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Edited Transcript of OMER earnings conference call or presentation 8-Aug-19 8:30pm GMT

Q2 2019 Omeros Corp Earnings Call

SEATTLE Sep 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Omeros Corp earnings conference call or presentation Thursday, August 8, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gregory A. Demopulos

Omeros Corporation - Co-Founder, Chairman, CEO & President

* Michael A. Jacobsen

Omeros Corporation - CAO, VP of Finance & Treasurer

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Conference Call Participants

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* Brandon Richard Folkes

Cantor Fitzgerald & Co., Research Division - Analyst

* Raghuram Selvaraju

H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst

* Stephen Gilbertpaul Brozak

WBB Securities, LLC, Research Division - Senior Equity Analyst

* Tian Sun

Needham & Company, LLC, Research Division - Research Analyst

* Jennifer Williams; Cook Williams Communications;Principal

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Presentation

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Operator [1]

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Good afternoon, and welcome to today's conference call for Omeros Corporation. (Operator Instructions) After the company's remarks, we will conduct a question-and-answer session. Please be advised that this call is being recorded at the company's request and a replay will be available on the company's website for one week from today.

I will turn over the call to Ms. Jennifer Williams, Investor Relations for Omeros.

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Jennifer Williams; Cook Williams Communications;Principal, [2]

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Good afternoon, and thank you for joining the call today. I'd like to remind you that some of the statements that will be made on the call today will be forward-looking. These statements are based on management's beliefs and expectations as of today only and are subject to change. All forward-looking statements involve risks and uncertainties that could cause the company's actual results to differ materially. Please refer to the special note regarding forward-looking statements in the company's quarterly report on Form 10-Q, which was filed today with the SEC and the Risk Factors section of the company's 2018 Annual Report on Form 10-K for a discussion of these risks and uncertainties.

Dr. Greg Demopulos, Chairman and CEO of Omeros, will take you through a corporate update and then Mike Jacobsen, our Chief Accounting Officer, will provide an overview of our second quarter financial results. We have some time reserved for questions after the financial overview.

Now, I would like to turn the call over to Dr. Demopulos.

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Gregory A. Demopulos, Omeros Corporation - Co-Founder, Chairman, CEO & President [3]

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Thank you, Jennifer, and good afternoon everyone. We appreciate you joining us today. The second quarter was another strong one for Omeros with OMIDRIA once again generating record quarterly sales and our pipeline programs achieving a number of important milestones. Let's begin our update today with narsoplimab, our MASP-2 inhibitor, and our progress toward regulatory approvals in stem cell transplant-associated thrombotic microangiopathy or stem cell TMA.

In the U.S., we have submitted to FDA our proposed schedule for rolling submission of our biologics license application or BLA and are awaiting the agency's response. Given the usual timing of the scheduling process, we are targeting submission of our BLA's first module by mid-next quarter. The response-based primary endpoint for our clinical data in stem cell TMA patients is set and includes both laboratory markers as indicators of disease process and measures of organ function. For competitive reasons, we have not yet released the specific details of the endpoint, given that there is no approved drug for stem cell TMA and that this is the first endpoint on which such an approval would be based. It's fair to say though that FDA would not have agreed to endpoint criteria on which they could not grant approval, and we are confident that our data meet them. No additional patients are required to be enrolled. A majority of the clinical trial data are already in-house, collection of the remaining data is underway, and narratives describing each patient's disease course and response to narsoplimab are already being written for inclusion in the BLA's clinical module. The safety profile of narsoplimab continues to look good and there have been no adverse safety signals.

Now let's look at our progress on Chemistry, Manufacturing & Controls, or CMC. Here again, we are well positioned. In addition to locking down the clinical and non-clinical requirements for approval, we have completed a successful pre-BLA CMC meeting with FDA. The agency reviewed our CMC data to date and we discussed with FDA the requirements for approval of our BLA. Again, we are confident that we can meet them. Lonza, our longstanding partner during the clinical development of narsoplimab, is now operating under a long-term agreement for commercial manufacturing of the drug.

We also have established a long-term agreement with Vetter, a world-leader in aseptic filling and packaging, under which they will provide their services for commercial narsoplimab. In Europe, we have begun meetings with our rapporteurs who will assist us throughout the preparations and submission of the Marketing Authorization Application or MAA and through the expected approval process. Our plan is to use the same clinical, manufacturing, and non-clinical data for approval in Europe.

With breakthrough therapy designation from FDA and orphan drug designations in both the U.S. and Europe, the BLA and MAA for narsoplimab and stem cell TMA each enjoy savings in review time and fees as well as market exclusivity following any approval. Our commercial team is actively preparing for the narsoplimab launch and continues to engage with transplant centers and thought leaders in the U.S. and Europe. These members of the transplant community are excited to welcome Omeros as a leader in this space and are providing guidance on how we can establish narsoplimab as standard of care for stem cell TMA patients.

The current therapeutic options are not adequately treating patients. And this creates an opportunity for a targeted lectin-specific complement pathway inhibitor that promises greater efficacy with a favorable safety profile. There is a need for innovation in the complement space. And with its MASP-2 and MASP-3 programs, Omeros is leading the way.

We continue to formulate our market access approach and have also gained insightful feedback from commercial payers on how to position narsoplimab appropriately as a life-saving therapeutic. These payer discussions also focus on the ways that narsoplimab is expected to reduce the overall cost associated with treating stem cell TMA, most notably hospitalizations, extended intensive care unit stays, acute dialysis and organ failure. Narsoplimab is expected to be used in both the inpatient and outpatient hospital settings, allowing providers the flexibility to dose across sites of care over the course of therapy. The value proposition for narsoplimab and stem cell TMA is strong. And based on discussions and feedback to date, we are encouraged that providers, payers and other members of the healthcare community will work with us to establish narsoplimab as standard of care for this indication.

Progress continues in the Phase 3 program for narsoplimab and IgA nephropathy as well. Enrollment is advancing at numerous sites in the U.S., Europe and Asia. As a reminder, the trial is enrolling patients with greater than 1 gram of proteinuria daily as well as a discrete subset of patients with 24-hour proteinuria levels greater than 2 grams. Either of these 2 populations can result in accelerated or full approval based on proteinuria reduction alone. To our knowledge, narsoplimab is the only drug that can receive full approval based on proteinuria alone. All other drugs in development for IgA nephropathy require glomerular filtration rate or GFR data for full approval. The ability of narsoplimab to obtain full approval on proteinuria would likely save 2 to 3 years in the full approval process.

Narsoplimab is also the only drug with FDA's breakthrough therapy designation for IgA nephropathy. It also has orphan drug designations from both FDA and the European Medicines Agency for this indication. A manuscript detailing the clinical data from our Phase 2 IgA nephropathy program has been prepared by our academic leadership committee and will be submitted for peer-reviewed publication within the next few weeks. An interesting case report has also been prepared for publication. It describes the impressive response to narsoplimab treatment by a patient who was quickly deteriorating due to IgA vasculitis-associated nephritis and rapidly progressive glomerulonephritis. We also expect the details of this case report to be published soon. In a separate study, pharmacokinetics and pharmacodynamics of subcutaneously administered narsoplimab will be evaluated together with potential biomarkers of IgA nephropathy in patients with this disease. Enrollment is expected to begin this month or next.

Subcutaneous dosing is also the route of administration in our Phase 3 trial of narsoplimab in patients with atypical hemolytic uremic syndrome or AHUS. This trial continues to enroll at multiple sites internationally. This is a single-arm open-label study planned for initial enrollment of 40 patients to support based on guidance from FDA and EMA and accelerated approval in the U.S. and a full approval in Europe. Narsoplimab has both FDA fast track and orphan drug designations for AHUS.

Our MASP-2 life cycle products are also advancing nicely. Our second-generation MASP-2 antibody is planned for clinical entry in mid-2021 and is targeting a subcutaneous dosing frequency of once monthly or better. Development of our orally available MASP-2 small molecules is also progressing. Assisted by a structure-based drug design using x-ray crystallography, we continue to optimize these compounds in preparation for clinical trials. With multiple series of highly potent and selective MASP-2 inhibitors, we expect to achieve our goal of advancing to the clinic by mid-2021 a once-a-day orally available compound that effectively ablates the lectin pathway.

Now let's turn to an overview of the numbers for the quarter and the performance of our commercial product, OMIDRIA, the only FDA-approved product for use in cataract surgery to prevent pupil constriction and reduced postoperative pain. The second quarter delivered another record for OMIDRIA with net sales at $26.8 million, an increase of 23% over the first quarter. Days of inventory remained at their historical norms. The growth in sales came from increased demand, driven by both a substantial increase in number of accounts and penetration within accounts across all channels, ASCs, hospitals, the Veterans Administration and other government customers.

Our net loss for the quarter was $14.5 million, or $0.29 per share, which includes non-cash charges of $6.3 million or $0.13 per share. As of June 30, 2019, we had $31.8 million available for general operations. We subsequently entered into our revolving line of credit facility with Silicon Valley Bank, under which we may borrow up to $50 million with borrowing availability depending primarily on our outstanding accounts receivable balance. The line of credit contains no financial covenants and we were not required to pledge any of our intellectual property as collateral. With the revolving line of credit at current revenues and expenses, we have over 1 year of operating capital.

As projected, growth of OMIDRIA sales again was strong in the second quarter and we expect continued double-digit growth in Q3. Consistent with previous sales growth, increasing physician demand and expanding payer coverage are key drivers.

Let's first examine our progress made on the payer front. Our field and reimbursement teams continue to meet with payers to ensure appropriate coverage for OMIDRIA. Additionally, we are partnering with surgeons and their administrators to advocate for separate payment across all payer plans. In July, CMS issued a permanent unique J-code for OMIDRIA. J-codes are reimbursement codes used by commercial insurance plans, Medicare, Medicare Advantage, Medicaid and other government payers for drugs like OMIDRIA that are administered by a physician. J-codes standardize the submission in payment of insurance claims, facilitating and streamlining billing and reimbursement. We expect many commercial and Medicare Advantage insurers that currently do not reimburse providers for OMIDRIA under the drug's current C-code to begin reimbursing under the newly assigned permanent J-code. Previously made effective only annually, on January 1, CMS is now implementing quarterly awards and we were pleased to learn that the permanent J-code for OMIDRIA will be effective in less than 2 months, on October 1.

Our market access, payer and sales teams have begun executing their commercialization and implementation plan to ensure that facilities are fully aware and ready to use the new J-code. We already have started receiving confirmations from those plans. Humana, for example, has informed us that the J-code for OMIDRIA is set up in their system and will be ready to go on October 1st, the day the J-code becomes effective.

Physician demand continues to grow as the significant benefits and safety of OMIDRIA compared to any other alternative become repeatedly proven by the published data, and as quality outcome measures are increasingly a focus of surgeons and facility administrators. Independent studies evaluating OMIDRIA in peer-reviewed publications detailing the results play an important role in building this support. Two independent studies in a total of approximately 2,800 patients showed that OMIDRIA reduces the incidents of cystoid macular edema or CME. CME is a sight-threatening complication of cataract surgery and the data from these 2 studies are planned for submission to peer-reviewed journals this month.

In each of these studies, patients receiving OMIDRIA did not receive any steroids whereas those without OMIDRIA were treated with steroids. The OMIDRIA-treated patients had a 3 to 12-fold reduction in the rate of CME. One of the studies also examined breakthrough iritis, which is inflammation of the iris and a challenge to manage, and also assessed pain and photophobia, which is extreme sensitivity to light. Each of these problems occurred about 3 times less frequently with OMIDRIA compared to steroids.

We also now have data on the ability of OMIDRIA to mitigate the need for postoperative and perioperative opioids. An abstract describing results of a new independent study has been accepted for presentation at the meetings of the American Academy of Ophthalmology in October. This study compares patients receiving OMIDRIA during cataract surgery to those receiving epinephrine, and patients were masked to treatment. Study patients were allowed to request fentanyl and opioid for pain or discomfort during the surgical procedure. Visual analog scale or VAS pain scores were also collected. Patients who received OMIDRIA were 23x less likely to request fentanyl or have significant pain than those patients who received epinephrine.

A written assessment of the study and its resulting data by an internationally recognized expert in pain management and opioid use disorder makes clear that OMIDRIA meaningfully reduces the risk of a cataract surgery patient developing opioid use disorder. The results will be submitted soon for publication in a peer-reviewed journal.

Each of these studies and those previously published in peer-reviewed journals continue to support our efforts to obtain permanent separate payment from CMS or Medicare Part B patients. We intend to submit comments to the 2020 proposed rule for CMS's Outpatient Prospective Payment System, which was just published in late July. This is the rule that governs Medicare payment for OMIDRIA and also helps guide payment by other payers. OMIDRIA was not directly mentioned in the proposed rule, which is not surprising given that the drug is not slated to come off pass-through until the fourth quarter of 2020.

Our team is continuing to analyze the proposed rule and to advocate on behalf of our drug. Early review of the proposed rule indicates that CMS intends to continue its policy of paying separately for non-opioid drugs that provide postoperative pain relief when used during surgery. Specifically, CMS indicates in the 2020 proposed rule that non-opioid drugs that are indicated for reduction of postoperative pain may warrant separate payment if there is evidence to show that such drugs help to deter or avoid prescription opioid use and addiction. And that package payment presents a demonstrated barrier to access for such drugs. Based on the opioid-sparing data that we just discussed as well as data from our Phase 3 clinical trials, together with the clear restriction of access to OMIDRIA during its recent pass-through hiatus, our team believes that OMIDRIA fits squarely within the parameters set forth by CMS to qualify for separate payment.

In addition to providing evidence on how OMIDRIA meets the non-opioid criteria for separate payment, we intend to ensure that CMS receives additional information that makes it clear that characterizing OMIDRIA as a supply in order to package the drug into the facility payment for cataract surgery is bad policy and harms Medicare beneficiaries, providing a lower quality of care than commercial payers and the Veterans Administration system. Consistent with our previous efforts, we have the support of the American Society of Cataract and Refractive Surgery, the Outpatient Ophthalmic Surgery Society and ophthalmic surgeons and facility administrators nationwide.

In addition, we have strong bipartisan and bicameral congressional support, including the bipartisan chairs of the house and Senate vision caucuses who are on record asking CMS to ensure appropriate reimbursement for any new pharmaceutical products like OMIDRIA that do not fit neatly into CMS's existing reimbursement mechanisms. Their letters to CMS directly referenced new ophthalmic drugs approved by the FDA for postoperative indications and strongly request that CMS reevaluate its packaged payment policies. These letters urge CMS to ensure appropriate reimbursement for drugs like OMIDRIA that advance the standard of care for Medicare beneficiaries by minimizing complications during surgery and reducing the reliance on opioids for postoperative pain management. CMS continuing to pay separately for OMIDRIA is the right thing to do for patients and likely will save money for CMS and other payers. Prior to scheduled termination of pass-through in late 2020, we expect that we will get there.

Now let's go over a few highlights from some of our pipeline programs before we move on to financial results. We began our comments today with an update on the MASP-2 part of our complement franchise. A second part of this franchise is OMS906, our antibody targeting MASP-3. The key activator of the complement system's alternative pathway, MASP-3 is responsible for the conversion of pro-factor D to factor D. Unlike other alternative pathway inhibitors on the market or in development, OMS906 has the advantage of selectively blocking the alternative pathway without affecting the function of either the classical or lectin pathways.

We expect that OMS906 will be dosed subcutaneously, once monthly or even less frequently. Manufacturing scale up is well under way and OMS906 is slated to enter the clinic in the first half of 2020. We're excited about the breadth of proven indications for this molecule. Our initial focus is paroxysmal nocturnal hemoglobinuria, a disease in which OMS906 compared to other alternative pathway inhibitors on the market or in development is expected to have a better safety profile, more convenient dosing and the ability to inhibit not only intravascular hemolysis but extravascular hemolysis as well.

Let's turn now to OMS527, our phosphodiesterase 7 or PDE7 program for the treatment of addiction and compulsive disorders. Here again, we see the potential for important advantages over addiction therapies on the market or in development. The data demonstrate that our PDE7 inhibitors are effective across multiple drugs of abuse and compulsive disorders and act without depressing the reward system. Current marketed drugs for the treatment of addiction do depress the reward system, a major deterrent to their use.

Our initial clinical focus in this program is nicotine addiction, which represents a large unmet clinical need. Dosing has now been completed and the single and multiple ascending cohorts in the Phase 1 trial for our lead PDE7 inhibitor. The pharmacokinetic data support once-daily dosing with or without food. Data analysis is being finalized and we expect to release detailed study results from both cohorts in the near future. In addition, a manuscript is being finalized detailing the mechanism of action of PDE7 inhibition in addiction and will be submitted soon for publication by a major peer-reviewed journal.

We'll wrap-up our program summary with our G protein-coupled receptor, a GPCR program. This is a platform technology and Omeros believes that it controls 54 GPCRs for drug development ranging in indications from CNS to metabolic, cardiovascular and cancer. One of our primary interest in this program recently has been GPR174, a receptor with a novel activity important in cancer immunotherapy. We expect to share more information about this program publicly in the very near future.

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Michael A. Jacobsen, Omeros Corporation - CAO, VP of Finance & Treasurer [4]

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Thanks, Greg. As Greg noted, OMIDRIA and total revenues for the second quarter were $26.8 million and our net loss was $14.5 million or $0.29 per share. This includes a non-cash expenses of $6.3 million, or $0.13 per share.

Here are some additional details regarding our second quarter results as compared to the first quarter. Once again, OMIDRIA achieved record quarterly sales with total product revenues of $26.8 million, compared to $21.8 million in the immediately preceding quarter. This is an [increase to] $5 million or 23%. During the second quarter, our overall growth to net deductions were 28%, which is relatively consistent with the 27% from the first quarter.

Cost and expenses for the quarter were $36.1 million, a $4.9 million decrease from the first quarter of this year. The decrease was primarily due to the timing of manufacturing scale of activities at Lonza, our commercial manufacturing partner for narsoplimab. Interest expense is in line with our expectations at $5.5 million and did include $2 million of non-cash interest. As of June 30, 2019, we had $31.8 million of cash, cash equivalents and short-term investments available for general operations.

Additionally, we recently entered into a 3-year agreement with Silicon Valley Bank for $50 million revolving line of credit. Under the terms of the agreement, we can generally borrow up to 85% of our outstanding accounts receivable. Interest on any of the outstanding balance that accrues at the greater of 5.5% or the prime rate. Once again, the agreement does not require a pledge of any of our intellectual property, nor does it include any financial covenants.

Now let's take a look ahead for the second half of this year. With regard to revenue, despite the fact that third quarter is historically one of the weakest for cataract surgery procedures, we expect solid double-digit revenue growth in Q3 compared to Q2 as we continue to increase our market penetration. We expect an even greater percentage revenue growth in the fourth quarter, one of the historically strongest cataract surgery quarters likely helped by the October 1 effective date of our J-code as well as a natural wholesale inventory stocking that occurs in late December.

During the remainder of the year, our research and development expenses are planned to be primarily related to narsoplimab with OMS527, OMS906 and our PCR program contributing lesser amounts. We expect research and development costs will increase in the second half of this year due to manufacturing scale of activities at Lonza, including the production of process validation batches in preparation for commercialization. BLA filing preparation for stem cell TMA will also contribute to the increase.

To be clear, as I mentioned last quarter, all development and manufacturing costs for narsoplimab, including the process validation costs incurred prior to the U.S. or EU approval, are expensed under research and development as they are incurred.

Selling, general and administrative expenses for the third quarter of 2019 could increase modestly from the second quarter total $16.9 million, primarily due to the incremental sales and marketing activities associated with pre-commercialization activities for stem cell TMA. Similarly, we would expect the fourth quarter sales and marketing expenses to increase slightly over those incurred in the third quarter for the same reason. Interest expense for the third and the fourth quarter should be in line with the second quarter at approximately $5.6 million.

With that, I'll turn the call back over to Greg.

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Gregory A. Demopulos, Omeros Corporation - Co-Founder, Chairman, CEO & President [5]

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Okay. Thank you, Mike. Operator, let's open the call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Steve Brozak from WBB.

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Stephen Gilbertpaul Brozak, WBB Securities, LLC, Research Division - Senior Equity Analyst [2]

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I'm just going to dive right in with 2 items. On OMIDRIA, what would you say the current market penetration is? I know there's familiarity, I know that you hit accounts, but what would you say the current market penetration is, and what can we take away from this right now and into the near future? And then obviously, I have a question on narsoplimab, please.

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Gregory A. Demopulos, Omeros Corporation - Co-Founder, Chairman, CEO & President [3]

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Sure. Thanks, Steve. We would expect that currently, we're running at about [8% to 9%, 8% to 10%] of cataract surgeries that are performed annually.

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Stephen Gilbertpaul Brozak, WBB Securities, LLC, Research Division - Senior Equity Analyst [4]

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Okay.

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Gregory A. Demopulos, Omeros Corporation - Co-Founder, Chairman, CEO & President [5]

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I mean obviously, there's a significant room for growth in that number.

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Stephen Gilbertpaul Brozak, WBB Securities, LLC, Research Division - Senior Equity Analyst [6]

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And as much as you can tell us, obviously, there's a specific focus in Congress dealing with opioids and opioid addiction. How does OMIDRIA positioned in that kind of discussion? How would you look to describe it? Then I'd like to go back into narsoplimab, please.

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Gregory A. Demopulos, Omeros Corporation - Co-Founder, Chairman, CEO & President [7]

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Sure. As I went through in sort of the prepared comments, we think we fit squarely within the criteria set by CMS not just last year or in last year's OPPS proposed and final rule, but this year's OPPS proposed rule. We have data which will be published, showing that OMIDRIA reduces the need for fentanyl which as you know is one of the most concerning opioids nationally, but also is of high focus in DC. And the data clearly show that OMIDRIA reduces the patient need for fentanyl. Our Phase 3 program show again the same thing, reduction and the need for opioids. And all of that while concurrently decreasing VAS pain scores. I mean, as you know, normally you hold one of those 2 parameters fixed while you measure the other. So if you're measuring pain medication, you should hold the VAS pain scores fixed and then measure the amount of drug needed or conversely you hold the amount of drug that you administer fixed and then assess VAS pain scores.

Here just as in our Phase 3 trials, both of those variables were allowed to float and yet we consistently see not only a reduction and the need for opioids at this most recent study, fentanyl specifically, but also marked reduction in VAS pain scores. So nearly an 80% reduction in the need for opioids or fentanyl and the concurrent greater than 50% reduction in VAS pain scores. That's really quite impressive. And so, in addition to that, there is a corresponding memo from one of the world's leaders in drug addiction, pain management, opioid use disorder who has commented specifically on the data coming out of this recent study. And the direct correlation of those data to opioid use disorder and specifically reducing the risk of opioid use disorder in cataract surgery patients. So I think in short, we are right in the center of it and I can't imagine how we would otherwise not meet those criteria.

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Stephen Gilbertpaul Brozak, WBB Securities, LLC, Research Division - Senior Equity Analyst [8]

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Okay. Going in narsoplimab, you obviously just -- you detailed the Lonza manufacturing relationship and you've been telling us about on the clinical side with FDA and your dealings with them. The one component I'd like you to talk about and I'll hop back in the queue, is the clinical reception. What -- given how much you've done so far -- are you seeing as far as the clinical demand? Of course there's self-described clinical demand, but what you're seeing from the clinicians that we should know in terms of their understanding and everything else and anything else actually you can tell us and I'll hop back in the queue.

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Gregory A. Demopulos, Omeros Corporation - Co-Founder, Chairman, CEO & President [9]

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Sure. Thanks, Steve. Look, obviously we're dealing closely with the opinion leaders in stem cell TMA and they are eager, and in fact, one could describe it as passionate about being able to access the drug for their patients. A number of these opinion leaders have used the drug, others are requesting it, our compassionate use program is expanding. All of these things indicate I think and underscore the clinical response to narsoplimab in this indication. So, our objective is to get this under the market as quickly as possible. We are collaborating closely with FDA to get that done and we're collaborating as well closely with EMA to get that done in Europe.

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Stephen Gilbertpaul Brozak, WBB Securities, LLC, Research Division - Senior Equity Analyst [10]

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Great. Congrats on the quarter.

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Gregory A. Demopulos, Omeros Corporation - Co-Founder, Chairman, CEO & President [11]

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Thanks, Steve. Thank you.

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Operator [12]

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(Operator Instructions) We have the next question from the line of Brandon Folkes.

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Brandon Richard Folkes, Cantor Fitzgerald & Co., Research Division - Analyst [13]

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So apologies if you've covered this on the call, just been hopping between a few calls. But I'd like to get your thoughts on the 2020 OPPS proposed rule. From my side, it looked quite positive in relation to OMIDRIA, just given that it seems that you do have evidence that not having pass-through this incentivizes use and encourage use of opioid and then as you mentioned earlier, the fentanyl side of things, you do have that evidence. So just any color on that proposed rule.

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Gregory A. Demopulos, Omeros Corporation - Co-Founder, Chairman, CEO & President [14]

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Sure. We and our team have really come through that rule very closely. And it's interesting that as I mentioned, I think in my opening remarks that OMIDRIA is not specifically named. And again, OMIDRIA is currently enjoying pass-through designation. And so, I think that may explain it. But when we look at this, as you said, we clearly meet those criteria. Not only do we have data which will be published that demonstrate the reduction in opioid use, but you pointed out an important second component which is that CMS has asked that -- that CMS claims data, support that packaging such a drug would limit access to that drug. And I can tell you that we have data with CMS claims data that clearly make that case. That 9-month hiatus that we had beginning January 1 of 2018 and running until pass-through as reinstated by congress on October 1, 2018, well, painful as that was, I think may have been fortunate at least in this respect where it clearly allowed us to generate those kind of claims data. And those show again as just as you would expect, a marked reduction in patient access to the drug.

So I think, as we read it -- and again, we're still digesting different parts of it and trying to make sure we put all the pieces together. As you know, it's an awfully large document and there are multiple components that sometimes even seem to conflict a little bit. But as we put all of the pieces together, I think we're quite confident that we squarely fit within the non-opioid exclusion. Then there's the entire other question about the drugs and the supplies. And I think we have -- we continue to enjoy and are frankly building on what we currently have support legislatively. I mentioned the bipartisan, bicameral vision caucus which has gone on record with CMS saying, look, this is a situation that's just not working and that this needs to be fixed to ensure access for patients to important drugs. Remember, this is all about patient access. Others try to describe it in other ways, but the distal lid of all of this is patient access. Should Medicare Part B patients be denied access to important drugs that other patients are readily able to access, whether those be commercial payer patients or Med Advantage patients, or VA patients.

As you know, the drug has been placed on the national formulary for the VA. That means that every VA facility in the country that performs ophthalmic surgery is mandated to, must make OMIDRIA available upon request to its physicians. That's a pretty powerful statement. So I think again, we're pretty well-situated and why don't I stop there and see if you've got any other questions about it?

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Brandon Richard Folkes, Cantor Fitzgerald & Co., Research Division - Analyst [15]

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No. That was very helpful. Maybe 1 additional question again. I'm sure you covered some of this on the call. But the agreements with the FDA on the endpoint seem to be very positive on narsoplimab. So if I look -- and the question I get from investors is when will we see additional data on the product? Is the EMA meeting and the agreement --coming to an agreement with EMA potentially a catalyst for us to see more data on that product?

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Gregory A. Demopulos, Omeros Corporation - Co-Founder, Chairman, CEO & President [16]

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Yes. I understand the question. Thank you. Brandon, look, first, I'll address those in the reverse order. We are working with EMA, so that we can also make the drug quickly available in Europe for the European transplant physicians who are frankly requesting it and want access to it for their patients. Is that related to our release of data? No. Not really. The data will be released as we put together the clinical module and finalize the clinical module of the BLA. But I think what people need to recognize -- I understand the question of, well, if they're not sharing the data, there must be something wrong with the data. I can understand that perspective. I can simply tell you that, that perspective is flatly wrong. We put a tremendous amount of effort, time and resources into developing what we propose to FDA as the criteria for the primary endpoint. Remember, it was FDA that frankly asked us to change the endpoint from overall survival to a response-based endpoint.

So, a lot of time, effort and resource went in to developing that, reaching agreement with the FDA on it and also generating the data that we have. We don't feel a particularly burning need to make all of that information potentially available or publicly available to any competitors who want to follow us. We're setting the bar, we plan to set the bar high and we plan to obviously meet that bar. We expect we will. The data will come out and when they do, others will be able to look at it and see, gee, this is how Omeros did it, how do we now if we want to follow Omeros into this space, how do we design our endpoints? How do we design our programs? But we don't see any real need at this point to accelerate that possibility for any competitors.

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Operator [17]

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We have another question from the line of Ram Selvaraju from H.C. Wainwright.

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Raghuram Selvaraju, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [18]

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Congrats on the good quarter. Just a couple on OMIDRIA first. I was wondering if you could elaborate, Greg, on what you saw as the main drivers of OMIDRIA sales momentum in the second quarter. And if you saw any meaningful new sales trends emerging or if it was sort of more of the same that you've seen earlier in the year. And if you could also comment on the reorder rate or the reutilization rate for OMIDRIA, please?

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Gregory A. Demopulos, Omeros Corporation - Co-Founder, Chairman, CEO & President [19]

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Sure. First, with respect to the drivers of the growth Q2 over Q1, Ram, they were largely the same. I mean it was increasing number of accounts and it was increasing penetration within accounts. But let me give you a little more color on that, which I think might be helpful. We are very focused on expanding the base of our customers and those using OMIDRIA. It's important that we increase the number of facilities for reasons which you of course readily understand. At the same time, within those facilities, we want to make sure that we are maximizing as much as possible the utilization of OMIDRIA across physicians and frankly across procedures and payers. So, we don't want physicians only to use this with Med Part B patients. That's why we're so focused on the commercial payers now, and we're having tremendous success there.

Our commercial team has been doing a wonderful job of expanding payer access. It's very interesting. Often these payers reply that they really didn't even know much about the drug. Now that they're learning about it and understanding and frankly hearing about it, they're understanding that payment is the right thing to provide. I think with respect to trends, we are seeing growth in the hospitals. That, as you know, always takes a little longer. It has to go through multiple committees for that kind of approval for use in hospitals. But we're really seeing quite an uptick in the number of hospitals. I think now even if you look at -- this may seem like somewhat of an odd statistic, but if you look at the Top 17 academic centers, I think we're now at about 12 of those that are using OMIDRIA. And that's impressive because you want the residence in training to have access to this drug, realize the benefits of the drug, and that only will help both the physician and the patient, as well as us temporarily downstream.

I think also, we're seeing an increase in VA sales, in veteran administration sales. We started at a relatively low number starting point given just when this came on national formulary and having to work and get those facilities on-board. But now that they are on-board, the growth rate was pretty steep Q2 over Q1. We expect that to continue to grow. So it's really across all channels. I think what is helping drive this are the data. When you start to talk to physicians and administrators about prevention of cystoid macular edema, that's a very big deal. That is probably the biggest concern. Although it occurs on a relatively small number of patient, it's a big problem when it occurs. It's one of the real sight-threatening complications of cataract surgery. Then when you look at our data on prevention of intra-operative floppy iris syndrome, that affects a lot of patients. And there hasn't been to my knowledge any drug that saved or any frankly therapy that's been able to prevent it other than sticking in a big ring or hook and kind of hoping you hold the pupil open to perform the procedure and you still get the billowing, still makes the case difficult. OMIDRIA prevents it.

So I think also the ability to use the drug without needing any steroids is an important part of the equation now for facilities and for physicians who are trying to move to a truly dropless cataract procedure. Then we also look at the potential to replace not only steroids, but postoperative NSAIDs making the procedure completely dropless with OMIDRIA. We'll see how that turns out, but I'm optimistic that the data there will be good as well. So when you put all of this together, I think it's the clinical data and it's also frankly concerns about liability. Docs want an FDA-approved product. They want to protect their patients' safety. This is the way that you can do that, while improving efficacy and while being reimbursed. I mean it's sort of the trifecta. I don't see how it gets much better than that.

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Raghuram Selvaraju, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [20]

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That's very helpful. Just on the reorder rate, if you could maybe just refresh me on that.

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Gregory A. Demopulos, Omeros Corporation - Co-Founder, Chairman, CEO & President [21]

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Sure. I understand the question, I believe, which is really one of inventory. And I can just tell you that inventory on hand at the wholesalers has remained consistent with historical norms. So, number of days of inventory at the wholesaler space about the same, which is at about 1.5 weeks usually. Remember, this is a drug that can be accessed very quickly. So it's turned around and effectively a day. So, there's not a lot of inventory that's held at the wholesalers and there's not really stockpiling of the drug. So, the sales that you're seeing in this quarter are real sales. I mean these translate to sell-through to the facilities.

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Raghuram Selvaraju, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [22]

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That's definitely helpful. But what I also wanted to know was the degree to which you get repeat orders from customers? How many customers are on a percentage basis are reordering the product?

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Gregory A. Demopulos, Omeros Corporation - Co-Founder, Chairman, CEO & President [23]

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Very high. I think once physicians and facilities see the advantages of the drug, it's I think frankly difficult for them to give it up. So, certainly, we see some attrition, but the reordering is highly consistent across groups.

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Raghuram Selvaraju, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [24]

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Okay. That's very helpful. I also wanted to ask about the R&D expense that you reported in the second quarter. It's a bit lower than we had originally expected. Is this sort of more in line with what we should anticipate for the remainder of this year? The reported R&D rate? Or do you expect it to go up in the second half?

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Gregory A. Demopulos, Omeros Corporation - Co-Founder, Chairman, CEO & President [25]

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It's going to be variable, Ram, as I think Mike mentioned. I mean manufacturing of antibodies as you know is an expensive proposition. And so, it really depends in part on where those manufacturing runs fall. So, I would expect sort of choppy or lumpy operating expenses which will be -- that variability is in good part driven by just the manufacturing of narsoplimab.

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Raghuram Selvaraju, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [26]

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Okay. And then just few questions on narsoplimab, if I may. I wanted to clarify the long active version that you talked about in the press release that I believe you mentioned would potentially provide a subcutaneous monthly administration to be possible that compares to daily subcutaneous injection using the current formulation, is that correct?

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Gregory A. Demopulos, Omeros Corporation - Co-Founder, Chairman, CEO & President [27]

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Subcutaneously now, we are administering this in the AHUS study daily. That doesn't mean that we're required to administer it daily, but we currently are, for frankly convenience as well. If you are going to administer this twice a week, it's a little more difficult to remember which days of the week you take it and which days you don't. So, given the absence of any adverse safety signal with the drug, we felt comfortable with daily subcu. But yes, I fully expect that we will have the longer-acting or longer-duration antibody in the clinic as I said by middle of 2021. And with that, we expect to be bringing on the orally-available small molecule MASP-2 inhibitor. So, I think what we've tried to do here is canvass the entire MASP-2 area which means we are canvassing the entire lectin pathway. At the same time, our MASP-3 inhibitor is coming. That will be out of the gate likely once monthly. It certainly looks that way. We'll know when we get it into Phase 1 studies which we plan to do by the middle of 2020. That's coming very soon as I say that. But we expect that, that will be once monthly or something close either up or down. And also small molecules of MASP-3 coming. So, we believe that we're creating quite a franchise on the complement front and that each of those drugs will have a use across a number of indications and we'll just figure out how we target.

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Raghuram Selvaraju, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [28]

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Can you just confirm that this second-generation antibody is a different molecule entirely to narsoplimab, correct?

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Gregory A. Demopulos, Omeros Corporation - Co-Founder, Chairman, CEO & President [29]

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Entirely different.

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Raghuram Selvaraju, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [30]

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Okay. And then just very quickly, can you just give us a sense of what the current size is of the compassionate use program for narsoplimab and how many patients are currently receiving therapy? And then if you could also give us a sense of what the timing interval is likely to be between module submissions for the narsoplimab BLA?

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Gregory A. Demopulos, Omeros Corporation - Co-Founder, Chairman, CEO & President [31]

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Yes. With respect to your first question, no, we haven't talked about the specific number of compassionate use patients. I'll just tell you that that number is growing. And in fact, we're going to be even needing to use an outside group to help us manage the number of compassionate use requests and the number of compassionate use patients that we have, so that we can make sure that all those patients who are requesting the drug and physicians who are requesting the drug can actually access it in a timely way to help their patients. There's nothing more disappointing than getting a request for use of OMIDRIA and by the time we can get the drug to them, the patient has died. We're working to expand and accelerate the delivery of the drug. So, I think that's where we are on the compassionate use piece. With respect to your second question about intervals of timing between modules, I think it's a little premature to say. I have told you what we're targeting and that targeting factors in sort of just the submission of the proposal for the timeline that we have already made, also factoring in FDA's time to respond to that.

So what we've said we're targeting there is mid-next quarter. So we're really talking about October or November -- mid-part of November to get our first module in and again, that's assuming the timeline works as we expect and FDA gets back to us and says, yes, we're comfortable with the overall schedule and we'll review it at these times. I think it's premature to talk about the timing of subsequent modules until we hear back from FDA and FDA has said, these times that you've proposed work for us, or, no, they don't and we need you to move them this way or that way. But we have made proposals for each of the modules and FDA has those and we'll wait for their response. I mean they're usually quite responsive, despite frankly how busy they are. I mean this division is extremely busy, and yet they seem to respond pretty quickly to us. So, we're very pleased about that relationship.

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Operator [32]

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We do have another question from the line of Serge Belanger from Needham.

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Tian Sun, Needham & Company, LLC, Research Division - Research Analyst [33]

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This is Tian on for Serge. So I think you mentioned that you're adding Humana.

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Gregory A. Demopulos, Omeros Corporation - Co-Founder, Chairman, CEO & President [34]

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I'm sorry. I can't hear you.

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Tian Sun, Needham & Company, LLC, Research Division - Research Analyst [35]

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Can you hear me?

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Gregory A. Demopulos, Omeros Corporation - Co-Founder, Chairman, CEO & President [36]

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I can now, yes, thanks.

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Tian Sun, Needham & Company, LLC, Research Division - Research Analyst [37]

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Okay. So, I think you mentioned that as of October 1, Humana is adding the J-code into their plans. So, do you have any expectation as to the rate or the number of plans that you might be expecting to add in the next few quarters in the future? How should we expect going forward?

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Gregory A. Demopulos, Omeros Corporation - Co-Founder, Chairman, CEO & President [38]

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Yes. I think that certainly, Serge, the numbers of payers who we'll reimburse for OMIDRIA under the J-code will increase relative to those that we have under a C-code, there are number of payers who simply just won't reimburse under a C-code. Those will quickly, I think, transfer over and we'll see reimbursement form them in J-code. In terms of getting other payers to put the J-code on, I expect we'll be quite successful with that. I don't have any projections at this time. We have multiple communications with those plans ongoing and we're tracking the responses. So, I expect we'll do well. I can't give you right now a specific slope of the curve that I think we're going to see, but I expect that will be upward moving pretty quickly.

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Operator [39]

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I am showing no further questions at this time. I would now like to turn the conference back to Dr. Demopulos.

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Gregory A. Demopulos, Omeros Corporation - Co-Founder, Chairman, CEO & President [40]

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Thank you, operator, and thank you, everyone. We really appreciate all of you taking the time to listen in. 2019 is living up to its promise. To our shareholders, we thank you for your continued support. We've now improved the lives of cataract surgery patients with OMIDRIA having been used in over 800,000 procedures and narsoplimab continues to save lives. The drugs are advancing quickly and our pipeline will, I believe, do similarly wonderful things to help patients. So again, we plan to be putting out some additional information in the relatively near-term as I went through in the comments. But until then, good evening to all of you. Thank you.

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Operator [41]

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Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You have wonderful day. You may all disconnect.