We have not revisited Omeros (OMER) since mid-July. The stock trades pretty much at the same levels as our last piece. However, the company has seen several positives since our last look at this promising biotech concern which shareholders have not been rewarded for yet. The company does seem to be heading into the close of this surreal year on several high notes. We update our investment thesis on Omeros in the paragraphs below.

Company Overview:

Omeros is based out of Seattle. The stock currently trades just over $14.00 a share and sports a market cap of approximately of just under $875 million. The company’s product portfolio consists largely of two assets. One of which is an approved product and the other a late stage drug candidate targeting numerous rare disease indications.

Omidria is approved to prevent miosis in cataract surgery and to reduce postoperative pain. The compound reduces the need for opioids, pupil-expansion devices and postoperative steroids. Omidria has been on the market for several years.

Source: Company Presentation

OMS721 or Narsoplimab is a potential late stage blockbuster targeting five indications. The company also has several stage compounds in development that are not germane for this analysis.

Recent Events:

The stock had a huge spike in early August as can be seen above. The rally was triggered by early stage positive results from a compassionate use study evaluating narsoplimab in severely ill COVID-19 patients with acute respiratory distress syndrome that required mechanical ventilation. Given the scores of companies targeting COVID-19 as well as new vaccines on the horizon, I place little value on these efforts currently.

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However, the company was smart in using the big rally in the stock to address its funding needs by raising nearly $300 million via a secondary and convertible debt offering. Convertible debt (at conversion price of $18.49 a share) was approximately 70% of the capital raise. Around $125 million of the convertible debt offering was used to pay off existing debt obligations.

On November 9th, Omeros reported third-quarter results that exceeded expectations both on a top and bottom line basis. Revenues for the third quarter of 2020 from Omidria were $26.1 million. The company had to incorporate an $8.7 million deduction as a return reserve associated with the expiration of pass-through reimbursement for Omidria that took effect on October 1st.

That important pass-through status was restored this week and will boost the stock nicely in trading this week. Specifically, the Centers for Medicare & Medicaid Services, or CMS, ruled that Omidria qualifies as a non-opioid pain management drug that functions as a surgical supply. This means that Omeros’ drug will be excluded from packaging under the ambulatory surgical center payment system for 2021. This is important as over 40% of sales are reimbursed this way.

Source: Company Presentation

More importantly for the long-term value of the company was the company’s completion of a rolling BLA submission for narsoplimab for the treatment of a complication associated with stem cell transplantation or HSCT-TMA on November 18th. This biologic has received breakthrough therapy designation and orphan drug designation for this indication.

Source: Company Presentation

Balance Sheet & Analyst Commentary:

Omeros is very much a battleground stock among the analyst community. Maxim Group did lift its price target to $25 from $20 this week on news around Omidria’s pass-through status. Maxim’s analyst is maintaining his Buy rating and notes the CMS decision ‘marks a significant event for Omeros, as Omidria is the cash engine for the company.’

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On October 20th, BAML initiated the shares with a Buy rating and $21 price target. The analyst there notes:

“The company offers “meaningful potential in the pipeline beyond currently marketed Omidria”, adding that while investors are focusing on its quarterly fluctuations, from a long-term standpoint, Omeros’ pipeline dwarfs Omidria. The analyst further states that the company’s “unique MASP-2 platform” has flown under the radar because Omeros holds sole rights to the ability to target this portion of the complement system.”

H.C. Wainwright reissued its Buy rating and Street high $32 price target on OMER just under two weeks ago. It should be noted both Wedbush ($13 price target) and Needham maintained their Hold ratings on Omeros this week.

The company ended the third quarter with just over $150 million of cash, equivalents and short-term investments on its balance sheet as well as accounts receivable of over $35 million.

Verdict:

The stock of Omeros has bounced up and down this year, but the company is ending 2020 on some high notes and 2021 could well be an inflection year. OMS721 should have its completed BLA accepted by the FDA in the first part of next year and, if all goes well, will be approved for this indication by year-end 2021.

Hopefully, this will the first of several indications this compound will be approved for. Omidria is a nice asset and continued sales growth will help reduce the cash burn for the company. However, peak sales are probably around $125 million for Omidria. OMS721 will determine the company’s long-term future.

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While speculative, I still like Omeros’ risk/reward profile. I am largely using covered call positions in this name using $15 call strikes of various duration. I am doing so for the following reasons.

A. I think the overall market is overbought here and due for a pullback.

B. The options on Omeros are liquid and lucrative.

C. Developmental timelines for this company always seem to take longer than initially envisioned. This is a key reason analysts are mixed on this name.

D. This strategy has worked well for me in this name over the past couple of years.

Bret Jensen is the Founder of and authors articles for the Biotech Forum, Busted IPO Forum, and Insiders Forum

Live Chat on The Biotech Forum has been dominated by discussion of these type of buy-write opportunities over the past several months. To see what I and the other season biotech investors are targeting as trading ideas real-time, just join our community at The Biotech Forum by clicking HERE.

Disclosure: I am/we are long OMER. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



Via SeekingAlpha.com

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