OMER - Omeros: $200M Added To The Company's Balance Sheet Upgrading To Strong Buy

Summary

• Omeros Corporation's stock has rallied 66% on Feb 6th based on the milestone payment of $200M, which eliminated the potential cash runway overhang some investors were worried about.
• With the additional $200M cash, now the enterprise value of the company is around $115M, which we believe is still very cheap for the company's compelling MASP-2 platform.
• We upgrade Omeros Corporation's rating to strong buy from our previous buy rating.

Key news

Omeros Corporation ( OMER ) announced that Rayner Surgical, Inc had paid a $200 million milestone payment according to the Asset Purchase Agreement, which was signed on December 1, 2021, for the ophthalmology product OMIDRIA sold to Rayner in December 2021. According to the agreement, the royalty rate applicable to the US net sales of OMIDRIA has decreased to 30% from 50%. Furthermore, we note that Rayner will be obligated to pay a royalty interest of 15% on non-US revenue of OMIDRIA. The company ended 2022 with $195M of cash on hand, and with the additional $200M received on Feb 6th, we believe the company would have around $395M cash to deploy, which is at least 2 years of cash runway. We find anything beyond 1 year investible.

Why did the stock skyrocket 66% on February 6th

Omeros Corporation's stock has rallied 66% on Feb 6th based on the milestone payment of $200M, which eliminated the potential cash runway overhang some investors were worried about. Furthermore, we attribute the jump in stock price to high short interest (~14.5% of the float), which we believe some investors (i.e., convertible bond holders) may decide to cover, driving the stock price up significantly more. With the additional $200M cash, now the enterprise value of the company is around $115M, which we believe is still very cheap for the company's compelling MASP-2 platform. For a more detailed analysis of the platform and our thesis around its upcoming IgAN catalyst, please read our previous article .

Risks

We reiterate risks from our previous article :

The company has >$300M debt and high cash burn due to its R&D programs; as the company is not cashflow positive yet, the company may issue more shares and dilute the value of the shares. As Narso is not approved yet, we believe there is clinical and regulatory risk; where if the drug does not receive FDA or EMA approval, the stock could suffer a big sell-off. Furthermore, there could be CMC risk as the company relies on third-party manufacturers to produce their pipeline products. Also, the management and IR don't seem to be proactive in marketing their story; for example, we haven't seen any updated deck available on the company, and the company is extremely undercovered by sell-side analysts, which may be the reason why Narsoplimab's IgAN story is under the radar.

Conclusion

We upgrade Omeros Corporation's rating to strong buy from our previous buy rating. We believe the Feb 6th news on $200M to be a net positive for the company as it eliminated the potential cash runway overhang of the stock. We continue to be a buyer of OMER based on the company's IgAN platform value and upcoming IgA nephropathy pipeline, and we believe the current enterprise value of $115M is highly attractive. We see a potential 200-400% upside from the current price level if any positive newsflow takes place in any of the company's clinical programs, as the market expectation of the company is at rock bottom at the moment. We believe the pessimism in the market stems from the management's poor track-record of meeting timelines (with frequent delays in trial readouts) and years of underdelivering (receiving CRL in 2021 ). However, we believe at this valuation, the potential upside outweighs the potential downside, and we have established an option-sized position, and we hope to hold it long-term.

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