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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2023

or

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

For the transition period from to

Commission file number: 001-34475

OMEROS CORPORATION

(Exact name of registrant as specified in its charter)

Washington

91-1663741

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

201 Elliott Avenue West

Seattle, Washington

98119

(Address of principal executive offices)

(Zip Code)

(206676-5000

(Registrant’s telephone number, including area code)

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

(Title of each class)

(Trading symbol)

(Name of each exchange on which registered)

Common Stock, par value $0.01 per share

OMER

The Nasdaq Stock Market LLC

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

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

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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

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

As of May 3, 2023, the number of outstanding shares of the registrant’s common stock, par value $0.01 per share, was 62,828,765.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

our estimates regarding how long our existing cash, cash equivalents, short-term investments, royalty receipts and potential revenues will fund our anticipated operating expenses, capital expenditures and debt service obligations;
our expectations related to future royalties potentially payable to us under the terms of the asset purchase agreement under which we divested our former commercial ophthalmology product OMIDRIA®;
our expectations regarding clinical plans and anticipated or potential paths to regulatory approval of narsoplimab by the U.S. Food and Drug Administration (“FDA”) and the European Medicines Agency (“EMA”) in hematopoietic stem cell transplant-associated thrombotic microangiopathy (“HSCT-TMA”), immunoglobulin A (“IgA”) nephropathy, atypical hemolytic uremic syndrome (“aHUS”) and COVID-19;
whether and when a marketing authorization application (“MAA”) may be filed with the EMA for narsoplimab in any indication, and whether the EMA will grant approval for narsoplimab in any indication;
our plans for the commercial launch of narsoplimab following any regulatory approval and our estimates and expectations regarding coverage and reimbursement for any approved products;
our expectation that we will rely on contract manufacturers to manufacture narsoplimab, if approved, for commercial sale and to manufacture our drug candidates for purposes of clinical supply and in anticipation of potential commercialization;
our expectations regarding the clinical, therapeutic and competitive benefits and importance of our drug candidates;
our ability to design, initiate and/or successfully complete clinical trials and other studies for our drug candidates and our plans and expectations regarding our ongoing or planned clinical trials, including for our lead MASP-2 inhibitor narsoplimab and for our other investigational candidates, including OMS906, OMS1029 and OMS527;
with respect to our narsoplimab clinical programs, our expectations regarding: whether enrollment in any ongoing or planned clinical trial will proceed as expected; whether we can capitalize on the financial and regulatory incentives provided by orphan drug designations granted by FDA, the European Commission (“EC”), or the EMA; and whether we can capitalize on the regulatory incentives provided by fast-track or breakthrough therapy designations granted by FDA;
our ability to raise additional capital through the capital markets or through one or more corporate partnerships, equity offerings, debt financings, collaborations, licensing arrangements or asset sales;
our expectations about the commercial competition that our drug candidates, if commercialized, face or may face;

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the expected course and costs of existing claims, legal proceedings and administrative actions, our involvement in potential claims, legal proceedings and administrative actions, and the merits, potential outcomes and effects of both existing and potential claims, legal proceedings and administrative actions, as well as regulatory determinations, on our business, prospects, financial condition and results of operations;
the extent of protection that our patents provide and that our pending patent applications will provide, if patents are issued from such applications, for our technologies, programs, and drug candidates;
the factors on which we base our estimates for accounting purposes and our expectations regarding the effect of changes in accounting guidance or standards on our operating results; and
our expected financial position, performance, revenues, growth, costs and expenses, magnitude of net losses and the availability of resources.

Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks, uncertainties and other factors described in this Quarterly Report on Form 10-Q under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in our other filings with the U.S. Securities and Exchange Commission (the “SEC”). Given these risks, uncertainties and other factors, actual results or anticipated developments may not be realized or, even if substantially realized, may not have the expected consequences to or effects on our company, business or operations. Accordingly, you should not place undue reliance on these forward-looking statements, which represent our estimates and assumptions only as of the date of the filing of this Quarterly Report on Form 10-Q. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual results in subsequent periods may differ materially 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.

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OMEROS CORPORATION

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2023

INDEX

Page

Part I — Financial Information

5

Item 1.

Financial Statements (unaudited)

5

Condensed Consolidated Balance Sheets

5

Condensed Consolidated Statements of Operations and Comprehensive Loss

6

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

7

Condensed Consolidated Statements of Cash Flows

8

Notes to Condensed Consolidated Financial Statements

9

Item 2.

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

21

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

29

Item 4.

Controls and Procedures

29

Part II — Other Information

30

Item 1.

Legal Proceedings

30

Item 1A.

Risk Factors

30

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

Item 3.

Default Upon Senior Securities

30

Item 4.

Mine Safety Disclosures

30

Item 5.

Other Information

30

Item 6.

Exhibits

31

Signatures

32

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PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

OMEROS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(unaudited)

March 31, 

December 31, 

    

2023

    

2022

Assets

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

3,829

$

11,009

Short-term investments

 

367,527

 

183,909

OMIDRIA contract royalty asset, short-term

28,940

28,797

Receivables

 

10,033

 

213,221

Prepaid expense and other assets

 

6,708

 

6,300

Total current assets

 

417,037

 

443,236

OMIDRIA contract royalty asset

119,681

123,425

Right of use assets

21,025

21,762

Property and equipment, net

 

1,335

 

1,492

Restricted investments

 

1,054

 

1,054

Total assets

$

560,132

$

590,969

Liabilities and shareholders’ equity

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

6,446

$

5,989

Accrued expenses

 

30,821

 

30,551

Current portion of unsecured convertible senior notes, net

94,554

94,381

Current portion of OMIDRIA royalty obligation

2,943

1,152

Current portion of lease liabilities

 

4,427

 

4,310

Total current liabilities

 

139,191

 

136,383

Unsecured convertible senior notes, net

 

221,209

 

220,906

OMIDRIA royalty obligation

123,057

125,126

Lease liabilities, non-current

21,287

22,426

Other accrued liabilities, non-current

 

452

 

444

Commitments and contingencies (Note 10)

 

  

 

  

Shareholders’ equity:

 

  

 

  

Preferred stock, par value $0.01 per share, 20,000,000 shares authorized; none issued and outstanding at March 31, 2023 and December 31, 2022.

 

 

Common stock, par value $0.01 per share, 150,000,000 shares authorized at March 31, 2023 and December 31, 2022;62,828,765 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively.

 

628

 

628

Additional paid-in capital

 

723,726

 

720,773

Accumulated deficit

 

(669,418)

 

(635,717)

Total shareholders’ equity

 

54,936

 

85,684

Total liabilities and shareholders’ equity

$

560,132

$

590,969

See accompanying Notes to Condensed Consolidated Financial Statements

-5-

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OMEROS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share data)

(unaudited)

Three Months Ended

March 31, 

    

2023

    

2022

Costs and expenses:

 

 

  

Research and development

$

24,610

$

24,087

Selling, general and administrative

 

11,103

 

10,959

Total costs and expenses

 

35,713

 

35,046

Loss from operations

 

(35,713)

 

(35,046)

Interest expense

 

(7,933)

 

(4,941)

Interest and other income

 

3,963

 

493

Net loss from continuing operations

(39,683)

(39,494)

Net income from discontinued operations, net of tax

5,982

6,483

Net loss

$

(33,701)

$

(33,011)

Basic and diluted net income (loss) per share:

Net loss from continuing operations

$

(0.63)

$

(0.63)

Net income from discontinued operations

0.09

0.10

Net loss

$

(0.54)

$

(0.53)

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

62,828,765

62,724,775

See accompanying Notes to Condensed Consolidated Financial Statements

-6-

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OMEROS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands, except share data)

(unaudited)

Additional

Common Stock

Paid-In

Accumulated

    

  

Shares

    

Amount

    

Capital

    

Deficit

    

Total

Balance at January 1, 2022

62,628,855

$

626

$

706,288

$

(683,134)

$

23,780

Exercise of stock options and warrants

101,160

1

413

414

Stock-based compensation expense

3,892

3,892

Net loss

(33,011)

(33,011)

Balance at March 31, 2022

62,730,015

$

627

$

710,593

$

(716,145)

$

(4,925)

Balance at January 1, 2023

    

  

62,828,765

    

$  

628

    

$

720,773

    

$

(635,717)

    

$

85,684

Stock-based compensation expense

2,953

2,953

Net loss

(33,701)

(33,701)

Balance at March 31, 2023

62,828,765

$

628

$

723,726

$

(669,418)

$

54,936

See accompanying Notes to Condensed Consolidated Financial Statements

-7-

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OMEROS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

Three Months Ended March 31, 

    

2023

    

2022

Operating activities:

Net loss

$

(33,701)

$

(33,011)

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

 

 

  

Stock-based compensation expense

2,953

3,892

Non-cash interest expense on unsecured convertible debt

477

 

446

Depreciation and amortization

186

 

278

Non-cash interest earned on OMIDRIA contract royalty asset

(3,925)

(4,838)

Remeasurement on OMIDRIA contract royalty asset

(1,677)

(2,158)

Accretion on U.S. government treasury bills, net

(2,316)

Early termination of operating lease

(454)

Changes in operating assets and liabilities:

 

 

  

Receivables

 

203,188

 

21,900

Prepaid expenses and other

 

(582)

 

592

OMIDRIA contract royalty asset

9,203

13,831

Accounts payable and accrued expense

 

733

 

(15,671)

Net cash provided by (used in) operating activities

 

174,539

 

(15,193)

Investing activities:

 

  

 

  

Purchases of investments and other

(523,941)

(83,013)

Proceeds from the sale and maturities of investments

342,610

6,200

Net cash used in investing activities

 

(181,331)

 

(76,813)

Financing activities:

 

  

 

  

Principal payments on OMIDRIA royalty obligation

 

(278)

 

Principal payments on finance lease obligations

(110)

(253)

Proceeds upon exercise of stock options and warrants

 

 

414

Net cash provided by (used in) financing activities

 

(388)

 

161

Net decrease in cash and cash equivalents

 

(7,180)

 

(91,845)

Cash and cash equivalents at beginning of period

 

11,009

 

100,808

Cash and cash equivalents at end of period

$

3,829

$

8,963

Supplemental cash flow information

 

  

 

  

Cash paid for interest

$

7,933

$

5,967

See accompanying Notes to Condensed Consolidated Financial Statements

-8-

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OMEROS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1—Organization and Basis of Presentation

General

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

The lead drug candidate in our pipeline of complement-targeted therapeutics is narsoplimab, a proprietary, patented human monoclonal antibody targeting mannan-binding lectin-associated serine protease 2 (“MASP-2”), the key activator of the lectin pathway of complement. Clinical development of narsoplimab is currently focused primarily on hematopoietic stem cell transplant-associated thrombotic microangiopathy (“HSCT-TMA”) and immunoglobulin A (“IgA”) nephropathy. Our pipeline of clinical-stage development programs includes: our long-acting MASP-2 inhibitor OMS1029, our inhibitor of mannan-binding lectin-associated serine protease-3 (“MASP-3”) OMS906 and our phophodiesterase 7 (PDE7) inhibitor OMS527.

Sale of OMIDRIA Assets

On December 23, 2021, we sold our commercial product OMIDRIA and certain related assets including inventory and prepaid expenses to Rayner Surgical Inc. (“Rayner”). Rayner paid us $126.0 million in cash at closing, and we retained all outstanding accounts receivable, accounts payable and accrued expenses as of the closing date.

Under the Asset Purchase Agreement with Rayner (“Asset Purchase Agreement”), we were entitled to receive a milestone payment of $200.0 million (the “Milestone Payment”) within 30 days following an event (the “Milestone Event”) that establishes separate payment for OMIDRIA for a continuous period of at least four years when furnished in the ambulatory surgery center (“ASC”) setting. In December 2022, the Milestone Event occurred and we recorded a $200.0 million milestone receivable. We received the Milestone Payment together with accrued interest in February 2023.

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

Basis of Presentation

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

Liquidity and Capital Resources

As of March 31, 2023, we had cash, cash equivalents and short-term investments of $371.4 million and outstanding accounts receivable of $10.0 million. Our loss for the quarter ended March 31, 2023 was $33.7 million and our cash provided by operations was $174.5 million. Included in our cash provided by operations was the $200.0 million collection of the Milestone Payment.

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Historically, we have incurred net losses from continuing operations and negative operating cash flows. We have not yet established an ongoing source of revenue sufficient to cover our operating costs and, therefore, could need to raise additional capital to accomplish our business plan and to retire our outstanding convertible senior notes due in 2026. We plan to continue to fund our operations for at least the next twelve months with our existing cash and investments, royalties from Rayner and our outstanding accounts receivable. If FDA approval is granted for narsoplimab for treatment of HSCT-TMA within the next twelve months, sales of narsoplimab may also provide funds for our operations. We have a sales agreement to sell shares of our common stock, from time to time, in an “at the market” equity offering facility through which we may offer and sell shares of our common stock equaling an aggregate amount up to $150.0 million. Should it be determined to be strategically advantageous, we could pursue debt financings as well as public and private offerings of our equity securities, similar to those we have previously completed, or other strategic transactions, which may include licensing a portion of our existing technology.

Use of Estimates

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

Note 2—Significant Accounting Policies

OMIDRIA Royalties, Milestones and Contract Royalty Assets

We have rights to receive future royalties from Rayner on OMIDRIA net sales at royalty rates that vary based on geography and certain regulatory contingencies. Therefore, future OMIDRIA royalties are treated as variable consideration. The sale of OMIDRIA qualified as an asset sale under GAAP. To measure the OMIDRIA contract royalty asset we used the expected value approach which is the sum of the discounted probability-weighted royalty payments we would receive using a range of potential outcomes to the extent that it is probable that a significant reversal in the amount of cumulative income recognized will not occur. As contemplated by the Asset Purchase Agreement, the royalty rate applicable to U.S. net sales of OMIDRIA was reduced from 50% to 30% upon the occurrence, in December 2022, of the event triggering the $200.0 million Milestone Payment. Consequently, in December 2022, we revalued the OMIDRIA contract royalty asset using the 30% royalty rate on U.S. net sales and adjusted the probability-weighted outcomes to reflect the occurrence of the Milestone Event. Royalties earned are recorded as a reduction to the OMIDRIA contract royalty asset. The amount recorded in discontinued operations in future periods will reflect interest earned on the outstanding OMIDRIA contract royalty asset at an effective interest rate of 11.0% and any amounts we receive that are different from the expected royalties. The OMIDRIA contract royalty asset will be re-measured periodically using the expected value approach based on actual results and future expectations. Any required adjustment to the OMIDRIA contract royalty asset will be recorded in discontinued operations.

OMIDRIA Royalty Obligation

On September 30, 2022, we sold to DRI Healthcare Acquisitions LP (“DRI”) an interest in a portion of our future OMIDRIA royalty receipts for a purchase price of $125.0 million in cash (see “Note 8 – OMIDRIA Royalty Obligation”).

The $125.0 million cash consideration obtained is classified as a liability and is recorded as an “OMIDRIA royalty obligation” on our condensed consolidated balance sheet. The liability is being amortized over the term of the arrangement using the implied effective interest rate of 9.4% and interest expense is recorded as a component of continuing operations.

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To the extent our estimates of future royalties differ from previous estimates, we will adjust the carrying amount of the liability for future OMIDRIA royalties to the present value of the revised estimated cash flows, discounted at the original effective interest rate of 9.4% utilizing the cumulative catch-up method. The offset to the adjustment would be recognized as a component of net income (loss) from continuing operations.

Inventory

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

Right-of-Use Assets and Related Lease Liabilities

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

We record finance lease obligations 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 finance lease obligations 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.

Stock-Based Compensation

Stock-based compensation expense is recognized for all share-based payments, including grants of stock option awards and restricted stock units (“RSU”) based on estimated fair values. The fair value of our stock is calculated using the Black-Scholes valuation model, which requires judgmental assumptions around volatility, risk-free rates, forfeiture rates and expected option life. Compensation expense is recognized over the requisite service periods, which is generally the vesting period, using the straight-line method. Forfeiture expense is estimated at the time of grant and revised in subsequent periods if actual forfeitures differ from those estimates.

Income Taxes

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

Note 3—Discontinued Operations

On December 23, 2021, we sold OMIDRIA and certain related assets including inventory and prepaid expenses to Rayner.

Under the Asset Purchase Agreement, the achievement of the Milestone Event in December 2022 triggered a $200.0 million Milestone Payment from Rayner and a reduction in the U.S. royalty rate from 50% to 30% on OMIDRIA net sales until the expiration or termination of the last issued and unexpired U.S. patent, which we expect to occur no earlier than 2033. The Milestone Event resulted in recognition of the $200.0 million Milestone Payment, which we received in

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February 2023. Upon the occurrence of certain events described in the Asset Purchase Agreement, including during any specific period in which OMIDRIA is no longer eligible for separate payment, the U.S. base royalty rate would be further reduced to 10%.

The sale of OMIDRIA was recorded as an asset sale. Additionally, the results of operations related to OMIDRIA are recorded as income from discontinued operations for all periods presented in the condensed consolidated statements of operations and comprehensive loss.

The following schedule presents a rollforward of the OMIDRIA contract royalty asset (in thousands):

OMIDRIA contract royalty asset at December 31, 2022

$

152,222

Royalties earned

(9,203)

Interest earned on OMIDRIA contract royalty asset

3,925

Remeasurement adjustments

1,677

OMIDRIA contract royalty asset at March 31, 2023

$

148,621

Net income from discontinued operations is as follows:

Three Months Ended

March 31,

    

2023

    

2022

(In thousands)

Interest earned on OMIDRIA contract royalty asset

$

3,925

$

4,838

Remeasurement adjustments

1,677

2,158

Other income (expense), net

380

(513)

Net income from discontinued operations, net of tax

$

5,982

$

6,483

Cash flow from discontinued operations is as follows:

Three Months Ended

March 31,

    

2023

    

2022

(In thousands)

Net cash provided by discontinued operations from operating activities

$

213,876

$

27,616

Net cash provided by discontinued operations primarily represents royalties earned and the $200.0 million Milestone Payment that we received from Rayner in February 2023.

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Note 4—Net Loss Per Share

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

Potentially dilutive securities excluded from Diluted EPS are as follows:

Three Months Ended

March 31, 

    

2023

    

2022

2026 Notes convertible to common stock (1)

12,172,008

12,172,008

2023 Notes convertible to common stock (1)

4,941,739

4,941,739

Outstanding options to purchase common stock

17,454

 

4,429

Outstanding restricted stock units

92,250

222,000

Total potentially dilutive shares excluded from net loss per share

17,223,451

 

17,340,176

(1)The 2023 Notes and 2026 Notes (defined below) are subject to capped call arrangements that potentially reduce the dilutive effect as described in “Note 7 — Unsecured Convertible Senior Notes.” Any potential impact of the capped call arrangements is excluded from this table.

Note 5—Certain Balance Sheet Accounts

OMIDRIA Contract Royalty Asset

The OMIDRIA contract royalty asset consists of the following:

March 31, 

December 31, 

    

2023

    

2022

(In thousands)

Short-term contract royalty asset

$

28,940

$

28,797

Long-term contract royalty asset

119,681

123,425

Total OMIDRIA contract royalty asset

$

148,621

$

152,222

Receivables

Receivables consist of the following:

March 31, 

December 31, 

    

2023

    

2022

(In thousands)

OMIDRIA royalty

$

7,600

$

12,966

Employee retention tax credit

2,131

Sublease and other

302

255

OMIDRIA milestone

 

 

200,000

Total receivables

$

10,033

$

213,221

In March 2023, we received notification of an employee retention tax credit of $2.1 million from the Internal Revenue Service due to the Coronavirus Aid, Relief and Economic Security (“CARES”) Act. We received an amount equal to the tax credit in April 2023.

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Property and Equipment, Net

Property and equipment, net consists of the following:

    

March 31, 

    

December 31, 

2023

2022

(In thousands)

Equipment under finance lease obligations

$

5,977

$

6,204

Laboratory equipment

 

3,164

 

3,135

Computer equipment

 

1,076

 

1,076

Office equipment and furniture

 

625

 

625

Total cost

 

10,842

 

11,040

Less accumulated depreciation and amortization

 

(9,507)

 

(9,548)

Total property and equipment, net

$

1,335

$

1,492

For the three months ended March 31, 2023 and 2022, depreciation and amortization expense was $0.2 million and $0.3 million, respectively.

Accrued Expenses

Accrued expenses consists of the following:

    

March 31, 

    

December 31, 

2023

2022

(In thousands)

Employee compensation

$

8,778

$

6,665

Clinical trials

6,486

5,536

Income taxes payable

4,871

4,871

Interest payable

3,703

5,172

Consulting and professional fees

3,686

4,425

Contract research and development

2,630

3,209

Other accrued expenses

 

667

 

673

Total accrued expenses

$

30,821

$

30,551

Note 6—Investments and Fair-Value Measurements

All of our investments are held in our name and are classified as short-term and held-to-maturity on the accompanying condensed consolidated balance sheets. Investment income for the three months ended March 31, 2023 and December 31, 2022 consists of interest earned of $3.4 million and $2.2 million, respectively, and is included in other income.

The following tables summarize our investments:

    

March 31, 2023

    

Amortized Cost

    

Gross Unrealized Gains/(Losses)

    

Estimated Fair Value

(In thousands)

U.S. government securities classified as short-term investments

$

293,645

$

205

$

293,850

Money-market funds classified as short-term investments

73,882

73,882

Total short-term investments

367,527

205

367,732

Certificate of deposit classified as non-current restricted investments

1,054

1,054

Total

$

368,581

$

205

$

368,786

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December 31, 2022

    

Amortized Cost

    

Gross Unrealized Gains/(Losses)

    

Estimated Fair Value

(In thousands)

U.S. government securities classified as short-term investments

$

99,027

$

22

$

99,049

Money-market funds classified as short-term investments

84,882

84,882

Total short-term investments

183,909

22

183,931

Certificate of deposit classified as non-current restricted investments

1,054

1,054

Total

$

184,963

$

22

$

184,985

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

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

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

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

Our fair value hierarchy for our financial assets and liabilities are as follows:

March 31, 2023

    

Level 1

    

Level 2

    

Level 3

    

Total

(In thousands)

Assets:

U.S. government securities classified as short-term investments

$

293,850

$

$

$

293,850

Money-market funds classified as short-term investments

73,882

73,882

Total short-term investments

367,732

367,732

Certificate of deposit classified as non-current restricted investments

 

1,054

 

 

 

1,054

Total

$

368,786

$

$

$

368,786

    

December 31, 2022

    

Level 1

    

Level 2

    

Level 3

    

Total

(In thousands)

Assets:

U.S. government securities classified as short-term investments

$

99,049

$

$

$

99,049

Money-market funds classified as short-term investments

84,882

84,882

Total short-term investments

183,931

183,931

Certificate of deposit classified as non-current restricted investments

 

1,054

 

 

 

1,054

Total

$

184,985

$

$

$

184,985

Cash held in demand deposit accounts of $3.8 million and $11.0 million is excluded from our fair-value hierarchy disclosure as of March 31, 2023 and December 31, 2022, respectively. The carrying amounts reported in the accompanying condensed consolidated balance sheets for receivables, accounts payable and other current monetary assets and liabilities approximate fair value.

See “Note 7—Unsecured Convertible Senior Notes” and “Note 8—OMIDRIA Royalty Obligation” for the carrying amount and estimated fair value of our outstanding convertible senior notes and the OMIDRIA royalty obligation.

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Note 7—Unsecured Convertible Senior Notes

We carry $95.0 million in aggregate principal on our 6.25% Convertible Senior Notes (the “2023 Notes”) and $225.0 million in aggregate principal on our 5.25% Convertible Senior Notes (the “2026 Notes”) as shown below:

Balance as of March 31, 2023

    

2023 Notes

    

2026 Notes

    

Total

(In thousands)

Principal amount

$

95,000

$

225,030

$

320,030

Unamortized debt issuance costs

 

(446)

 

(3,821)

 

(4,267)

Total unsecured convertible senior notes, net

$

94,554

$

221,209

$

315,763

Fair value of outstanding unsecured convertible senior notes (1)

$

93,575

$

141,769

Balance as of December 31, 2022

    

2023 Notes

    

2026 Notes

    

Total

(In thousands)

Principal amount

$

95,000

$

225,030

$

320,030

Unamortized discount

 

(619)

 

(4,124)

 

(4,743)

Total unsecured convertible senior notes, net

$

94,381

$

220,906

$

315,287

Fair value of outstanding unsecured convertible senior notes (1)

$

92,031

$

118,141

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

2023 Unsecured Convertible Senior Notes

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

The unamortized debt issuance costs of $0.4 million as of March 31, 2023 will be amortized to interest expense at an effective interest rate of 7.0% over the remaining term.

Subject to the satisfaction of certain conditions, the 2023 Notes are convertible into cash, shares of our common stock or a combination thereof, as we elect at our sole discretion. The initial conversion rate is 52.0183 shares of our common stock per $1,000 of note principal (equivalent to an initial conversion price of approximately $19.22 per share of common stock), which equals approximately 4.9 million shares of common stock issuable upon conversion, subject to adjustment in certain circumstances.

To reduce the dilutive impact or potential cash expenditure associated with the conversion of the 2023 Notes, we entered into a capped call transaction (the “2023 Capped Call”), which covers the number of shares of our common stock underlying the 2023 Notes when our common stock share price is trading between the initial conversion price of $19.22 and $28.84. However, should the market price of our common stock exceed the $28.84 cap, then the conversion of the 2023 notes could have a dilutive impact or may require a cash expenditure to the extent the market price exceeds the cap price. In connection with the partial repurchase of the 2023 Notes, we entered into a capped call termination contract to unwind a proportionate amount of the 2023 Capped Call. As of March 31, 2023, approximately 4.9 million shares remained outstanding on the 2023 Capped Call.

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

    

Three Months Ended

March 31,

2023

    

2022

(In thousands)

Contractual interest expense

$

1,484

$

1,484

Amortization of debt issuance costs

 

173

 

161

Total

$

1,657

$

1,645

2026 Unsecured Convertible Senior Notes

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

The unamortized debt issuance costs of $3.8 million as of March 31, 2023 will be amortized to interest expense at an effective interest rate of 5.9% over the remaining term.

Subject to the satisfaction of certain conditions, the 2026 Notes are convertible into cash, shares of our common stock or a combination thereof, as we elect at our sole discretion. The initial conversion rate is 54.0906 shares of our common stock per $1,000 of note principal (equivalent to an initial conversion price of approximately $18.4875 per share of common stock), which equals approximately 12.2 million shares of common stock issuable upon conversion, subject to adjustment in certain circumstances.

To reduce the dilutive impact or potential cash expenditure associated with the conversion of the 2026 Notes, we entered into capped call transactions (the “2026 Capped Calls”), which cover the number of shares of our common stock underlying the 2026 Notes when our common stock share price is trading between the initial conversion price of $18.49 and $26.10. However, should the market price of our common stock exceed the $26.10 cap, then the conversion of the 2026 Notes would have a dilutive impact or may require a cash expenditure to the extent the market price exceeds the cap price. As of March 31, 2023, approximately 12.2 million shares remained outstanding on the 2026 Capped Call.

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

Three Months Ended

March 31,

    

2023

    

2022

(In thousands)

Contractual interest expense

$

2,954

$

2,954

Amortization of debt issuance costs

 

304

 

285

Total

$

3,258

$

3,239

Future Minimum Principal Payments

Future minimum principal payments for the 2023 Notes and 2026 Notes as of March 31, 2023 are as follows (in thousands):

2023

    

$

95,000

2024

 

2025

 

2026

 

225,030

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

 

$

320,030

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Note 8—OMIDRIA Royalty Obligation

On September 30, 2022, we sold to DRI an interest in our future OMIDRIA royalty receipts and received $125.0 million in cash consideration which was recorded as an OMIDRIA royalty obligation on our condensed consolidated balance sheet. DRI is entitled to receive royalties on OMIDRIA net sales through December 31, 2030, subject to annual caps. DRI receives their prorated monthly cap amount before we receive any royalty proceeds. DRI is not entitled to carry-forward nor recoup any shortfall if the royalties paid by Rayner for an annual period are less than the cap amount applicable to each discrete calendar year. Additionally, DRI has no recourse to or security interest in our assets other than our OMIDRIA royalty receipts, and we retain all royalty receipts in excess of the respective cap in any given calendar year. At March 31, 2023, the maximum remaining amount that DRI is entitled to receive through the term of the agreement (December 31, 2030) is $183.5 million, which, if fully paid, would be at an implied effective interest rate of 9.4% over the entire term of the loan.

As of March 31, 2023, the OMIDRIA royalty obligation’s carrying value approximates fair value, which is a Level 3 estimate as its valuation requires substantial judgment and estimation of factors that are not currently observable in the market. As of March 31, 2023, the obligation’s carrying value approximates fair value.

For the three months ended March 31, 2023, we incurred $3.0 million of cash interest expense.

As of March 31, 2023, the maximum scheduled principal and interest payments (based on an implied effective interest rate of 9.4%) are as follows:

Total

    

Principal

    

Interest

    

Annual Cap

(In thousands)

2023

$

874

$

8,876

$

9,750

2024

 

8,576

 

11,424

20,000

2025

 

14,641

 

10,359

25,000

2026

 

16,081

 

8,919

25,000

2027

 

17,664

 

7,336

25,000

Thereafter

 

68,164

 

10,586

78,750

Total scheduled payments

$

126,000

$

57,500

$

183,500

Note 9—Leases

We have an operating lease for our office and laboratory facilities with an initial term that ends in November 2027 and two options to extend the lease term by an additional five years each. Restricted investments of $1.1 million represent the security deposit on our office and laboratory facilities. On January 14, 2022, we entered into an agreement with our landlord to early terminate a portion of the rentable square footage of our office and laboratory facilities, which reduced the right of use asset by $4.7 million and related liability by $5.2 million. We recorded a non-cash gain of $0.5 million upon early termination of this portion of the lease. In addition, we carry various finance lease obligations for laboratory equipment.

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Supplemental lease information is as follows:

Three Months Ended

March 31, 

    

2023

    

2022

(In thousands)

Lease cost

  

    

  

Operating lease cost

$

1,633

$

1,196

Finance lease cost:

 

 

  

Amortization

 

118

 

197

Interest

 

51

 

56

Variable lease cost

 

790

 

860

Sublease income

 

(375)

 

(491)

Net lease cost

$

2,217

$

1,818

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

Three Months Ended

March 31, 

    

2023

    

2022

(In thousands)

Cash paid for amounts included in the measurement of lease liabilities

Cash payments for operating leases

$

1,780

$

1,803

Cash payments for financing leases

$

152

 

$

253

Note 10—Commitments and Contingencies

Contracts

We have various agreements with third parties that collectively require payment of termination fees totaling $26.1 million as of March 31, 2023 if we cancel the work within specific time frames, either prior to commencing or during performance of the contracted services.

Development Milestones and Product Royalties

We have licensed a variety of intellectual property from third parties that we are currently developing or may develop in the future. These licenses may require milestone payments during the clinical development processes or on approval of commercial sale as well as low single- to low double-digit royalties on the net income or net sales of the product. For the three months ended March 31, 2023 and March 31, 2022, development milestone expenses were insignificant. Should narsoplimab be approved, we would owe milestone payments to development partners and be obligated to pay low single-digit royalties on net sales of the product.

Note 11—Shareholders’ Deficit

Common Stock and Warrants

On March 1, 2021, we entered into a sales agreement to sell shares of our common stock having an aggregate offering price of up to $150.0 million, from time to time, through an “at the market” equity offering program. As of March 31, 2023, we have not sold any shares under this program.

As of March 31, 2023, warrants to purchase 200,000 shares of our common stock remained outstanding with an exercise price of $23.00 per share. The warrants expired without being exercised on April 12, 2023.

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Note 12—Stock-Based Compensation

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

Stock-based compensation is as follows:

March 31, 

    

2023

    

2022

(In thousands)

Continuing operations

Research and development

$

1,272

$

1,715

Selling, general and administrative

 

1,722

 

2,177

Total stock-based compensation in continuing operations

2,994

3,892

Discontinued operations

(41)

Total stock-based compensation

$

2,953

$

3,892

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

    

Three Months Ended

March 31, 2023

Estimated weighted-average fair value

$

2.34

Weighted-average assumptions:

 

Expected volatility

 

94

%  

Expected life, in years

 

6.1

Risk-free interest rate

 

3.71

%  

Expected dividend yield

 

%  

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

    

    

Weighted- 

    

    

Average 

Aggregate 

Exercise 

Remaining 

Intrinsic 

Options 

Price per 

Contractual Life 

Value 

Outstanding

Share

(In years)

(In thousands)

Balance at December 31, 2022

 

13,872,973

$

11.02

 

  

 

  

Granted

 

38,500

 

3.00

 

  

 

  

Forfeited

 

(195,052)

 

10.78

 

  

 

  

Balance at March 31, 2023

 

13,716,421

$

11.00

 

5.6

$

2,172

Vested and expected to vest at March 31, 2023

 

13,342,280

$

11.08

 

5.5

$

1,982

Exercisable at March 31, 2023

 

10,142,013

$

12.06

 

4.5

$

380

As of March 31, 2023, there were 3.6 million unvested options outstanding that will vest over a weighted-average period of 2.1 years. The total estimated compensation expense yet to be recognized on outstanding options is $17.0 million.

The Company had 92,250 unvested RSUs outstanding as of March 31, 2023 that vest on December 1, 2023. The weighted average grant date fair value per share was $7.53.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

Overview

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

Complement Programs: Lectin Pathway / MASP-2

The lead drug candidate in our pipeline of complement-targeted therapeutics is narsoplimab (OMS721), a proprietary, patented human monoclonal antibody targeting mannan-binding lectin-associated serine protease 2 (“MASP-2”), the key activator of the lectin pathway of complement. Clinical development of narsoplimab is currently focused primarily on hematopoietic stem cell transplant-associated thrombotic microangiopathy (“HSCT-TMA”) and immunoglobulin A (“IgA”) nephropathy.

We expect to read out 36-week proteinuria data from our Phase 3 clinical trial evaluating narsoplimab for the treatment of IgA nephropathy, ARTEMIS-IGAN, later this year.

We successfully completed a pivotal clinical trial for narsoplimab in HSCT-TMA and previously submitted to the U.S. Food and Drug Administration (“FDA”) a biologics licensing application (“BLA”) seeking marketing approval for narsoplimab in this indication. In late 2021, FDA issued a complete response letter (“CRL”) with respect to the BLA in which the agency indicated that additional information would be needed to support regulatory approval. We appealed FDA’s decision to issue the CRL through a formal dispute resolution process that concluded in late 2022. Although our appeal was denied, the decision identified potential paths for resubmission of the BLA based on both response data and survival data from the completed pivotal trial versus a historical control group, with or without an independent literature analysis. We have submitted to the review division at FDA a proposed plan to assess already existing clinical trial data and external data on both response rate and survival and are scheduled to meet with the division to confirm the additional information required to be included in the resubmission to support approval of the BLA. There can be no guarantee that the specific requirements for resubmission, when determined through interaction with the FDA review division, will be satisfactory in terms of the time and/or expenditure required, and there can be no guarantee that any resubmission will result in approval of narsoplimab for HSCT-TMA.

We are also developing OMS1029, a long-acting, next-generation antibody targeting MASP-2 and the lectin pathway. Dosing of all cohorts in a single-ascending dose Phase 1 clinical trial of OMS1029 was successfully completed in early 2023. OMS1029 was well tolerated with no safety concerns identified. Preliminary pharmacokinetic (“PK”) and pharmacodynamic (“PD”) data show dose-proportional exposure and sustained lectin pathway inhibition, consistent with potentially quarterly intravenous or subcutaneous dosing. We expect to initiate this summer a Phase 1 multiple-ascending-dose study of OMS1029 in healthy subjects.

Complement Programs: Alternative Pathway / MASP-3

Our pipeline of clinical-stage complement-targeted therapeutic candidates also includes OMS906, a proprietary, patented monoclonal antibody targeting mannan-binding lectin-associated serine protease 3 (“MASP-3”), the key activator of the alternative pathway of complement. We believe OMS906 has the potential to treat a wide range of alternative pathway-related diseases and that its attributes favorably differentiate OMS906 from other marketed and in-development alternative pathway inhibitors. Clinical development of OMS906 is currently focused on rapidly obtaining proof-of-concept data in multiple alternative pathway-related disorders, including complement 3 glomerulopathy

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(“C3G”), a rare chronic kidney disease, and paroxysmal nocturnal hemoglobinuria (“PNH”), a rare and life-threatening hemolytic blood disorder.

In April 2023, we announced positive results from a pre-specified interim analysis of our Phase 1b clinical trial of OMS906 in complement-inhibitor-naïve adults with PNH and, in May 2023, we announced updated data from the ongoing trial. Statistically significant and clinically meaningful improvements were observed in all measured markers of hemolysis, including hemoglobin and lactate dehydrogenase. No patients were reported to have had a clinical breakthrough of PNH or a thrombotic event, and none were reported to require a transfusion while receiving OMS906 treatment. Based on pharmacokinetic data from a successful Phase 1 single-ascending-dose study of OMS906 in healthy subjects and the interim data from our Phase 1b clinical trial in treatment-naïve PNH patients, we are planning a dosing frequency of once quarterly, either intravenously or subcutaneously.

We have two additional Phase 1b clinical programs ongoing. One, evaluating OMS906 in PNH patients who have had an unsatisfactory response to the C5 inhibitor ravulizumab, is enrolling and dosing of OMS906 has inititated. The second, also underway, is evaluating OMS906 in patients with C3G.

PDE7 Inhibitor Program

Our development pipeline also includes OMS527, our phosphodiesterase 7 (“PDE7”) inhibitor program focused on addiction and movement disorders. In April 2023, we were awarded a grant from the National Institute on Drug Abuse, part of the National Institutes of Health, to develop our lead orally administered PDE7 inhibitor compound, for which we have successfully completed a Phase 1 study, for the treatment of cocaine use disorder (“CUD”). The grant amount, a total of $6.69 million over three years, is intended to support preclinical cocaine interaction/toxicology studies to assess safety of the therapeutic candidate in the presence of concomitant cocaine administration, as well as an in-patient, placebo-controlled clinical study evaluating the safety and effectiveness of OMS527 in adults with CUD who receive concurrent intravenous cocaine. Investigators at Emory University are also evaluating OMS527 in a clinically predictive primate model of levodopa-induced dyskinesias, a common and debilitating side effect of long-term levodopa dosing in patients with Parkinson’s disease. Data will be publicly disclosed after the filing of patent applications, as appropriate.

Pre-clinical Programs

We also have a diverse group of preclinical programs, including GPR174, a novel target in immuno-oncology that modulates a new cancer immunity axis that we discovered. Inhibitors of GPR174 are part of our proprietary G protein-coupled receptor (“GPCR”) platform through which we control 54 GPCR drug targets and their corresponding compounds. We are also developing novel adoptive T cell/CAR-T therapies and novel immunotherapeutics and cancer vaccines as part of our immuno-oncology platform.

OMIDRIA

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

On December 23, 2021, we sold our commercial product OMIDRIA and certain related assets, including inventory and prepaid expenses to Rayner Surgical Inc. (“Rayner”). Rayner paid us $126.0 million in cash at the closing and we retained all outstanding accounts receivable, accounts payable, and accrued expenses as of the closing date.

Under the Asset Purchase Agreement with Rayner (the “Asset Purchase Agreement”), we were entitled to receive a milestone payment of $200.0 million (the “Milestone Payment”) within 30 days following an event (the “Milestone Event”) that establishes separate payment for OMIDRIA for a continuous period of at least four years when furnished in the ambulatory surgery center (“ASC”) setting. The Milestone Event occurred in December 2022 and we recorded a $200.0 million milestone receivable. We received the Milestone Payment together with accrued interest in February 2023.

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Under the Asset Purchase Agreement, the occurrence of the Milestone Event in December 2022 triggered a reduction in the U.S. royalty rate from 50% to 30% on OMIDRIA net sales until the expiration or termination of the last issued and unexpired U.S. patent, which we expect to occur no earlier than 2033. Upon the occurrence of certain events described in the Asset Purchase Agreement, including during any specific period in which OMIDRIA is no longer eligible for separate payment (i.e., included in the packaged payment rate for the surgical procedure) under Medicare Part B, the U.S. base royalty rate would be reduced to 10%. Pursuant to legislation enacted in late 2022, we expect separate payment for OMIDRIA under Medicare Part B to extend until at least January 1, 2028.

On September 30, 2022, we sold to DRI Healthcare Acquisitions LP (“DRI”) an interest in a portion of our future OMIDRIA royalty receipts and received $125.0 million in cash consideration, which we recorded as a liability on our condensed consolidated balance sheet. The liability is being amortized over the term of the arrangement using the implied effective interest rate of 9.4%. Interest expense is recorded as a component of continuing operations. As of March 31, 2023, the maximum future payout that DRI is entitled to receive through the remaining term of the agreement is $183.5 million. The term of the agreement with DRI runs through December 31, 2030, and our payments to DRI will not total $125.0 million until August 2028 at the earliest.

Financial Summary

Our loss for the quarter ended March 31, 2023 was $33.7 million. As of March 31, 2023, we had cash, cash equivalents and short-term investments of $371.4 million and outstanding accounts receivable of $10.0 million available to fund operations and debt service. We have a $95.0 million principal payment due on our 2023 Notes which we expect

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either to pay from our existing funds or to refinance. Our cash provided by operations for the quarter ended March 31, 2023 was $174.5 million which includes the collection of our $200.0 million Milestone Payment.

Results of Operations

Research and Development Expenses

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

Three Months Ended

March 31, 

    

2023

    

2022

(In thousands)

Continuing research and development expenses:

Direct external expenses:

Clinical research and development:

 

  

 

  

MASP-2 program - OMS721 (narsoplimab)

$

8,953

$

9,244

MASP-3 program - OMS906

2,511

1,302

MASP-2 program - OMS1029

 

1,320

 

Other

 

44

 

127

Total clinical research and development

 

12,828

 

10,673

Preclinical research and development

 

909

 

2,744

Total direct external expenses

 

13,737

 

13,417

Internal overhead and other expenses

 

9,601

 

8,955

Stock-based compensation expenses

 

1,272

 

1,715

Total continuing research and development expenses

$

24,610

$

24,087

Clinical research and development expenses increased $2.2 million for the three months ended March 31, 2023 compared to the prior year primarily due to bioanalytical laboratory, proof-of-concept and investigational site start-up expenses related to OMS906, and transitioning of OMS1029 from preclinical research and development to clinical research and development upon the initiation of human trials during the third quarter of 2022.

The $1.8 million decrease in our preclinical research and development expenses for the three months ended March 31, 2023 as compared to the same period in 2022 is due primarily to the transitioning of OMS1029 from preclinical research and development to clinical research and development during the third quarter of 2022.

Internal overhead and other expenses increased $0.6 million for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 due to additional employee-related costs. This increase was partially offset by the recognition of an employee retention tax credit from the Internal Revenue Service resulting from the passage and implementation of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act.

The $0.4 million decrease in stock-based compensation for the three months ended March 31, 2023 compared to the same period in the prior year is due to the valuation and timing of the vesting of employee stock options.

We expect overall research and development costs will increase in the second quarter of 2023 compared to the first quarter of 2023 due to the timing of certain clinical and manufacturing activities.

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

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