Omeros Corp Q3 FY2022 Earnings Call

Good afternoon and welcome to today's earnings call for Omeros Corporation. At this time, all participants are in a listen-only mode. After the company's remarks, we will conduct a question-and-answer session. Please be advised that this call is being recorded at the company's request and a replay will be available on the company's website for one week from today. I'll turn over the call over to Jennifer Williams, Investor Relations for Omeros.

Good afternoon and thank you for joining the call today. I'd like to remind you that some of the statements that will be made on the call today will be forward-looking. These statements are based on management's beliefs and expectations as of today only and are subject to change. All forward-looking statements involve risks and uncertainties that could cause the company's actual results to differ materially. Please refer to the special note regarding forward-looking statements and the company's quarterly report on Form 10-Q, which was filed today with the SEC and the risk factors section of the company's annual report on Form 10-K for a discussion of these risks and uncertainties. Now, I would like to turn the call over to Dr. Greg Demopulos, Chairman and CEO of Omeros.

Thank you, Jennifer. Good afternoon, everyone. We appreciate you joining us for today's call. We'll begin with a corporate update and an overview of our third quarter 2022 financial results, followed by a more detailed financial summary. Joining me on the call are Mike Jacobsen, Nadia Dac, Cathy Melfi, and Steve Whitaker, our heads of Finance, Commercial, Regulatory, and Clinical. Let's start with narsoplimab in transplant-associated thrombotic microangiopathy or TA-TMA. We have received the decision from the FDA's office of new drugs regarding our appeal of the Complete Response Letter we received earlier. This decision suggests a path forward based on historical survival data, proposing a resubmission that compares responses from our pivotal trial to a threshold from an independent literature analysis and demonstrates increased survival in our trial compared to a suitable historical control group. It also indicates that compelling evidence of superior survival against a well-matched historical control group could be adequate without the independent literature analysis. We are currently analyzing the details of this decision with our regulatory and legal teams, and we will update shareholders once we have a clearer understanding of our preferred path forward. In our narsoplimab development program, the Phase 3 ARTEMIS-IGAN trial assessing narsoplimab for IgA nephropathy treatment is on track to report nine-month proteinuria data in mid-2023. Discussions are ongoing with the US government about our preparedness strategy for current and future pandemics and forthcoming funding pathways, presenting numerous opportunities for our COVID-related assays and narsoplimab as a therapy for COVID-19 and possibly other severe infectious diseases. We have also published two recent peer-reviewed articles and are preparing several manuscripts focusing on the role of MASP-2 and the lectin pathway in COVID-19 and various pulmonary diseases. Moving on to OMS1029, our next-generation antibody against MASP-2, we are advancing through our Phase 1 clinical trial in healthy subjects, having completed three of the six planned cohorts. The pharmacokinetic and pharmacodynamic data are consistent with our expectations and the drug has shown good tolerability without safety issues. Preparatory toxicology and regulatory activities are on schedule to initiate a Phase 1 multiple ascending dose study of OMS1029 in mid-2023, allowing rapid advancement into various Phase 2 evaluations. We anticipate a once monthly to quarterly administration for OMS1029, making it suitable for chronic conditions. As we finish developing our MASP-2 portfolio, we are nearing the identification of a lead candidate for our small molecule MASP-2 inhibitor, with data expected by year-end. Now, let's discuss OMS906, our lead antibody targeting MASP-3. A Phase 1b program is currently assessing OMS906 in both ravulizumab-treated and treatment-naive PNH patients, with enrollment expected to start in December and initial patient data in the first quarter of 2023. An additional Phase 1b program for OMS906 is beginning in patients with C3 glomerulopathy, with data available soon after the PNH results. The commercial potential for alternative pathway inhibitors is well established, and we believe OMS906 will likely show significant benefits over existing alternatives, including reduced infection risk and a more convenient dosing schedule. An important benefit of MASP-3 is that it does not appear to be an acute phase reactant, which can complicate dosing during inflammatory events, unlike other alternative pathway targets. This characteristic may offer OMS906 a stable dosing regimen, reducing the risk of treatment failure during such events. Recent results from a Phase 3 trial involving either ravulizumab or eculizumab combined with iptacopan show substantial reductions in hemolysis in PNH patients, and we expect OMS906 to yield similar results. Turning to financial results for the third quarter, let's look back briefly at some history. In December, Omeros sold its ophthalmic product, OMIDRIA, to Rayner Surgical. This sale required us to reclassify all historical OMIDRIA revenues and expenses, recording the future estimated OMIDRIA royalties as a contract royalty asset. Currently, our royalty rate for US net sales of OMIDRIA is 50%, which represents around 80% of total operating profit. The loss for this quarter was $17.5 million, or $0.28 per share, compared to a $22.7 million loss, or $0.36 per share, for the same quarter last year. Our non-cash expenses were $4.6 million this quarter and $6.4 million in the previous year. Our total cash burn for the quarter was $26.6 million, approximately $5 million of which was for manufacturing costs. Our royalty earnings from Rayner this quarter were $16.5 million, a slight decrease of about $700,000 from the second quarter due to the timing of wholesaler purchases leading up to the July 4 holiday. However, Rayner's unit sell-through increased by 4% compared to the second quarter. We expect continued growth in OMIDRIA sales in the fourth quarter. As of September 30, 2022, we had $221 million in cash and investments to support ongoing operations, which includes $125 million received from DRI Healthcare Trust for a portion of our anticipated OMIDRIA royalties. This transaction closed on September 30, under terms that require DRI to be paid solely from the OMIDRIA royalties we obtain from Rayner. The structure of this agreement is favorable to Omeros, with potential total royalty payments to DRI capped at $188 million through 2030. The maximum royalty payment to DRI for 2022 is $1.7 million, increasing to only $13 million in 2023. DRI will not be able to recover the amount it is due if our royalties are below the capped amount, shifting risk away from Omeros. Furthermore, our company has received the up-front payment of $125 million and will continue earning all royalties beyond our capped payment to DRI. Additionally, I want to share some positive news regarding OMIDRIA. Recently, CMS released its 2023 final rule for the outpatient prospective payment system, reaffirming OMIDRIA's qualification for separate payment when used in cataract or lens replacement surgeries under the non-opioid surgical pain management policy through 2023. The bipartisan NOPAIN Act is progressing in Congress and would provide additional payment for non-opioid pain management drugs like OMIDRIA, triggering a $200 million milestone payment to Omeros, which would be fully ours due to its exclusion from the DRI transaction. Finally, we continue work on our other pipeline programs, including our PDE7 inhibitor, OMS527, which is being discussed for third-party funding to advance its development for addictive disorders. Our encouraging preliminary data from Emory University in primate models will help us consider a Phase 2 trial for OMS527 in patients with L-DOPA induced dyskinesias, a condition with significant unmet needs. We are also progressing our immuno-oncology efforts, exploring cellular and molecular therapies that emerge from our GPCR research. We aim to improve T-cell therapies' efficacy against tumors by addressing limitations in current treatments and enhancing T-cell memory. Promising preliminary data supports our ongoing development, and we will keep you updated with further developments. Now, I'll turn the call over to Mike Jacobson, our Chief Accounting Officer, to provide a detailed discussion of our third quarter financial outcomes and more information on the DRI transaction.

Yes. Thanks, Greg. As Greg briefly discussed in December of last year, Rayner acquired OMIDRIA and associated business operations. The sale required us to restate our financial statements for all the prior periods into continuing operations and discontinued operations, which means that for all of 2021 OMIDRIA revenue and operating expenses are shown in a single line on our income statement as discontinued operations. In addition, for 2022 any OMIDRIA related activities are also included in discontinued operations. All of our other activities are included in continuing operations. We received royalties of 50% of the net sales of OMIDRIA in the US, until the earlier of either January 1, 2025, or the payment of the $200 million milestone. The milestones to be paid by Rayner in the event and a separate payment is secure for OMIDRIA for a continuous period of at least four years. Thereafter, we'll receive a 30% royalty on US net sales for the duration of the relevant patent terms, which extends to at least 2033. We will also receive a 50% royalty on any non-U.S. net sales of OMIDRIA over the life of the relevant patents. From an overall standpoint, considering US royalties and the reduction in our operating expenses, we received nearly 80% of the US operating profit when royalties are 50% and then over 40%, when the royalty is 30%. Turning to our actual sales. Our net loss for the third quarter was $15.5 million or $0.28 per share. This compares to a $30.8 million loss or reporting $0.09 per share for the second quarter of this year. Our non-cash expenses for this quarter were $4.6 million or $0.07 per share. As of September 30, 2022, we had $221 million of cash, cash equivalents and short-term investments available for our general operations. This is a $98 million increase from June 30 of this year. Excluding the $125 million received from DRI, our decrease in cash and investments from the end of the second quarter was $26.6 million. We also have an at-the-market sales agreement that allows us to sell from time to time, up to $115 million of common stock. As Greg discussed earlier, on September 30, we entered into an agreement with DRI whereby we received $125 million upon closing and are obligated to pay DRI up to $188 million out of the monthly royalties on OMIDRIA net sales between September 1, 2022 and December 31, 2030. Monthly, as Rayner makes the royalty payments, DRI receives their predefined portion of the royalty payments, which is a pro-rated monthly portion of the annual royalty cap for the applicable year. We are entitled to any remaining royalties received. DRI is not entitled under the agreement to carry forward and later recoup any shortfall in the royalties received on OMIDRIA for any annual period or less than the cap amount applicable to that calendar year. In addition, DRI has no recourse to our assets other than OMIDRIA royalty receipts. As required under GAAP, we have recorded a $125 million receipt from DRI as a liability on our balance sheet rather than as a reduction in our OMIDRIA contract royalty asset. As Greg mentioned, despite this being an asset sale without any recourse to securitization other than the predefined royalties owed, we are required to book the $125 million payment as a liability. The direct result of DRI's royalty payments being capped, we will record implied interest expense at 9.4% on the outstanding liability and the implied interest expense will be recorded as a component of continuing operations in our income statement. The annual amount that DRI is entitled to receive and additional details on the transaction are included in Note 8 in our quarterly 10-Q filed earlier today. Costs and expenses from continued operations for the third quarter were $50.8 million, which is an increase of $13.3 million from the second quarter. The increase is primarily due to commercial narsoplimab drug substance manufactured in the third quarter, which we expensed as research and development costs, given that we do not yet have FDA approval for narsoplimab. As we finalize our path forward for TA-TMA, we continue to gate on narsoplimab sales and marketing spend until the timing of FDA approval is clear. Interest expense for the third quarter was $5 million and consistent with the previous quarter. Now let's look at OMIDRIA royalties. As I mentioned previously, royalties earned are recorded as a reduction in the OMIDRIA contract royalty asset on our balance sheet. In the third quarter, extra royalties earned from OMIDRIA sales was $16.5 million, which was a decrease of $700,000 from the second quarter. The decrease is due to the timing of the wholesaler purchases at the end of the second quarter due to the July 4 holiday. For the third quarter, actual OMIDRIA unit sales purchased by the ASCs and the hospitals increased 4% over second quarter purchases, while Rayner’s gross to net discounts remain consistent. Discontinued operations include two key components; royalty interest income and periodic remeasurements to the OMIDRIA contract royalty asset. We recorded $37 million of income in discontinued operations in our third quarter income statement, recognizing for accounting purposes, the $8 million of interest earned on the amended contract for the asset and $29 million in the remeasurement adjustments to the OMIDRIA contract royalty asset based primarily on the increase in OMIDRIA sales that we're seeing. Now let's take a look at our expected fourth quarter results. We expect operating costs from continuing operations in the fourth quarter to decrease from the third quarter of 2022, as narsoplimab drug substance manufacturing for the year was completed and expensed in the third quarter. Interest expense for the fourth quarter should be approximately $8 million. This is an increase of $3 million due to the transaction with DRI being accounted for as a liability. Income from discontinued operations should be in the $8 million to $9 million range. With that, I'll turn the call back over to Greg.

All right. Thanks, Mike. Operator, let's open the call to questions.

Thank you. At this time, we will conduct a question-and-answer session. Our first question comes from Colin Bristow with UBS.

Hey good afternoon, and thanks for taking my question. So on the HSCT-TMA indication. Just curious, is there an outcome here where you would ultimately abandon taking this forward? And then in terms of the comparable historic data set FDA wants this compared to. It seems likely that FDA presumably already performed some sort of similar internal review versus what they're asking you to do? I'm just curious, has FDA given any indication of this or the efficacy bar that it believes is the appropriate benchmark? Thanks.

Yeah. Hi, Colin, and thanks for the questions. In answer to your first question, look, we believe, as we have believed since we've seen the data on this drug that this should be approved and warrant approval. So with respect to abandoning that, I mean, that's really not on the option table at this point. I mean, so I think that answers that pretty clearly as of now. With respect to your second question, did FDA conduct research with a historic control group and may have some idea of the threshold that they're expecting. We have no indication of that, but can't speak for what FDA has done to that regard. I'll ask Steve or Cathy, if they have any other views on that?

No, I don't know if FDA did anything, but it would surprise me if they had actually done an independent review.

Okay. Thank you.

Thanks, Colin.

One moment for our next question. And our next question comes from Steve Brozak with WBB Securities.

Hey. Good afternoon, Greg.

Good afternoon.

Two questions. The first one, I'm not sure if you're aware, but it looks like there's been some negative voting on a recent study and how they were looking at their therapeutic on COVID. But, one of the questions that popped up, specifically around it was a failure to understand mechanism of action. I'm not going to compare them to you, because obviously, it's completely different. But can you go and give us as much detail as possible on how comfortable you are with mechanism of action? And specifically, how that brought you into developing the diagnostic approach to understand what the markers, what the signals were and as much detail as you can give on that. And then I've got a follow-up question, please.

I'm sorry, Steve, you're asking about mechanism of action in TA-TMA or mechanism of action in COVID. I'm trying to make sure I answer your question.

Sorry, absolutely. Mechanism of action that as you understand in COVID and also, how the companion diagnostic system you've set up plays into this and not just what you've done, but what other people have written about it. And I've got one follow-up afterwards, please.

Sure. I understand you want detailed information. The details are well documented, not only in our publications but also in the publication in Frontiers in Immunology and the manuscript in Clinical and Translational Medicine, which clearly explain the mechanism. Additionally, the first publication on the response to narsoplimab in severe COVID patients treated in Bergamo provides further clarity. I'll summarize this at a high level since much of it is already documented. Essentially, COVID-19 causes endothelial injury, similar to what we see in TA-TMA. We have data, including published data from Bergamo and a controlled double-blind study from I-SPY, where narsoplimab demonstrated significant survival benefits despite challenges faced in that study. In animal models of COVID-19, there is clear data indicating that lectin pathway hyperactivation drives the condition. This hyperactivation leads to consumptive hypocomplementemia, which in turn impairs the adaptive immune response, likely causing secondary infections in COVID-19. We know that treatment with narsoplimab, within one to two doses, reverses hypocomplementemia, normalizes the complement profile, and restores the adaptive immune response. All of this has been well published, and the extension to long COVID is also supported by our data. We observe similar hyperactivation of the lectin pathway in about 25% to 30% of patients with long COVID based on our analysis of nearly a thousand patients. I hope this covers your query, and I'm happy to refer you to the publications for more details.

Got it. That actually is a great segue. The key to life is finding balance, which is what you just achieved. But seriously, the FDA has come back and indicated they want a literature review. One thing to consider is that literature doesn't emerge on its own; it is shaped, guided, and created by key opinion leaders who are knowledgeable about the subject matter. How would you position narsoplimab with the key opinion leaders you have worked with, particularly the hematological oncologists regarding stem-cell TMA related narsoplimab use? How would you advocate for them and explain the value of narsoplimab in relation to what the FDA will be examining in the future? I'll return to the queue after that. Thank you.

I believe I understand your question. We have significant support within the expert community, particularly among the stem cell transplant specialists who perform this rare procedure and manage the associated complications, including TA-TMA. As I mentioned, the level of advocacy is very strong. If you check the publication in the Journal of Clinical Oncology, which is regarded as one of the top journals in oncology with an impact factor around 55 million, you'll see the author list highlights our support. This illustrates how these experts could assist us in our interactions with the FDA. However, we haven't fully considered our strategy regarding this new decision from the FDA. We need time to process it. While we wanted to share this information with shareholders promptly, we still have considerable work to do as we analyze the situation and consult with our advisers to determine the most effective and swift path to get narsoplimab approved for this use. I'll pause here to see if that responds to your question.

Yes. Yes, it did. Thanks. Let me hop back in the queue.

Okay. Thanks.

One moment for our next question. And our next question comes from Eric Joseph with JPMorgan.

Hi. Thanks for taking the questions. We have two inquiries. Regarding the FDA and TMA with narsoplimab, if the FDA is looking for a survival benefit in a matched historical patient population, do you know the minimum survival benefit you would be able to detect given the conservative size of your study population? Additionally, about IGAN and Phase III ARTEMIS, you mentioned that enrollment is ongoing and a nine-month readout is expected midyear. Can you clarify how close you are to completing the full study enrollment? Also, do you anticipate the study will have sufficient power to detect a difference in proteinuria when you read out next year? Thanks.

Yes. With respect to what would be the minimum threshold that FDA would want to see with respect to narsoplimab survival benefit relative to historical control? We haven't had a chance to discuss that with FDA. We know that what we've seen with narsoplimab, it clearly exceeds particularly given the severity of the patients that we treated with narsoplimab clearly exceeds what's in the literature, and we think that likely the literature is reflective and frankly, likely over reflective of what is happening in the real world, just given publication bias, which would usually don't publish negative data as you know. So if anything, it's an overstatement. But the mortality benefit or the survival benefit that we have seen with narsoplimab, we think, is quite substantial. With respect to your second question on the IGAN trial study enrollment powering, we've powered that at 98% and our enrollment is wrapping up, and we believe, as I said, we're on track for mid-2023 top line data. I mean, Steve, do you have any other comments or more color you can give to that?

I don't think so, Greg. We powered at 90% and we did it conservatively, and we will have data in mid-2023, with our nine point – sorry, our 9 million, million point.

To be clear, those are longer-term EGFR data as we've been very clear, the data that we are looking for in mid-2023 and our 36-month – 36-week proteinuria data.

So just to clarify, you may not necessarily need to enroll all 450 patients required by the clinical trial to have sufficient power for proteinuria?

No. The sufficient proteinuria power is not based on the 450 patients, Eric. It's actually based on about 60% of that for the 90% confidence. Is that correct, Steve? The 450 is the power required for all patients with the EGFR endpoint. So I think there might be some confusion between those two numbers.

That's very helpful. I appreciate it.

Yes. Okay. Great. Thank you.

One moment for our next question. And our next question comes from Greg Harrison with Bank of America.

Hi, there. This is Mary Kate on for Greg. Thanks for taking our questions. Regarding the updates expected at ASH, including the trial design of the Phase 2 study in pediatric, maybe what differences should we keep in mind as you evaluate narsoplimab in pediatric patients? And do you expect a similar impact in this population?

Yeah. Let me turn that over to Steve Whitaker. Steve, can you address that?

We would anticipate a similar treatment effect in the pediatric population. Pediatric studies are typically smaller than those conducted with adults. The study will resemble the single-arm study we previously conducted, with a historical control for the EMA. It's important to note that we do not need to complete this before the EMA process. Additionally, we have reached an agreement with the Pediatric Committee of the EMA.

Does that help, Mary?

Yeah, that's great.

One moment for our next question.

I might add one point on the pediatric, which is that pediatric patients tend to do better. with TMA following transplant than do adults. It's almost as if they're two different populations. One is the resiliency, I think, of children as a cause. The other is the diseases in the children for which they undergo transplant are often not as belift as are those in the adult population.

And our next question comes from Brandon Folkes with Cantor.

Hi. Thanks for taking my questions. Greg, I wanted to follow up on the options you’re considering in response to the FDA's guidance regarding historical control and independent literature analysis. Are you looking at specific options to address that, or are you also considering broader possibilities for narsoplimab or TA-TMA?

Thank you for your question, Brandon. In terms of the options we're evaluating, we are indeed considering a wide array. Regarding the historical control, we believe that it's a feasible option that we can tackle, and we need to determine the best approach to move forward. If I understood your question correctly, there was some technical interruption on our side, but to answer you, we're also exploring broader possibilities. Let me check in with Cathy, our Head of Regulatory, to see if she has anything to add.

Sure. Sure, Greg. And as Greg mentioned before, we will be going back to FDA to discuss the accounts. And as we always do, to reach agreement with them on what is expected and what we need to do. So again, as Greg also mentioned, we're still sorting through this and our options. But we'll plan to put together what we think is a very robust proposal, whatever that may look like and go to the FDA with it.

Yes. Obviously, Brandon, the objective is to get the drug approved as quickly as possible. There's no approved treatment; patients need it. We're hearing that from the physicians. We're hearing that from the physicians who have used it. Even those who were initially sort of nonbelievers, who have now used it and are believers as a result of compassionate use, I think there's a clear need, and this is why we're committed to getting this approved as quickly as possible.

One moment for our next question. And our next question comes from Serge Belanger with Needham.

Hi. Good afternoon.

Hey, Serge.

Hi. I have a couple of questions about the recent O&D division and their proposed plan to resubmit the BLA. If I remember correctly, up until early 2019, the pivotal study for narsoplimab in HSCT-TMA had a primary endpoint that compared mortality to historical controls. I'm curious if the data the FDA is seeking is similar to what you were already collecting during the trial, and in hindsight, why was that endpoint modified at that time? Thank you.

Thank you for the question. Yes, you're right. We initially proposed a historical control with survival as the primary endpoint. However, the division rejected that and requested a response-based endpoint with a specific threshold to exceed. You’re also probably correct about the dates. I would need to check, but I appreciate your insight on that. So, yes, we had proposed what we currently see as the way forward. The FDA requested we focus on a response-based endpoint with a threshold, and we worked with them to develop that endpoint. Does that address your question?

Well, I guess the proposed path that was elucidated in their denial a couple of days ago. How close is it to what you were already doing as a secondary endpoint in the pivotal study?

I think it's very close. As we understand it, it's effectively the same as what we initially proposed with the historical control. We were very willing to proceed with this approach at that time, and we are currently able to undertake it in the same manner we suggested several years ago.

Got it. Thank you.

Okay.

I would now like to turn it back to Dr. Demopulos for closing comments.

Thank you to the operator and to everyone who asked questions. They were very relevant, and I appreciate it. I also want to thank everyone for participating in the call today. We will keep you informed about our progress. I know there is a strong focus on the path forward with narsoplimab and TA-TMA. We are working diligently on that, and we will provide updates as more information becomes available. I believe the remainder of 2022 and the upcoming year contain some exciting milestones for the company, and we will keep you posted on those developments. Thank you for your ongoing support, and have a pleasant evening.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.