OMER - Omeros: Where Medical Hopes Tangle With Fiscal Ropes

2023-08-24 08:00:00 ET

Summary

• Omeros focuses on immunologic disorders; faces FDA approval challenges for lead drug narsoplimab.
• Q2 2023 reports net loss of $37.3M; significant debt and rising expenses threaten financial stability.
• Investment recommendation: "Sell" due to financial concerns, regulatory hurdles, and treatment delivery issues.

Introduction

Omeros (OMER) is a biopharmaceutical firm focusing on immunologic disorders, with lead drug narsoplimab in trials for HSCT-TMA and IgA nephropathy. Despite FDA hurdles, they seek approval for narsoplimab. Their portfolio includes OMS1029, OMS906, and OMS527 for various ailments. They sold Omidria for cataract surgery to Rayner, and part of its royalties to DRI for $125 million.

The following article details Omeros' financial situation, drug developments, challenges with narsoplimab's IV administration, and FDA approval hurdles. I recommend selling the stock.

Q2 2023 Earnings

Looking at Omeros' most recent financial report , the company recorded a net loss of $37.3M for the quarter ending June 30, 2023, up from a $30.8M loss the prior year. Cash burn stood at $30.1M, including an extra $3.4M due to Rayner's late royalty payment. Omidria royalties from Rayner decreased to $10.7M from $17.2M year-over-year despite an increase in U.S. net sales. Expenses climbed to $40.9M, largely because of the OMS906 program and clinical trial costs. Interest expense rose to $7.9M due to obligations from the Omidria royalty receivables sale. The company's earnings from interest and other sources grew to $4.5M. Net income from discontinued operations dropped to $7M. Finally, they reported $341.3M in cash and short-term investments.

Liquidity & Cash Runway

Turning to Omeros' balance sheet , as of June 30, 2023, cash and cash equivalents stood at $6.6M, with short-term investments amounting to $334.7M. The combined value of these liquid assets totaled $341.3M. Over the six months ended June 30, 2023, the net cash used in operating activities was $142.2M. Calculating the average monthly cash burn, it amounts to $23.7M ($142.2M ÷ 6 months). With the available liquid assets, the company's cash runway is approximately 14.4 months ($341.3M ÷ $23.7M). However, these estimates are my own and may differ from other analyses. Observing the company's overall financial health, while the liquidity position seems favorable with a cash runway >1 year, the firm carries significant debt with $316.2M in unsecured convertible senior notes. This, paired with an accumulated deficit of $706.7M, could potentially necessitate additional financing, especially if the company continues to operate at a loss in the next year.

Valuation, Growth, & Momentum

According to Seeking Alpha data: Omeros's capital structure reveals a significant debt relative to its market capitalization, but this is somewhat offset by a small cash position. With an enterprise value of $347.67M, the company's valuation metrics are difficult to interpret due to the absence of standard ratios like P/E and EV/Sales for the given timeframe. In terms of growth, Omeros is anticipated to increase its revenues, jumping from no recorded sales in 2023 to $27.50M in 2024 and further accelerating to $47.76M by 2025, marking a significant YoY increase. However, its stock momentum appears turbulent. Over the past year, the stock has largely underperformed the S&P 500, indicating possible investor skepticism.

With a market capitalization under $300M ($222M), potential investors should exercise caution. Microcap stocks can be subject to higher volatility, limited liquidity, and potentially less financial transparency, making them riskier investments.

Omeros Jumps in: IV vs. Oral in the Nephropathy Arena

Omeros is advancing the ARTEMIS-IGAN Phase 3 trial for narsoplimab as a treatment for IgA nephropathy. The trial includes patients aged 18 and up with verified IgA nephropathy and elevated proteinuria. The regimen starts with a weekly IV dose for 12 weeks, with potential extended dosing to achieve the desired outcome. The main goal is proteinuria reduction by 36 weeks. If patients with high proteinuria display significant improvements at this mark, it could support the drug's approval. The trial allows sample size adjustments, essential for assessing full or accelerated approval at 36 weeks. Notably, after the FDA considered investigator feedback, high-proteinuria patients assigned to the placebo group will receive narsoplimab following 18 months of blinded treatment. Narsoplimab has secured breakthrough therapy and orphan drug designations in the U.S. and Europe, highlighting its importance in treating IgA nephropathy.

However, IV treatment for IgA nephropathy has its drawbacks compared to oral medications. It demands regular visits to medical centers, possibly consuming hours and disturbing daily routines. There's potential for complications, like infections, despite risk minimization. Some patients might find the procedure uncomfortable, and IV therapies can be costlier, possibly creating financial hurdles.

However, IV treatments can be essential for certain patients or conditions. The choice depends on evaluating the patient's condition, the drug, and weighing benefits against risks.

Omeros understands these challenges. They're focusing on a specific patient subset (e.g., "those with proteinuria levels ?2 g/day") that might benefit from IV narsoplimab. Additionally, they're progressing with OMS1029, a long-acting oral MASP-2 inhibitor in Phase 1 trials.

HSCT-TMA Treatment: Omeros's Pursuit Amid FDA Reservations

Transitioning from the discussions on IgA nephropathy treatments, Omeros is also striving to make significant advancements in the realm of hematopoietic stem cell transplantation-associated thrombotic microangiopathy (HSCT-TMA). Securing regulatory approval for narsoplimab in this arena has not been without its challenges. According to the company, in October 2021, the FDA raised concerns regarding the drug's effectiveness, prompting a request for more exhaustive data before any potential approval. Omeros's effort to challenge this FDA stance didn't prevail. However, it paved the way for a clearer pathway for resubmission. For a successful resubmission, Omeros intends to provide a more thorough analysis and information in their BLA. In my view, however, it seems more in-depth studies, possibly even more pivotal trials, will be required.

My Analysis & Recommendation

The multifaceted picture painted of Omeros suggests a company with commendable ambition, pressing forward with its drug portfolio despite facing significant challenges both clinically and financially. The balance sheet clearly demonstrates that while Omeros has a decent cash runway of around 14.4 months, its significant debt and increasing net losses are causes for concern. This paired with an accumulated deficit nearing three-quarters of a billion dollars could strain the company's future financial standing.

Investors ought to also be wary of the firm's fluctuating momentum and microcap status, as these attributes carry intrinsic risks such as heightened volatility, limited liquidity, and potential lack of transparency. Furthermore, while the potential of narsoplimab in treating HSCT-TMA and IgA nephropathy is evident, it comes with its own set of hurdles. The FDA's concerns, which have caused delays in the approval process, combined with the logistical and financial challenges associated with IV administration, cannot be overlooked.

In light of these challenges, and given the firm's financial performance, investors should be cautious. The immediate future for Omeros appears uncertain. The pivotal trials, high net losses, and debt burden suggest a cautious approach for investors, especially given the FDA's past concerns about narsoplimab.

Therefore, my investment recommendation is "Sell". While Omeros' commitment to medical advancement and patient welfare is laudable, the totality of their financial picture, regulatory struggles, and inherent risks associated with their lead drug signals a bumpy road ahead. The company might have a brighter future in the long term, especially if they can navigate FDA hurdles and find more cost-effective treatment delivery methods. But in the short to mid-term, the outlook appears precarious, suggesting it may be prudent for investors to divest before more tangible positive results materialize.

Risks to Thesis

When the facts change, I change my mind.

Below are some potential risks that may contradict my "Sell" recommendation.

• Overlooked Potential: Omeros is in a fast-evolving biopharmaceutical landscape. With their lead drug narsoplimab gaining traction in multiple geographies, any significant breakthrough could contradict my "Sell" recommendation.

• FDA Approval: While there have been hurdles, FDA approval for narsoplimab, if achieved, would be a game-changer, significantly altering Omeros' valuation and prospects.

• Miscalculations: My analysis of their cash runway might be too conservative. A successful capital raise or better-than-expected royalty revenues could extend their operational runway.

• Evolving Treatment Methods: While IV administration presents challenges now, technological advances or operational improvements could ease these concerns, making the treatment more viable.

• Misjudged Momentum: My assessment of Omeros' stock momentum might not fully capture the potential upside if investor sentiment shifts positively.

• R&D Breakthroughs: The success of other drugs in Omeros' pipeline, like OMS1029, could change the company's prospects drastically.

• Strategic Partnerships or Mergers: Any strategic partnership or acquisition offer could boost stock value and validate Omeros' potential.

• Competitive Landscape: I might have underestimated Omeros' positioning relative to competitors. If rivals face setbacks, Omeros could benefit.

For further details see: