affective disorder. The company is also encouraged by the progress on GPR174, "a receptor that represents a novel target for enhancing the immune response and a unique approach to immune therapies and cancer." The company expects to share additional information on this program before the end of 2016. It's still very early for all of these preclinical programs to add value in the near-term, but they could eventually become very valuable assets.
Conclusion
While the funding risk is not completely off the table, Omeros has made significant progress with Omidria in Q3 and especially in Q4 and the company seems on its way to achieving cash flow breakeven in late 2017 or in 2018 without additional dilution (or with minimal dilution if the credit facility covenants are not satisfied). Omeros' pipeline remains largely neglected and the wealth of positive data the company reported recently is far from being fully appreciated. I remain a long-term Omeros bull and am encouraged by recent developments on both the commercial and product development side.
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oneil trader from stock growth forum
