Omeros Looks Like a Good Biotech Play
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Disclosure: My family and I own positions in Omeros.
I don't normally like to talk about individual stocks, but occasionally I do like to invest in companies that either represent a great value or present an excellent opportunity for growth.
Omeros Corp (OMER) is a clinical stage biopharmaceutical company that engages in discovering, developing and commercializing products targeting inflammation, coagulopathies and disorders of the central nervous system. The company's products are derived from its proprietary PharmacoSurgery platform designed to improve clinical outcomes of patients undergoing arthroscopic, ophthalmological, urological and other surgical and medical procedures. It also has a deep and diverse pipeline of preclinical programs as well as a platform capable of unlocking new drug targets. The company was founded by Gregory A. Demopulos and Pamela Pierce Palmer on June 16, 1994 and is headquartered in Seattle, WA.
I was a little unhappy that they recently did a secondary offering at $10 when the stock was trading at $13, which resulted in a big one day decline in the stock price, but they do need to continue to fund their development pipeline, which is very interesting as you'll see below. Over the past four quarters through June 30, 2012, they had a cash "burn rate" of ($26) million. If you use the most recent (June 30, 2012) quarter's cash burn rate of ($9) million, Omeros has a ($36) million annualized cash burn rate. After the recent stock sale (which netted proceeds of $32 million plus cash on hand of slightly more than $7 million), the Company will have approximately $40 million in cash. This should support it for the next twelve months, assuming the annualized burn rate of $36 million. This will need be confirmed by a "clean" audit report in their December 31, 2012 annual report. Below is the statement of operations for the most recent quarter:
OMEROS CORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS(In thousands, except share and per share data)(unaudited)
Three Months Ended
June 30,Six Months Ended
June 30, 2012201120122011Revenue $1,526$1,155 $3,022 $2,394Operating expenses: Research and development 7,558 4,077 14,804 9,502 General and administrative 2,212 2,027 4,534 4,291
Total operating expenses 9,770 6,104 19,338 13,793
Loss from operations (8,244) (4,949) (16,316) (11,399) Investment income 6 14 18 31 Interest expense (453) (527) (947) (820) Other income (expense), net 152 171 (189) 355
Net loss $(8,539) $(5,291) $(17,434) $(11,833)
Comprehensive loss $(8,539) $(5,291) $(17,434) $(11,833)
Basic and diluted net loss per share $(0.38) $(0.24) $(0.78) $(0.54)
Weighted-average shares used to compute basic and diluted net loss per share 22,466,540 22,167,629 22,450,722 22,112,110
The Company is currently in late stages of development of two drugs that reduce inflammation and promote recovery during and after eye and knee surgery. The Company recently announced a successful initial Phase 3 trial for one compound (OMS 302), the eye surgery candidate. OMS 302 and another compound (OMS 103HP, the knee surgery candidate) are in Phase 3 trials.
Below is a quick summary of how clinical trials for new drugs work:
Before a drug can be approved for sale to the public there is a set of clinical tests that must be performed. There is the Pre-Clinical Research Stage. Here the drug is synthesized and purified. Animal tests are performed, and institutional review boards assess the studies and make recommendations on how to proceed. If the recommendations are positive, then an application to the FDA occurs and clinical tests begin.
Phase 1: clinical studies in this phase represent the first time that an IND is tested on humans either healthy volunteers or sometimes patients. The purpose of these studies is study in a clinical setting the metabolism, structure-reactivity relationships, mechanism ofaction, and side effects of the drug in humans. If possible, phase 1 studies are used to determine how effective the drug is. Phase 1 studies are usually conducted on 20 to 80 subjects.
The purpose of phase 2 clinical trials is to determine the efficacy of a drug to treat patients with a specific disease or condition, as well as learn about common short-term side effects or risks. These studies are conducted on a larger scale than phase 1 studies and typically involve several hundred patients.
Phase 3 clinical trials provide more information about the effects and safety of the drug and they allow scientists to extrapolate the results of clinical studies to the general population. Phase 3 studies generally involve several hundred to several thousand people.
Completion of Phase 3 trials means that the Company can request New Drug Application approval from the Federal Drug Administration. If approved, the Company will be able to market the drug and generate revenue, either by making and selling the drug itself or licensing it out. It can take 8+ years to develop a new drug through the entire clinical development process through approval, so you have to be patient (no pun intended) and have adequate capital to fund the development effort.
Eight years is a long time to review a drug. Some patients, especially terminally ill patients, don't particularly care if the drug meets high standards of safety. They don't have the time. Taking any drug, in their view, is better than the alternative. So today's policies also allow some investigational drugs even before they are approved for marketing.
These new policies called "expanded access" protocols include the Treatment Investigational New Drug (IND) application and the parallel track mechanism. Both tracks allow promising drugs, not yet approved for marketing, to be used in moderately unrestricted studies where the intent is not only to learn more about the drug, especially about its safety, but also to provide treatment for people with no real alternative. But these expanded access protocols still require clinical researchers to formally investigate the drug in well-controlled studies and to supply some evidence that the drug is likely to be helpful.
Below is a graphic showing Omeros' current product pipeline (note that four drug candidates are planned for the IND application described above):
Product Pipeline
Of greatest interest is the Company's program for unlocking "orphan receptors," the last but certainly not least item on the pipeline above. Orphan receptors are very valuable for drug development, as the Company describes below:
"GPCRs, which mediate key physiological processes in the body, are one of the most valuable families of drug targets. According to Insight Pharma Reports, GPCR-targeting drugs represent 30 to 40 percent of marketed pharmaceuticals. Examples include Claritin® (allergy), Zantac® (ulcers and reflux), OxyContin® (pain), Lopressor® (high blood pressure), Imitrex® (migraine headache), Reglan® (nausea) and Abilify® (schizophrenia, bipolar disease and depression) as well as all other antihistamines, opioids, alpha and beta blockers, serotonergics and dopaminergics.
The industry focuses its GPCR drug discovery efforts mostly on non-sensory GPCRs. Of the 363 total non-sensory GPCRs, approximately 240 have known ligands (molecules that bind the receptors) with nearly half of those targeted either by marketed drugs (46 GPCRs) or by drugs in development (about 70 GPCRs). There are approximately 120 GPCRs with no known ligands, which are termed "orphan GPCRs." Without a known ligand, drug development for a given receptor is extremely difficult.
Omeros uses its proprietary high-throughput CRA to identify small-molecule agonists and antagonists for orphan GPCRs, unlocking them to drug development. Omeros believes that it is the first to possess the capability to unlock orphan GPCRs in high-throughput, and that currently there is no other comparable technology. Unlocking these receptors could lead to the development of drugs that act at these new targets. There is a broad range of indications linked to orphan GPCRs including cardiovascular disease, asthma, diabetes, pain, obesity, Alzheimer's disease, Parkinson's disease, multiple sclerosis, schizophrenia, learning and cognitive disorders, autism, osteoporosis, osteoarthritis and several forms of cancer."
Biotech stocks are certainly very risky investments and this one is no exception. However, Omeros has a deep product pipeline for an 8 year old company. They also have a good strategy and execution so far and some of the drug candidates could be game changers (i.e., Addiction, Schizophrenia).
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