UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2020March 31, 2021
or
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☐ | 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)
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Washington | | 91-1663741 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification Number) |
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201 Elliott Avenue West Seattle, Washington | | 98119 |
(Address of principal executive offices) | | (Zip Code) |
(206) 676-5000 (Registrant’s telephone number, including area code) |
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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 |
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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.
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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 November 5, 2020,May 6, 2021, the number of outstanding shares of the registrant’s common stock, par value $0.01 per share, was 61,652,326.62,328,370.
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)“Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the Exchange Act)“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 information currently available to our management. 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,” “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:
● | whether the U.S. Food and Drug Administration (“FDA”) will approve the BLA for our |
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● | whether and when a marketing authorization application 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/or reimbursement |
● | our estimates regarding how long our existing cash, cash equivalents, short-term investments and revenues will be sufficient to fund our anticipated operating expenses, capital expenditures and debt service obligations; |
● | our expectations relating to demand for OMIDRIA® (phenylephrine and ketorolac intraocular solution) 1%/0.3% from wholesalers, ambulatory surgery centers |
● | the severity and duration of the impact of the COVID-19 pandemic on our business, operations, clinical programs and financial results; |
● | our expectations related to separate payment for OMIDRIA from the Centers for Medicare & Medicaid Services (“CMS”) and CMS’ separate payment policy for non-opioid pain management surgical drugs, and our expectations regarding reimbursement coverage for OMIDRIA by commercial and government payers; |
● | our plans for |
● | our expectations regarding the clinical, therapeutic |
● | our ability to design, initiate |
● | our plans and expectations regarding development of narsoplimab for the treatment of critically ill COVID-19 |
● | with respect to our narsoplimab clinical programs, our expectations regarding: whether enrollment in any |
● | our expectation that |
● | 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 OMIDRIA and our product 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, products and product 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 (SEC)(“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 SEPTEMBER 30, 2020MARCH 31, 2021
INDEX
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| | Condensed Consolidated Statements of Operations and Comprehensive Loss | 6 |
| | 7 | |
| | 8 | |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OMEROS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(unaudited)
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| | September 30, | | December 31, | | March 31, | | December 31, | ||||
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| 2020 |
| 2019 |
| 2021 |
| 2020 | ||||
Assets | | | |
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Current assets: |
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Cash and cash equivalents | | $ | 21,075 | | $ | 3,084 | | $ | 9,028 | | $ | 10,501 |
Short-term investments | |
| 132,448 | |
| 57,704 | |
| 91,455 | |
| 124,452 |
Receivables, net | |
| 37,379 | |
| 35,185 | |
| 24,826 | |
| 3,841 |
Inventory | |
| 1,542 | |
| 1,147 | |
| 1,191 | |
| 1,355 |
Prepaid expense and other assets | |
| 3,541 | |
| 6,625 | |
| 5,982 | |
| 11,136 |
Total current assets | |
| 195,985 | |
| 103,745 | |
| 132,482 | |
| 151,285 |
Property and equipment, net | |
| 2,950 | |
| 3,829 | |
| 2,173 | |
| 2,551 |
Right of use assets | | | 26,116 | | | 27,082 | | | 24,994 | | | 25,526 |
Restricted investments | |
| 1,154 | |
| 1,154 | |
| 1,054 | |
| 1,055 |
Advanced payments, non-current | |
| 870 | |
| 1,159 | |
| 741 | |
| 625 |
Total assets | | $ | 227,075 | | $ | 136,969 | | $ | 161,444 | | $ | 181,042 |
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Liabilities and shareholders’ deficit | |
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Current liabilities: | |
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Accounts payable | | $ | 7,017 | | $ | 5,328 | | $ | 11,499 | | $ | 4,199 |
Accrued expenses | |
| 36,948 | |
| 46,627 | |
| 28,132 | |
| 28,755 |
Current portion of lease liabilities | |
| 3,754 | |
| 3,504 | |
| 3,803 | |
| 3,782 |
Total current liabilities | |
| 47,719 | |
| 55,459 | |
| 43,434 | |
| 36,736 |
Lease liabilities, non-current | |
| 29,717 | |
| 32,318 | |
| 27,806 | |
| 28,770 |
Unsecured convertible senior notes, net | |
| 232,808 | |
| 158,213 | |
| 312,159 | |
| 236,288 |
Deferred tax liability | |
| 4,157 | |
| — | ||||||
Commitments and contingencies (Note 8) | |
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Commitments and contingencies (Note 9) | |
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Shareholders’ deficit: | |
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Preferred stock, par value $0.01 per share, 20,000,000 shares authorized; NaN issued and outstanding at September 30, 2020 and December 31, 2019. | |
| — | |
| — | ||||||
Common stock, par value $0.01 per share, 150,000,000 shares authorized at September 30, 2020 and December 31, 2019; 61,651,152 and 54,200,810 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively. | |
| 616 | |
| 542 | ||||||
Preferred stock, par value $0.01 per share, 20,000,000 shares authorized; NaN issued and outstanding at March 31, 2021 and December 31, 2020. | |
| — | |
| — | ||||||
Common stock, par value $0.01 per share, 150,000,000 shares authorized at March 31, 2021 and December 31, 2020; 62,252,012 and 61,671,231 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively. | |
| 622 | |
| 616 | ||||||
Additional paid-in capital | |
| 747,457 | |
| 625,048 | |
| 689,882 | |
| 751,304 |
Accumulated deficit | |
| (835,399) | |
| (734,611) | |
| (912,459) | |
| (872,672) |
Total shareholders’ deficit | |
| (87,326) | |
| (109,021) | |
| (221,955) | |
| (120,752) |
Total liabilities and shareholders’ deficit | | $ | 227,075 | | $ | 136,969 | | $ | 161,444 | | $ | 181,042 |
See accompanying Notes to Condensed Consolidated Financial Statements
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OMEROS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except share and per share data)
(unaudited)
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| | Three Months Ended | | Nine Months Ended | | | Three Months Ended | | ||||||||||||
| | September 30, | | September 30, | | | March 31, | | ||||||||||||
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| 2020 |
| 2019 |
| 2020 |
| 2019 |
| 2021 |
| 2020 | | |||||||
Revenue: | | | | | | | | | | | | | ||||||||
Product sales, net | | $ | 26,114 | | $ | 29,856 | | $ | 63,181 | | $ | 78,389 | ||||||||
Product sales, net | | $ | 21,061 | | $ | 23,537 | | |||||||||||||
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Costs and expenses: | |
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Cost of product sales | |
| 401 | |
| 278 | |
| 815 | |
| 464 | |
| 263 | |
| 267 | | |
Research and development | |
| 31,316 | |
| 23,746 | |
| 84,359 | |
| 69,108 | |
| 33,358 | |
| 28,911 | | |
Selling, general and administrative | |
| 19,825 | |
| 16,933 | |
| 54,792 | |
| 48,493 | |
| 18,052 | |
| 18,036 | | |
Total costs and expenses | |
| 51,542 | |
| 40,957 | |
| 139,966 | |
| 118,065 | |
| 51,673 | |
| 47,214 | | |
Loss from operations | |
| (25,428) | |
| (11,101) | |
| (76,785) | |
| (39,676) | |
| (30,612) | |
| (23,677) | | |
Loss on early extinguishment of debt | |
| (13,374) | |
| — | |
| (13,374) | |
| — | ||||||||
Interest expense | |
| (6,882) | |
| (5,715) | |
| (18,763) | |
| (16,846) | |
| (4,897) | |
| (5,903) | | |
Other (expense) income | |
| (633) | |
| 353 | |
| 280 | |
| 1,261 | ||||||||
Loss before income taxes | |
| (46,317) | |
| (16,463) | |
| (108,642) | |
| (55,261) | ||||||||
Income tax benefit | |
| 7,854 | |
| — | |
| 7,854 | |
| — | ||||||||
Other income | |
| 419 | |
| 549 | | |||||||||||||
Net loss | | $ | (38,463) | | $ | (16,463) | | $ | (100,788) | | $ | (55,261) | | $ | (35,090) | | $ | (29,031) | | |
Comprehensive loss | | $ | (38,463) | | $ | (16,463) | | $ | (100,788) | | $ | (55,261) | | $ | (35,090) | | $ | (29,031) | | |
Basic and diluted net loss per share | | $ | (0.66) | | $ | (0.33) | | $ | (1.81) | | $ | (1.12) | | $ | (0.57) | | $ | (0.53) | | |
Weighted-average shares used to compute basic and diluted net loss per share | |
| 58,233,988 | |
| 49,373,156 | |
| 55,682,379 | |
| 49,157,055 | |
| 61,928,511 | |
| 54,299,813 | |
See accompanying Notes to Condensed Consolidated Financial Statements
-6-
OMEROS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
| | | | | | | | | | | | |
| | Nine Months Ended September 30, | | Three Months Ended March 31, | ||||||||
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| 2020 |
| 2019 |
| 2021 |
| 2020 | ||||
Operating activities: | | | | | | | | | | | | |
Net loss | | $ | (100,788) | | $ | (55,261) | | $ | (35,090) | | $ | (29,031) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
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Stock-based compensation expense | |
| 11,122 | |
| 10,468 | |
| 3,271 | |
| 3,476 |
Non-cash interest expense | |
| 8,169 | |
| 6,790 | |
| 396 | |
| 2,533 |
Depreciation and amortization | |
| 1,218 | |
| 1,262 | |
| 390 | |
| 402 |
Loss on early extinguishment of debt | |
| 13,374 | |
| — | ||||||
Deferred income tax | |
| (7,854) | |
| — | ||||||
Fair value settlement upon termination of cap call contract | |
| 838 | |
| — | ||||||
Changes in operating assets and liabilities: | |
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Receivables | |
| (2,194) | |
| (7,113) | |
| (20,985) | |
| 11,068 |
Inventory | |
| (395) | |
| (1,085) | |
| 164 | |
| (64) |
Prepaid expenses and other assets | |
| 3,533 | |
| 959 | |
| 5,038 | |
| 628 |
Accounts payable and accrued expenses | |
| (8,702) | |
| 6,921 | |
| 6,562 | |
| 1,847 |
Net cash used in operating activities | |
| (81,679) | |
| (37,059) | |
| (40,254) | |
| (9,141) |
Investing activities: | |
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Purchases of property and equipment | |
| (283) | |
| (318) | |
| (12) | |
| (66) |
Purchases of investments | |
| (133,190) | |
| (594) | |
| (3) | |
| (3,176) |
Proceeds from the sale and maturities of investments | |
| 58,446 | |
| 36,750 | |
| 33,000 | |
| 14,018 |
Net cash (used in) provided by investing activities | |
| (75,027) | |
| 35,838 | ||||||
Net cash provided by investing activities | |
| 32,985 | |
| 10,776 | ||||||
Financing activities: | |
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Proceeds from issuance of convertible senior notes, net of issuance costs | |
| 218,245 | |
| — | ||||||
Purchases of capped calls related to convertible senior notes | |
| (23,223) | |
| — | ||||||
Payments for repurchases of convertible senior notes | |
| (125,638) | |
| — | ||||||
Proceeds from termination of capped call contracts | |
| 7,549 | |
| — | ||||||
Proceeds from issuance of common stock, net | |
| 93,675 | |
| — | ||||||
Proceeds upon exercise of stock options | |
| 4,978 | |
| 5,034 | ||||||
Principal payments on finance lease liabilities | |
| (889) | |
| (813) | ||||||
Proceeds upon exercise of stock options and warrants | |
| 6,333 | |
| 2,712 | ||||||
At the market offering costs | |
| (241) | |
| — | ||||||
Payments on finance lease obligations | |
| (296) | |
| (313) | ||||||
Net cash provided by financing activities | |
| 174,697 | |
| 4,221 | |
| 5,796 | |
| 2,399 |
Net increase in cash and cash equivalents | |
| 17,991 | |
| 3,000 | ||||||
Net (decrease) increase in cash and cash equivalents | |
| (1,473) | |
| 4,034 | ||||||
Cash and cash equivalents at beginning of period | |
| 3,084 | |
| 5,861 | |
| 10,501 | |
| 3,084 |
Cash and cash equivalents at end of period | | $ | 21,075 | | $ | 8,861 | | $ | 9,028 | | $ | 7,118 |
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Supplemental cash flow information | |
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Cash paid for interest | | $ | 8,564 | | $ | 6,811 | | $ | 5,995 | | $ | 89 |
Property acquired under finance lease | | $ | 216 | | $ | 886 | | $ | — | | $ | 22 |
See accompanying Notes to Condensed Consolidated Financial Statements
-7-
OMEROS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1—Organization and Significant Accounting PoliciesDescription of Business
OrganizationDescription of Business
We are a commercial-stage biopharmaceutical company committed to discovering, developing and commercializing small-molecule and protein therapeutics for large-market as well as orphan indications targeting inflammation, complement-mediated diseases, disorders of the central nervous system, addiction and immune-related diseases, including cancers. Our first drug product, OMIDRIA® (phenylephrine and ketorolac intraocular solution) 1%/0.3%, is marketed in the United States (U.S.(“U.S.”) for use during cataract surgery or intraocular lens replacement. In December 2020, the Centers for Medicare & Medicaid Services (“CMS”) confirmed that OMIDRIA qualifies for separate payment when used on Medicare Part B patients in ambulatory surgery centers (“ASCs”), effective retroactively as of October 1, 2020. OMIDRIA’s pass through status, which had allowed for separate payment when used on Medicare Part B patients in the ASC or hospital setting, had expired on October 1, 2020.
Our drug candidate narsoplimab is the subject of a biologics license application (“BLA”) under priority review by the U.S. Food and Drug Administration (“FDA”) for the treatment of hematopoietic stem cell transplant-associated thrombotic microangiopathy (“HSCT-TMA”). 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.
Basis of Presentation
Our condensed consolidated financial statements include the financial position and results of operations of Omeros Corporation (Omeros)(“Omeros”) and our wholly owned subsidiaries. All intercompany transactions have been eliminated, and we have determined we operate in 1 segment. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP)(“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The information as of September 30, 2020March 31,2021 and December 31, 20192020 and for the three and nine months ended September 30,March 31, 2021 and 2020 and 2019 includes all adjustments, which include normal recurring adjustments, necessary to present fairly our interim financial information. The Condensed Consolidated Balance Sheet at December 31, 20192020 has been derived from our audited financial statements but does not include all of the information and footnotes required by GAAP for audited annual financial information.
The accompanying unaudited condensed consolidated financial statements and related notes thereto should be read in conjunction with the audited consolidated financial statements and related notes thereto that are included in our Annual Report on Form 10-K for the year ended December 31, 2019,2020, which was filed with the U.S. Securities and Exchange Commission (SEC)(“SEC”) on March 2, 2020.1, 2021.
Risks and Uncertainties
In its 2021 outpatient prospective payment system (OPPS) proposed rule, the Centers for Medicare and Medicaid Services (CMS), a part of the Department of Health and Human Services (HHS), confirmed the October 1, 2020 expiration of pass-through reimbursement for OMIDRIA and indicated an intention to package payment for OMIDRIA with payment for the associated surgical procedure in both the hospital outpatient department (HOPD) and ambulatory surgery center (ASC) settings. We are continuing to pursue administrative and legislative avenues to secure separate payment for OMIDRIA; however, we cannot provide assurance that these efforts will be successful.
The outbreak of the novel strain of coronavirus (SARS-CoV-2) that causes COVID-19 pandemic and the responses to the global pandemicit by various governmental authorities, the medical community and others continue to have had a significant impact on our business. In March 2020, ASCs and hospitals using OMIDRIA postponed nearly all cataract surgery in responseIt is not possible to recommendations from government and medical organizations. As a result, we did not record any salesestimate precisely the future impact of OMIDRIA toCOVID-19 on our wholesalers from March 25 to May 19, 2020. However, by the end of June 2020, the run rate of weekly OMIDRIA sales had recovered to levels approximating those seen prior to the pandemic. Duebusiness, operations or financial results due to the unknown magnitude, duration and outcome of the COVID-19 pandemic, it is not possible to estimate precisely its impact on our business, operations or financial results; however, the impact has been and could continue to be material.
As of September 30, 2020, we had cash, cash equivalents and short-term investments of $153.5 million and an accounts receivable-based line of credit that allows us to borrow up to the lesser of $50.0 million or 85% of our accounts receivable borrowing base, less certain reserves. We have incurred losses from operations of $76.8 million for the nine months ended September 30, 2020, and cash used in operating activities was $81.7 million for the nine months ended
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September 30, 2020. We will continue to incur losses from operating activities until our revenues exceed operating costs and debt service obligations.
OMIDRIA pass-through reimbursement from CMS expired on October 1, 2020. If continued separate payment is determined not to be reasonably achievable in the near term, we have developed a commercial strategy that can be quickly implemented to lower the per-vial sales price of OMIDRIA to achieve substantially larger sales volumes. We believe that this approach would result in substantial revenues from OMIDRIA, in part because CMS Medicare Part B beneficiaries only represent approximately 45% of cataract surgery procedures annually.pandemic.
We anticipatehave filed with FDA our narsoplimab BLA for HSCT-TMA, which has been granted priority review with an FDA action date of July 17, 2021 under the Prescription Drug User Fee Act. We anticipate, but cannot guarantee, that narsoplimab will receive FDA approval and will launch in early to mid-2021. Currentlythe U.S. in 2021. If approved, we cannot fully predict the timing or the magnitude of narsoplimab revenues, but we believe they will be significant. Execution of ourOur sales and marketing
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strategies for the launch of narsoplimab for HSCT-TMA is underway. These plans include various milestones at which we commit to incremental activities,spending, providing for flexibility in the timing of costs incurred should the approval of narsoplimab be accelerated or delayed. If warranted, we will adjust the timing and associated costs of our HSCT-TMA launch activities as we advance through the biologics license application (BLA) review and approval process.
We plan to continue to fund our operations for at least the next twelve months with our cash and investments on hand, from sales of OMIDRIA and, if FDA approval is granted, from sales of narsoplimab for HSCT-TMA. There is also the possibility that we could generate revenue from sales of narsoplimab for the treatment of COVID-19. In addition, we may utilize funds available under our accounts receivable-based line of credit, which allows us to borrow up to 85% of our available accounts receivable borrowing base, less certain reserves, or $50.0 million, whichever is less. We also entered into a sales agreement to sell shares of our common stock, from time to time, up to an aggregate offering amount of $150.0 million through an “at the market” equity offering program. Should it be necessary or determined to be strategically advantageous, we also could pursue debt financings as well as public and private offerings of our equity securities, similar to those we have previously completed, previously, or other strategic transactions, which may include licensing a portion of our existing technology. Should it be necessary to manage our operating expenses, we would reduce our projected cash requirements through reduction of our expenses by delaying clinical trials, reducing selected research and development efforts, or implementing other restructuring activities.
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 revenue recognition, stock-based compensation expense and accruals for clinical trials as well as manufacturing of drug product and clinical drug supply and other contingencies.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
Revenue Recognition
When we enter into a customer contract, we perform the following five steps: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation.
We generally record revenue from product sales when the product is delivered to our wholesalers. Product sales are recorded net of wholesaler distribution fees and estimated chargebacks, rebates, returns and purchase-volume discounts. Accruals or allowances are established for these deductions in the same period when revenue is recognized, and actual amounts incurred are offset against the applicable accruals or allowances. We reflect 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.
-9-Inventory
TableInventory is stated at the lower of Contentscost or market determined on a specific identification basis in a manner that approximates the first-in, first-out (“FIFO”) method. Costs include amounts related to third-party manufacturing, transportation and internal labor and overhead. Capitalization of costs as inventory begins when regulatory approval of the product candidate is reasonably assured in the U.S. or the European Union (“EU”). We expense inventory costs related to product candidates as research and development expenses prior to receiving regulatory approval in the respective territory. Inventory is reduced to net realizable value for excess and obsolete inventories based on forecasted demand.
Right-of-UseRight 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
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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.
Advance PaymentsStock-Based Compensation
AdvanceStock-based compensation expense is recognized for all share-based payments for goods or services that will be used or rendered for future researchbased on estimated fair values as of the date of grant. 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 development activities are deferredexpected 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 then recognized as an expense as the related goods are delivered or the services are performed, or when the goods or services are no longer expected to be provided.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.
Stock-Based Compensation
Stock-based compensation expense is recognized for all share-based payments based on estimated fair values as of the date of grant. The fair value of our stock options is calculated using the Black-Scholes option-pricing model which requires judgmental assumptions including volatility, forfeiture rates and expected option life. We use the straight-line method to allocate stock-based compensation cost to reporting periods over each optionee’s requisite service period, which is generally the vesting period.
Recently Adopted Pronouncements
In June 2016, the Financial Accounting Standards Board issued ASU 2016-13, Financial Instruments—Credit Losses, (Topic 326) which changes how entities account for credit losses on most financial assets and certain other instruments and expands disclosures. The standard is effective for annual and interim periods beginning after December 15, 2019 with early adoption permitted. We adopted the standard onOn January 1, 2020 and the adoption did not have a material impact on our consolidated financial statements and disclosures.
Recent2021, we adopted Accounting Pronouncements Not Yet Adopted
In August 2020, the Financial Accounting Standards BoardStandard Update (“ issued ASUASU”) 2020-06, Debt—Debt with Conversion Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. Among other changes, on a modified retrospective basis. ASU 2020-06 removes from U.S. GAAP the separate liability and equity separation modelaccounting for convertible instruments with a cash conversion feature, and as a result, after adoption, entities will no longer separately present in equity an embedded conversion feature for such debt. Similarly, the embedded conversion feature will no longer be amortized into income as interest expense over the life of the instrument. Instead, entities will account for a convertible debt instrument wholly as debt unless (1) a convertible instrument contains features that require bifurcation as a derivative under Topic 815, Derivatives and Hedging, or (2) a
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convertible debt instrument was issued at a substantial premium. Among other potential impacts, this change is expected to reduce reported interest expense, increase reported net income, and result in a reclassification of certain conversion feature balance sheet amounts from stockholders’ equity to liabilities as it relates to the Company’sour convertible senior notes. Additionally, ASU 2020-06 requires the application of the if-converted method to calculate the impact ofConsequently, we now account for our convertible instruments on diluted earnings per share (EPS), which is consistent with the Company’s accounting treatment under the current standard. ASU 2020-06 is effectivesenior notes wholly as debt. (See “Note 3 – Net Loss Per Share” and “Note 7 – Unsecured Convertible Senior Notes” for fiscal years beginning after December 15,further information)
On January 1, 2021, with early adoption permitted for fiscal years beginning after December 15, 2020, and can bewe adopted on either a fully retrospective or modified retrospective basis. The Company is evaluating the impact of this pronouncement on its consolidated financial statements.
In December 2019, the Financial Accounting Standards Board issued ASU 2019-12, Income Taxes (Topic 740), which is intended to simplify various aspects of the income tax accounting guidance, including elimination of the exception to the incremental approach of intra-period tax allocation when there is a loss from continuing operations and income or gain from other items (for example, other comprehensive income). ASU 2019-12 is effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is evaluatingWe adopted the standard on a prospective basis and the impact of this pronouncement on itsto our consolidated financial statements. We have a history of losses and therefore have historically not made a provisionstatements for income taxes.the three months ended March 31,2021 was immaterial.
Note 2—3—Net Loss Per Share
Basic net lossOur potentially dilutive securities include potential common shares related to our stock options, warrant 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 calculated by dividinga loss because the net loss byinclusion of the weighted-average number ofpotential common shares outstanding forwould have an anti-dilutive effect. Shares issuable under the period. Diluted net loss per share is computed by dividing the net loss by the weighted-average number of common shares and dilutive common share equivalents outstanding for the period, determinedunsecured convertible notes are calculated using the treasury-stock method. Common share equivalentsif-converted method and are excluded from the diluted net loss per share computation ifbelow table as their effectimpact is anti-dilutive.
The basic and diluted net loss per share amounts 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 three and nine months ended September 30, 2020 and 2019 were computed based on the shares of common stock outstanding during the respective periods. Potentially dilutive securities excluded from the diluted loss per share calculation are as follows:
| | | | | | | |
| Three Months Ended | | Nine Months Ended | ||||
| September 30, | | September 30, | ||||
| 2020 |
| 2019 |
| 2020 |
| 2019 |
Outstanding options to purchase common stock | 1,456,454 |
| 3,026,871 | | 1,777,393 |
| 2,829,807 |
Outstanding warrants to purchase common stock | 9,828 |
| 18,128 | | 11,712 |
| 16,923 |
Total potentially dilutive shares excluded from loss per share | 1,466,282 |
| 3,044,999 | | 1,789,105 |
| 2,846,730 |
Note 3—Certain Balance Sheet Accounts
Accounts Receivable, net
Accounts receivable, net consist of the following:
| | | | | | |
| | September 30, | | December 31, | ||
|
| 2020 |
| 2019 | ||
| | (In thousands) | ||||
Trade receivables, net | | $ | 37,218 | | $ | 35,074 |
Sublease and other receivables | |
| 161 | |
| 111 |
Total accounts receivables, net | | $ | 37,379 | | $ | 35,185 |
Trade receivables as of September 30, 2020 are shown net of $8.7 million of product return and chargeback allowances. Trade receivables as of December 31, 2019 are shown net of $1.6 million of chargeback allowances.period.
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Potentially dilutive securities excluded from Diluted EPS are as follows:
| | | | |
| Three Months Ended | | ||
| March 31, | | ||
| 2021 |
| 2020 |
|
Outstanding options to purchase common stock | 3,453,133 |
| 1,659,029 | |
Outstanding warrants to purchase common stock | — |
| 10,901 | |
Total potentially dilutive shares excluded from loss per share | 3,453,133 |
| 1,669,930 | |
Note 4—Certain Balance Sheet Accounts
Accounts Receivable, net
Accounts receivable, net consist of the following:
| | | | | | |
| | March 31, | | December 31, | ||
|
| 2021 |
| 2020 | ||
| | (In thousands) | ||||
Trade receivables, net | | $ | 24,576 | | $ | 3,771 |
Sublease and other receivables | |
| 250 | |
| 70 |
Total accounts receivables, net | | $ | 24,826 | | $ | 3,841 |
Trade receivables net of product return and chargeback allowances were $1.5 million and $1.2 million as of March 31, 2021 and December 31, 2020, respectively.
Inventory
Inventory consists of the following:
| | | | | | | | | | | | |
| | September 30, | | December 31, | | March 31, | | December 31, | ||||
|
| 2020 |
| 2019 |
| 2021 |
| 2020 | ||||
| | (In thousands) | | (In thousands) | ||||||||
Raw materials |
| $ | 79 |
| $ | 91 |
| $ | 242 |
| $ | 109 |
Work-in-progress | |
| 797 | |
| 338 | |
| 405 | |
| 462 |
Finished goods | |
| 666 | |
| 718 | |
| 544 | |
| 784 |
Total inventory |
| $ | 1,542 |
| $ | 1,147 |
| $ | 1,191 |
| $ | 1,355 |
Property and Equipment, Net
Property and equipment, net consists of the following:
| | | | | | | | | | | | |
|
| September 30, |
| December 31, |
| March 31, |
| December 31, | ||||
| | 2020 | | 2019 | | 2021 | | 2020 | ||||
| | (In thousands) | | (In thousands) | ||||||||
Finance leases | | $ | 5,690 | | $ | 5,474 | | $ | 5,690 | | $ | 5,690 |
Laboratory equipment | |
| 2,903 | |
| 2,844 | |
| 2,910 | |
| 2,898 |
Computer equipment | |
| 985 | |
| 921 | |
| 985 | |
| 985 |
Office equipment and furniture | |
| 625 | |
| 625 | |
| 625 | |
| 625 |
Total cost | |
| 10,203 | |
| 9,864 | |
| 10,210 | |
| 10,198 |
Less accumulated depreciation and amortization | |
| (7,253) | |
| (6,035) | |
| (8,037) | |
| (7,647) |
Total property and equipment, net | | $ | 2,950 | | $ | 3,829 | | $ | 2,173 | | $ | 2,551 |
Depreciation expense forFor the three months ended September 30,March 31, 2021 and 2020, depreciation and 2019 wasamortization expenses were $0.4 million for both periods, respectively. Depreciation expense for the nine months ended September 30, 2020 and 2019 was $1.2 million and $1.3 million, respectively.million.
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Accrued Expenses
Accrued expenses consist of the following:
| | | | | | | | | | | | |
|
| September 30, |
| December 31, |
| March 31, |
| December 31, | ||||
| | 2020 | | 2019 | | 2021 | | 2020 | ||||
| | (In thousands) | | (In thousands) | ||||||||
Sales rebates, fees and discounts | | $ | 10,201 | | $ | 10,870 | | $ | 6,871 | | $ | 3,326 |
Contract research and development | | | 8,813 | | | 24,107 | | | 6,146 | |
| 7,952 |
Employee compensation | |
| 6,415 | |
| 3,546 | ||||||
Consulting and professional fees | |
| 5,479 | |
| 3,610 | |
| 5,002 | | | 5,393 |
Interest payable | |
| 3,736 | |
| 1,640 | |
| 3,703 | |
| 5,205 |
Employee compensation | |
| 3,665 | |
| 3,948 | ||||||
Clinical trials | |
| 1,482 | |
| 1,982 | |
| 2,007 | |
| 2,121 |
Other accrued expenses | |
| 822 | |
| 872 | |
| 738 | |
| 810 |
Total accrued expenses | | $ | 36,948 | | $ | 46,627 | | $ | 28,132 | | $ | 28,755 |
Note 4—Fair-Value Measurements
As of September 30, 2020, and December 31, 2019, 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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Note 5—Fair-Value Measurements
As of March 31, 2021, and December 31, 2020, 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.
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:
| | | | | | | | | | | | | | | | | | | | | | | | |
|
| September 30, 2020 |
| March 31, 2021 | ||||||||||||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||||||
| | (In thousands) | | (In thousands) | ||||||||||||||||||||
Assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Money-market funds classified as non-current restricted investments | | $ | 1,154 | | $ | — | | $ | — | | $ | 1,154 | | $ | 1,054 | | $ | — | | $ | — | | $ | 1,054 |
Money-market funds classified as short-term investments | |
| 132,448 | |
| — | |
| — | |
| 132,448 | |
| 91,455 | |
| — | |
| — | |
| 91,455 |
Total | | $ | 133,602 | | $ | — | | $ | — | | $ | 133,602 | | $ | 92,509 | | $ | — | | $ | — | | $ | 92,509 |
| | | | | | | | | | | | | | | | | | | | | | | | |
|
| December 31, 2019 |
| December 31, 2020 | ||||||||||||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||||||
| | (In thousands) | | (In thousands) | ||||||||||||||||||||
Assets: | | |
|
| |
|
| |
|
| |
| | |
|
| |
|
| |
|
| |
|
Money-market funds classified as non-current restricted investments | | $ | 1,154 | | $ | — | | $ | — | | $ | 1,154 | | $ | 1,055 | | $ | — | | $ | — | | $ | 1,055 |
Money-market funds classified as short-term investments | |
| 57,704 | |
| — | |
| — | |
| 57,704 | |
| 124,452 | |
| — | |
| — | |
| 124,452 |
Total | | $ | 58,858 | | $ | — | | $ | — | | $ | 58,858 | | $ | 125,507 | | $ | — | | $ | — | | $ | 125,507 |
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Cash held in demand deposit accounts of $21.1$9.0 million and $3.1$10.5 million is excluded from our fair-value hierarchy disclosure as of September 30, 2020March 31, 2021 and December 31, 2019,2020, respectively. There were 0 unrealized gains or losses associated with our investments as of September 30, 2020March 31, 2021 or December 31, 2019.2020. 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 6—“Note7—Unsecured Convertible Senior Notes” for the carrying amount and estimated fair value of our 6.25% Convertible Senior Notes due 2023.outstanding convertible senior notes.
Note 5—6—Line of Credit
We have a Loan and Security Agreement with Silicon Valley Bank, which provides for a $50.0 million revolving line of credit facility (the Line“Line of Credit Agreement)Agreement”). Under the Line of Credit Agreement, we may draw, on a revolving basis, up to the lesser of $50.0 million or 85.0% of our eligible accounts receivable, less certain reserves. Interest on amounts outstanding is payable monthly at the greater of 5.5% andor the prime rate. The line of credit is secured by all our assets excluding intellectual property and development program inventories.
As of September 30, 2020March 31, 2021 and December 31, 2019, we had2020, 0 amounts were outstanding borrowings under the Line of Credit Agreement.
Note 7—Unsecured Convertible Senior Notes
On January 1, 2021, we early adopted ASU 2020-06on amodified retrospective basis. ASU 2020-06 removes the separate liability and equity accounting for our outstanding convertible senior notes. Consequently, we now account for our convertible senior notes wholly as debt. Adoption of ASU 2020-06 resulted in a cumulative effect adjustment of $75.5 million to restore our unsecured convertible notes and additional paid-in capital to the balances without an equity allocation component. The carrying value of the notes are reflective of their face value less unamortized debt issuance costs. Interest expense recognized in future periods will be reduced as a result of accounting for the unsecured convertible notes wholly as a liability measured at amortized cost.
Unsecured convertible senior notes outstanding at March 31, 2021 and December 31, 2020 are as follows:
| | | | | | | | | |
| | Balance as of March 31, 2021 | |||||||
|
| 2023 Notes |
| 2026 Notes |
| Total | |||
| | (In thousands) | |||||||
Principal amount | | $ | 95,000 | | $ | 225,030 | | $ | 320,030 |
Unamortized debt issuance costs | |
| (1,749) | |
| (6,122) | |
| (7,871) |
Total unsecured convertible senior notes, net | | $ | 93,251 | | $ | 218,908 | | $ | 312,159 |
| | | | | | | | | |
Fair value of outstanding unsecured convertible senior notes (1) | | $ | 114,119 | | $ | 279,431 | | | |
| | | | | | | | | |
Amount by which the unsecured convertible senior notes if-converted value exceeds their principal amount | | $ | 19,119 | | $ | 54,401 | | | |
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Note 6—Unsecured Convertible Senior Notes
Unsecured convertible senior notes outstanding at September 30, 2020 and December 31, 2019 are as follows:
| | | | | | | | | |
| | Balance as of September 30, 2020 | |||||||
|
| 2023 Notes |
| 2026 Notes |
| Total | |||
| | (In thousands) | |||||||
Principal amount | | $ | 95,000 | | $ | 225,030 | | $ | 320,030 |
Unamortized discount | |
| (18,276) | |
| (62,591) | |
| (80,867) |
Unamortized issuance costs attributable to liability component | |
| (1,583) | |
| (4,772) | |
| (6,355) |
Total Convertible Senior Notes, net | | $ | 75,141 | | $ | 157,667 | | $ | 232,808 |
| | | | | | | | | |
Fair value of outstanding Convertible Senior Notes (2) | | $ | 89,775 | | $ | 182,043 | | | |
| | | | | | | | | |
Amount by which the Convertible Senior Notes if-converted value exceeds their principal amount | | $ | — | | $ | — | | | |
| | | | | | | | | |
Equity component | | $ | 25,854 | | $ | 63,544 | | | |
Unamortized issuance costs | |
| (837) | |
| (1,916) | | | |
Net carrying amount of equity component (1) | | $ | 25,017 | | $ | 61,628 | | | |
| | | | | | | | | | |||||||||
| | | | | | | | | | | | | | | | | | |
| | Balance as of December 31, 2019 | | Balance as of December 31, 2020 | ||||||||||||||
|
| 2023 Notes |
| 2026 Notes |
| Total |
| 2023 Notes |
| 2026 Notes |
| Total | ||||||
| | (In thousands) | | (In thousands) | ||||||||||||||
Principal amount | | $ | 210,000 | | $ | — | | $ | 210,000 | | $ | 95,000 | | $ | 225,030 | | $ | 320,030 |
Unamortized discount | |
| (47,660) | |
| — | |
| (47,660) | |
| (17,101) | |
| (60,544) | |
| (77,645) |
Unamortized issuance costs attributable to liability component | |
| (4,127) | |
| — | |
| (4,127) | |
| (1,481) | |
| (4,616) | |
| (6,097) |
Total Convertible Senior Notes, net | | $ | 158,213 | | $ | — | | $ | 158,213 | |||||||||
Total unsecured convertible senior notes, net | | $ | 76,418 | | $ | 159,870 | | $ | 236,288 | |||||||||
| | | | | | | | | | | | | | | | | | |
Fair value of outstanding Convertible Senior Notes (2) | | $ | 208,163 | | $ | — | | | | |||||||||
Fair value of outstanding unsecured convertible senior notes (1) | | $ | 101,769 | | $ | 246,779 | | | | |||||||||
| | | | | | | | | | | | | | | | | | |
Amount by which the Convertible Senior Notes if-converted value exceeds their principal amount | | $ | — | | $ | — | | | | |||||||||
Amount by which the unsecured convertible senior notes if-converted value exceeds their principal amount | | $ | 6,769 | | $ | 21,749 | | | | |||||||||
| | | | | | | | | | | | | | | | | | |
Equity component | | $ | 57,152 | | $ | — | | | | | $ | 25,854 | | $ | 63,544 | | | |
Unamortized issuance costs | |
| (1,851) | | | — | | | | |
| (837) | |
| (1,916) | | | |
Net carrying amount of equity component (1) | | $ | 55,301 | | $ | — | | | | |||||||||
Net carrying amount of equity component (2) | | $ | 25,017 | | $ | 61,628 | | | |
(1) |
The fair value is classified as Level 3 due to the limited trading activity for the |
(2) | Included in the Condensed Consolidated Balance Sheet within additional paid-in capital at December 31, 2020. Upon early adoption of ASU 2020-06 on January 1, 2021, amounts were reclassified to unsecured convertible senior notes, net. |
2023 Unsecured Convertible Senior Notes
On November 15, 2018, we issued $210.0 million in aggregate principal amount of our 6.25% Convertible Senior Notesconvertible senior notes (the 2023 Notes)“2023 Notes”). The 2023 Notes are unsecured and 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. On August 14, 2020, we issued the 5.25% convertible senior notes (the “2026 Notes”) and used approximately $125.6 million of the net proceeds to repurchase $115.0 million principal amount of the 2023 Notes (see “2026 Unsecured Convertible Senior Notes” below).
The 2023 Notes will beare 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“2023 Capped Call)Call”), which essentially covers the number of
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shares of our common stock underlying the 2023 Notes when our common stock is trading between the initial conversion price of $19.22 per share and $28.84 per share.
On August 14, 2020, we issued $210.0 million aggregate principal amount of 5.25% Convertible Senior Notes (the 2026 Notes) and used $125.6 million of the net proceeds to repurchase $115.0 million principal amount of the 2023 Notes (see “2026 Convertible Senior Notes” below). The settlement consideration was allocated between the repurchase of the liability and the equity component with the fair value of the liability component estimated to be $103.6 million based on the expected future cash flows associated with the $115.0 million principal amount discounted at a 9.9% effective interest rate. The remaining $22.0 million was accounted for as a repurchase of the equity component, reducing additional paid-in capital. As of the repurchase date of August 14, 2020, the carrying value of the repurchased 2023 Notes, net of unamortized debt discount and issuance costs, was $90.2 million. The difference between the $103.6 million fair value of the 2023 Notes repurchased and the carrying value of $90.2 million resulted in a $13.4 million loss on early extinguishment of debt. After giving effect to the repurchase, the total principal amount outstanding on the 2023 Notes as of August 14, 2020 was $95.0 million.
In connection with the partial repurchase of $115.0 million in principal amount of the 2023 Notes, we entered into a capped call termination contract in August 2020 for approximately 6.0 million underlying shares to unwind a proportionate amount of the 2023 Capped Call. Upon settlement, the Company received $7.5 million in cash and recorded a $0.8 million loss due to the change in fair value of the contract between signing and settlement dates. The proceeds were recorded as an increase in additional paid-in capital and the loss was recorded to other expense in the condensed consolidated statements of operations and comprehensive loss. As of September 30, 2020,March 31, 2021, approximately 4.9 million shares remained outstanding on the 2023 Capped Call.
The following table sets forth total interest expense recognized in connection with the 2023 Notes:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, | ||||||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| 2021 |
| 2020 | ||||||
| | (In thousands) | | (In thousands) | ||||||||||||||
Contractual interest expense | | $ | 2,363 | | $ | 3,281 | | $ | 8,925 | | $ | 9,844 | | $ | 1,484 | | $ | 3,281 |
Amortization of debt issuance costs | |
| 156 | |
| 188 | |
| 567 | |
| 543 | |
| 150 | |
| 202 |
Amortization of debt discount | |
| 1,804 | |
| 2,167 | |
| 6,551 | |
| 6,271 | |
| — | |
| 2,331 |
Total | | $ | 4,323 | | $ | 5,636 | | $ | 16,043 | | $ | 16,658 | | $ | 1,634 | | $ | 5,814 |
-14-
2026 Unsecured Convertible Senior Notes
In August 2020, we issued $210.0 million aggregate principal amount of 5.25% convertible senior notes. In September 2020, an additional $15.0 million aggregate principal amount was issued on the partial exercise of the underwriters’ option, which resulted in an aggregate principal amount outstanding of $225.0 million. The issuance of the notes and use of proceeds are below:
| | | |
|
| (In thousands) | |
2026 Notes issued | | $ | 225,030 |
Termination of the 2023 Capped Call contracts related to debt repurchased | |
| 7,549 |
Repurchase of 2023 Notes | |
| (125,638) |
Purchase of 2026 Capped Call | |
| (23,223) |
Issuance costs | |
| (6,785) |
Net proceeds available for corporate use | | $ | 76,933 |
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.
-15-
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 issuable upon conversion, subject to adjustment in certain circumstances.
The 2026 Notes are convertible at the option of the holders on or after November 15, 2025 at any time prior to the close of business on February 12, 2026, the second scheduled trading day immediately before the stated maturity date of February 15, 2026. Additionally, holders may convert their 2026 Notes at their option at specified times prior to the maturity date only if:
(1) | during any calendar quarter, beginning after September 30, 2020, that the last reported sale price per share of our common stock exceeds 130% of the conversion price of the 2026 Notes for each of at least 20 trading days in the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter; |
(2) | during the five consecutive business days immediately after any five-consecutive-trading-day period (such five-consecutive-trading-day period, the “measurement period”) in which the trading price per $1,000 principal amount of 2026 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per share of our common stock on such trading day and the conversion rate on such trading day; |
(3) | there is an occurrence of one or more certain corporate events or distributions of our common stock; or |
(4) | we call the 2026 Notes for redemption. |
We may elect, atAt our sole discretion, we may elect to convert the 2026 Notes into cash, shares of our common stock or a combination thereof.
thereof at maturity. Subject to the satisfaction of certain conditions, beginning August 15, 2023, we may redeem in whole or in part the 2026 Notes at our option beginning August 15, 2023 through the 50th scheduled trading day immediately before the maturity date at a cash redemption price equal to the principal amount of the 2026 Notes to be redeemed plus any accrued and unpaid interest to, but excluding, the redemption date. The 2026 Notes are subject to redemption only if certain requirements are satisfied, including that the last reported sale price per share of our common stock exceeds 130% of the conversion price on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date we send the related redemption notice and (ii) the trading day immediately before the date we send such notice.interest.
In order to reduce the dilutive impact or potential cash expenditure associated with the conversion of the 2026 Notes, we entered into capped call transactions in connection with the initial issuance of the 2026 Notes and at the time of the issuance of additional 2026 Notes upon the underwriters’ partial exercise of their option (collectively, the 2026(the “2026 Capped Call)Calls”). The 2026 Capped CallCalls will cover subject to anti-dilution adjustments substantially similar to those applicable to the 2026 Notes, the number of shares of common stock underlying the 2026 Notes when our common stock is trading within the range of approximately $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 2026 Capped Call will expire on various dates over the 50-trading-day period ranging from December 2, 2025following table sets forth interest expense recognized related to February 12, 2026, if not exercised earlier. The 2026 Capped Call is a separate transaction and not part of the terms of the 2026 Notes and was executed separately from the issuance of the 2026 Notes. The amount paid for the 2026 Capped Call was recorded as a reduction to additional paid-in capital in the condensed consolidated balance sheet.Notes:
We evaluated the accounting for the issuance of the 2026 Notes and concluded that the embedded conversion features meet the requirements for a derivative scope exception for instruments that are both indexed to an entity’s own stock and classified in stockholders’ equity in its balance sheet, and that the cash conversion guidance applies. Therefore, proceeds of $225.0 million are allocated first to the liability component based on the fair value of non-convertible debt with the residual proceeds allocated to the equity component for the conversion features. The Company
| | | |
|
| | |
| | Three Months Ended | |
| | March 31, 2021 | |
| | (In thousands) | |
Contractual interest expense | | $ | 2,954 |
Amortization of debt issuance costs | |
| 246 |
Total | | $ | 3,200 |
-16--15-
allocated $6.8 million in issuance costs associated with the 2026 Notes to the liability and equity component in the same proportion as the $225.0 million in proceeds.
Further, we concluded the 2026 Capped Call qualifies for a derivative scope exception for instruments that are both indexed to an entity’s own stock and classified in stockholders’ equity in its balance sheet. Consequently, the fair value of the 2026 Capped Call of $23.2 million is classified as equity and will not be subsequently remeasured.
In accounting for the issuance of the 2026 Notes, we separated the 2026 Notes into liability and equity components, using an effective interest rate of 12.5% to determine the fair value of the liability component.
The following table sets forth interest expense recognized related to the 2026 Notes:
| | | |
|
| Three and Nine | |
| | Months Ended | |
| | September 30, 2020 | |
| | (In thousands) | |
Contractual interest expense | | $ | 1,444 |
Amortization of debt issuance costs | |
| 74 |
Amortization of debt discount | |
| 976 |
Total | | $ | 2,494 |
Future minimum payments for the 2023 and 2026 Notes as of September 30, 2020March 31, 2021 are as follows:
| | | | | | |
|
| (In thousands) |
| (In thousands) | ||
2020 | | $ | — | |||
2021 |
| | — | | $ | — |
2022 |
| | — |
| | — |
2023 |
| | 95,000 |
| | 95,000 |
2024 |
| | — |
| | — |
2025 and thereafter |
| | 225,030 | |||
2025 |
| | — | |||
2026 |
| | 225,030 | |||
Total future minimum payments under the convertible senior notes |
| $ | 320,030 |
| $ | 320,030 |
Note 7—8—Leases
We have an operating leases related tolease for our office and laboratory space and finance leases for certain laboratory and office equipment as follows:
| | | | | |
| September 30, | | December 31, | ||
| 2020 |
| 2019 | ||
| (In thousands) | ||||
Assets | | | | | |
Operating lease assets | $ | 26,116 |
| $ | 27,082 |
Finance lease assets, net |
| 2,150 | |
| 2,973 |
Total lease assets | $ | 28,266 |
| $ | 30,055 |
| | | | | |
Liabilities | | | | | |
Current: | | | | | |
Operating leases | $ | 2,619 |
| $ | 2,282 |
Finance leases |
| 1,135 | |
| 1,222 |
Non-current: | | | | | |
Operating leases |
| 28,767 | |
| 30,772 |
Finance leases |
| 950 | |
| 1,546 |
Total lease liabilities | $ | 33,471 |
| $ | 35,822 |
-17-
The components of total lease cost are as follows:
| | | | | |
| Nine Months Ended | ||||
| September 30, | ||||
| 2020 |
| 2019 | ||
| (In thousands) | ||||
Lease cost | |
|
| |
|
Operating lease cost | $ | 4,540 | | $ | 3,121 |
Finance lease cost: |
| | |
|
|
Amortization |
| 1,039 | |
| 984 |
Interest |
| 224 | |
| 248 |
Variable lease cost |
| 1,715 | |
| 1,699 |
Sublease income |
| (929) | |
| (673) |
Total lease cost | $ | 6,589 | | $ | 5,379 |
The supplemental cash flow information related to leases is as follows:
| | | | | |
| Nine Months Ended | ||||
| September 30, | ||||
| 2020 |
| 2019 | ||
| (In thousands) | ||||
Cash paid for amounts included in the measurement of lease liabilities | | | | | |
Operating cash flows used for operating leases | $ | 6,490 | | $ | 4,962 |
Operating cash flows used for finance leases | $ | 224 |
| $ | 248 |
Financing cash flows used for finance leases | $ | 889 |
| $ | 813 |
Note 8—Commitments and Contingencies
Lease Agreements
We lease our office and laboratory space in The Omeros Building under a lease agreementfacilities with BMR - 201 Elliott Avenue LLC. Thean initial term of the leasethat ends in November 2027 and we havewith 2 options to extend the lease term each by five years. AsWe carry various finance leases for laboratory equipment.
Supplemental lease information is as follows:
| | | | | |
| Three Months Ended | ||||
| 2021 |
| 2020 | ||
| (In thousands) | ||||
Lease cost | |
|
| |
|
Operating lease cost | $ | 1,583 | | $ | 1,509 |
Finance lease cost: |
| | |
|
|
Amortization |
| 323 | |
| 357 |
Interest |
| 63 | |
| 89 |
Variable lease cost |
| 813 | |
| 542 |
Sublease income |
| (418) | |
| (293) |
Net lease cost | $ | 2,364 | | $ | 2,204 |
Cash paid for amounts included in the measurement of September 30, 2020, the remaining aggregate non-cancelable rent payable under the initial term of the lease excluding common area maintenanceliabilities is as follows:
| | | | | |
| Three Months Ended | ||||
| 2021 |
| 2020 | ||
| (In thousands) | ||||
Cash payments for operating leases | $ | 3,381 | | $ | 2,136 |
Cash payments for financing leases | $ | 354 |
| $ | 402 |
Note 9—Commitments and related operating expenses, is $48.2 million.Contingencies
Contracts
We have various agreements with third parties that would collectively require payment of termination fees totaling $35.9 million if we had cancelled the work as of September 30, 2020.March 31, 2021.
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 in connection with clinical development or commercial milestones and/oras well as low single to low double-digit royalties on the net income or net sales of the product.
-16-
For the three and nine months ended September 30,March 31, 2021 and 2020, and 2019, development milestonesmilestone expenses were insignificant. We do not owe any royalties on OMIDRIA.
Note 9—Shareholders’ Deficit
Common Stock Should narsoplimab be approved, we would owe milestone payments to development partners and Warrants
Forbe obligated to pay low single-digit royalties on net sales of the nine months ended September 30, 2020, we received proceeds of $5.0 million upon the exercise of stock options which resulted in the issuance of 550,342 shares of common stock. For the nine months ended September 30,product.
-18-
2019, we received proceeds of $5.0 million upon the exercise of stock options which resulted in the issuance of 513,790 shares of common stock.Note 10—Shareholders’ Deficit
As of September 30, 2020 and December 31, 2019, we had 243,115 warrants outstanding with a weighted average exercise price of $20.68 per share.
Underwritten Public Offering of Common Stock and Warrants
On August 14, 2020,March 1, 2021, we sold 6.9 millionentered into a sales agreement to sell shares of our common stock at a publichaving an aggregate offering price of $14.50up to $150.0 million, from time to time, through an “at the market” equity offering program. As of March 31, 2021, we have not sold any shares under this program.
During the three months ended March 31, 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, 2021, 200,000 warrants remained outstanding with an exercise price of $23.00 per share. After deducting underwriter discounts and offering expenses, we received net proceeds from the transaction of $93.7 million.The warrants expire on April 12, 2023.
Interim Condensed Consolidated Statements of Shareholders’ Deficit
The changes in interim balances of the components of our shareholders’ deficit are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Additional | | | | | | | | | | | Additional | | | | | | | ||
| | Common | | Paid-In | | Accumulated | | | | | Common | | Paid-In | | Accumulated | | | | ||||||
|
| Stock |
| Capital |
| Deficit | | Total |
| Stock |
| Capital |
| Deficit | | Total | ||||||||
| | | (In thousands) | | | (In thousands) | ||||||||||||||||||
Balance January 1, 2020 | | $ | 542 | | $ | 625,048 | | $ | (734,611) | | $ | (109,021) | ||||||||||||
Balance January 1, 2021 | | $ | 616 | | $ | 751,304 | | $ | (872,672) | | $ | (120,752) | ||||||||||||
Exercise of stock options | | | 3 | | | 2,709 | | | — | | | 2,712 | | | 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 | | | — | | | 3,476 | | | — | | | 3,476 | | | — | | | 3,271 | | | — | | | 3,271 |
Net loss | | | — | | | — | | | (29,031) | | | (29,031) | | | — | | | — | | | (35,090) | | | (35,090) |
Balance March 31, 2020 | | | 545 | | | 631,233 | | | (763,642) | | | (131,864) | ||||||||||||
Exercise of stock options | | | — | | | 66 | | | — | | | 66 | ||||||||||||
Stock-based compensation expense | | | — | | | 3,822 | | | — | | | 3,822 | ||||||||||||
Net loss | | | — | | | — | | | (33,294) | | | (33,294) | ||||||||||||
Balance June 30, 2020 | | | 545 | | | 635,121 | | | (796,936) | | | (161,270) | ||||||||||||
Issuance of common stock in direct offering, net of offering costs | | | 69 | | | 93,606 | | | — | | | 93,675 | ||||||||||||
Exercise of stock options | | | 2 | | | 2,198 | | | — | | | 2,200 | ||||||||||||
Stock-based compensation expense | | | — | | | 3,824 | | | — | | | 3,824 | ||||||||||||
Equity component of 2026 Notes, net of issuance costs | | | — | | | 61,628 | | | — | | | 61,628 | ||||||||||||
Purchases of 2026 Capped Calls | | | — | | | (23,223) | | | — | | | (23,223) | ||||||||||||
Equity component of early extinguishment of 2023 Notes | | | — | | | (22,073) | | | — | | | (22,073) | ||||||||||||
Termination of the 2023 Capped Call contracts related to debt repurchased | | | — | | | 8,387 | | | — | | | 8,387 | ||||||||||||
Tax benefit related to issuance of 2026 Notes, net of extinguishment | | | — | | | (12,011) | | | — | | | (12,011) | ||||||||||||
Net loss | | | — | | | — | | | (38,463) | | | (38,463) | ||||||||||||
Balance September 30, 2020 | | $ | 616 | | $ | 747,457 | | $ | (835,399) | | $ | (87,326) | ||||||||||||
Balance March 31, 2021 | | $ | 622 | | $ | 689,882 | | $ | (912,459) | | $ | (221,955) |
| | | | | | | | | | | | |
| | | | | Additional | | | | | | | |
| | Common | | Paid-In | | Accumulated | | | | |||
|
| Stock |
| Capital |
| Deficit | | Total | ||||
| | | (In thousands) | |||||||||
Balance January 1, 2020 | | $ | 542 | | $ | 625,048 | | $ | (734,611) | | $ | (109,021) |
Exercise of stock options | | | 3 | | | 2,709 | | | — | | | 2,712 |
Stock-based compensation expense | | | — | | | 3,476 | | | — | | | 3,476 |
Net loss | | | — | | | — | | | (29,031) | | | (29,031) |
Balance March 31, 2020 | | $ | 545 | | $ | 631,233 | | $ | (763,642) | | $ | (131,864) |
Note 11—Stock-Based Compensation
Stock-based compensation expense is as follows:
| | | | | | | |
|
| Three Months Ended |
| ||||
| | March 31, | | ||||
|
| 2021 |
| 2020 |
| ||
| | (In thousands) | |||||
Research and development | | $ | 1,480 | | $ | 1,447 | |
Selling, general and administrative | |
| 1,791 | |
| 2,029 | |
Total | | $ | 3,271 | | $ | 3,476 | |
-19--17-
| | | | | | | | | | | | |
| | | | | Additional | | | | | | | |
| | Common | | Paid-In | | Accumulated | | | | |||
|
| Stock |
| Capital |
| Deficit | | Total | ||||
| | | (In thousands) | |||||||||
Balance January 1, 2019 | | $ | 490 | | $ | 549,479 | | $ | (650,125) | | $ | (100,156) |
Exercise of stock options | | | — | | | 108 | | | — | | | 108 |
Stock-based compensation expense | | | — | | | 3,374 | | | — | | | 3,374 |
Net loss | | | — | | | — | | | (24,345) | | | (24,345) |
Balance March 31, 2019 | | | 490 | | | 552,961 | | | (674,470) | | | (121,019) |
Exercise of stock options | | | 2 | | | 1,598 | | | — | | | 1,600 |
Stock-based compensation expense | | | — | | | 3,598 | | | — | | | 3,598 |
Net loss | | | — | | | — | | | (14,453) | | | (14,453) |
Balance June 30, 2019 | | | 492 | | | 558,157 | | | (688,923) | | | (130,274) |
Exercise of stock options | | | 3 | | | 3,323 | | | — | | | 3,326 |
Stock-based compensation expense | | | — | | | 3,496 | | | — | | | 3,496 |
Net loss | | | — | | | — | | | (16,463) | | | (16,463) |
Balance September 30, 2019 | | $ | 495 | | $ | 564,976 | | $ | (705,386) | | $ | (139,915) |
Note 10—Stock-Based Compensation
Stock-based compensation expense is as follows:
| | | | | | | | | | | | |
|
| Three Months Ended |
| Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
| | (In thousands) | ||||||||||
Research and development | | $ | 1,636 | | $ | 1,558 | | $ | 4,714 | | $ | 4,698 |
Selling, general and administrative | |
| 2,188 | |
| 1,938 | |
| 6,408 | |
| 5,770 |
Total | | $ | 3,824 | | $ | 3,496 | | $ | 11,122 | | $ | 10,468 |
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 | | | Nine Months Ended |
| Three Months Ended | | | ||||||
| | September 30, 2020 | | | September 30, 2020 | | March 31, 2021 | | | ||||||
Estimated weighted-average fair value | | $ | 8.21 | | | | $ | 8.22 | | | $ | 13.15 | | | |
Weighted-average assumptions: | |
| | | | |
| | | |
| | | | |
Expected volatility | |
| 82 | % | | |
| 77 | % | |
| 81 | % | | |
Expected term, in years | |
| 6.1 | | | |
| 6.0 | | ||||||
Expected life, in years | |
| 6.1 | | | | |||||||||
Risk-free interest rate | |
| 0.58 | % | | |
| 1.10 | % | |
| 0.71 | % | | |
Expected dividend yield | |
| 0 | % | | |
| 0 | % | |
| 0 | % | | |
-20-
Stock option activity for all stock plans and related information is as follows:
| | | | | | | | | | | | | | | | | | | | |
|
| |
| Weighted- |
| |
| | |
| |
| Weighted- |
| |
| | | ||
| | | | Average | | | | Aggregate | | | | Average | | | | Aggregate | ||||
| | | | Exercise | | Remaining | | Intrinsic | | | | Exercise | | Remaining | | Intrinsic | ||||
| | Options | | Price per | | Contractual Life | | Value | | Options | | Price per | | Contractual Life | | Value | ||||
| | Outstanding | | Share | | (In years) | | (In thousands) | | Outstanding | | Share | | (In years) | | (In thousands) | ||||
Balance at December 31, 2019 |
| 11,207,931 | | $ | 11.72 |
|
|
| |
| ||||||||||
Balance at December 31, 2020 |
| 11,938,528 | | $ | 11.92 |
|
|
| |
| ||||||||||
Granted |
| 2,074,460 | |
| 12.36 |
|
|
| |
|
| 244,500 | |
| 19.09 |
|
|
| |
|
Exercised |
| (550,342) | |
| 9.05 |
|
|
| |
|
| (555,880) | |
| 11.39 |
|
|
| |
|
Forfeited |
| (635,433) | |
| 11.29 |
|
|
| |
| ||||||||||
Balance at September 30, 2020 |
| 12,096,616 | | $ | 11.98 |
| 6.2 | | $ | 3,433 | ||||||||||
Vested and expected to vest at September 30, 2020 |
| 11,689,261 | | $ | 11.93 |
| 6.1 | | $ | 3,432 | ||||||||||
Exercisable at September 30, 2020 |
| 8,407,551 | | $ | 11.38 |
| 5.1 | | $ | 3,426 | ||||||||||
Canceled |
| (69,603) | |
| 15.26 |
|
|
| |
| ||||||||||
Balance at March 31, 2021 |
| 11,557,545 | | $ | 12.08 |
| 5.9 | | $ | 67,933 | ||||||||||
Vested and expected to vest at March 31, 2021 |
| 11,223,195 | | $ | 12.03 |
| 5.8 | | $ | 66,493 | ||||||||||
Exercisable at March 31, 2021 |
| 8,591,292 | | $ | 11.55 |
| 4.9 | | $ | 54,999 |
As of September 30, 2020,March 31, 2021, there were 3.73.0 million unvested options outstanding that will vest over a weighted-average period of 2.62.5 years and 4.03.9 million shares were available to grant. The total estimated compensation expense yet to be recognized on outstanding options is $28.0$22.7 million.
Note 11—Income Taxes
We have a history of losses and therefore have historically not made a provision for income taxes. However, in the quarter ended September 30, 2020, we recorded an income tax benefit of $7.9 million related to the issuance of our 2026 Notes (see “Note 6—Unsecured Convertible Senior Notes”). In accordance with intra-period tax allocation rules, the deferred tax liability related to the equity component of convertible debt is a source of income that can be used to recognize the tax benefit of the current year loss through continuing operations. The tax benefit related to the issuance of our 2026 Notes will not recur in subsequent years. Deferred income taxes reflect the tax effect of net operating loss and tax credit carryforwards and the net temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
-21--18-
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
We are a commercial-stage biopharmaceutical company committed to discovering, developing and commercializing small-molecule and protein therapeutics for large-market as well as orphan indications targeting inflammation, complement-mediated diseases, disorders of the central nervous system, and immune-related diseases, including cancers.
Our drug product OMIDRIA® is marketed in the United States for use during cataract surgery or intraocular lens replacement for adult and pediatric patients. Our drug candidate narsoplimab is the subject of a rolling biologics license application (“BLA”) withunder priority review by the U.S. Food and Drug Administration (“FDA”) for narsoplimab for the treatment of hematopoietic stem cell transplant-associated thrombotic microangiopathy (“HSCT-TMA”), which will be submitted in mid-November.. We also have multiple Phase 3 and Phase 2 clinical-stagelate-stage clinical development programs in our pipeline, which are focused on:on complement-mediated disorders, including Immunoglobulinimmunoglobulin A (“IgA”) nephropathy, and atypical hemolytic uremic syndrome (“aHUS”), as well as addiction. and COVID-19. We have also initiated a Phase 1 clinical program for our MASP-3 inhibitor OMS906 targeting the alternative pathway of complement.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 recently discovered. Small-molecule and antibody inhibitors of GPR174 are part of our proprietary G protein-coupled receptor (“GPCR”) platform through which we control 54 new GPCR drug targets and their corresponding compounds. We also exclusively possesshave a novelproprietary-asset-enabled antibody-generating platform.technology. We have retained control of all commercial rights for OMIDRIA and each of our product candidates and programs.
OMIDRIA Separate Payment
As of October 1, 2020, OMIDRIA pass-through status expired. We are currently seeking separate payment for OMIDRIA through administrative and legislative means as more fully described under “Commercial Product—OMIDRIA” below.
Impact of Global Pandemic
The outbreak of the novel strain of coronavirus (SARS-CoV-2), which causes COVID-19 pandemic and the responses to the global pandemicit by various governmental authorities, the medical community and others continue to have a significant impact on our business. In March 2020, ambulatory surgery centers (“ASCs”) and hospitals using OMIDRIA postponed nearly all cataract surgery in response to recommendations from government and medical organizations. As a result, we did not record any sales of OMIDRIA to our wholesalers from March 25 to May 19, 2020. However, by the end of June 2020, the run rate of weekly OMIDRIA sales had recovered to levels approximating those seen prior to the pandemic. COVID-19 andIt is not possible to estimate precisely the corresponding government response could have a continuing adversefuture impact of COVID-19 on our business, operations andor financial results. If the number of cataract procedures once again becomes limited, either by a need for time-consuming safety protocols, reduction in patient demand, or prohibition on elective surgical procedures in some localities, then we would expect a corresponding reduction in demand for OMIDRIA. Additionally, new or continued restrictions on visits to customer facilities by our field sales representatives could lead to a further reduction in our OMIDRIA revenues. Dueresults due to the unknown magnitude, duration and outcome of the COVID-19 pandemic, especially in light of the variances both in the severity and transmissibility of virus variants and in thepossible local governmental responses to the COVID-19 pandemic across the U.S., it is not possible to estimate precisely its impact on our business, operations or financial results; however, the impact has been and could continue to be material.
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Commercial Product - OMIDRIA® (phenylephrine and ketorolac intraocular solution) 1%/0.3%
OMIDRIA is approved by the FDA for use during cataract surgery or intraocular lens replacement to maintain pupil size by preventing intraoperative miosis (pupil constriction) and to reduce postoperative ocular pain. Outside the U.S., we have received approval from the European Commission (“EC”) to market OMIDRIA in the European Economic Area (“EEA”) for use during cataract surgery and other IOL replacement procedures for maintenance of intraoperative mydriasis (pupil dilation), prevention of intraoperative miosis and reduction of acute postoperative ocular pain.
OMIDRIA is a proprietary drug product containing two active pharmaceutical ingredients: ketorolac, an anti-inflammatory agent, and phenylephrine, a mydriatic, or pupil dilating, agent. Cataract and other lens replacement surgery involves replacement of the original lens of the eye with an artificial intraocular lens. OMIDRIA is added to standard irrigation solution used during cataract and lens replacement surgery and is delivered intracamerally, or within the anterior chamber of the eye, to the site of the surgical trauma throughout the procedure. Preventing pupil constriction is essential for these procedures and, if miosis occurs, the risk of damaging structures within the eye and other complications increases, as does the operating time required to perform the procedure.
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We launched OMIDRIA in the U.S. in the second quarter of 2015 and sell OMIDRIA primarily through wholesalers who,which, in turn, sell to ASCs and hospitals. The Centers for Medicare & Medicaid Services (“CMS”), a part of the Department of Health and Human Services (“HHS”) and the federal agency responsible for administering the Medicare program, granted transitional pass-through reimbursement status for OMIDRIA in 2014, effective from January 1, 2015 through December 31, 2017. Pass-through status allows for separate payment (i.e., outside the packaged payment rate for the surgical procedure) under Medicare Part B. In March 2018, Congress extended pass-through reimbursement status for a small number of drugs, including OMIDRIA through September 30, 2020 when used during procedures performed on Medicare Part B fee-for-service patients through September 30, 2020.
In its 2021 outpatient prospective payment system (“OPPS”) proposed rule, CMS confirmed the October 1, 2020 expiration of pass-throughpatients. Pass-through reimbursement for OMIDRIA and indicated an intention to package payment for OMIDRIA with payment for the associated surgical procedureunder Medicare Part B expired on October 1, 2020. In December 2020, in both the hospital outpatient departmentits annual rule on Outpatient Prospective Payments System (“OPPS”) and ASC settings. In September 2020, we submitted topayments, CMS a comment letter on the 2021 OPPS proposed rule and a legal memorandum outlining our positionconfirmed that OMIDRIA meets all of the regulatory criteria established by CMS for separate payment in the ASC setting. CMS is required under the Substance Use–Disorder Prevention that Promotes Opioid Recovery and Treatment for Patients and Communities Act to review OPPS payments for opioids and evidence-based non-opioid alternatives for pain management with a goal to ensure that there are not financial incentives to use opioids instead of non-opioid alternatives, and in 2019 it codified revisions to the ASC payment system pursuant to its policy to “unpackage and pay separately at ASP+6 percent for the cost of non-opioid pain management drugs that function as surgical supplies when they are furnished in the ASC setting.” CMS continued this policy, without change, in 2020 and has proposed to extend it again in 2021. During the time that these revisions to the ASC payment system have been in force, they have not applied to OMIDRIA because OMIDRIA has had pass-through status and, accordingly, has not been separately packaged. OMIDRIA does not contain an opioid, has an FDA-approved label indication for postoperative pain reduction and CMS considers the drug to function as a surgical supply. Because OMIDRIA is subject to packaged payment following expiration of its pass-through status, we believe that OMIDRIA now satisfies the criteriaqualifies for separate payment when providedused on Medicare Part B patients in the ASC setting and that CMS is required to comply with regulatory law and pay separatelyASCs under CMS’ policy for OMIDRIA in the ASC setting. Although we can provide no assurance regarding whether or when separate payment for OMIDRIA in the ASC setting will be effective, if we are successful in securing separate payment for OMIDRIA for the fourth quarter of 2020, we expect that OMIDRIA will receive similar separate payment in the ASC setting throughout 2021. We also are continuing to pursue other administrative and legislative avenues to secure separate payment for OMIDRIA for the remainder of 2020 and beyond; however, we cannot provide assurance that these efforts will be successful.
If continued separate payment is determined not to be reasonably achievable in the near term, we have developed a commercial strategy that can be quickly implemented to lower the per-vial sales price of OMIDRIA to achieve substantially larger sales volumes.non-opioid pain management surgical drugs. We believe that this approach would resultCMS will not change its separate payment policy for non-opioid pain management surgical drugs, which has been in substantial revenues from sales of OMIDRIA, in part because CMS Medicare Part B beneficiaries only represent approximately 45% of cataract surgery
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procedures annually. However, we are likely to have significantly reduced sales of OMIDRIA until we are able to implement such strategy. For more information regarding OMIDRIA reimbursement, see “Financial Summary” below.
In July 2018, we placed OMIDRIA on the market in the European Union (“EU”) on a limited basis and continue to maintain the ongoing validity of the Marketing Authorization for OMIDRIA in Europe. At this time, we do not expect to see significant sales of OMIDRIA in any countries within the EEA or other international territories.effect since 2019.
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 |
We have completedFDA is currently reviewing our pivotal clinical trialBLA for narsoplimab in HSCT-TMA, and Phase 3 clinical programs are underwayin process for narsoplimab in IgA nephropathy and aHUS. Narsoplimab is also being evaluated for treatment of COVID-19 in a late-stage adaptive platform trial and has been administered under compassionate use to treat COVID-19 patients in Italy and in the U.S.
Narsoplimab has received multiple designations from the FDA and from the EMA across the three current indications. These include:
● | HSCT-TMA: In the U.S., the FDA has granted narsoplimab (1) breakthrough therapy designation in patients who have persistent TMA despite modification of immunosuppressive therapy |
● | IgA nephropathy: In the U.S., narsoplimab has received from the FDA (1) breakthrough therapy designation for the treatment of IgA nephropathy and (2) orphan drug designation in IgA nephropathy. In Europe, narsoplimab has been granted designation as an orphan medicinal product for the treatment of primary IgA nephropathy. |
● | aHUS: In the U.S., narsoplimab has received from the FDA (1) fast-track designation for the treatment of patients with aHUS and (2) orphan drug designation for the prevention (inhibition) of complement-mediated thrombotic microangiopathies. |
We plan to complete in mid-November the submission to FDA of our rolling BLA for narsoplimab for the treatment of HSCT-TMA, a frequently lethal complication of HSCT. A rolling submission enables us to submit sections of the BLA as they are completed, which can accelerate the time to approval by allowing FDA to review completed sections of the application as they are submitted rather than waiting for the entire BLA to be received before beginning its review. The nonclinical sections, including pharmacology, pharmacokinetics and toxicology data, and the chemistry, manufacturing and controls (“CMC”) sections for narsoplimab have already been submitted.
In October 2020, we reported the final clinical data from our pivotal trial of narsoplimab in HSCT-TMA, which are included in our BLA.a frequently lethal complication of HSCT. The single-arm, open-label trial included safety and efficacy endpoints that were previously agreed with FDA. The efficacy endpoints were assessed for (1) all 28 patients who received at least one dose of narsoplimab and (2) patients who received the protocol-specified dosing of at least four weeks of narsoplimab.
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The primary efficacy endpoint in the trial was the proportion of patients who achieved designated “responder” status based on improvement in HSCT-TMA laboratory markers and clinical status. This is referred to as the “complete
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“complete response rate.” The primary laboratory markers that were evaluated were platelet count and lactaselactate dehydrogenase (“LDH”), levels, while improvement in clinical status was evaluated based on organ function and transfusions. Patients wereEach patient was required to show improvement in both laboratory markers and clinical status to be considered a responder. All others were considered non-responders.
The FDA-agreed efficacy threshold for the primary endpoint is a complete response rate of 15%, meaning that a lower bound of the 95% confidence interval on the observed response rate greater than 15% is sufficient evidence of efficacy of narsoplimab in the treatment of the targeted patient population. Among patients who received at least one dose of narsoplimab, the complete response rate was 61% (p(95% confidence interval [CI] 40.6 to 78.5; p<0.0001), while the complete response rate among patients who received the protocol-specified narsoplimab treatment of at least four weeks of dosing was 74% (p(95% CI 51.6 to 89.8; p<0.0001). The response rates and their respective lower limitlevels of the 95% confidence interval for both groups isintervals are a multiple of the 15%pre-specified efficacy threshold.threshold of 15%.
Secondary endpoints in the trial were survival rates and change from baseline in HSCT-TMA laboratory markers. Among all treated patients, 68% survived for at least 100 days following HSCT-TMA diagnosis, while 83% of patients who received treatment for at least four weeks and 94% of the responders achieved this endpoint. Median overall survival was 274 days among all patients and 361 days among patients who received the protocol-specified treatment of at least four weeks. Median survival could not be estimated for responders because more than half of the responders were alive at last follow-up. Results also included statistically significant improvements in platelet count, LDH and haptoglobin. The treated population had multiple high-risk features that portend a poor outcome, including the persistence of HSCT-TMA despite modification of immunosuppression (which was a criterion for entry into the trial), graft-versus-host disease, significant infections, non-infectious pulmonary complications and neurological findings. The most common adverse events observed in the trial were nausea, vomiting, diarrhea, hypokalemia, neutropenia and fever, which are all common in stem-cell transplant patients. Six deaths occurred during the trial. These were due to sepsis, progression of the underlying disease, and graft-versus-host disease.disease with TMA. All of these are common causes of death in this patient population.
In November 2020, we completed the rolling submission to FDA of our BLA for narsoplimab for the treatment of HSCT-TMA. The BLA was accepted for filing by FDA and granted priority review, and we have responded to all information requests received to date. The FDA action date under the Prescription Drug User Fee Act (“PDUFA”) is July 17, 2021.
In Europe, the EMA has confirmed narsoplimab’s eligibility for EMA’s centralized review of a single MAAmarketing authorization application (“MAA”) that, if approved, authorizes the product to be marketed in all EU member states and EEA countries. We are targeting to complete our MAA submission in 2021.
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 with 24-hour urine protein excretion greater than one gram per 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 we believe 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 (78 per arm) 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.
The Phase 3 clinical program in patients with aHUS, in which patient enrollment 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 Europe and accelerated approval in the U.S. with approximately 80 total patients required by FDA for full approval in the U.S. The trial
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includes multiple sites in the U.S., Asia and Europe, though 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.
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The studyinitial cohort treated under this compassionate use program included a total of six COVID-19 patients treated with narsoplimab, under compassionate use, all with ARDSacute respiratory distress syndrome (“ARDS”) and requiring continuous positive airway pressure (CPAP)(“CPAP”) or intubation. At baseline, circulating endothelial cell (CEC)(“CEC”) counts and serum levels of interleukin-6 (IL-6), interleukin-8 (IL-8),IL-8, C-reactive protein (CRP), lactate dehydrogenase (LDH),LDH, D-dimer and aspartate aminotransferase (AST) were markedly elevated. During the course of the study,compassionate use program, institutional guidelines at the treating hospital were updated to require that all COVID-19 patients in the hospital receive steroids. One patient treated with narsoplimab did not receive steroids. Of the five narsoplimab-treated patients who received steroids, two initiated them after already improving such that CPAP was no longer required or was discontinued the following day. The study evaluated CEC counts in a separate group of four patients receiving only steroids for a short duration, and the counts were found to be unaffected by steroid administration. This suggests that any beneficial effect of steroids on COVID-19-associated endothelial damage may be delayed and had little effect on the recovery course of the narsoplimab-treated patients who initiated steroid treatment after improving.
Narsoplimab treatment was associated with rapid and sustained reduction across all of thesethe above-named markers of endothelial damage and inflammation. In addition, massive bilateral pulmonary thromboses, seen in two of the patients, resolved while on narsoplimab. All six narsoplimab-treated patients recovered, survived and were discharged. Narsoplimab was well tolerated in the study and no adverse drug reactions were reported. Two control groups with similar baseline characteristics were used for retrospective comparison both showingand showed substantial mortality rates of 32% and 53%. A manuscript detailing the results of the study evaluatinginitial cohort of Bergamo patients treated with narsoplimab in patients with severe COVID-19 was published in the peer-reviewed journal Immunobiology.
All six patients were evaluated five to six months after cessation of narsoplimab treatment. None of them showed any clinical or laboratory evidence of long-term effects of COVID-19, such as cognitive impairment or cardiac, pulmonary or other organ disorder, commonly seen following resolution of initial COVID-19 symptoms.
Endothelial damage and resultant thromboses are significant to the pathophysiology of COVID-19, and we believe these data illustrate the importance of inhibiting the lectin pathway to treat critically ill COVID-19 patients. Endothelial damage activates the lectin pathway of complement. We believe the results observed following narsoplimab treatment in severecritically ill COVID-19 patients with ARDS at Papa Giovanni were consistent with those seen in HSCT-TMA and underscore the pathophysiologic similarities between these two disorders. Narsoplimab has been shown to inhibit lectin pathway activation and to block the MASP-2-mediated conversion of prothrombin to thrombin, microvascular injury-associated thrombus formation and the activation of factor XII as well as the MASP-2-mediated activation of kallikrein. We believe that the anticoagulant effects of narsoplimab may provide therapeutic benefits in both HSCT-TMA and COVID-19.
Following treatment of the initial six patients under the compassionate use studyprogram in Italy, we have continued compassionate-use treatment in the U.S. and Italy. Our discussionsPrior to receiving narsoplimab, all of the patients in this second cohort were severely ill, mechanically ventilated, had multiple comorbidities, and had failed other therapies, including anti-virals, targeted anti-inflammatory therapeutics, convalescent plasma and steroids. Following treatment with narsoplimab, the laboratory improvements and clinical outcomes of these patients are similar to those seen in the initial cohort of Bergamo patients.
Narsoplimab is also the only complement inhibitor included in the I-SPY COVID-19 platform trial sponsored by Quantum Leap Healthcare Collaborative, which is evaluating investigational therapies for the treatment of critically ill COVID-19 patients. The trial utilizes Quantum Leap Healthcare Collaborative's adaptive platform
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trial design, which is intended to increase trial efficiency by minimizing the number of participants and time required to evaluate potential treatments.
Discussions regarding the use of narsoplimab in COVID-19 have progressed with leaders across various government agencies. We have also received requestsagencies, both in the U.S. and are in discussionsinternationally, continue to include narsoplimab in platform trials for COVID-19.progress.
● | 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. We believe that MASP-3 inhibitors have the potential to treat patients suffering from a wide range of diseases and conditions, including: paroxysmal nocturnal hemoglobinuria (“PNH”); |
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In August 2020, we submitted to FDA an Investigational New Drug Application (“IND”) to initiate clinical trials evaluating OMS906, our lead human monoclonal antibody from our MASP-3 program, in the U.S. 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. Dosing is completeWe have completed dosing all of the intravenous dosing cohorts and the first subcutaneous dosing cohort in the first cohort and has started in the second cohort of this Phase 1 trial. The third and fourth cohorts are currently enrolling.single-ascending dose study. Initial data from the Phase 1 trial are expected next year.in the second quarter of 2021.
● | PDE7 - OMS527. In our |
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. Our focus is nicotine addiction, and we are planning our Phase 2Continued clinical development program. Initiation of a Phase 2 study in our PDE7 program is dependent on availabilitysubject to allocation of financial and other resources, which are currently prioritized for other programs. A manuscript detailing the mechanism of action of PDE7 inhibition in nicotine addiction has been accepted for publication in the peer-reviewed Journal of Neuroscience.
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 |
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● | GPR174 and GPCR 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 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 |
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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 |
Financial Summary
We recognized net losses of $38.5$35.1 million and $16.5$29.0 million for the three months ended September 30,March 31, 2021 and 2020, and 2019, respectively, and our OMIDRIA net revenues were $26.1$21.1 million and $29.9$23.5 million for the same periods. During the three months ended September 30, 2020, we recorded a $13.4 million loss on early extinguishment of debt and a related tax benefit of $7.9 million associated with the repurchase of $115.0 million principal amount of our 6.25% Convertible Senior Notes (the “2023 Notes”). As of September 30, 2020,March 31, 2021, we had $153.5$100.5 million in cash and cash equivalents and short-term investments available for general corporate use and $37.4$24.8 million in accounts receivable, net.
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* | Fiscal quarters with significantly reduced cataract procedures due to COVID-19 | |
** | Pass-through reimbursement expired on October 1, 2020. In December 2020, separate payment was confirmed for OMIDRIA, effective retroactively as of October 1, 2020. |
Pass-through reimbursement for OMIDRIA under Medicare Part B expired on October 1, 2020, which negatively affected our net revenues for September, the fourth quarter of 2020 and the first quarter of 2021. In December 2020, CMS confirmed that OMIDRIA qualifies for separate payment when used on Medicare Part B patients in ASCs. CMS’ current non-opioid separate payment policy can be changed by CMS through its OPPS/ASC annual rulemaking and
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comment process. We believe CMS will continue its separate payment policy for non-opioid pain management surgical drugs, which has been in effect since 2019, and that OMIDRIA will continue to be separately reimbursed when used in the ASC setting.
We expect our net losses will continue until such time as we derive sufficient revenues from sales of OMIDRIA narsoplimab and/or other sources, such as licensing, product sales and other revenues from our product candidates, including narsoplimab for HSCT-TMA, that are sufficient to cover our operating expenses and debt service obligations.
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During the period from January 1, 2018 to September 30, 2018, OMIDRIA was not reimbursed separately when used for procedures involving patients covered by Medicare Part B, and our revenues decreased significantly. After reinstatement of separate reimbursement for OMIDRIA in the fourth quarter of 2018, our revenues quickly returned to levels during which separate reimbursement was available and subsequent quarter-over-quarter revenue growth approximated historical rates. Due to the postponement of elective surgical procedures, including cataract surgery, we did not make any sales of OMIDRIA to our wholesalers from March 25 to May 19, 2020. However, by the end of June 2020, the run rate of weekly OMIDRIA sales approximated those seen prior to the pandemic.
In its 2021 OPPS proposed rule, CMS confirmed the October 1, 2020 expiration of pass-through reimbursement for OMIDRIA and consequently, pass-through reimbursement for OMIDRIA under Medicare Part B ended on October 1, 2020 and our net revenues for September were significantly reduced. CMS is expected to publish the final 2021 OPPS
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rule later in 2020. However, we can provide no guarantee that CMS’ final 2021 OPPS rule will provide separate reimbursement for OMIDRIA.
In 2019 CMS codified revisions to the ASC payment system pursuant to its policy to “unpackage and pay separately at ASP+6 percent for the cost of non-opioid pain management drugs that function as surgical supplies when they are furnished in the ASC setting.” CMS continued this policy, without change, in 2020 and has proposed to extend it again in 2021. During the time that these revisions to the ASC payment system have been in force, they have not applied to OMIDRIA because OMIDRIA had pass-through status and, accordingly, has not been packaged. OMIDRIA does not contain an opioid, has an FDA-approved label indication for pain reduction and CMS considers it to function as a surgical supply. Because OMIDRIA is subject to packaged payment following expiration of its pass-through status, we believe that OMIDRIA now satisfies these criteria for separate payment when provided in the ASC setting. In September 2020, we submitted to CMS a comment letter on the 2021 OPPS proposed rule and a legal memorandum outlining our position that OMIDRIA meets all of the regulatory criteria established by CMS for separate payment in the ASC setting and by law should be separately paid when used in the ASC in the fourth quarter of 2020 and throughout calendar year 2021. We are also continuing to pursue other administrative and legislative avenues to secure separate payment for OMIDRIA for the remainder of 2020 and beyond.If these efforts are not successful, we expect to implement an alternative market approach, however we are likely to have significantly reduced sales of OMIDRIA until we are able to implement such strategy. We may face difficulties or delays in implementing such a strategy and, even if successfully implemented, we cannot predict whether, or to what extent, our customers would maintain or increase their utilization of OMIDRIA. See “Commercial Product - OMIDRIA” earlier in this section for additional details regarding the separate payment status for OMIDRIA.
The uncertainty around pass-through reimbursement or other separate payment status for OMIDRIA and COVID-19 will likely have a continuing adverse impact on our business, operations and financial results, limiting the number of cataract procedures which may be performed and significantly reducing demand for our commercial drug product, OMIDRIA. COVID-19 and the corresponding governmental response has and may continue to lead to disruptions in commercial sales activities, delays in our clinical trials or in the submission or review of regulatory applications. Due to the ongoing impact of the global pandemic on OMIDRIA sales, as well as the uncertain reimbursement status for OMIDRIA for the remainder of 2020 and beyond, we are unable to predict future OMIDRIA product sales, net.
Results of Operations
Revenue
Our revenue consists of OMIDRIA product sales to ASCs and hospitals in the U.S. Our product sales, net are as follows:
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| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
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Product sales, net | | $ | 26,114 | | $ | 29,856 | | $ | 63,181 | | $ | 78,389 |
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| 2020 |
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Product sales, net | | $ | 21,061 | | $ | 23,537 | |
During the three and nine months ended September 30, 2020,March 31, 2021, OMIDRIA net revenue was $26.1 million and $63.2$21.1 million as compared to $29.9 million and $78.4$23.5 million for the three and nine months ended September 30, 2019.March 31, 2020. The decrease in revenue during the three months ended September 30, 2020March 31, 2021 compared to the same period in the prior year was due to recording an $8.7 million deductionthe timing of ASCs’ ability to verify reimbursement status following the December confirmation by CMS of separate payment for product returns from wholesalers, ASCs and hospitals relatedOMIDRIA before resuming their OMIDRIA usage. The lack of Medicare Part B reimbursement in the hospital setting during the quarter ended March 31, 2021 also contributed to the expirationdecrease in revenues. The ongoing COVID-19 pandemic negatively affected the number of pass-through reimbursementcataract procedures performed in the quarter ended March 31, 2020 and, to a lesser extent, the quarter ended March 31, 2021. With separate payment for OMIDRIA on October 1, 2020. The additional decrease in revenue during the nine months ended September 30, 2020 compared to the same period in the prior year was due to COVID-19 related closings of ASCs and hospitals to elective cataract procedures from mid-March 2020 through to late June 2020. By the end of June 2020, the weekly run rate ofestablished, we expect OMIDRIA sales had returned to levels approaching those seen prior to the pandemic and continuedrevenues to increase during the third quarter prior to recording the OMIDRIA return reserve. Given the uncertainty and local variances in the severity and response to the COVID-19 pandemic across the U.S., and whether OMIDRIA will receive separate payment, we are not able to predict future OMIDRIA revenue.second quarter.
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Gross-to-Net Deductions
We record OMIDRIA product sales net of estimated chargebacks, rebates, distribution fees and product returns. These deductions are generally referred to as gross-to-net deductions. Our total gross-to-net provision for the three and nine months ended September 30, 2020March 31, 2021 was 46.8% and 36.6%31.5% of gross OMIDRIA product sales respectively. This comparescompared to 28.5% and 28.0%32.3% for the three and nine months ended September 30, 2019, respectively.March 31, 2020. The increasedecrease in gross-to-net deductions as a percentage of sales in 20202021 compared to 20192020 is due to a reduction in sales returns during the OMIDRIA return provision recorded in the thirdfirst quarter of 2020.2021 partially offset by an increase in our OMIDRIAssure®patient assistance and reimbursement program.
A summary of our gross-to-net related accruals for the ninethree months ended September 30, 2020March 31, 2021 is as follows:
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Balance as of December 31, 2019 | | $ | 10,240 | | $ | 2,237 | | $ | 12,477 |
Provisions | |
| 20,345 | | | 16,179 | | | 36,524 |
Payments | |
| (25,793) | | | (4,205) | | | (29,998) |
Balance as of September 30, 2020 | | $ | 4,792 | | $ | 14,211 | | $ | 19,003 |
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Balance as of December 31, 2020 | | | 3,740 | | | 948 | | | 4,688 |
Provisions | |
| 8,539 | | | 1,109 | | | 9,648 |
Payments | |
| (5,399) | | | (582) | | | (5,981) |
Balance as of March 31, 2021 | | $ | 6,880 | | $ | 1,475 | | $ | 8,355 |
Chargebacks and Rebates
We record a provision for estimated chargebacks and rebates at the time we recognize OMIDRIA product sales revenue and reduce the accrual when payments are made or credits are granted. Our chargebacks are related to a
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pharmaceutical pricing agreement, a federal supply schedule agreement, a 340B prime vendor agreement, a Medicaid drug rebate agreement and an off-invoice discount to our ASC and hospital customers. We also record a provision for our OMIDRIAssure® patient assistance and reimbursement services program and ourfor rebates under our purchase volume-discount programs.
Distribution Fees and Product Return Allowances
We pay our wholesalers a distribution fee for services they perform for us based on the dollar value of their purchases of OMIDRIA. We record a provision for these charges as a reduction to revenue at the time of sale to the wholesaler and make payments to our wholesalers based on contractual terms.
We allow for the return of product up to 12 months past its expiration date or for product that is damaged or not used by our customers. We record a provision for returns upon sale of OMIDRIA to our wholesaler. When a return or claim is received, we issue a credit memo to the wholesaler against its outstanding receivable to us or we reimburse the customer. During the three months ended September 30, 2020 we estimated and recorded an $8.7 million provision for potential returns from our wholesalers, ASCs and hospital customers due to the October 1, 2020 expiration of pass-through reimbursement for OMIDRIA.
Research and Development Expenses
Our research and development expenses can be divided into three categories: direct external expenses, which include clinical research and development, preclinical research and development activities; internal, overhead and other expenses; and stock-based compensation expense. Direct externalThe following table illustrates our expenses consist primarilyassociated with these activities:
| | | | | | |
| | March 31, | ||||
|
| 2021 |
| 2020 | ||
| | (In thousands) | ||||
Direct external expenses: | | | | | | |
Clinical research and development: |
| |
|
| |
|
MASP-2 program - OMS721 (narsoplimab) | | $ | 17,031 | | $ | 13,215 |
MASP-3 program - OMS906 | | | 1,771 | | | — |
OMIDRIA - Ophthalmology | |
| 565 | |
| 626 |
PDE7 - OMS527 | |
| 142 | |
| 1,337 |
Total clinical research and development | |
| 19,509 | |
| 15,178 |
Preclinical research and development | |
| 2,711 | |
| 3,515 |
Total direct external expenses | |
| 22,220 | |
| 18,693 |
Internal, overhead and other expenses | |
| 9,657 | |
| 8,771 |
Stock-based compensation expense | |
| 1,480 | |
| 1,447 |
Total research and development expenses | | $ | 33,357 | | $ | 28,911 |
Total clinical research and development expenses increased $4.3 million for the three months ended March 31, 2021 compared to the same period in the prior year due to timing of narsoplimab drug manufacturing and medical affairs-related activities surrounding the commercial launch of narsoplimab. During the first quarter of 2021, OMS906 clinical research and development expenses incurred pursuantwere $1.8 million, which also contributed to agreements with third-party manufacturing organizationsthe increase in total clinical research and development expenses. In the prior to receiving regulatory approval for a product candidate, contractyear quarter, OMS906 expenses of $2.3 million were included as preclinical research organizations, clinical trial sites, collaborators, consultants, and licensors consultants. Costs are reporteddevelopment.
The decrease in preclinical research and development untilexpenses for the program entersthree months ended March 31, 2021 compared to the clinic. Internal,same period in the prior year is primarily due to the migration of OMS906 from preclinical research and development to clinical research and development beginning in the third quarter of 2020 when OMS906 entered Phase 1 clinical trials.
The increases in internal, overhead and other expenses consist of personnelare primarily due to additional employee-related costs overhead costs such as rent, utilities and depreciationadditional leased laboratory facilities to support our research and other miscellaneous costs. We do not generally allocate our internal resources, employees and infrastructure to any individual research project because we deploy them across multiple clinical and preclinical projects that we are advancing in parallel.development activities.
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The following table illustrates our expenses associated with these activities:
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
| | (In thousands) | ||||||||||
Direct external expenses: | | | | | | | | | | | | |
Clinical research and development: |
| |
|
| |
|
| |
|
| |
|
MASP-2 program - OMS721 (narsoplimab) | | $ | 10,624 | | $ | 9,120 | | $ | 33,559 | | $ | 28,615 |
MASP-3 program - OMS906 | | | 6,172 | | | — | | | 6,172 | | | — |
OMIDRIA - Ophthalmology | |
| 206 | |
| 657 | |
| 1,090 | |
| 1,744 |
PDE7 - OMS527 | |
| 134 | |
| 1,425 | |
| 1,730 | |
| 3,019 |
Total clinical research and development | |
| 17,136 | |
| 11,202 | |
| 42,551 | |
| 33,378 |
Preclinical research and development | |
| 2,012 | |
| 3,625 | |
| 8,846 | |
| 6,827 |
Total direct external expenses | |
| 19,148 | |
| 14,827 | |
| 51,397 | |
| 40,205 |
Internal, overhead and other expenses | |
| 10,532 | |
| 7,361 | |
| 28,248 | |
| 24,205 |
Stock-based compensation expense | |
| 1,636 | |
| 1,558 | |
| 4,714 | |
| 4,698 |
Total research and development expenses | | $ | 31,316 | | $ | 23,746 | | $ | 84,359 | | $ | 69,108 |
Total direct research and development expenses increased $4.3 million and $11.2 million, respectively, for the three and nine months ended September 30, 2020 compared to the same periods in 2019. The $4.3 million increase for the three months ended September 30, 2020 is due to a $5.0 million access fee payable upon entry into a newly signed technology license agreement with a third party related to the MASP-3 program, which began clinical trials in the third quarter of 2020. The $11.2 million increase for the nine months ended September 30, 2020 is primarily due to the $5.0 million access fee payable under the technology license agreement related to the MASP-3 program entered into during the third quarter of 2020, increased IgA nephropathy clinical trial costs, and additional HSCT-TMA costs related to the preparation of our rolling BLA and disease awareness activities.
We expect the majority of our research and development expenses for the remainder of 2020 to be related to our narsoplimab and MASP-3 programs. We expect overall research and development costs in the fourth quarter 2020 to increase slightly from current levels as we manufacture additional drug substance and expand our disease awareness activities in preparation for the anticipated U.S. commercial launch of narsoplimab in HSCT-TMA. These increases will be partially offset by the absence of technology license agreement costs in the fourthsecond quarter of 2020.2021 to be comparable to the quarter ended March 31, 2021.
At this time, we are unable to estimate with certainty the longer-term costs we will incur in the continued development of our product candidates due to the inherently unpredictable nature of our preclinical and clinical development activities as well as to the potential impacts of the COVID-19 pandemic. 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 product candidate as well as on ongoing assessments of each program’s commercial potential. In addition, we cannot forecast with precision which product 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 product 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 | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
| | (In thousands) | ||||||||||
Selling, general and administrative expenses, excluding stock-based compensation expense | | $ | 17,637 | | $ | 14,995 | | $ | 48,384 | | $ | 42,723 |
Stock-based compensation expense | |
| 2,188 | |
| 1,938 | |
| 6,408 | |
| 5,770 |
Total selling, general and administrative expenses | | $ | 19,825 | | $ | 16,933 | | $ | 54,792 | | $ | 48,493 |
| | | | | | |
| | Three Months Ended | ||||
|
| 2021 |
| 2020 | ||
| | (In thousands) | ||||
Selling, general and administrative expenses, excluding stock-based compensation expense | | $ | 16,261 | | $ | 16,007 |
Stock-based compensation expense | |
| 1,791 | |
| 2,029 |
Total selling, general and administrative expenses | | $ | 18,052 | | $ | 18,036 |
Total selling, general and administrative expenses increased $2.9 million and $6.3 million, respectively, for the three and nine months ended September 30, 2020. Thedid not increase in selling, general and administrative expenses during the three and nine months ended September 30, 2020significantly compared to the same periodsperiod in 2019 was primarily due to increased pre-commercialization activities for narsoplimab, including costs related to product training.the prior year.
We expect that our selling, general and administrative expenses will increase during the fourthsecond quarter of 2020 compared to current levels, primarily2021 due to increased pre-commercialization activities for narsoplimab.
Interest Expense
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
| | (In thousands) | ||||||||||
Interest expense | | $ | 6,882 | | $ | 5,715 | | $ | 18,763 | | $ | 16,846 |
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
|
| 2021 |
| 2020 | ||
| | (In thousands) | ||||
Interest expense | | $ | 4,897 | | $ | 5,903 |
Interest expense is comprised of contractual interest and amortization of debt issuance and debt discount related to our 2023 and 2026 Notes as well as to interest on our finance leases. We expect thatInterest expense decreased $1.0 million for the three months ended March 31, 2021 compared to the same period in the prior year due to the early adoption of ASU 2020-06, which eliminated the amortization of the non-cash debt discount on the 2023 and 2026 Notes. This decrease was partially offset by the increase in interest related to our fourth quarter2026 Notes, which were issued in August and September 2020 interest expense will be approximately $8.0 million. For(for more information, see “Note 6—7—Unsecured Convertible Senior Notes.”Notes”).
Loss on Early Extinguishment of Debt
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
| | (In thousands) | ||||||||||
Loss on early extinguishment of debt | | $ | 13,374 | | $ | — | | $ | 13,374 | | $ | — |
In August 2020, we issued the 2026 Notes and repurchased $115.0 million of the previously outstanding 2023 Notes. We recorded a $13.4 million loss on early extinguishment of debt related to the unamortized discount and issuance costs related to the repurchased 2023 Notes in the three and nine months ended September 30, 2020.
Income Tax Benefit
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
| | (In thousands) | ||||||||||
Income tax benefit | | $ | 7,854 | | $ | — | | $ | 7,854 | | $ | — |
During the third quarter of 2020, we issued the 2026 Notes which created an income tax benefit of $7.9 million. We anticipate that we will recognize an additional income tax benefit of $4.1 million during the fourth quarter of 2020. See “Note 6—Unsecured Convertible Senior Notes.”
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Financial Condition - Liquidity and Capital Resources
As of September 30, 2020,March 31, 2021, we had $153.5$100.5 million in cash, cash equivalents and short-term investments available for general corporate use held primarily in money-market accounts.accounts as compared to $135.0 million at December 31, 2020. In addition, as of September 30, 2020,March 31, 2021, we had $37.4$24.8 million in accounts receivable, net. We have historically generated net losses and incurred negative cash flows from operations and debt service. For the ninethree months ended September 30, 2020, March 31, 2021,
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we incurred a net lossesloss of $100.8$35.1 million and incurred negative cash flows from operations of $81.7$40.3 million. We expect to continue to incur lossesThe net loss and the negative cash flows from operations until our revenues exceed operating costs and debt service obligations.
OMIDRIA pass-through reimbursement from CMS expired on October 1, 2020. If continued separate payment is determined not to be reasonably achievable in the near term, we have developed a commercial strategyquarter ended March 31, 2021 were significantly affected by (1) reduced OMIDRIA revenues following expiration of the drug’s pass-through status and the delayed posting by Medicare Administrative Contractors of CMS’ December 2020 determination that canOMIDRIA be quickly implemented to lower the per-vial sales price of OMIDRIA to achieve substantially larger sales volumes. We believe that this approach would result in substantial revenues from OMIDRIA, in part because CMSpaid separately under Medicare Part B beneficiaries only represent approximately 45%in the ASC setting, and (2) the COVID-19-related decrease in the number of cataract surgery procedures annually.performed nationally.
FDA accepted our BLA for narsoplimab in HSCT-TMA for priority review with a PDUFA action date of July 17, 2021. We anticipate, but cannot guarantee, that narsoplimab for HSCT-TMA will receive FDA approval and will launch in early to mid-2021. Currentlythe U.S. in 2021. If approved, we cannot fully predict the timing or the magnitude of narsoplimab revenues, but we believe they will be significant. Execution of ourOur sales and marketing strategies for the launch of narsoplimab for HSCT-TMA is underway. These plans include various milestones at which we commit to incremental activities,spending, such as for field sales hiring, providing for flexibility in the timing of costs incurred should the approval of narsoplimab be accelerated or delayed. If warranted, we will adjust the timing and associated costs of our HSCT-TMA launch activities as we advance through the BLA review and approval process.
We plan to continue to fund our operations for at least the next twelve months with our cash and investments on hand from sales of OMIDRIA and, if FDA approval is granted, from sales of narsoplimab for HSCT-TMA. There is also that possibility that narsoplimab will generate revenues in the treatment of COVID-19. In addition, we may utilize funds available under our accounts receivable-based line of credit, which allows us to borrow up to 85% of our available accounts receivable borrowing base, less certain reserves, or $50.0 million, whichever is less. We also entered into a sales agreement to sell shares of our common stock, from time to time, up to an aggregate offering amount of $150.0 million through an “at the market” equity offering program. Should it be necessary or determined to be strategically advantageous, we also could pursue debt financings as well as public and private offerings of our equity securities, similar to those we have previously completed, previously, or other strategic transactions, which may include licensing a portion of our existing technology. Should it be necessary to manage our operating expenses, we would reduce our projected cash requirements through reduction of our expenses by delaying clinical trials, reducing selected research and development efforts, or implementing other restructuring activities.
Cash Flow Data
| | | | | | |
| | Nine Months Ended September 30, | ||||
|
| 2020 |
| 2019 | ||
| | (In thousands) | ||||
Selected cash flow data | | | | | | |
Cash provided by (used in): | | | | | | |
Operating activities | | $ | (81,679) | | $ | (37,059) |
Investing activities | | $ | (75,027) | | $ | 35,838 |
Financing activities | | $ | 174,697 | | $ | 4,221 |
| | | | | | |
| | Three Months Ended March 31, | ||||
|
| 2021 |
| 2020 | ||
| | (In thousands) | ||||
Selected cash flow data | | | | | | |
Cash provided by (used in): | | | | | | |
Operating activities | | $ | (40,254) | | $ | (9,141) |
Investing activities | | $ | 32,985 | | $ | 10,776 |
Financing activities | | $ | 5,796 | | $ | 2,399 |
Operating Activities. Net cash used in operating activities for the ninethree months ended September 30, 2020March 31, 2021 increased by $44.6$31.1 million as compared to the same period in 2019.2020. The net increase is primarily due to ana $32.1 million reduction in accounts receivable cash collections, a $6.1 million increase in our net loss of $45.5and a $2.3 million which was partially offset by an increasedecrease in non-cash charges of $8.3 million. In addition, cash usedoffset by $4.4 million decrease in prepaids and a $4.7 million increase in accounts payable and accrued expense increased by $15.6 million. These increases were partially offset by a $4.9 million increase in cash provided from collections of accounts receivable.expenses.
Investing Activities. Cash flows from investing activities primarily reflect cash used to purchase short-term investments and proceeds from the sale of short-term investments, thus causing a shift between our cash and cash equivalents and short-term investment balances. Because we manage our cash usage with respect to our total cash, cash
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equivalents and short-term investments, we do not consider fluctuations in cash flows from investing activities to be important to the understanding of our liquidity and capital resources.
Net cash used inprovided by investing activities during the ninethree months ended September 30, 2020March 31, 2021 was $75.0$33.0 million, a decreasean increase of $110.9$22.2 million for the same period in 2019 driven by an increase in purchases of investments of $132.6 million offset by2020 due to net proceeds from sale andinvestment maturities exceeding investment purchases.
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Financing Activities. Net cash provided by financing activities during the ninethree months ended September 30, 2020March 31, 2021 was $174.7$5.8 million, an increase of $170.5$3.4 million compared to the same period in 2019.2020. The increase for the nine months ended September 30, 2020 compared to the prior year was due to receivingincremental cash proceeds of $218.2 million from the issuance of our 2026 Notes and $7.5 million from the termination of the 2023 Capped Call contract offset by $125.6 million to repurchase our 2023 Notes and $23.2 million to purchase the 2026 Capped Call. In addition, we received net proceeds of $93.7 million from our August 2020 public offeringexercise of our common stock.
At the Market Sales Agreement. On March 1, 2021, we entered into a sales agreement to sell shares of our common stock, from time to time and having an aggregate offering price of up to $150.0 million, through an “at the market” equity offering program. As of March 31, 2021, we have not sold any shares under this agreement.
Line of Credit Agreement. Our Line of Credit Agreement with Silicon Valley Bank provides for a $50.0 million revolving line of credit facility. Under the Line of Credit Agreement we may draw, on a revolving basis, up to the lesser of $50.0 million or 85.0% of our eligible accounts receivable, less certain reserves. The Line of Credit Agreement is secured by all of our assets, excluding intellectual property and development program inventories, and matures on August 2, 2022. As of September 30, 2020,March 31, 2021, we had no outstanding borrowings under the Line of Credit Agreement, and we were in compliance with all covenants in all material respects. See earlier discussion under “Liquidity and Capital Resources” for further detail regarding the availability of the line of credit.
Contractual Obligations and Commitments
TheOur future minimum contractual commitments and obligations were reported in our Annual Report on Form 10-K for the year ended December 31, 2020. Other than the following, table presents a summary of our future minimum contractual obligations and commitments as of September 30, 2020.
| | | | | | | | | | | | | | | |
| | Payments Due Within | |||||||||||||
| | | | | | | | | | | More than | | | | |
|
| 1 Year |
| 2-3 Years |
| 4-5 Years |
| 5 Years |
| Total | |||||
| | (In thousands) | |||||||||||||
Operating leases | | $ | 1,616 | | $ | 13,214 | | $ | 13,795 | | $ | 19,590 | | $ | 48,215 |
Finance leases (principal and interest) | |
| 364 | |
| 1,809 | |
| 198 | |
| — | |
| 2,371 |
Unsecured convertible senior notes | |
| 4,438 | |
| 35,503 | |
| 123,823 | |
| 238,321 | |
| 402,085 |
Goods & services | | | 14,835 | | | 10,179 | | | 10,854 | | | — | | | 35,868 |
Total | | $ | 21,253 | | $ | 60,706 | | $ | 148,670 | | $ | 257,911 | | $ | 488,539 |
have not changed materially from the amounts previously reported.
Lease Agreements
WeOur lease for our office and laboratory space in The Omeros Building under a lease agreement with BMR - 201 Elliott Avenue LLC. The initial term of the lease ends in November 2027, and we2027. We have two five-year options to extend the lease term, each by five years.term. As of September 30, 2020,March 31, 2021, the remaining aggregate non-cancelable rent payable under the initial term of the lease, excluding common area maintenance and related operating expenses, is $48.2$53.8 million.
Unsecured Convertible Senior Notes
For more information, see “Note 6—Unsecured Convertible Senior Notes.”
Goods and Services
We have certain other non-cancelable obligations under various agreements that relate to goods and services. As of September 30, 2020,March 31, 2021, our aggregate firm commitments were $35.9$30.9 million.
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We may be required, in connection with in-licensing or asset acquisition agreements, to make certain royalty and milestone payments and we cannot, at this time, determine when or if the related milestones will be achieved or whether the events triggering the commencement of payment obligations will occur. Therefore, such payments are not included in the amountamounts described above.
Critical Accounting Policies and Significant Judgments and Estimates
ThereOn January 1, 2021, we adopted ASU 2020-06, Debt—Debt with Conversion Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) on a modified retrospective basis (for more information, see “Note 2—Significant Accounting Policies, Recently Adopted Pronouncements”).
Other than the adoption of ASU 2020-06, there have not been any material changes in our critical accounting policies and significant judgments and estimates as disclosed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2019.2020.
Off-Balance Sheet Arrangements
We have not engaged in any off-balance sheet arrangements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is primarily confined to our investment securities. The primary objective of our investment activities is to preserve our capital to fund operations. We also seek to maximize income from our investments without assuming significant risk. To achieve our objectives, we maintain a portfolio of investments in high-credit-quality securities. As of September 30, 2020,March 31, 2021, we had cash, cash equivalents and short-term investments of $153.5$100.5 million. In accordance with our investment policy, we invest funds in highly liquid, investment-grade securities. These securities in our investment portfolio are not leveraged and are classified as available-for-sale. We currently do not hedge interest rate exposure. Because of the short-term maturities of our investments, we do not believe that an increase in market rates would have a materialmaterially negative impact on the realized value of our investment portfolio. We actively monitor changes in interest rates and, with our current portfolio of short-term investments, we are not exposed to potential loss due to changes in interest rates.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of September 30, 2020.March 31, 2021. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2020,March 31, 2021, our principal executive officer and principal financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) under the Exchange Act that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, in the ordinary course of business, we may be involved in various claims, lawsuits and other proceedings. As of the date of filing of this Quarterly Report on Form 10-Q, we were not involved in any material legal proceedings.
ITEM 1A. RISK FACTORS
We operate in an environment that involves a number of risks and uncertainties. Before making an investment decision you should carefully consider the risks described in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2019,2020, as filed with the SEC on March 2, 2020.1, 2021. In assessing the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2019,2020, you should also refer to the other information included therein and in this Quarterly Report on Form 10-Q. In addition, we may be adversely affected by risks that we currently deem immaterial or by other risks that are not currently known to us. The trading price of our common stock could decline due to any of these risks and you may lose all or part of your investment.
The risk factors set forth below update, and should be read together with, the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2019.
Our ability to continue as a going concern and achieve profitability is highly dependent on the commercial success of OMIDRIA, and to the extent OMIDRIA is not successful, our business, financial condition and results of operations would be materially adversely affected, and the price of our common stock may decline.
OMIDRIA is currently our only product that has been approved by the FDA for commercial sale in the U.S. For the three months ended September 30, 2020, we recorded net sales of OMIDRIA of $26.1 million. Revenues from sales of OMIDRIA have not been sufficient to fund our operations fully in prior periods and we cannot provide assurance that revenues from OMIDRIA sales will be sufficient to fund our operations fully in the future. In prior periods, when OMIDRIA was not reimbursed separately under Medicare Part B, our revenues decreased significantly. In the absence of other revenue sources, we will need to generate substantially more product revenue from OMIDRIA to achieve and sustain profitability. We may be unable to sustain or increase revenues generated from OMIDRIA product sales for a number of reasons, including:
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Pass-through reimbursement for OMIDRIA under Medicare Part B expired on October 1, 2020. In the event that we are not able to secure separate payment or similar reimbursement for OMIDRIA, or if there is a delay in securing separate payment or similar reimbursement for OMIDRIA, our revenue from OMIDRIA could decrease significantly as was the case during the period from January 1, 2018 to September 30, 2018, when OMIDRIA was not reimbursed separately when used for procedures involving patients covered by Medicare Part B.
Any decline in sales from OMIDRIA also would impact our ability to borrow under the Loan Agreement since the amount we can borrow is dependent on our eligible receivables.
If legislative and/or administrative means to secure separate payment for OMIDRIA are not successful, we would need to pursue an alternative sales strategy, and our revenues and financial condition could be adversely and significantly affected.
Pass-through reimbursement status allows for separate payment (i.e., outside the packaged payment rate for the surgical procedure) under Medicare Part B. In March 2018, Congress extended pass-through reimbursement status for a small number of drugs, including OMIDRIA, used during procedures performed on Medicare Part B fee-for-service patients through September 30, 2020. In its 2021 OPPS final rule, CMS confirmed the October 1, 2020 expiration of pass-through reimbursement for OMIDRIA and indicated an intention to package payment for OMIDRIA within the ambulatory payment classification for the associated surgical procedure in both the hospital outpatient department and ASC settings. We are continuing to pursue separate payment for OMIDRIA and have submitted to CMS a comment letter and a legal memorandum outlining our position that OMIDRIA meets all of the regulatory criteria established by CMS for separate payment in the ASC setting. However, we can provide no assurances that separate reimbursement for OMIDRIA will be available for the remainder of 2020 and beyond or, if available, that the reimbursement rate will be adequate. If the future reimbursement status of OMIDRIA continues to be uncertain, then demand for OMIDRIA from ASCs and hospitals may be reduced substantially. In such event, sales to our wholesalers may decrease correspondingly, as they adjust on-hand inventory in anticipation of reduced demand from end users.
If we are unable to obtain separate payment for OMIDRIA, we expect to pursue an alternative sales strategy. We may face difficulties or delays in implementing an alternative sales strategy and, even if successfully implemented, we cannot predict how quickly, or if, our customers would increase their OMIDRIA utilization, and the net revenues we receive from sales of OMIDRIA could be reduced, potentially by a significant amount. Additionally, private payers often follow CMS with respect to reimbursement for new drugs, and they may cease or decrease coverage or reimbursement for OMIDRIA if we are unable to obtain separate payment for OMIDRIA from CMS. A reduction in OMIDRIA revenues for these or any other reasons may also impair our ability to borrow under our line of credit facility with Silicon Valley Bank.
Any of these risks, if realized, would adversely affect our ability to generate revenue and attain profitability, and there would be a material adverse effect on our business, financial condition, results of operations and growth prospects and the trading price of our stock could decline.
The spread of COVID-19 and efforts to reduce its transmission may negatively impact our business, operations and financial results.
The COVID-19 pandemic has significantly affected the global economy and has adversely affected our sales of OMIDRIA due to a reduction in the overall volume of cataract surgery and intraocular lens replacement procedures. In March 2020, ASCs and hospitals using OMIDRIA postponed nearly all cataract procedures in response to recommendations from government and medical organizations. As a result, we did not record any sales of OMIDRIA to our wholesalers from March 25 to May 19, 2020. Beginning in the second half of May 2020, cataract surgeries resumed to varying degrees in locations throughout the country. If the number of cataract procedures becomes or continues to be limited, either by necessity for time-consuming safety protocols, reduction in patient demand, or the imposition of prohibitions on elective surgeries in some localities, then we would expect there to be a corresponding reduction in demand for OMIDRIA.
We may also experience disruptions to our operations due to COVID-19, such as delays or disruptions with respect to manufacturing of clinical or commercial drug substance or drug product and delays in our clinical trials or in the submission or review of regulatory applications. Such delays or disruptions could negatively affect our commercial
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operations, clinical programs, and research and development. The health of our employees, contractors and other persons on whom we rely may be adversely affected by COVID-19. Although we are taking precautionary measures intended to help minimize the risk of the virus to our employees, these measures may be ineffective or may otherwise adversely affect our productivity. In addition, the conditions created by the pandemic may intensify other risks inherent in our business. Due to the unknown magnitude, duration and outcome of the COVID-19 pandemic, it is not possible to estimate precisely its impact on our business, operations or financial results; however, the impact could be material.
To the extent COVID-19 adversely affects our business, financial condition, and results of operations and global economic conditions more generally, it may also have the effect of heightening many of the other risk factors set forth herein as well as those described in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019.
We may be unable to further evaluate narsoplimab in COVID-19 patients and there can be no guarantee that the results of any such evaluations will be favorable.
In response to the COVID-19 pandemic, we initiated a compassionate use program for narsoplimab to treat COVID-19 patients with ARDS. While all six COVID-19 patients initially treated with narsoplimab survived, recovered, and were discharged from the hospital, and we believe the results observed following narsoplimab treatment in severe COVID-19 cases demonstrate the similarity in pathophysiology between COVID-19 and HSCT-TMA, we cannot provide assurance that the results observed in the compassionate use program will be observed in any future study of narsoplimab for this indication or that we will receive regulatory authorization or approval for narsoplimab in the treatment of hospitalized patients with COVID-19. We may be unable to design and conduct a large-scale clinical trial evaluating narsoplimab in COVID-19, secure the large-scale manufacturing capacity from third parties necessary to manufacture narsoplimab in sufficient quantities to enable broader availability of narsoplimab for COVID-19 patients, or secure funding and other resources necessary for us to conduct these activities from government or other sources. In addition, another party may be successful in producing a vaccine or an alternative therapy for COVID-19 or ARDS associated with COVID-19, which may also lead to the diversion of governmental and other potential sources of funding away from us and toward other companies and limit the viability of any approved or authorized product candidate for the treatment of COVID-19. Any therapeutic candidate that we may develop to address COVID-19 will be subject to risks in addition to those normally associated with pharmaceutical research, development, and commercialization, such as higher risk of technical failure, lower and transient opportunities for revenue, higher manufacturing costs, product safety or efficacy risks related to an expedited research and development timeline, and novel liability theories. Relatedly, FDA may require that we conduct a large-scale trial of narsoplimab in COVID-19 patients in order to grant any approval or authorization. These risks may affect our ability to develop or commercialize a therapeutic for COVID-19 or any other current or future indication.
If our clinical trials or clinical protocols are delayed, suspended or terminated, we may be unable to develop our product candidates on a timely basis, which would adversely affect our ability to obtain regulatory approvals, increase our development costs and delay or prevent commercialization of approved products.
We cannot predict whether we will encounter problems with any of our completed, ongoing or planned clinical trials or clinical data collection protocols that will cause regulatory agencies, institutional review boards or ethics committees, or us to delay our clinical trials or suspend or delay the analysis of the data from those trials. Clinical trials and clinical data protocols can be delayed for a variety of reasons, including:
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If the results of our clinical trials are not available when we expect or if we encounter any delay in the analysis of data from our clinical trials, we may be unable to file for regulatory approval or conduct additional clinical trials on the schedule we currently anticipate. Many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of a product candidate. Any delays in completing our clinical trials could increase our development costs, could slow down our product development and
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regulatory submission process, could delay our receipt of product revenue and could make it difficult to raise additional capital. In addition, significant clinical trial delays also could allow our competitors to bring products to market before we do and impair our ability to commercialize our future products, potentially harming our business.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.We issued 24,901 shares of our common stock upon the cashless net exercise of a warrant to purchase 43,115 shares of our common stock during the three months ended March 31, 2021. The warrant was issued on May 18, 2016 in connection with the amendment of a previous loan agreement. We deemed the issuance of common stock upon the exercise of the warrant to be exempt from registration under the Securities Act pursuant to Section 3(a)(9) of the Securities Act. No underwriters were involved in the issuance of our common stock upon the exercise of the warrant and no commissions were paid in connection with such issuance.
ITEM 6. EXHIBITS
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Exhibit Number | | Description |
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10.1† | | |
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101.INS | | Inline XBRL Instance Document |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Link base Document |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104.1 | | Cover Page Interactive Data File, formatted in Inline XBRL (included in Exhibit 101) |
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The certifications attached as Exhibits 32.1 and 32.2 that accompany this Quarterly Report on Form 10-Q are not deemed filed with the SEC and are not to be incorporated by reference into any filing of Omeros Corporation under the Securities Act or the Exchange Act, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| OMEROS CORPORATION |
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Dated: | /s/ Gregory A. Demopulos |
| Gregory A. Demopulos, M.D. |
| President, Chief Executive Officer and Chairman of the Board of Directors |
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Dated: | /s/ Michael A. Jacobsen |
| Michael A. Jacobsen |
| Vice President, Finance, Chief Accounting Officer and Treasurer |
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