10-Q 1 omer-20220331x10q.htm 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-34475

OMEROS CORPORATION

(Exact name of registrant as specified in its charter)

Washington

91-1663741

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

201 Elliott Avenue West

Seattle, Washington

98119

(Address of principal executive offices)

(Zip Code)

(206676-5000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

(Title of each class)

(Trading symbol)

(Name of each exchange on which registered)

Common Stock, $0.01 par value per share

OMER

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

As of May 6, 2022, the number of outstanding shares of the registrant’s common stock, par value $0.01 per share, was 62,730,015.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), which are subject to the “safe harbor” created by those sections for such statements. Forward-looking statements are based on our management’s beliefs and assumptions and on currently available information. All statements other than statements of historical fact are “forward-looking statements.” Terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “goal,” “intend,” “likely,” “may,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would,” and similar expressions and variations thereof are intended to identify forward-looking statements, but these terms are not the exclusive means of identifying such statements. Examples of these statements include, but are not limited to, statements regarding:

our estimates regarding how long our existing cash, cash equivalents, short-term investments and revenues will fund our anticipated operating expenses, capital expenditures and debt service obligations;
our expectations related to future milestone and royalty payments potentially payable to us under the terms of the asset purchase agreement under which we divested our former commercial ophthalmology product OMIDRIA® (phenylephrine and ketorolac intraocular solution);
our expectations regarding clinical plans and anticipated or potential paths to regulatory approval of narsoplimab by the U.S. Food and Drug Administration (“FDA”) and the European Medicines Agency (the “EMA”) in hematopoietic stem cell transplant-associated thrombotic microangiopathy (“HSCT-TMA”), immunoglobulin A (“IgA”) nephropathy, COVID-19 and atypical hemolytic uremic syndrome (“aHUS”);
our expectations regarding the clinical, therapeutic and competitive benefits and importance of our drug candidates;
whether and when a marketing authorization application (“MAA”) may be filed with the EMA for narsoplimab in any indication, and whether the EMA will grant approval for narsoplimab in any indication;
our plans for the commercial launch of narsoplimab following any regulatory approval and our estimates and expectations regarding coverage and reimbursement for any approved products;
our plans and expectations regarding development of narsoplimab for the treatment of critically ill COVID-19 patients, including statements regarding the therapeutic potential of narsoplimab for the treatment of COVID-19, discussions with government agencies regarding narsoplimab for the treatment of COVID-19, expectations for the treatment of additional COVID-19 patients in clinical trials or other settings and expectations regarding the availability of data and the announcement of outcomes from a clincal trial evaluating narsoplimab in COVID-19;
with respect to our narsoplimab clinical programs, our expectations regarding: whether enrollment in any ongoing or planned clinical trial will proceed as expected; whether we can capitalize on the financial and regulatory incentives provided by orphan drug designations granted by FDA, the European Commission (the “EC”), or the EMA; and whether we can capitalize on the regulatory incentives provided by fast-track or breakthrough therapy designations granted by FDA;
our expectation that we will rely on contract manufacturers to manufacture narsoplimab, if approved, for commercial sale and to manufacture our drug candidates for purposes of clinical supply and in anticipation of potential commercialization;
our ability to design, initiate and/or successfully complete clinical trials and other studies for our drug candidates and our plans and expectations regarding our ongoing or planned clinical trials, including for our lead MASP-2 inhibitor, narsoplimab, and for our other investigational candidates, including OMS527 and OMS906;

the severity and duration of the impact of the COVID-19 pandemic on our business, operations, clinical programs and financial results;
our ability to raise additional capital through the capital markets or through one or more corporate partnerships, equity offerings, debt financings, collaborations, licensing arrangements or asset sales;
our expectations about the commercial competition that our drug candidates, if commercialized, face or may face;
the expected course and costs of existing claims, legal proceedings and administrative actions, our involvement in potential claims, legal proceedings and administrative actions, and the merits, potential outcomes and effects of both existing and potential claims, legal proceedings and administrative actions, as well as regulatory determinations, on our business, prospects, financial condition and results of operations;
the extent of protection that our patents provide and that our pending patent applications will provide, if patents are issued from such applications, for our technologies, programs, and drug candidates;
the factors on which we base our estimates for accounting purposes and our expectations regarding the effect of changes in accounting guidance or standards on our operating results; and
our expected financial position, performance, revenues, growth, costs and expenses, magnitude of net losses and the availability of resources.

Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks, uncertainties and other factors described in this Quarterly Report on Form 10-Q under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in our other filings with the U.S. Securities and Exchange Commission (the “SEC”). Given these risks, uncertainties and other factors, actual results or anticipated developments may not be realized or, even if substantially realized, may not have the expected consequences to or effects on our company, business or operations. Accordingly, you should not place undue reliance on these forward-looking statements, which represent our estimates and assumptions only as of the date of the filing of this Quarterly Report on Form 10-Q. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual results in subsequent periods may materially differ from current expectations. Except as required by applicable law, we assume no obligation to update or revise any forward-looking statements contained herein, whether as a result of any new information, future events or otherwise.

OMEROS CORPORATION

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2022

INDEX

Page

Part I — Financial Information

5

Item 1.

Financial Statements (unaudited)

5

Condensed Consolidated Balance Sheets

5

Condensed Consolidated Statements of Operations and Comprehensive Loss

6

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

7

Condensed Consolidated Statements of Cash Flows

8

Notes to Condensed Consolidated Financial Statements

9

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

29

Item 4.

Controls and Procedures

29

Part II — Other Information

30

Item 1.

Legal Proceedings

30

Item 1A.

Risk Factors

30

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

Item 6.

Exhibits

30

Signatures

31

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

OMEROS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(unaudited)

March 31, 

December 31, 

    

2022

    

2021

Assets

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

8,963

$

100,808

Short-term investments

 

133,271

 

56,458

OMIDRIA contract royalty asset, short-term

44,110

44,319

Receivables, net

 

16,255

 

38,155

Prepaid expense and other assets

 

7,623

 

8,216

Total current assets

 

210,222

 

247,956

OMIDRIA contract royalty asset

133,625

140,251

Property and equipment, net

 

1,453

 

1,731

Right of use assets

22,909

28,276

Restricted investments

 

1,054

 

1,054

Total assets

$

369,263

$

419,268

Liabilities and shareholders’ equity (deficit)

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

7,345

$

13,400

Accrued expenses

 

23,796

 

33,134

Current portion of lease liabilities

 

3,925

 

5,255

Total current liabilities

 

35,066

 

51,789

Lease liabilities, non-current

 

24,296

 

29,126

Unsecured convertible senior notes, net

 

313,904

 

313,458

Other accrued liabilities - noncurrent

 

922

 

1,115

Commitments and contingencies (Note 10)

 

  

 

  

Shareholders’ equity (deficit):

 

  

 

  

Preferred stock, par value $0.01 per share, 20,000,000 shares authorized; none issued and outstanding at March 31, 2022 and December 31, 2021.

 

 

Common stock, par value $0.01 per share, 150,000,000 shares authorized at March 31, 2022 and December 31, 2021; 62,730,015 and 62,628,855 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively.

 

627

 

626

Additional paid-in capital

 

710,593

 

706,288

Accumulated deficit

 

(716,145)

 

(683,134)

Total shareholders’ equity (deficit)

 

(4,925)

 

23,780

Total liabilities and shareholders’ equity (deficit)

$

369,263

$

419,268

See accompanying Notes to Condensed Consolidated Financial Statements

-5-

OMEROS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share data)

(unaudited)

Three Months Ended

March 31, 

    

    

2022

    

2021

Costs and expenses:

 

 

  

Research and development

$

24,087

$

32,504

Selling, general and administrative

 

10,959

 

12,786

Total costs and expenses

 

35,046

 

45,290

Loss from continuing operations

 

(35,046)

 

(45,290)

Interest expense

 

(4,941)

 

(4,897)

Other income

 

493

 

418

Net loss from continuing operations

(39,494)

(49,769)

Net income from discontinued operations

6,483

14,679

Net loss

$

(33,011)

$

(35,090)

Basic and diluted net income (loss) per share:

Net loss from continuing operations

$

(0.63)

$

(0.81)

Net income from discontinued operations

0.10

0.24

Net loss

$

(0.53)

$

(0.57)

Weighted-average shares used to compute basic and diluted net income (loss) per share

62,724,775

61,928,511

See accompanying Notes to Condensed Consolidated Financial Statements

-6-

OMEROS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands, except share data)

(unaudited)

Additional

Common Stock

Paid-In

Accumulated

Shares

Amount

    

Capital

    

Deficit

Total

Balance at January 1, 2021

    

61,671,231

    

$

616

    

$

751,304

    

$

(872,672)

    

$

(120,752)

Exercise of stock options and warrants

580,781

6

6,327

6,333

At the market offering costs

(241)

(241)

Cumulative effect of adopting ASU 2020-06

(70,779)

(4,697)

(75,476)

Stock-based compensation expense

3,271

3,271

Net loss

(35,090)

(35,090)

Balance at March 31, 2021

62,252,012

$

622

$

689,882

$

(912,459)

$

(221,955)

             

                    

Balance at January 1, 2022

    

62,628,855

    

$

626

    

$

706,288

    

$

(683,134)

    

$

23,780

Exercise of stock options and warrants

101,160

1

413

414

Stock-based compensation expense

3,892

3,892

Net loss

(33,011)

(33,011)

Balance at March 31, 2022

62,730,015

$

627

$

710,593

$

(716,145)

$

(4,925)

See accompanying Notes to Condensed Consolidated Financial Statements

-7-

OMEROS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

Three Months Ended March 31, 

    

2022

    

2021

Operating activities:

Net loss

$

(33,011)

$

(35,090)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

  

Early termination of operating lease

(454)

Stock-based compensation expense

3,892

3,271

Non-cash interest expense

 

446

 

396

Depreciation and amortization

 

278

 

390

Changes in operating assets and liabilities:

 

 

  

Receivables

 

21,900

 

(20,985)

Prepaid expenses and other assets

 

592

 

5,202

OMIDRIA contract royalty asset

6,835

Accounts payable and accrued expense

 

(15,671)

 

6,562

Net cash used in operating activities

 

(15,193)

 

(40,254)

Investing activities:

 

  

 

  

Purchases of investments

(83,013)

(3)

Proceeds from the sale and maturities of investments

6,200

33,000

Purchases of property and equipment

 

 

(12)

Net cash provided by (used in) investing activities

 

(76,813)

 

32,985

Financing activities:

 

  

 

  

Proceeds upon exercise of stock options and warrants

 

414

 

6,333

Payments on finance lease obligations

(253)

(296)

At the market offering costs

 

 

(241)

Net cash provided by financing activities

 

161

 

5,796

Net decrease in cash and cash equivalents

 

(91,845)

 

(1,473)

Cash and cash equivalents at beginning of period

 

100,808

 

10,501

Cash and cash equivalents at end of period

$

8,963

$

9,028

Supplemental cash flow information

 

  

 

  

Cash paid for interest

$

5,967

$

5,995

See accompanying Notes to Condensed Consolidated Financial Statements

-8-

OMEROS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1—Organization and Basis of Presentation

General

Omeros Corporation (“Omeros,” the “Company” or “we”) is a clinical-stage biopharmaceutical company committed to discovering, developing and commercializing small-molecule and protein therapeutics for large-market as well as orphan indications targeting immunologic diseases, including complement-mediated diseases and cancers related to dysfunction of the immune system, as well as addictive and compulsive disorders. We marketed our first drug product, OMIDRIA® (phenylephrine and ketorolac intraocular solution) 1% / 0.3% for use during cataract surgery or intraocular lens replacement in the United States (the “U.S.”) until we sold OMIDRIA and related business assets on December 23, 2021 (see “Sale of OMIDRIA Assets” below for additional information).

Our drug candidate narsoplimab is the subject of a biologics license application (“BLA”) pending before the U.S. Food and Drug Administration (“FDA”) for the treatment of hematopoietic stem cell transplant-associated thrombotic microangiopathy (“HSCT-TMA”). On October 18, 2021, we announced the receipt of a Complete Response Letter (“CRL”) from FDA regarding the BLA. In the CRL, FDA expressed difficulty in estimating the treatment effect of narsoplimab in HSCT-TMA and asserted that additional information will be needed to support regulatory approval. In February 2022, we had a Type A end-of-review meeting with FDA to discuss the CRL, including each of the review issues that FDA identified as presenting difficulties interpreting the treatment response in the pivotal trial. Although we feel that we adequately addressed all of the issues noted in the CRL, the meeting minutes included a number of the review division’s critiques that we believe had already been addressed and/or were inaccurate. As a result, we currently plan to submit a Formal Dispute Resolution Request. Formal dispute resolution is an official pathway that enables a sponsor to appeal a decision by an FDA review division to a higher authority within FDA, in this case the Office of New Drugs. Our request is for regular approval based on the data in our existing BLA. We continue to believe that our BLA, as submitted, merits approval and that the data meet or exceed the threshold for substantial evidence of effectiveness; however, there can be no assurances that the Formal Dispute Resolution process will result in approval of our BLA, will provide a clear path to resubmission of our BLA, or that any identified path to BLA resubmission will be satisafactory in terms of the information, time and/or expenditure required.

We also have multiple late-stage clinical development programs in our pipeline, which are focused on: complement-mediated disorders, including immunoglobulin A (“IgA”) nephropathy, atypical hemolytic uremic syndrome (“aHUS”) and COVID-19.

Sale of OMIDRIA Assets

On December 23, 2021, we completed the sale of OMIDRIA and certain related assets and liabilities to Rayner Surgical Inc. (“Rayner”) pursuant to an Asset Purchase Agreement dated December 1, 2021 (the “Asset Purchase Agreement”). We received a payment of $126.0 million at closing and receive royalty payments on worldwide sales of OMIDRIA and potentially a $200.0 million milestone payment if separate payment for OMIDRIA is secured in the U.S. for a continuous period of at least four years before January 1, 2025.

As a result of the divestiture, the results of OMIDRIA operations (e.g., revenues and operating costs) are included in discontinued operations in our condensed consolidated statements of operations and comprehensive loss for all periods presented (see “Note 3 – Discontinued Operations”).

Basis of Presentation

Our condensed consolidated financial statements include the financial position and results of operations of Omeros and our wholly owned subsidiaries. All inter-company transactions have been eliminated. The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles

-9-

(“GAAP”). Certain prior year amounts in the condensed consolidated balance sheets, statements of operations, statements of stockholders’ equity (deficit) and statements of cash flows and the notes to the condensed consolidated financial statements have been reclassified in the condensed consolidated financial statements to conform to the current year presentation.

Risks and Uncertainties

As of March 31, 2022, we had cash, cash equivalents and short-term investments of $142.2 million and outstanding accounts receivable of $16.3 million. Our loss for the quarter ended March 31, 2022 was $33.0 million and included $4.2 million of noncash operating expenses.

We plan to continue to fund our operations for the next twelve months with our existing cash and investments, our current accounts receivable, and OMIDRIA royalties. There is also the potential for us to receive a $200.0 million milestone related to achievement of long-term OMIDRIA separate payment. If FDA approval is granted for narsoplimab for HSCT-TMA within the next twelve months, we expect that sales of narsoplimab will also provide funds for our operations. We have a sales agreement to sell shares of our common stock, from time to time, in an “at the market” equity offering facility through which we may offer and sell shares of our common stock equaling an aggregate amount up to $150.0 million. Should it be determined to be strategically advantageous, we could pursue debt financings as well as public and private offerings of our equity securities, similar to those we have previously completed, or other strategic transactions, which may include licensing a portion of our existing technology.

Management believes the assets on hand along with expected royalties received are adequate to finance our operations at least through May 10, 2023. Accordingly, the accompanying condensed consolidated financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant items subject to such estimates include OMIDRIA contract royalty asset valuation, stock-based compensation expense, and accruals for clinical trials and manufacturing of drug product. We base our estimates on historical experience and on various other factors, including the impact of the COVID-19 pandemic, that we believe are reasonable under the circumstances; however, actual results could differ from these estimates.

Note 2—Significant Accounting Policies

Discontinued Operations

We review the presentation of planned or completed business dispositions in the condensed consolidated financial statements based on the available information and events that have occurred. The review consists of evaluating whether the business meets the definition of a component for which the operations and cash flows are clearly distinguishable from the other components of the business and, if so, whether it is anticipated that after the disposal the cash flows of the component would be eliminated from continuing operations and whether the disposition represents a strategic shift that has a major effect on operations and financial results.

Planned or completed business dispositions are presented as discontinued operations when all the criteria described above are met. For those divestitures that qualify as discontinued operations, all comparative periods presented are reclassified in the consolidated balance sheets. Additionally, the results of operations of a discontinued operation are reclassified to income from discontinued operations, for all periods presented in the condensed consolidated statements of operations and comprehensive loss. Results of discontinued operations include all revenues and expenses directly derived from such businesses; general corporate overhead is not allocated to discontinued operations. The OMIDRIA asset sale to Rayner qualifies as a discontinued operation. The Company included information regarding cash flows from discontinued operations (see “Note 3 – Discontinued Operations”).

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OMIDRIA Royalties and OMIDRIA Contract Royalty Assets

We have rights to receive future royalties from Rayner on OMIDRIA net sales at rates that vary based on geography and certain regulatory contingencies. Therefore, future OMIDRIA royalties are treated as variable consideration. The sale of OMIDRIA qualified as an asset sale under GAAP. To measure the OMIDRIA contract royalty asset, we used the expected value approach which is the sum of the discounted probability-weighted royalty payments, net of tax, we would receive using a range of potential outcomes, to the extent that it is probable that a significant reversal in the amount of cumulative income recognized will not occur. Accordingly, the contract royalty asset excludes the achievement of the $200.0 million milestone payment and any foreign royalties to the extent it is probable that a significant reversal in the amount of cumulative income recognized will not occur. Royalties earned will primarily be recorded as a reduction to the OMIDRIA contract royalty asset. The amount recorded in discontinued operations will reflect interest earned on the outstanding OMIDRIA contract royalty asset and any amounts received that are different from the expected royalties recorded at closing. The OMIDRIA contract royalty asset will also be re-measured periodically using the expected value approach based on actual results and future expectations. Any required adjustment to the OMIDRIA contract royalty asset will be recorded into discontinued operations.

OMIDRIA Revenue Recognition

Prior to the sale of OMIDRIA on December 23, 2021, when we entered into a customer contract, we performed the following five steps: (i) identified the contract with a customer; (ii) identified the performance obligations in the contract; (iii) determined the transaction price; (iv) allocated the transaction price to the performance obligations in the contract; and (v) recognized revenue when (or as) we satisfy a performance obligation.

We generally recorded OMIDRIA product sales when the product was delivered to our wholesalers. OMIDRIA product sales were recorded net of wholesaler distribution fees and estimated chargebacks, rebates, returns and purchase-volume discounts. Accruals or allowances were established for these deductions in the same period when revenue was recognized, and actual amounts incurred were offset against the applicable accruals or allowances. We reflected each of these accruals or allowances as either a reduction in the related accounts receivable or as an accrued liability, depending on how the amount is expected to be settled.

Inventory

We expense inventory costs related to product candidates as research and development expenses until regulatory approval is reasonably assured in the U.S. or the European Union (the “EU”). Once approval is reasonably assured, costs including amounts related to third-party manufacturing, transportation and internal labor and overhead will be capitalized.

Right of Use Assets and Related Lease Liabilities

We record operating leases as right-of-use assets and recognize the related lease liabilities equal to the fair value of the lease payments using our incremental borrowing rate when the implicit rate in the lease agreement is not readily available. We recognize variable lease payments, when incurred. Costs associated with operating lease assets are recognized on a straight-line basis within operating expenses over the term of the lease.

We record finance leases as a component of property and equipment and amortize these assets within operating expenses on a straight-line basis to their residual values over the shorter of the term of the underlying lease or the estimated useful life of the equipment. The interest component of a finance lease is included in interest expense and recognized using the effective interest method over the lease term.

We account for leases with initial terms of 12 months or less as operating expenses on a straight-line basis over the lease term.

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Stock-Based Compensation

Stock-based compensation expense is recognized for all share-based payments based on estimated fair values. The fair value of our stock options is calculated using the Black-Scholes option-pricing model which requires judgmental assumptions around volatility, forfeiture rates and expected option term. Compensation expense is recognized over the optionees’ requisite service periods, which is generally the vesting period, using the straight-line method. Forfeiture expense is estimated at the time of grant and revised in subsequent periods if actual forfeitures differ from those estimates.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases. Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. We recognize the effect of income tax positions only if those positions are more likely than not of being sustained upon an examination. A valuation allowance is established when it is more likely than not that the deferred tax assets will not be realized.

Note 3—Discontinued Operations

On December 23, 2021, we completed the sale of OMIDRIA and certain related assets including inventory and prepaid expenses. We retained the outstanding accounts receivable and all outstanding liabilities related to OMIDRIA as of the closing date.

Upon closing, we received an up-front cash payment of $126.0 million. We receive a 50% royalty on OMIDRIA net sales in the U.S. until the earlier of January 1, 2025 or the payment of the $200.0 million milestone described below. After such date, we will receive a 30% royalty on OMIDRIA net sales in the U.S. (the “U.S. base royalty rate”) until the expiration or termination of the last issued and unexpired U.S. patent. The U.S. base royalty rate is reduced to 10% upon the occurrence of certain events described in the Asset Purchase Agreement, including during any specific period in which OMIDRIA is no longer eligible for separate payment. We will also receive a royalty of 15% on OMIDRIA net sales outside the U.S. on a country-by-country basis until the expiration or termination of the last issued and unexpired OMIDRIA patent in such country. We will receive a $200.0 million milestone payment if, prior to January 1, 2025, separate payment for OMIDRIA is secured in the U.S. for a continuous period of at least four years.

During the three months ended March 31, 2022, we earned royalties of $13.8 million on sales of OMIDRIA which we recorded as a reduction to the OMIDRIA contract royalty asset. We also recorded $7.0 million of income in discontinued operations representing interest income and remeasurement adjustments to the OMIDRIA contract royalty asset. The following schedule presents a rollforward of the OMIDRIA contract royalty asset (in thousands):

OMIDRIA contract royalty asset at December 31, 2021

$

184,570

Royalties earned

(13,831)

Royalty interest income and remeasurement adjustments

6,996

OMIDRIA contract royalty asset at March 31, 2022

$

177,735

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Net income from discontinued operations is as follows:

Three Months Ended

March 31,

2022

    

2021

(In thousands)

Product sales, net

$

$

21,061

Royalty interest income and remeasurement adjustments

6,996

Total

6,996

21,061

Costs and expenses

513

6,382

Net income from discontinued operations

$

6,483

$

14,679

Cash flow from discontinued operations is as follows:

Three Months Ended March 31,

    

2022

    

2021

(In thousands)

Total operating cash flows from discontinued operations

$

13,636

$

(16,284)

Note 4—Net Loss Per Share

Our potentially dilutive securities include potential common shares related to our stock options, warrants, restricted stock units (“RSUs”) and unsecured convertible senior notes. Diluted earnings per share (“Diluted EPS”) considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares would have an anti-dilutive effect. Diluted EPS excludes the impact of potential common shares related to our stock options in periods in which the option exercise price is greater than the average market price of our common stock for the period.

Potentially dilutive securities excluded from Diluted EPS are as follows:

March 31, 

2022

    

2021

2023 Notes convertible to common stock (1)

4,941,739

4,941,739

Outstanding options to purchase common stock

4,429

 

3,453,133

Outstanding restricted stock units

88,001

Total potentially dilutive shares excluded from net loss per share

5,034,168

 

8,394,872

(1)The 2023 Notes are subject to a capped call arrangement that potentially reduces the dilutive effect as described in “Note 8 — Unsecured Convertible Senior Notes.” Any potential impact of the capped call arrangement is excluded from this table.

Note 5—Certain Balance Sheet Accounts

OMIDRIA Contract Royalty Asset

OMIDRIA contract royalty asset consists of the following:

March 31, 

December 31, 

2022

    

2021

(In thousands)

Short-term contract royalty asset

$

44,110

$

44,319

Long-term contract royalty asset

133,625

140,251

Total OMIDRIA contract royalty asset

$

177,735

$

184,570

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Receivables, net

Receivables, net consists of the following:

March 31, 

December 31, 

    

2022

    

2021

(In thousands)

Royalty and trade receivables, net

$

15,847

$

36,505

Sublease and other receivables

 

408

 

1,650

Total receivables, net

$

16,255

$

38,155

Trade receivables are net of product return and chargeback allowances. Product returns and chargeback allowances were $2.0 million as of December 31, 2021.

Property and Equipment, Net

Property and equipment, net consists of the following:

    

March 31, 

    

December 31, 

2022

2021

(In thousands)

Finance leases

$

5,979

$

5,979

Laboratory equipment

 

3,091

 

3,091

Computer equipment

 

1,069

 

1,069

Office equipment and furniture

 

625

 

625

Total cost

 

10,764

 

10,764

Less accumulated depreciation and amortization

 

(9,311)

 

(9,033)

Total property and equipment, net

$

1,453

$

1,731

For the three months ended March 31, 2022 and 2021, depreciation and amortization expense was $0.3 million and $0.4 million, respectively.

Accrued Expenses

Accrued expenses consists of the following:

    

March 31, 

    

December 31, 

2022

2021

(In thousands)

Consulting and professional fees

$

6,555

$

7,455

Contract research and development

4,492

3,916

Interest payable

 

3,703

 

5,172

Clinical trials

3,408

2,430

Employee compensation

 

2,503

 

3,706

Sales rebates, fees and discounts

 

1,727

 

8,442

Other accrued expenses

 

1,408

 

2,013

Total accrued expenses

$

23,796

$

33,134

Note 6—Fair-Value Measurements

As of March 31, 2022, and December 31, 2021, all investments were classified as short-term and available-for-sale on the accompanying condensed consolidated balance sheets. Investment income, which was included as a component of other income, consists of interest earned.

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On a recurring basis, we measure certain financial assets at fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, an exit price, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The accounting standard establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs required:

Level 1—Observable inputs for identical assets or liabilities, such as quoted prices in active markets;

Level 2—Inputs other than quoted prices in active markets that are either directly or indirectly observable; and

Level 3—Unobservable inputs in which little or no market data exists, therefore they are developed using estimates and assumptions developed by us, which reflect those that a market participant would use.

Our fair value hierarchy for our financial assets and liabilities measured at fair value on a recurring basis are as follows:

    

March 31, 2022

    

Level 1

    

Level 2

    

Level 3

    

Total

(In thousands)

Assets:

Money-market funds classified as short-term investments

$

133,271

$

$

$

133,271

Money-market funds classified as non-current restricted investments

 

1,054

 

 

 

1,054

Total

$

134,325

$

$

$

134,325

    

December 31, 2021

    

Level 1

    

Level 2

    

Level 3

    

Total

(In thousands)

Assets:

  

 

  

 

  

 

  

Money-market funds classified as short-term investments

$

56,458

$

$

$

56,458

Money-market funds classified as non-current restricted investments

 

1,054

 

 

 

1,054

Total

$

57,512

$

$

$

57,512

Cash held in demand deposit accounts of $9.0 million and $100.8 million is excluded from our fair-value hierarchy disclosure as of March 31, 2022 and December 31, 2021, respectively. There were no unrealized gains or losses associated with our investments as of March 31, 2022 or December 31, 2021. The carrying amounts reported in the accompanying condensed consolidated balance sheets for receivables, accounts payable, other current monetary assets and liabilities approximate fair value.

See “Note 8—Unsecured Convertible Senior Notes” for the carrying amount and estimated fair value of our outstanding convertible senior notes.

Note 7—Line of Credit

We have a Loan and Security Agreement with Silicon Valley Bank (“SVB”), which provides for a $50.0 million revolving line of credit facility (the “Line of Credit Agreement”) based on 85% of our eligible royalty and trade receivables, net. The Line of Credit Agreement is secured by all our assets excluding intellectual property and development program inventories and matures in August 2022.

As of March 31, 2022 and December 31, 2021, no amounts were outstanding under the Line of Credit Agreement.

Note 8—Unsecured Convertible Senior Notes

In November 2018, we issued $210.0 million in aggregate principal amount of our 6.25% Convertible Senior Notes (the “2023 Notes”), and in August and September 2020, we issued $225.0 million in aggregate principal amount

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of our 5.25% Convertible Senior Notes (the “2026 Notes”). We used a portion of the proceeds from the 2026 Notes to repurchase $115.0 million principal amount of the 2023 Notes and terminate a corresponding portion of the related capped call for the 2023 Notes, as described below.

Unsecured convertible senior notes outstanding at March 31, 2022 and December 31, 2021 are as follows:

Balance as of March 31, 2022

    

2023 Notes

    

2026 Notes

    

Total

(In thousands)

Principal amount

$

95,000

$

225,030

$

320,030

Unamortized debt issuance costs

 

(1,120)

 

(5,006)

 

(6,126)

Total unsecured convertible senior notes, net

$

93,880

$

220,024

$

313,904

Fair value of outstanding unsecured convertible senior notes (1)

$

89,063

$

171,585

Balance as of December 31, 2021

    

2023 Notes

    

2026 Notes

    

Total

(In thousands)

Principal amount

$

95,000

$

225,030

$

320,030

Unamortized discount

 

(1,282)

 

(5,290)

 

(6,572)

Total unsecured convertible senior notes, net

$

93,718

$

219,740

$

313,458

Fair value of outstanding unsecured convertible senior notes (1)

$

87,163

$

171,867

(1)The fair value is classified as Level 3 due to the limited trading activity for the unsecured convertible senior notes.

2023 Unsecured Convertible Senior Notes

Our 2023 Notes accrue interest at an annual rate of 6.25% per annum, payable semi-annually in arrears on May 15 and November 15 of each year. The 2023 Notes mature on November 15, 2023 unless earlier purchased, redeemed or converted in accordance with their terms.

As of March 31, 2022, the unamortized debt issuance costs of $1.1 million will be amortized to interest expense at an effective interest rate of 7.0% over the remaining term.

The 2023 Notes are convertible into cash, shares of our common stock or a combination thereof, as we elect at our sole discretion. The initial conversion rate is 52.0183 shares of our common stock per $1,000 of note principal (equivalent to an initial conversion price of approximately $19.22 per share of common stock), subject to adjustment in certain circumstances. To reduce the dilutive impact or potential cash expenditure associated with the conversion of the 2023 Notes, we entered into a capped call transaction (the “2023 Capped Call”), which covers the number of shares of our common stock underlying the 2023 Notes when our common stock share price is trading between the initial conversion price of $19.22 and $28.84. In connection with the partial repurchase of the 2023 Notes, we entered into a capped call termination contract to unwind a proportionate amount of the 2023 Capped Call. As of March 31, 2022, approximately 4.9 million shares remained outstanding on the 2023 Capped Call.

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The following table sets forth total interest expense recognized in connection with the 2023 Notes:

Three Months Ended March 31, 

2022

    

2021

(In thousands)

Contractual interest expense

$

1,484

$

1,484

Amortization of debt issuance costs

 

161

 

150

Total

$

1,645

$

1,634

2026 Unsecured Convertible Senior Notes

The 2026 Notes are unsecured and accrue interest at an annual rate of 5.25% per annum, payable semi-annually in arrears on February 15 and August 15 of each year. The 2026 Notes mature on February 15, 2026, unless earlier purchased, redeemed or converted in accordance with their terms.

As of March 31, 2022, the unamortized debt issuance costs of $5.0 million will be amortized to interest expense at an effective interest rate of 5.9% over the remaining term.

The initial conversion rate is 54.0906 shares of our common stock per $1,000 of note principal (equivalent to an initial conversion price of approximately $18.4875 per share of common stock), which equals approximately 12.2 million shares of common stock issuable upon conversion, subject to adjustment in certain circumstances.

To reduce the dilutive impact or potential cash expenditure associated with the conversion of the 2026 Notes, we entered into capped call transactions (the “2026 Capped Calls”). The 2026 Capped Calls will cover the number of shares of our common stock underlying the 2026 Notes when our common stock share price is trading between the initial conversion price of $18.49 and $26.10. However, should the market price of our common stock exceed the $26.10 cap, then the conversion of the 2026 Notes would have a dilutive impact or may require a cash expenditure to the extent the market price exceeds the cap price.

The following table sets forth interest expense recognized related to the 2026 Notes:

    

Three Months Ended March 31, 

2022

    

2021

(In thousands)

Contractual interest expense

$

2,954

$

2,954

Amortization of debt issuance costs

 

285

 

246

Total

$

3,239

$

3,200

Future minimum payments for the 2023 Notes and 2026 Notes as of March 31, 2022 are as follows:

 

(In thousands)

2023

 

$

95,000

2024

 

2025

 

2026

 

225,030

2027

Total future minimum principal payments under the 2023 Notes and 2026 Notes

 

$

320,030

Note 9—Leases

We have an operating lease for our office and laboratory facilities with an initial term that ends in 2027 with two options to extend the lease term by five years. On January 14, 2022, we entered into an agreement with our landlord to

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early terminate a portion of the rentable square footage of our office and laboratory facilities, which reduced the right of use asset by $4.7 million and related liability by $5.2 million. We recorded a non-cash gain of $0.5 million to early terminate the lease. In addition, we carry various finance leases for laboratory equipment.

Supplemental lease information is as follows:

Three Months Ended

March 31, 

2022

 

2021

(In thousands)

Lease cost

  

    

  

Operating lease cost

$

1,196

$

1,583

Finance lease cost:

 

 

  

Amortization

 

197

 

323

Interest

 

56

 

63

Variable lease cost

 

860

 

813

Sublease income

 

(491)

 

(418)

Net lease cost

$

1,818

$

2,364

Cash paid for amounts included in the measurement of lease liabilities is as follows:

Three Months Ended

March 31, 

2022

 

2021

(In thousands)

Cash paid for amounts included in the measurement of lease liabilities

Cash payments for operating leases

$

1,803

$

1,628

Cash payments for financing leases

$

253

 

$

354

Note 10—Commitments and Contingencies

Contracts

We have various agreements with third parties that collectively require payment of termination fees totaling $31.0 million as of March 31, 2022 if we cancel the work within specific time frames, either prior to commencing or during performance of the contracted services.

Development Milestones and Product Royalties

We have licensed a variety of intellectual property from third parties that we are currently developing or may develop in the future. These licenses may require milestone payments during the clinical development processes or upon approval of commercial sale as well as low single- to low double-digit royalties on the net income or net sales of the product. For the three months ended March 31, 2022 and March 31, 2021, development milestone expenses were insignificant. Should narsoplimab be approved, we would owe milestone payments to development partners and be obligated to pay low single-digit royalties on net sales of the product.

Note 11—Shareholders’ Deficit

Common Stock and Warrants

On March 1, 2021, we entered into a sales agreement to sell shares of our common stock having an aggregate offering price of up to $150.0 million, from time to time, through an “at the market” equity offering program. As of March 31, 2022, we have not sold any shares under this program.

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In March 2021, a cashless exercise was executed for 43,115 warrants, resulting in the issuance of 24,901 shares of our common stock. As of March 31, 2022, 200,000 warrants remained outstanding with an exercise price of $23.00 per share. The warrants expire on April 12, 2023.

Note 12—Stock-Based Compensation

Our stock option plans provide for the grant of incentive and non-qualified stock options, restricted stock awards, RSUs, warrants and other stock awards to employees, non-employee directors and consultants.

Stock-based compensation expense is as follows:

    

Three Months Ended

March 31, 

    

2022

    

2021

(In thousands)

Continuing operations

Research and development

$

1,715

$

1,450

Selling, general and administrative

 

2,177

 

1,610

Total stock-based compensation in continuing operations

3,892

3,060

Discontinued operations

211

Total stock-based compensation

$

3,892

$

3,271

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following assumptions were applied to all stock option grants:

    

Three Months Ended

March 31, 2022

Estimated weighted-average fair value

$

4.58

Weighted-average assumptions:

 

Expected volatility

 

81

%  

Expected life, in years

 

6.1

Risk-free interest rate

 

1.98

%  

Expected dividend yield

 

%  

Stock option activity for all stock plans and related information is as follows:

    

    

Weighted- 

    

    

Average 

Aggregate 

Exercise 

Remaining 

Intrinsic 

Options 

Price per 

Contractual Life 

Value 

Outstanding

Share

(In years)

(In thousands)

Balance at December 31, 2021

 

12,709,887

$

12.61

 

  

 

  

Granted

 

17,884

 

9.74

 

  

 

  

Exercised

 

(101,160)

 

4.10

 

  

 

  

Forfeited

 

(189,010)

 

14.29

 

  

 

  

Balance at March 31, 2022

 

12,437,601

$

12.65

 

5.3

$

15

Vested and expected to vest at March 31, 2022

 

12,139,058

$

12.61

 

5.2

$

15

Exercisable at March 31, 2022

 

9,601,612

$

12.19

 

4.3

$

14

As of March 31, 2022, there were 2.8 million unvested options outstanding that will vest over a weighted-average period of 2.4 years. The total estimated compensation expense yet to be recognized on outstanding options is $23.0 million.

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The Company has 222,000 shares of unvested RSUs outstanding as of March 31, 2022 that vest 50% on December 1, 2022 and 50% on December 1, 2023.

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 condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

Overview

Omeros Corporation (“Omeros,” the “Company” or “we”) is an innovative biopharmaceutical company committed to discovering, developing and commercializing small-molecule and protein therapeutics for large-market and orphan indications targeting immunologic diseases, including complement-mediated diseases and cancers related to dysfunction of the immune system, as well as addictive and compulsive disorders.

Our drug candidate narsoplimab is the subject of a biologics license application (“BLA”) pending before the U.S. Food and Drug Administration (“FDA”) for the treatment of hematopoietic stem cell transplant-associated thrombotic microangiopathy (“HSCT-TMA”). On October 18, 2021, we announced the receipt of a Complete Response Letter (“CRL”) from FDA regarding the BLA. In the CRL, FDA expressed difficulty in estimating the treatment effect of narsoplimab in HSCT-TMA and asserted that additional information will be needed to support regulatory approval. In February 2022, we had a Type A end-of-review meeting with FDA to discuss the CRL, including each of the review issues that FDA identified as presenting difficulties interpreting the treatment response in the pivotal trial. Although we feel that we adequately addressed all of the issues noted in the CRL, the meeting minutes included a number of the review division’s critiques that we believe had already been addressed and/or were inaccurate. As a result, we currently plan to submit a Formal Dispute Resolution Request. Formal dispute resolution is an official pathway that enables a sponsor to appeal a decision by an FDA review division to a higher authority within FDA, in this case the Office of New Drugs. Our request is for regular approval based on the data in our existing BLA. We continue to believe that our BLA, as submitted, merits approval and that the data meet or exceed the threshold for substantial evidence of effectiveness; however, there can be no assurances that the Formal Dispute Resolution process will result in approval of our BLA, will provide a clear path to resubmission of our BLA, or that any identified path to BLA resubmission will be satisafactory in terms of the information, time and/or expenditure required.

We also have multiple Phase 3 and Phase 2 clinical-stage development programs in progress with narsoplimab, which are focused on: complement-mediated disorders, including immunoglobulin A (“IgA”) nephropathy, atypical hemolytic uremic syndrome (“aHUS”) and COVID-19. We are also initiating a Phase 1b clinical program in paroxysmal nocturnal hemoglobinuria (“PNH”) for our MASP-3 inhibitor OMS906 targeting the alternative pathway of complement and have successfully completed a Phase 1 study in our phosphodiesterase 7 (“PDE7”) program focused on addiction. In addition, we have a diverse group of preclinical programs, including GPR174, a novel target in immuno-oncology that modulates a new cancer immunity axis that we discovered. Small-molecule inhibitors of GPR174 are part of our proprietary G protein-coupled receptor (“GPCR”) platform through which we control 54 GPCR drug targets and their corresponding compounds. Also as part of our immuno-oncology platform, we are developing other novel anti-cancer therapeutics as well as adoptive T cell therapies.

We previously developed and commercialized OMIDRIA® (phenylephrine and ketorolac intraocular solution) 1%/0.3%, which is approved by FDA for use during cataract surgery or intraocular lens (“IOL”) replacement to maintain pupil size by preventing intraoperative miosis (pupil constriction) and to reduce postoperative ocular pain. We marketed OMIDRIA in the United States (“U.S.”) from the time of its commercial launch in 2015 until December 2021.

On December 23, 2021, we completed the sale of OMIDRIA and certain related assets and liabilities to Rayner Surgical Inc. (“Rayner”) pursuant to an Asset Purchase Agreement dated December 1, 2021 (the “Asset Purchase Agreement”). We received approximately $126.0 million in cash at the closing and we receive a royalty of 50% of the net revenue, as defined in the Asset Purchase Agreement, from sales of OMIDRIA in the U.S. between the closing date

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and the earlier of January 1, 2025 or the payment of the $200.0 million milestone described below. After such date, we will receive a royalty of 30% of the net revenue from sales of OMIDRIA in the U.S. until the expiration or termination of the last issued and unexpired patent with respect to OMIDRIA in the U.S. The U.S. base royalty rate is subject to a reduction down to 10% upon the occurrence of certain events described in the Asset Purchase Agreement, including during any specific period in which OMIDRIA is no longer eligible for separate payment (i.e., outside the packaged payment rate for the surgical procedure) under Medicare Part B. We will also will receive a royalty of 15% of the net revenue from sales of OMIDRIA outside the U.S. on a country-by-country basis between the closing date and the expiration or termination of the last issued and unexpired patent with respect to OMIDRIA in such country. In addition, we will receive a $200.0 million milestone payment if, prior to January 1, 2025, separate payment for OMIDRIA is secured under Medicare Part B for a continuous period of at least four years.

Clinical Development Programs

Our clinical stage development programs include:

MASP-2 - narsoplimab (OMS721) - Lectin Pathway Disorders. Narsoplimab, also referred to as OMS721, is our lead fully human monoclonal antibody targeting mannan-binding lectin-associated serine protease-2 (“MASP-2”), a novel pro-inflammatory protein target involved in activation of the lectin pathway of the complement system. The lectin pathway plays an important role in the body’s inflammatory response and becomes activated as a result of tissue damage or microbial pathogen invasion. Inappropriate or uncontrolled activation of the lectin pathway can cause serious diseases and disorders. MASP-2 is the effector enzyme of the lectin pathway, and the current development focus for narsoplimab is diseases that are strongly associated with activation of the lectin pathway.

In October 2020, we reported final clinical data from our pivotal trial of narsoplimab in HSCT-TMA, a frequently lethal complication of HSCT. In November 2020, we completed the rolling submission of our BLA for narsoplimab for the treatment of HSCT-TMA, and FDA accepted the BLA for filing in January 2021 under its Priority Review program. On October 18, 2021, we announced the receipt of a Complete Response Letter (“CRL”) from FDA regarding the BLA. In the CRL, FDA expressed difficulty in estimating the treatment effect of narsoplimab in HSCT-TMA and asserted that additional information will be needed to support regulatory approval. In February 2022, we had a Type A meeting with FDA to discuss the CRL, including each of the review issues that FDA identified as presenting difficulties interpreting the treatment response in the pivotal trial. Although we feel that we adequately addressed all of the issues noted in the CRL, the meeting minutes included a number of the review division’s critiques that we believe had already been addressed and/or were inaccurate. As a result, we currently plan to submit a Formal Dispute Resolution Request. Formal dispute resolution is an official pathway that enables a sponsor to appeal a decision by an FDA review division to a higher authority within FDA, in this case the Office of New Drugs. Our request is for regular approval based on the data in our existing BLA. We continue to believe that our BLA, as submitted, merits approval and that the data meet or exceed the threshold for substantial evidence of effectiveness; however, there can be no assurances that the Formal Dispute Resolution process will result in approval of our BLA, will provide a clear path to resubmission of our BLA, or that any identified path to BLA resubmission will be satisafactory in terms of the information, time and/or expenditure required.

In the EU, the EMA has confirmed narsoplimab’s eligibility for EMA’s centralized review of a single marketing authorization application (“MAA”) that, if approved, would authorize the product to be marketed in all EU member states and EEA countries. Although our resources are currently focused primarily on BLA approval in the U.S., we continue to advance toward submission of our MAA.

Phase 3 clinical programs are also ongoing for narsoplimab in IgA nephropathy and aHUS. In addition, narsoplimab is the only complement inhibitor included in a nationwide, late-stage adaptive platform trial evaluating multiple agents as potential treatments for COVID-19. Narsoplimab also has been administered under compassionate use to treat COVID-19 patients in Italy and in the U.S.

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Narsoplimab has received multiple designations from FDA and from the EMA across three current indications. These include:

HSCT-TMA: In the U.S., FDA has granted narsoplimab (1) breakthrough therapy designation in patients who have persistent TMA despite modification of immunosuppressive therapy and (2) orphan drug designation for the treatment of HSCT-TMA. In the EU, narsoplimab has been granted designation as an orphan medicinal product for treatment in hematopoietic stem cell transplantation.
IgA nephropathy: In the U.S., FDA has granted narsoplimab (1) breakthrough therapy designation for the treatment of IgA nephropathy and (2) orphan drug designation in IgA nephropathy. In the EU, narsoplimab has been granted designation as an orphan medicinal product for the treatment of primary IgA nephropathy.
aHUS: In the U.S., FDA has granted narsoplimab orphan drug designation for the prevention (inhibition) of complement-mediated TMAs and fast-track designation for the treatment of patients with aHUS.

In our IgA nephropathy program, patient enrollment continues in the narsoplimab Phase 3 clinical trial, ARTEMIS-IGAN. The single Phase 3 trial design is a randomized, double-blind, placebo-controlled multicenter trial in patients at least 18 years of age with biopsy-confirmed IgA nephropathy and 24-hour urine protein excretion greater than 1 g/day at baseline on optimized renin-angiotensin system blockade. This trial includes a run-in period. Initially, patients are expected to receive an IV dose of study drug each week for 12 weeks; additional weekly dosing can be administered to achieve optimal response. The primary endpoint, which could suffice for full or accelerated approval depending on the effect size, is reduction in proteinuria at 36 weeks after the start of dosing. The trial is designed to allow intra-trial adjustment in sample size. For the purposes of safety and efficacy assessments, the initial sample size for the proteinuria endpoint is estimated at 140 patients in each of the treatment and placebo groups. This will include a subset of patients with high levels of proteinuria (i.e., equal to or greater than 2 g/day) at baseline, and a substantial improvement at 36 weeks in this subset of patients alone could potentially form the basis for approval. We believe that the trial design will allow assessment for either full or accelerated approval at 36 weeks based on proteinuria results either (1) across the general population of study patients or (2) in the high-proteinuria subset of patients. In the event of full approval, estimated glomerular filtration rate (“eGFR”) becomes a safety endpoint only. In the event that the primary endpoint at 36 weeks results in accelerated approval from FDA, change in eGFR is expected to be assessed at approximately two years after the start of dosing. These eGFR data, if satisfactory, would then likely form the basis for full approval. In response to investigators’ concerns about extended withholding of narsoplimab treatment from any high-proteinuria patient initially randomized to the placebo-treated group, FDA will allow patients in that sub-population open-label treatment with narsoplimab after at least one year of blinded treatment.

The Phase 3 clinical program in patients with aHUS, in which patient recruitment is ongoing, consists of one Phase 3 clinical trial – a single-arm (i.e., no control arm), open-label trial in patients with newly diagnosed or ongoing aHUS. This trial is targeting approximately 40 patients for full approval in the EU and accelerated approval in the U.S. and, as required by FDA, approximately 80 total patients for full approval in the U.S. The trial includes multiple sites in the U.S., Asia and Europe; however, enrollment has been slow in part due to prioritizing the use of resources within our narsoplimab programs on HSCT-TMA, COVID-19 and IgA nephropathy.

Narsoplimab is also the only complement inhibitor included in the I-SPY COVID-19 adaptive platform trial sponsored by Quantum Leap Healthcare Collaborative, which is evaluating drugs and investigational products for the treatment of critically ill COVID-19 patients. To date, no drug investigated in the trial has been reported to show a benefit relative to the background therapy in the trial. Quantum is finalizing analyses of the narsoplimab data, and we look forward to sharing the outcome of the trial.

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MASP-3 - OMS906 - Alternative Pathway Disorders. As part of our MASP program, we have identified mannan-binding lectin-associated serine protease 3 (“MASP-3”), which has been shown to be the key activator of the complement system’s alternative pathway (“APC”), and we believe that we are the first to make this and related discoveries associated with the APC. The complement system is part of the immune system’s innate response, and the APC is considered the amplification loop within the complement system. MASP-3 is responsible for the conversion of pro-factor D to factor D; converted factor D is necessary for the activation of the APC. Based on our alternative pathway-related discoveries, we have expanded our intellectual property position to protect our inventions stemming from these discoveries beyond MASP-2 associated inhibition of the lectin pathway to include inhibition of the alternative pathway. Our current primary focus in this program is developing MASP-3 inhibitors for the treatment of disorders related to the APC.

In September 2020 we began enrollment and dosing in a placebo-controlled, double-blind, single-ascending-dose and multiple-ascending-dose Phase 1 clinical trial to evaluate the safety, tolerability, pharmacodynamics and pharmacokinetics of OMS906. We have dosed subjects across all dosing cohorts in the single-ascending dose study and reported preliminary data from the Phase 1 trial in June 2021. OMS906 has been well tolerated at all doses tested and preliminary human pharmacokinetic and pharmacodynamic data are consistent with once-monthly subcutaneous dosing and every-other-month or less frequent IV dosing. Recent data show high level suppression of alternative pathway activity. We have determined to forego the multiple-ascending dose portion of our Phase 1 trial in healthy subjects and plan to move directly into a Phase 1b clinical trial in patients with PNH who have an unsatisfactory response to the C5 inhibitor ravulizumab. We expect that this will accelerate our overall clinical development program for OMS906 in PNH. Preparations for the Phase 1b trial are underway and enrollment is expected to begin this summer.

PDE7 - OMS527. Our PDE7 program is based on our discoveries of previously unknown links between PDE7 and any addiction or compulsive disorder, and between PDE7 and any movement disorders, such as Parkinson’s disease. PDE7 appears to modulate the dopaminergic system, which plays a significant role in regulating both addiction and movement. We believe that PDE7 inhibitors could be effective therapeutics for the treatment of addictions and compulsions as well as for movement disorders. Data generated in preclinical studies support the use of PDE7 inhibitors in both of these therapeutic areas.

In September 2019, we reported positive results from our completed Phase 1 clinical trial designed to assess the safety, tolerability and pharmacokinetics of the compound in healthy subjects. In the double blind, randomized Phase 1 study, the study drug, referred to as OMS182399, met the primary endpoints of safety and tolerability and showed a favorable and dose-proportional pharmacokinetic profile supporting once-daily dosing. There was no apparent food effect on plasma exposure to OMS182399. Continued clinical development in our PDE7 program is currently subject to allocation of internal financial and other resources, which are at present are prioritized for other programs, and/or accessing external funding.

Preclinical Development Programs and Platforms

Our preclinical programs and platforms include:

Other MASP Inhibitor Preclinical Programs. We have generated positive preclinical data from MASP-2 inhibition in in vivo models of age-related macular degeneration, myocardial infarction, diabetic neuropathy, stroke, traumatic brain injury, ischemia-reperfusion injury, and other diseases and disorders. We are also developing a longer-acting second generation antibody targeting MASP-2 for which we expect to initiate clinical trials this summer. This program is designated “OMS1029.” Development efforts are also directed to a small-molecule inhibitor of MASP-2 designed for oral administration as well as to small-molecule inhibitors of MASP-3 and bispecific small- and large-molecule inhibitors of MASP-2/-3.
GPR174, GPCR Platform and and Immuno-oncology Platform. We have developed a proprietary cellular redistribution assay which we use in a high-throughput manner to identify synthetic ligands, including antagonists, agonists and inverse agonists, that bind to and affect the function of orphan GPCRs. We have screened Class A orphan GPCRs against our small-molecule chemical libraries using the cellular redistribution

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assay and have identified and confirmed compounds that interact with 54 of the 81 Class A orphan GPCRs linked to a wide range of indications including cancer as well as metabolic, cardiovascular, immunologic, inflammatory and central nervous system disorders. One of our priorities in this program is GPR174, which is involved in the modulation of the immune system. In ex vivo human studies, our small-molecule inhibitors targeting GPR174 upregulate the production of cytokines, block multiple checkpoints and tumor promoters, and suppress regulatory T-cells. Based on our data, we believe that GPR174 controls a major, previously unrecognized pathway in cancer and modulation of the receptor could provide a seminal advance in immuno-oncologic treatments for a wide range of tumors. Our studies in mouse models of melanoma and colon carcinoma found that GPR174-deficiency resulted in significantly reduced tumor growth and improved survival of the animals versus normal mice. Our discoveries suggest a new approach to cancer immunotherapy that targets inhibition of GPR174 and can be combined with and significantly improve the tumor-killing effects of other oncologic agents, including radiation, adenosine pathway inhibitors and checkpoint inhibitors. These discoveries include (1) identification of cancer-immunity pathways controlled by GPR174, (2) the identification of phosphatidylserine as a natural ligand for GPR174, (3) a collection of novel small-molecule inhibitors of GPR174 and (4) a synergistic enhancement of “tumor-fighting” cytokine production by T cells following the combined inhibition of both GPR174 and the adenosine pathway, another key metabolic pathway that regulates tumor immunity. We are developing small-molecule inhibitors of GPR174 with the objective of moving compounds into human trials. We are also exploring several of our other GPCR targets.

Additionally, we are advancing research on a technology that may improve the potency and durability of adoptive T cell therapies. We validated our novel approach – which enforces memory phenotypes in cultured T cells through a previously unexplored pathway – in an aggressive mouse tumor model and are building a broad and exclusive intellectual property position around our platform. We believe that our novel approach has the potential to improve response rates for patients receiving either engineered or native T-cell therapies for liquid or solid tumors and are continuing to explore the application of this technology to human CAR-T and adoptive T cell therapy systems.

Financial Summary

On December 23, 2021, we completed the sale of our commercial product OMIDRIA and certain related assets, including inventory and prepaid expenses, to Rayner. We received $126.0 million in cash at closing, and we retained all outstanding accounts receivable as of the closing date. We will receive a royalty on world-wide sales of OMIDRIA and potentially a $200.0 million milestone payment if separate payment for OMIDRIA is secured in the U.S. for a continuous period of at least four years before January 1, 2025.

As a result of the OMIDRIA divestiture, all the revenues and expenses related to OMIDRIA have been reclassified to net income from discontinued operations in our condensed consolidated statements of operations and comprehensive loss and excluded from continuing operations for all periods presented (see “Net Income from Discontinued Operations” below for additional information).

As of March 31, 2022, we had $142.2 million in cash and cash equivalents and short-term investments available for general corporate use and $16.3 million in receivables.

Results of Operations

Research and Development Expenses

Our research and development expenses can be divided into three categories: direct external expenses, which include clinical research and development and preclinical research and development activities; internal, overhead and other expenses; and stock-based compensation expense. Direct external expenses consist primarily of expenses incurred pursuant to agreements with third-party manufacturing organizations prior to receiving regulatory approval for a drug candidate, contract research organizations (“CROs”), clinical trial sites, collaborators, and licensors and consultants. Costs are reported in preclinical research and development until the program enters the clinic. Internal, overhead and other expenses consist of personnel costs, overhead costs such as rent, utilities and depreciation and other miscellaneous

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costs. The discontinued operations of OMIDRIA relate to the costs of drug manufacturing stability and quality control testing and costs of employees and consultants. The following table illustrates our expenses associated with these activities:

Three Months Ended

March 31, 

    

2022

    

2021

(In thousands)

Continuing research and development expenses:

Direct external expenses:

Clinical research and development:

 

  

 

  

MASP-2 program - OMS721 (narsoplimab)

$

9,244

$

17,031

MASP-3 program - OMS906

1,302

1,771

Other

 

127

 

142

Total clinical research and development

 

10,673

 

18,944

Preclinical research and development

 

2,744

 

2,711

Total direct external expenses

 

13,417

 

21,655

Internal overhead and other expenses

 

8,955

 

9,399

Stock-based compensation expenses

 

1,715

 

1,450

Total continuing research and development expenses

$

24,087

$

32,504

Clinical research and development expenses decreased $8.3 million for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 due primarily to the timing of narsoplimab drug substance manufacturing activities and timing of clinical trial costs related to OMS906.

Internal overhead and other expenses decreased $0.4 million for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 due to returning a small portion of our leased building to the landlord and a reduction in employee-related costs.

The increases in stock-based compensation for the three months ended March 31, 2022 compared to the same period in the prior year are due to the valuation and timing of annual stock option grants to employees.

We expect overall research and development costs will increase in the second quarter of 2022 compared to the first quarter of 2022 due to the timing of certain research and development activities and increased employee related costs.

At this time, we are unable to estimate with certainty the longer-term costs we will incur in the continued development of our drug candidates due to the inherently unpredictable nature of our preclinical and clinical development activities. Clinical development timelines, the probability of success and development costs can differ materially as new data become available and as expectations change. Our future research and development expenses will depend, in part, on the preclinical or clinical success of each drug candidate as well as ongoing assessments of each program’s commercial potential. In addition, we cannot forecast with precision which drug candidates, if any, 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.

We are required to expend substantial resources in the development of our drug candidates due to the lengthy process of completing clinical trials and seeking regulatory approval. Any failure or delay in completing clinical trials, or in obtaining regulatory approvals, could delay our generation of product revenue and increase our research and development expenses.

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Selling, General and Administrative Expenses

Three Months Ended

March 31,

    

2022

    

2021

(In thousands)

Continuing selling, general and administrative expense:

Selling, general and administrative expenses, excluding stock-based compensation expense

$

8,782

$

11,176

Stock-based compensation expense

 

2,177

 

1,610

Total continuing selling, general and administrative expense

$

10,959

$

12,786

Total selling, general and administrative expenses decreased by $1.8 million for the three months ended March 31, 2022 compared to the same period in the prior year. The decrease was primarily related to narsoplimab pre-launch sales and marketing costs in the prior year quarter and the timing of legal costs.

The increase in stock-based compensation for the three months ended March 31, 2022 compared to the same period in the prior year is due to the valuation and timing of annual stock option grants to employees.

We expect that our selling, general and administrative expenses will be higher in the second quarter of 2022 compared to the first quarter of 2022 due to additional employee related costs.

Interest Expense

Three Months Ended

March 31, 

    

2022

    

2021

(In thousands)

Interest expense

$

4,941

$

4,897

Interest expense is primarily comprised of contractual interest and amortization of debt issuance and debt discount related to our 6.25% Convertible Senior Notes (the “2023 Notes”) and 5.25% Convertible Senior Notes (the “2026 Notes”) as well as interest on our finance leases (see “Note 8— Unsecured Convertible Senior Notes”).

OMIDRIA Royalties

On December 23, 2021, we sold our commercial drug, OMIDRIA, to Rayner. We currently receive royalty payments of 50% of Rayner’s U.S. net sales of OMIDRIA (see the “Overview” section of the Management’s Discussion and Analysis for additional details).

During the three months ended March 31, 2022, we earned royalties of $13.8 million on sales of OMIDRIA which we recorded as a reduction to the OMIDRIA contract royalty asset. We also recorded $7.0 million of income in discontinued operations representing interest income and remeasurement adjustments to the OMIDRIA contract royalty asset. The following schedule presents a rollforward of the OMIDRIA contract royalty asset (in thousands):

OMIDRIA contract royalty asset at December 31, 2021

$

184,570

Royalties earned

(13,831)

Royalty interest income and remeasurement adjustments

6,996

OMIDRIA contract royalty asset at March 31, 2022

$

177,735

Net Income from Discontinued Operations

As a result of the OMIDRIA divestiture, all the revenue and expenses related to OMIDRIA have been reclassified to discontinued operations in our condensed consolidated statements of operations and comprehensive loss for all periods presented.

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Net income from discontinued operations is as follows:

Three Months Ended

March 31,

    

2022

    

2021

(in thousands)

Product sales, net

$

$

21,061

Royalty interest income and remeasurement adjustments

6,996

Total

6,996

21,061

Costs and expenses

 

513

 

6,382

Net income from discontinued operations

$

6,483

$

14,679

OMIDRIA sales have historically been highly dependent on separate payment under Medicare Part B and we would likely experience significant fluctuations in period-over-period OMIDRIA royalty earnings should CMS change its reimbursement policy for OMIDRIA.

Financial Condition - Liquidity and Capital Resources

As of March 31, 2022, we had $142.2 million in cash, cash equivalents and short-term investments available for general corporate use held primarily in money-market accounts as compared to $157.3 million at December 31, 2021. For the three months ended March 31, 2022, we incurred a net loss from operations of $33.0 million, including non-cash charges of $4.2 million.

We plan to continue to fund our operations with our cash and investments, realization of our outstanding accounts receivable, OMIDRIA royalties and potentially the $200.0 million milestone related to achieving long-term OMIDRIA separate payment. If FDA approval is granted for narsoplimab for HSCT-TMA within the next twelve months, we expect that sales of narsoplimab would also provide funds for our operations. In addition, we have a sales agreement to sell shares of our common stock, from time to time, in an “at the market” equity offering facility through which we may offer and sell shares of our common stock having an aggregate amount of up to $150.0 million. Should it be determined to be strategically advantageous, we could also pursue debt financings as well as public and private offerings of our equity securities, similar to those we have previously completed, or other strategic transactions, which may include licensing a portion of our existing technology. Should it be necessary to manage our operating expenses, we could also reduce our projected cash requirements by delaying clinical trials, reducing selected research and development efforts, or implementing other restructuring activities. We have $95.0 million of 2023 Notes that will mature and become due in November 2023. We plan to fund the repayment of the 2023 Notes through a combination of cash from operations, including narsoplimab HSCT-TMA revenues should approval be granted by FDA, the $200.0 million milestone related to OMIDRIA, strategic transactions, sale of stock or through issuance of additional debt.

Cash Flow Data

Three Months Ended

March 31, 

    

2022

    

2021

(In thousands)

Selected cash flow data

Cash provided by (used in):

Operating activities

$

(15,193)

$

(40,254)

Investing activities

$

(76,813)

$

32,985

Financing activities

$

161

$

5,796

Operating Activities. Net cash used in operating activities for the three months ended March 31, 2022 decreased by $25.1 million as compared to the same period in 2021. The decrease was primarily due to a $42.9 million change in cash provided from accounts receivable due to collecting trade receivables outstanding during the three months ended March 31, 2022 and the increase in receivables during the same quarter in the prior year due to reinstatement of OMIDRIA separate payment by CMS in December 2020. Other changes in operating activities between the periods included a $2.1

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