OMEROS CORP - Quarter Report: 2020 June (Form 10-Q)

Table of Contents

​

​

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

​

For the quarterly period ended June 30, 2020

or

​

For the transition period from to

Commission file number: 001-34475

OMEROS CORPORATION

(Exact name of registrant as specified in its charter)

​

​

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.

​

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 August 6, 2020, the number of outstanding shares of the registrant’s common stock, par value $0.01 per share, was 54,518,358.

​

​

​

​

Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the Securities Act) and Section 21E of the Securities Exchange Act of 1934 (the Exchange Act) which are subject to the “safe harbor” created by those sections for such statements. Forward-looking statements are based on our management’s beliefs and assumptions and on 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:

​

Table of Contents

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). 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.

​

​

Table of Contents

OMEROS CORPORATION

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2020

INDEX

​

​

​

​

Table of Contents

​

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

OMEROS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(unaudited)

​

See accompanying Notes to Condensed Consolidated Financial Statements

​

-5-

Table of Contents

OMEROS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share data)

(unaudited)

​

See accompanying Notes to Condensed Consolidated Financial Statements

​

-6-

Table of Contents

OMEROS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

​

See accompanying Notes to Condensed Consolidated Financial Statements

​

-7-

Table of Contents

OMEROS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1—Organization and Significant Accounting Policies

Organization

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, is marketed in the United States (U.S.) for use during cataract surgery or intraocular lens replacement.

Basis of Presentation

Our condensed consolidated financial statements include the financial position and results of operations of Omeros Corporation (Omeros) and our wholly owned subsidiaries. All intercompany transactions have been eliminated, and we have determined we operate in one segment. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (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 June 30, 2020 and December 31, 2019 and for the three and six months ended June 30, 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, 2019 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, which was filed with the U.S. Securities and Exchange Commission (SEC) on March 2, 2020.

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 September 30, 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 other administrative and legislative avenues to secure permanent separate payment or similar reimbursement for OMIDRIA beyond September 30, 2020; however, we cannot provide assurance that these efforts will be successful.

The outbreak of the novel strain of coronavirus (SARS-CoV-2) that causes the Coronavirus Disease 2019 (COVID-19) and the responses to the global pandemic by various governmental authorities, the medical community and others continue to have a significant impact on our business. In March 2020, 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. Beginning in the second half of May 2020, cataract surgery resumed to varying degrees in locations throughout the country. By the end of June 2020, the run rate of weekly OMIDRIA sales had recovered to levels approximating those seen prior to the pandemic. 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.

-8-

Table of Contents

Going Concern Discussion

As of June 30, 2020, we had cash, cash equivalents and short-term investments of $16.1 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 $51.4 million and $63.4 million for the six months ended June 30, 2020, and the year ended December 31, 2019, respectively. Cash used in operating activities was $46.7 million and $60.1 million for the six months ended June 30, 2020, and the year ended December 31, 2019, respectively. We will continue to incur losses from operating activities until our revenues exceed operating costs and debt service obligations.

OMIDRIA pass-through reimbursement is scheduled to expire on September 30, 2020, and our sales of OMIDRIA continue to be affected by and are potentially at risk due to the COVID-19 pandemic. As such, we cannot predict future OMIDRIA revenues in 2020 and beyond. Similarly, we are unable to include in the determination regarding our prospects as a going concern amounts available under our accounts receivable-based line of credit or any proceeds from debt transactions or other financing instruments despite our successful track record in accessing capital through these avenues. We also have not included any potential partnerships related to our products or product candidates. Regardless of whether we secure continued pass-through payment for OMIDRIA, our working capital needs will likely continue to increase, particularly if the disruption to our operations caused by the COVID-19 pandemic continues. The conditions described above, when evaluated within the constraints of the accounting literature, raise substantial doubt with respect to our ability to meet our obligations through August 10, 2021 and, therefore, to continue as a going concern.

We plan to continue to fund our operations through proceeds from sales of OMIDRIA and, 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. Should it be necessary or determined to be strategically advantageous, we also could pursue debt financings, public and private offerings of our equity securities similar to those we have completed previously, or other strategic transactions, which may include licensing a portion of our existing technology. If these capital sources, for any reason, are needed but inaccessible, it would have a material negative effect on our financial condition. 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.

The accompanying consolidated financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from uncertainty related to our ability to continue as a going concern.

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, manufacturing of drug product and clinical drug supply and other contingencies. 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.

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.

-9-

Table of Contents

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.

Right-of-Use Assets and Related Lease Liabilities

We record operating leases as right-of-use assets and recognize the related lease liabilities equal to the fair value of the lease payments using our incremental borrowing rate when the implicit rate in the lease agreement is not readily available. We recognize variable lease payments when incurred. Costs associated with operating lease assets are recognized on a straight-line basis within operating expenses over the term of the lease. We record finance leases as a component of property and equipment and amortize these assets within operating expenses on a straight-line basis to their residual values over the shorter of the term of the underlying lease or the estimated useful life of the equipment. The interest component of a finance lease is included in interest expense and recognized using the effective interest method over the lease term. We account for leases with initial terms of 12 months or less as operating expenses on a straight-line basis over the lease term.

Advance Payments

Advance payments for goods or services that will be used or rendered for future research and development activities are deferred 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.

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 on January 1, 2020 and the adoption did not have a material impact on our consolidated financial statements and disclosures.

​

​

Note 2—Net Loss Per Share

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of common shares outstanding for 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, determined using the treasury-stock method. Common share equivalents are excluded from the diluted net loss per share computation if their effect is anti-dilutive.

-10-

Table of Contents

The basic and diluted net loss per share amounts for the three and six months ended June 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:

​

​

Note 3—Certain Balance Sheet Accounts

Accounts Receivable, net

Accounts receivable, net consist of the following:

​

​

Trade receivables are shown net of $1.1 million and $1.6 million of chargeback and product return allowances as of June 30, 2020 and December 31, 2019, respectively.

Inventory

Inventory consists of the following:

​

​

​

-11-

Table of Contents

Property and Equipment, Net

Property and equipment, net consists of the following:

​

​

For the six months ended June 30, 2020 and 2019, depreciation and amortization expenses were $0.8 million for both periods, respectively.

Accrued Expenses

Accrued expenses consist of the following:

​

​

Note 4—Fair-Value Measurements

As of June 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.

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.

-12-

Table of Contents

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

​

​

​

Cash held in demand deposit accounts of $2.0 million and $3.1 million is excluded from our fair-value hierarchy disclosure as of June 30, 2020 and December 31, 2019, respectively. There were no unrealized gains or losses associated with our short-term investments as of June 30, 2020 or December 31, 2019. 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--Convertible Senior Notes” for the carrying amount and estimated fair value of our 6.25% Convertible Senior Notes due 2023.

Note 5—Debt

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 of Credit 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% and the prime rate. The line of credit is secured by all our assets excluding intellectual property and development program inventories.

As of June 30, 2020 and December 31, 2019, we had no outstanding borrowings under the Line of Credit Agreement.

​

Note 6—Convertible Senior Notes

We have issued $210.0 million aggregate principal amount 6.25% Convertible Senior Notes due 2023 (the Convertible Notes). The Convertible 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 Convertible Notes mature on November 15, 2023, unless earlier purchased, redeemed or converted in accordance with their terms.

The Convertible Notes will be 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 conversion of the Convertible Notes, we entered into a capped call transaction which essentially covers the number of shares of our common stock underlying the Convertible Notes when our common stock is trading between the initial

-13-

Table of Contents

conversion price of $19.22 per share and $28.84 per share. As of June 30, 2020, all Convertible Notes remain outstanding.

The balance of our Convertible Notes at June 30, 2020 and December 31, 2019, is as follows:

​

​

The estimated fair value of the Convertible Notes at June 30, 2020, as determined through consideration of quoted market prices, was $216.6 million. The fair value is classified as Level 3 due to the limited trading activity for the Convertible Notes.

Note 7—Leases

We have operating leases related to our office and laboratory space and finance leases for certain laboratory and office equipment, as follows:

​

​

The components of total lease cost are as follows:

​

-14-

Table of Contents

​

​

The supplemental cash flow information related to leases is as follows:

​

​

​

Note 8—Commitments and Contingencies

Lease Agreements

We lease 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 we have two options to extend the lease term, each by five years. As of June 30, 2020, the remaining aggregate non-cancelable rent payable under the initial term of the lease, excluding common area maintenance and related operating expenses, is $49.8 million.

Contracts

We have various agreements with third parties that would collectively require payment of termination fees totaling $18.1 million if we had cancelled the work as of June 30, 2020.

Development Milestones and Product Royalties

We have licensed a variety of intellectual property from third parties that we are currently developing or may develop in the future. These licenses may require milestone payments during clinical development processes as well as low single to low double-digit royalties on the net income or net sales of the product. For the three and six months ended June 30, 2020 and 2019, development milestones were insignificant. We do not owe any royalties on OMIDRIA.

Note 9—Shareholders’ Deficit

Common Stock and Warrants

For the six months ended June 30, 2020, we received proceeds of $2.8 million upon the exercise of stock options which resulted in the issuance of 315,048 shares of common stock. For the six months ended June 30, 2019, we received proceeds of $1.7 million upon the exercise of stock options which resulted in the issuance of 184,365 shares of common stock.

As of June 30, 2020 and December 31, 2019, we had 243,115 warrants outstanding with a weighted average exercise price of $20.68 per share.

-15-

Table of Contents

Interim Condensed Consolidated Statements of Shareholders’ Deficit

The changes in interim balances of the components of our shareholders’ deficit are as follows:

​

​

​

​

Note 10—Stock-Based Compensation

Stock-based compensation expense is as follows:

​

​

-16-

Table of Contents

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:

​

​

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

​

​

At June 30, 2020, there were 4.1 million unvested options outstanding that will vest over a weighted-average period of 2.7 years and 3.5 million shares were available to grant. The total estimated compensation expense yet to be recognized on outstanding options is $31.4 million.

​

-17-

Table of Contents

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. We have multiple Phase 3 and Phase 2 clinical-stage development programs in our pipeline, which are focused on: complement-mediated disorders, including hematopoietic stem cell transplant-associated thrombotic microangiopathy (“HSCT-TMA”), Immunoglobulin A (“IgA”) nephropathy and atypical hemolytic uremic syndrome (“aHUS”), as well as 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 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 possess a novel antibody-generating platform. We have retained control of all commercial rights for OMIDRIA and each of our product candidates and programs.

Impact of Global Pandemic

The outbreak of the novel strain of coronavirus (“SARS-CoV-2”) that causes the Coronavirus Disease 2019 (“COVID-19”) and the responses to the global pandemic 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. Beginning in the second half of May 2020, cataract surgery resumed to varying degrees in locations throughout the country, generally under strict safety protocols. 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 and the corresponding government response could have a continuing adverse impact on our business, operations and financial results. If the number of cataract procedures continues to be limited, either by a need for time-consuming safety protocols, reduction in patient demand, or prohibition on elective surgical procedures in some localities, then there may be a corresponding reduction in demand for OMIDRIA. Additionally, continued restrictions on visits to customer facilities by our field sales representatives could lead to a further reduction in our OMIDRIA revenues. Due to the unknown magnitude, duration and outcome of the COVID-19 pandemic, especially in light of the variances both in the severity of and in the 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 could be material.

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

-18-

Table of Contents

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.

We launched OMIDRIA in the U.S. in the second quarter of 2015 and sell OMIDRIA primarily through wholesalers 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, used during procedures performed on Medicare Part B fee-for-service patients for an additional two years, running from October 1, 2018 through September 30, 2020.

We are continuing to pursue permanent separate reimbursement for OMIDRIA beyond the currently scheduled expiration of pass-through reimbursement on September 30, 2020, but we can provide no assurance that these efforts will be successful. In its 2021 outpatient prospective payment system (“OPPS”) proposed rule, CMS confirmed the September 30, 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 and ASC settings.

However, 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 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. Based on these criteria, we believe that OMIDRIA will satisfy the criteria for separate payment when provided in the ASC setting once it again becomes packaged following expiration of its pass-through status, and that CMS is required to apply this policy to OMIDRIA as it has to another drug meeting these criteria. We intend to meet with HHS to seek separate payment for OMIDRIA when used in the ASC setting for the fourth quarter of 2020. 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 permanent separate payment or similar reimbursement for OMIDRIA beyond September 30, 2020; however, we cannot provide assurance that these efforts will be successful. 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. 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, which maintained the ongoing validity of the EMA for OMIDRIA. At this time, we do not expect to see significant sales of OMIDRIA in any countries within the EEA or other international territories.

Narsoplimab Developments

In March 2020, in response to a request from physicians at the Papa Giovanni XXIII Hospital in Bergamo, Italy, we initiated a compassionate use program for narsoplimab, our investigational human monoclonal antibody targeting mannan-binding lectin-associated serine protease-2 (MASP-2), to treat COVID-19 patients with ARDS, a severe and life-threatening symptom of COVID-19.

-19-

Table of Contents

The study included a total of six COVID-19 patients treated with narsoplimab under compassionate use, all with ARDS and requiring continuous positive airway pressure (CPAP) or intubation. At baseline, circulating endothelial cell (CEC) counts and serum levels of interleukin-6 (IL-6), interleukin-8 (IL-8), C-reactive protein (CRP), lactate dehydrogenase (LDH), D-dimer and aspartate aminotransferase (AST) were markedly elevated. During the course of the study 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 patients who initiated steroid treatment after improving.

Narsoplimab treatment was associated with rapid and sustained reduction across all of these 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 and survived. 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 showing substantial mortality rates (ranging from 32% to 53%). A manuscript detailing the results of a study evaluating narsoplimab in patients with severe COVID-19 has been accepted for publication in the peer-reviewed journal of Immunobiology.

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 ARDS associated with the disease. As we know through our work in HSCT-TMA, an endothelial injury syndrome, endothelial damage activates the lectin pathway of complement. We believe the results observed following narsoplimab treatment in severe COVID-19 patients with ARDS at Papa Giovanni were consistent with those seen in HSCT-TMA and underscore the mechanistic similarities between these two disorders. Narsoplimab has been shown to inhibit lectin pathway activation and block microvascular injury-associated thrombus formation as well as MASP-2-mediated activation of kallikrein and factor XII. We believe such anticoagulant effects may provide therapeutic benefits in both HSCT-TMA and COVID-19.

We currently are in discussions with agencies within the U.S. federal government regarding potential funding to accelerate large-scale manufacturing of narsoplimab to enable broader availability of narsoplimab for COVID-19 patients and for other COVID-19-related programmatic activities.

​

Clinical Development Programs

Our clinical stage development programs include:

We have completed our pivotal clinical trial for narsoplimab in HSCT-TMA, and Phase 3 clinical programs are in process for narsoplimab in IgA nephropathy and aHUS.

-20-

Table of Contents

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

In October 2019, we initiated the rolling submission to FDA of our 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 submitted before beginning its review. The initial submission to FDA included all of the nonclinical (i.e., pharmacology, pharmacokinetics and toxicology) data, study reports, overview and summaries for the nonclinical sections of the BLA. Following the successful completion of manufacturing of the required process validation lots of narsoplimab, we submitted in April 2020 the second part of the BLA containing information related to the chemistry, manufacturing and controls (“CMC”) for narsoplimab. The remaining CMC information for the BLA was submitted to FDA in early August 2020. The clinical sections of the BLA are being prepared for submission and, once all analyses are complete and compiled, these remaining parts of the BLA will be submitted.

In March 2020, we reported clinical data from our pivotal trial of narsoplimab in HSCT-TMA. The single-arm, open-label trial included safety and efficacy endpoints that were previously agreed to with FDA. These 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.

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 response rate.” The primary laboratory markers that were evaluated were platelet count and LDH, levels, while improvement in clinical status was evaluated based on organ function and transfusions. Patients who did not fully meet these criteria were considered “non-responders.”

The FDA-agreed efficacy threshold for the primary endpoint is a complete response rate of 15%. Among patients who received at least one dose of narsoplimab, the complete response rate was 54% (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 65% (p<0.0001).

Secondary endpoints in the trial were survival rates and change from baseline in HSCT-TMA laboratory markers. Among the responder population, 93% of patients survived for at least 100 days following HSCT-TMA diagnosis, while 83% of patients who received treatment for at least four weeks and 68% of the total treated population achieved this endpoint. 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

-21-

Table of Contents

complications and neurological findings. Patients in the trial had a high expected mortality rate, with 93% of them having multiple risk factors. 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. All of these are common causes of death in this patient population.

In Europe, EMA has confirmed narsoplimab’s eligibility for EMA’s centralized review of a single MAA that, if approved, authorizes the product to be marketed in all EU member states and EEA countries. We plan to complete the submission of an MAA after our BLA submission has been filed with FDA. We are targeting to complete our MAA submission in the first half of 2021. In October 2019 we received a positive opinion from EMA on our pediatric investigation plan (“PIP”) for narsoplimab in the treatment of HSCT-TMA. A PIP outlining a development program for the investigational product in the pediatric population must be agreed with EMA as a prerequisite to EMA’s acceptance of an MAA. The narsoplimab PIP provides a study plan to evaluate the safety and effectiveness of the drug for HSCT-TMA in patients from one month through 17 years of age. We received a deferral for completion of our PIP until after approval of the narsoplimab MAA.

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 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.

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 2 development program.

-22-

Table of Contents

In June 2020 we submitted a Clinical Trial Application (“CTA”) to European regulators to initiate clinical trials evaluating OMS906, the company’s lead human monoclonal antibody from its MASP-3 program. For maximum flexibility in the conduct of our OMS906 clinical trials and to ensure timely progress of our OMS906 program, we also submitted an IND application to FDA to initiate clinical trials evaluating OMS906 in the United States. Assuming positive regulatory review of the CTA or IND, as applicable, we plan to initiate the Phase 1 clinical trial evaluating OMS906 in either the United States or Europe, based on the earliest availability of clinical testing sites. We currently expect to begin enrollment in the Phase 1 trial in September. The Phase 1 clinical trial will be a placebo-controlled, double-blind, single-ascending-dose and multiple-ascending-dose study to evaluate the safety, tolerability, pharmacodynamics and pharmacokinetics of OMS906 administered subcutaneously and intravenously to healthy subjects. Following adequate collection and analysis in the Phase 1 study data, the initial Phase 2 study for OMS906 is expected to be conducted in patients with paroxysmal nocturnal hemoglobinuria (PNH), a rare, acquired, life-threatening disease of the blood.

Preclinical Development Programs and Platforms

Our preclinical programs and platforms include:

-23-

Table of Contents

Financial Summary

We recognized net losses of $33.3 million and $14.5 million for the three months ended June 30, 2020 and 2019, respectively, and our OMIDRIA revenues were $13.5 million and $26.8 million for the same periods. As of June 30, 2020, we had $16.1 million in cash and cash equivalents and short-term investments available for general corporate use and $15.8 million in accounts receivable, net.

We expect our net losses will continue until such time as we derive sufficient revenues from sales of OMIDRIA and/or other sources, such as licensing, product sales and other revenues from our product candidates, that are sufficient to cover our operating expenses and debt service obligations.

​

*Fiscal quarters without pass-through reimbursement.

** Fiscal quarters with reduced cataract procedures due to COVID-19

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 Q4 2018, our revenues quickly returned to levels when separate reimbursement was available and 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. Beginning in the second half of May 2020, cataract procedures resumed to varying degrees in locations throughout the country. 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 September 30, 2020 expiration of pass-through reimbursement for OMIDRIA. However, 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 has 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. Based on these criteria, we believe that OMIDRIA will satisfy the criteria

-24-

Table of Contents

for separate payment when provided in the ASC setting once it again becomes packaged following expiration of its pass-through status. We are also continuing to pursue other administrative and legislative avenues to secure permanent separate payment or similar reimbursement for OMIDRIA beyond September 30, 2020. 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 pass-through reimbursement status for OMIDRIA.

COVID-19 and uncertainty around pass-through status for OMIDRIA could have a continuing adverse impact on our business, operations and financial results, limiting the number of cataract procedures which may be performed and 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 following the scheduled expiration of pass-through status on September 30, 2020, 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:

During the three and six months ended June 30, 2020, OMIDRIA revenue was $13.5 million and $37.1 million as compared to $26.8 million and $48.5 million for the three and six months ended June 30, 2019. The decrease in revenue during the three and six months ended June 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 beginning in mid-March 2020. In early May, a large number of states began re-opening, and, by the end of June 2020 the weekly run rate of OMIDRIA sales had returned to levels approaching those seen prior to the pandemic. Given the uncertainty and local variances in the severity and response to the COVID-19 pandemic across the U.S., and the future of pass-through reimbursement, we are not able to predict future OMIDRIA revenue.

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 six months ended June 30, 2020 was 14.6% and 26.8% of gross OMIDRIA product sales. This compares to 28.2% and 27.7% for the three and six months ended June 30, 2019. The decrease in gross-to-net deductions as a percentage of sales compared to the three months ended June 30, 2019 is primarily due to the reversal of $2.4 million of product return allowances which were originally recorded in Q1 2020 to account for potential product returns due to the postponement of elective surgical procedures, including cataract surgery due to the COVID-19 pandemic. The reserve was eliminated in Q2 2020 due to the resumption of cataract procedures in mid-May 2020.

-25-

Table of Contents

A summary of our gross-to-net related accruals for the six months ended June 30, 2020 is as follows: