Omeros Corp (OMER) 2016 Q3 法說會逐字稿

Good afternoon, and welcome to today's conference call for Omeros Corporation. (Operator Instructions) Please be advised that this call is being recorded at the company's request, and a replay would be available on the company's website for one week from today.

I'll turn over the call to Jennifer Williams, Investor Relations for Omeros.

Good afternoon, and thank you for joining the call today. I'd like to remind you that some of the statements that will be made on the call today will be forward-looking. These statements are based on management's beliefs and expectations as of today only and are subject to change.

All forward-looking statements involve risks and uncertainties that could cause the company's actual results to differ materially. Please refer to the Risk Factors section of the company's filings with the SEC for a discussion of these risks and uncertainties.

Now I would like to turn the call over to Dr. Greg Demopulos, Chairman and CEO of Omeros.

Thank you, Jennifer, and good afternoon, everyone. Also with me today is Mike Jacobsen, our Chief Accounting Officer. Thanks to all of you for joining the call today. I know it's a busy time. I'll begin with a corporate update, and then Mike will provide an overview of our third quarter financial results. We do have time reserved for questions following that overview.

The third quarter has been a productive one for Omeros, and we have a lot to discuss today. So with that, let's start off with OMIDRIA. For the sixth consecutive quarter since its commercial launch, sales of OMIDRIA have achieved double-digit growth. Our total revenues for the third quarter were $11.3 million, all of which resulted from sales of OMIDRIA, our FDA-approved product for cataract surgery.

OMIDRIA revenues in the third quarter increased $1.3 million or 13% over the prior quarter. This represents sell-in or sales to distributors. Sell-through or unit sales to our customers were up 18% compared to the previous quarter, with September showing 21% growth over June. Both July and the first half of August demonstrated the sales variability expected in the summer months. The accelerating growth that we see coming out of the summer is a positive indicator for what we expect going forward.

This sell-through acceleration is driven by continuing increases in new accounts and in vials purchased per account quarter-over-quarter. The primary reason for the difference between sell-in and sell-through for the third quarter was our focus on expanding use of OMIDRIA within the hospital setting. This sector had previously been underrepresented in our sales as we focused initially on ambulatory surgery centers that perform cataract procedures.

From a sales perspective, it takes longer to achieve access and adoption in hospitals, mainly because of the need to service and satisfy numerous health care professionals within a given hospital setting and to obtain the multiple administrative approvals required to introduce a new drug. Hospitals though, especially teaching hospitals, can often have a greater impact as long-term customers, given their ability to influence other practices in their communities and importantly, because of their role in training residents.

For at least several years after entering practice, graduating residents usually incorporate the methods, procedures and products that they used during their training. This is especially true of surgical residents, including ophthalmic surgery residents.

I am pleased to report that we were successful in increasing our penetration in the hospitals, and that the relative balance of OMIDRIA sales between the ASCs and hospitals now directly mirrors the national distribution of cataract surgery procedures across these two settings. Approximately 65% of OMIDRIA sales are in ASCs and 35% are in hospitals. To achieve that balance, the quantity of OMIDRIA vials sold to hospitals grew by 41% from the second quarter to the third. This had an understated impact on our net revenues due to the fact that several hospitals that serve indigent patients are able to acquire OMIDRIA at the discounted 340B price. This results in an increased gross-to-net spread during the past quarter.

We expect that our hospital sales will contribute increased growth in both unit and dollar volumes in the future as we continue to penetrate highly respected and influential teaching institutions similar to those that are already using OMIDRIA, including Massachusetts Eye and Ear, Yale University Medical Center, Henry Ford Health System, Duke University Hospital, Wake Forest Medical Center and medical centers affiliated with the universities of Virginia, North Carolina and Texas. At all of these sites, OMIDRIA is already on formulary, with several more P&T approvals expected soon.

Other strategies that we have implemented in the market over the past few months have also begun to yield positive results, driving an accelerated level of growth in participating accounts. For example, at the beginning of June, we rolled out a program for holding OMIDRIA inventory on consignment. After implementation and a period of evaluation by the centers, the first ambulatory surgery centers implemented consignment at the end of July.

As a group, the accounts that are now on consignment are utilizing 50% more OMIDRIA than they were three months ago. Going forward, we expect more and more accounts to move to consignment. Consignment is only part of our strategy to ramp up utilization among accounts that have begun purchasing a moderate volume of OMIDRIA. By providing a set of services like consignment that allow facilities to use OMIDRIA in a larger percentage of their patient populations, we are focused on driving centers to adopt OMIDRIA as standard of use in cataract surgery.

As more accounts utilize these programs, we expect that the accelerated growth that we are seeing will extend to an increasingly large share of our customer base. Throughout the third quarter, we also focused on amplifying the message of the clinical importance of OMIDRIA, a message that is resonating with both surgeons and their facilities. The clinical benefits of OMIDRIA are a major driver in expanding its use nationally.

We understand that five manuscripts underscoring the real-world benefits of OMIDRIA have been submitted or are already accepted for publication in peer-reviewed journals, and a sixth is being finalized for submission. The manuscripts include results from independent studies of OMIDRIA and describe a host of clear clinical advantages of OMIDRIA compared to the use of epinephrine, reduced complication rates; reduced use of costly and iris-damaging pupil expanding devices; faster surgical times, allowing increased patient throughput; greater ease in performing femtosecond laser cases; and better visual acuity following surgery. All of these differences meeting statistical significance.

At the annual meetings of the American Academy of Ophthalmology in October, in addition to the frequent testimonials from podium speakers, a lunch seminar led by a group of preeminent opinion leaders in cataract surgery focused on the increasingly recognized OMIDRIA benefits for both surgeons and their patients. A packed auditorium of attendees participated in a seminar, which included videos and discussion of real-world cases presented by each of the experts comparing the advantages of using OMIDRIA to their respective previous standards of care.

One of our clinical efforts now is to focus on the importance of the anti-inflammatory effect of OMIDRIA, not only during surgery but postoperatively. The message that the ketorolac in OMIDRIA prevents intraoperative pupil constriction and postoperative pain is well understood and accepted. Now additional data have been generated that further underscore the importance of the anti-inflammatory action of OMIDRIA, and experts are proposing that use of OMIDRIA can obviate the need for pre- and postoperative topical NSAID drops in patients undergoing cataract surgery. These topical drops can be expensive and compliance is always a challenge.

We have learned that a letter to the editor is currently in press in the Journal of Ocular Pharmacology and Therapeutics, discussing OMIDRIA versus topical NSAID drops, and the full manuscript detailing the data is being finalized for submission.

Reimbursement for OMIDRIA also continues to expand. 100% of Medicare Administrative Contractors reimburse for OMIDRIA and commercial payers as well as Medicare Advantage continue to reimburse for the product. Customers are becoming increasingly comfortable with OMIDRIAssure, our reimbursement assistance program, and are making greater use of its services and benefits on behalf of their patients.

Collectively, the strategic investments made over the third quarter have produced results. Based on the most recent weekly data, we currently are generating OMIDRIA net sales at an annualized run rate in excess of $55 million, and we expect to continue our broad-based sales growth across both ASCs and hospitals.

In the interest of time, let's now turn to our pipeline, which recently has generated a steady stream of positive data. We'll start with our antibody OMS721, which targets MASP-2, the effector enzyme of the lectin pathway of the complement system, a key component of the immune response. As many of you know, we have three OMS721 programs currently in progress, a Phase 3 program in atypical hemolytic uremic syndrome or aHUS; a Phase 2 program in complement-mediated thrombotic microangiopathies or TMAs; and another Phase 2 program in patients with complement-associated renal diseases including IgA nephropathy, membranous nephropathy, C3 glomerulopathy and lupus nephritis.

As you know, these are all serious diseases, many of which have no approved treatment. Based on data and what we are learning from investigators, patients who were expected to die from their diseases are alive today following treatment with OMS721.

Here are a few highlights from our OMS721 program. In October, we announced statistically significant positive data from our Phase 2 renal disease program in both IgA nephropathy and membranous nephropathy. OMS721 significantly improved key endpoints of renal function, and patients achieved partial remission with just 12 weeks of dosing.

IgA nephropathy and membranous nephropathy frequently lead to end-stage renal disease, and there currently is no approved treatment for either of them. We plan to present the Phase 2 data at the European Renal Association-European Dialysis Transplant Association Annual Congress in June 2017.

Given the data seen in patients with renal disease, we met with the FDA. Based on that meeting, we are pursuing breakthrough therapy designation for OMS721 in IgA nephropathy. We also have requested Fast Track and Orphan Drug Designations from the FDA for OMS721 in the same indication. If granted, any or all of these designations are expected to expedite our upcoming Phase 3 program for OMS721 in IgA nephropathy.

Also in October, we announced statistically significant positive Phase 2 clinical data for OMS721 in patients with hematopoietic stem cell transplant-associated TMA. Here, OMS721 delivered clinically meaningful improvement in measures of red blood cell destruction, specifically lactate dehydrogenase and haptoglobin levels. We expect that the data will be presented in February at the Tandem Meeting of the American Society of Blood and Marrow Transplantation and the Center for International Blood and Marrow Transplant Research.

Severe stem cell transplant-associated TMAs carry a mortality rate, a very high mortality rate. And as with the kidney disorders that we are targeting, there really is no approved treatment for this disorder either. Based on discussions with the FDA, we are also pursuing breakthrough therapy designation for OMS721 in stem cell transplant-associated TMAs. FDA has already granted Orphan Drug status for OMS721 broadly in TMAs, including those related to stem cell transplants.

In addition, we intend to request Fast Track Designation for OMS721 in this indication. We also plan to discuss with FDA and international regulatory agencies the design of a single OMS721 Phase 3 trial for stem cell transplant-associated TMA, which we expect to begin enrolling next year. OMS721 also demonstrated positive data in an animal model of stroke, statistically significantly limiting brain infarct size and preserving neurological function.

The OMS721 compassionate use program continues to provide treatment to patients across the U.S., Europe and Asia who are not eligible for our clinical trials and who do not have or have exhausted other treatment options. This program has provided OMS721 treatment to patients with aHUS, stem cell transplant-associated TMA and C3 glomerulopathy, including patients who have failed or not tolerated Soliris treatment. Beneficial treatment effects have been reported across all indications.

We have some recent new information as well, which we have not previously disclosed publicly, and that is our excitement about the potential for OMS721 in C3 glomerulopathy. Recently, in a patient with C3 glomerulopathy, findings from kidney biopsies demonstrate substantial improvement, with markedly reduced renal C3 deposits, following treatment with OMS721. This particular patient is significant as well for the fact that he had accelerated progression of his disease while being treated with Soliris. The incidence of C3 glomerulopathy is approximately twice that of aHUS, and a high percentage of these patients advance to end-stage renal disease. We are working to develop additional data in C3 glomerulopathy to define a path forward for OMS721 in this serious unmet medical need.

Behind all of these advances in our MASP-2 program is the backdrop of our Phase 3 program for OMS721 in patients with aHUS, which also has received Fast Track Designation from the FDA. Based on guidance from FDA and from the European Medicines Agency, our OMS721 Phase 3 clinical program for aHUS will consist of one single-arm clinical trial, which will be applicable for approval from both agencies. We plan to open enrollment for that aHUS Phase 3 trial later this year.

So to recap for OMS721, during the third quarter, we substantially expanded the late-stage clinical indications for our drug. We now have five shots on goal -- aHUS; stem cell transplant-associated TMA; IgA nephropathy; membranous nephropathy; and as of recently, C3 glomerulopathy. Our objective is to secure marketing approval for OMS721 as quickly as possible in any or all of these indications.

Next, let's discuss the other half of our MASP program, OMS906, which also made significant progress during the third quarter. OMS906 targets MASP-3, which is required for activation of the complement systems alternative pathway.

In August, we announced two sets of important data from our OMS906 program. First, results in a well-established animal model of arthritis known to be mediated by the alternative pathway show that our antibody delivered statistically significant reductions of 86% and 90% in both disease incidence and severity, respectively. Second, in a well-established animal model associated with paroxysmal nocturnal hemoglobinuria or PNH, OMS906, again with statistical significance, improved the survival of red blood cells by approximately fourfold when compared to a C5 inhibitor.

Of course, PNS -- PNH is one of the indications that we are targeting for OMS906, given that it appears to have a significant advantage over any C5 inhibitor. While a C5 inhibitor can block only the intravascular homolysis associated with PNH, the data show that OMS906 blocks both the intra- and extravascular homolysis seen in PNH patients. We are finalizing selection of our lead and backup molecules as we initiate the process for scale-up in preparation for clinical trials.

Now let's turn to our addiction programs, OMS405, our PPAR-gamma agonist program, and OMS527, our phosphodiesterase 7 or PDE7 inhibitor program for addiction and compulsive disorders. Omeros has broad issued and pending patents covering the use of any PPAR-gamma agonist or any PDE7 inhibitor in the treatment of any form of addiction or compulsive disorder.

In October, we announced positive results from a Phase 2 clinical trial evaluating the effects of a PPAR-gamma agonist in patients with cocaine use disorder. The trial demonstrates that the PPAR-gamma agonist reduces craving and improves the integrity of brain white matter in patients with cocaine use disorder. There currently are no approved medications to treat cocaine addiction, and it is estimated that over 15 million people worldwide suffer from the disorder.

Earlier this month, we also announced positive data from a Phase 2 clinical trial evaluating the effects of a PPAR-gamma agonist in heroin-dependent subjects. Heroin abuse affects an estimated 9 million people worldwide. The clinical trial demonstrated statistically significant reduction in drug craving and in measures of anxiety in heroin users maintained on the sublingual combination of buprenorphine and naloxone, with up to three weeks of treatment with the PPAR-gamma agonist.

The clinical findings from the study substantiate those seen in the study of cocaine addiction and are particularly meaningful given the relatively short duration of treatment and the statistically significant improvement seen on top of the combination of buprenorphine and naloxone, one of the most frequently prescribed medications for heroin addiction, with annual worldwide sales in excess of $1.1 billion.

The other half of our addiction program is OMS527 which inhibits PDE7. PDE7 is considered one of the most exciting targets for addiction. And Omeros, through its issued patent position, controls the use of any PDE7 inhibitor for the treatment of any form of addiction or compulsive disorder.

We are finalizing the manuscript for submission to a premier peer-reviewed journal that details the in-vivo efficacy data as well as the mechanism of action of PDE7 in addiction and compulsions. With consistently positive preclinical results in cocaine, alcohol, nicotine, and opioids as well as in binge eating, the data show that our PDE7 inhibitors decrease craving as well as both cue- and stress-induced relapse. Importantly, studies demonstrate that PDE7 inhibitors accomplish these effects without depressing the reward system, a problem that seriously hinders the use of currently approved anti-addiction agents. IND-enabling studies are underway and we plan to submit an IND or CTA to begin clinical trials with OMS527 in the latter part of next year.

Turning to our OMS824 program. Most of you know that this is our phosphodiesterase 10 or PDE10 inhibitor in development for the treatment of Huntington's disease and other cognitive disorders. Pfizer apparently has completed enrollment of its large Phase 2 clinical trial on Huntington's disease, and we are awaiting release of the trial results. Based on those data, we will make decisions with respect to further development plans for OMS824. Pfizer's PDE10 inhibitor requires twice-daily dosing as opposed to OMS824, which is administered once daily.

Let's wrap up the overview of our development progress with a brief update on our GPCR program. We are advancing preclinical programs on a number of exciting targets for which Omeros alone has compounds. The indications include triple-negative breast cancer, demyelinating diseases such as multiple sclerosis, appetite and eating disorders, osteoporosis and seasonal affective disorder.

We also are excited about our progress on GPR174, a receptor that represents a novel target for enhancing the immune response and a unique approach to immune therapies for cancer. Compound optimization in animal studies are ongoing, and we expect to share additional information on this specific program before year-end.

Prior to turning the call over to Mike for a summary of our third quarter financials, I'd like to briefly finish by running through the highlights of our recent debt restructuring with CRG. As many of you know, subsequent to the end of the third quarter, we closed $125 million secured credit facility and have already drawn the first tranche of $80 million, using the majority of the proceeds to retire our previously existing debt.

From a corporate perspective, the new CRG loan has provided us with multiple advantages compared to our prior credit facility. First, we have deferred all loan principal payments until at least March 2021 and potentially through the full six-year term of the loan if certain milestones are met.

Second, we have cut the restricted cash requirements by at least half. The CRG loan requires us to maintain only $5 million of cash and cash equivalents at all times, and there are no covenants under the CRG loan that can increase the restricted cash requirement.

Third, we have substantially reduced the annual revenue covenants while also providing an alternative means to satisfy them by achieving market capitalization thresholds. In addition, any covenant shortfall is addressed by paying the amount of the shortfall toward the outstanding principal.

Finally, because of the interest deferral, our cash interest payment has remained effectively unchanged from that required under our previous loan despite our adding approximately $8 million in working capital. So with current funds on hand and annualizing OMIDRIA net revenues and expenses at their current levels only, we anticipate that we have in excess of 12 months of operating capital.

With that, Mike, please lead us through our third quarter financial results.

Thanks, Greg. As Greg noted, our overall GAAP revenue for the third quarter was $11.3 million, and our net loss was $14 million or $0.34 per share. Our net loss includes the noncash expense of $3.1 million or $0.08 per share.

All of our third quarter revenue was from OMIDRIA product sales and based on sell-in or our sales to distributors, is an increase of $1.3 million or 13% from the $10 million we achieved in the second quarter. Sell-through units or the units sold from the wholesalers to our customers, increased 18% over the second quarter.

During the third quarter, our net revenue per vial sold decreased slightly from the prior quarter as a result of our increase in hospital sales, which increases our 340B customers and the related discounts that come along with 340B.

The growing use of our OMIDRIAssure program also contributed to this difference as ASCs and hospitals use OMIDRIA across a broader spectrum of cataract procedures. We expect that the net revenue per vial of OMIDRIA will continue to increase slightly as we gain additional traction in the 340B hospitals, as OMIDRIAssure usage continues to increase and as we implement other programs to drive broader usage of OMIDRIA at both new and existing ASCs and hospitals.

Our total costs and operating expenses for the third quarter were $23.3 million, an increase of $2.4 million from the second quarter of this year. The increase was primarily related to additional OMS721 clinical and manufacturing activities and incremental costs associated with the Par lawsuit. These increases were partially offset by a decrease in OMIDRIA marketing costs associated with reduced activity during the summer months.

Turning to the balance sheet. As of the end of the third quarter, we had $47.4 million in cash available for general operations and $10.8 million in restricted cash, $10 million of which was tied to our loan with Oxford Finance and East West Bank. As Greg mentioned, in October, we entered into a six-year secured term loan agreement with CRG. On November 3, we borrowed $80 million under the loan and used $75.7 million of the proceeds to retire our then outstanding loan with Oxford and East West Bank.

The CRG loan allows us to borrow an additional $25 million if we achieve at least $18 million of OMIDRIA revenues or a minimum market capitalization during any three-month period before June 30, 2017, and then an additional $20 million if we achieve OMIDRIA revenue of at least $25 million or a minimum market capitalization during any three-month period before December 31, 2017.

The CRG loan is secured by substantially all of our assets, including intellectual property, and requires us to maintain $5 million of cash and cash equivalents at all times, which is a $5 million reduction in the restricted cash required under our previously outstanding loan.

The CRG loan contains annual OMIDRIA revenue minimums. The minimum OMIDRIA revenue requirement for 2016 is $35 million, which would require revenues of $6.5 million in the fourth quarter of 2016 in order for us to satisfy the covenant for this year. The minimum OMIDRIA revenue requirement for 2017 is $55 million.

As Greg mentioned, any annual OMIDRIA revenue requirement or -- the revenue requirements can also be satisfied by achieving market capitalization thresholds. Also, should we have a revenue shortfall, the shortfall can be satisfied by making principal payments on the loan equal to the shortfall with proceeds from an equity or subordinated debt financing.

With that, let's take a look ahead at what we expect in the fourth quarter regarding our operating expenses. With regards to research and development, we anticipate the majority of our research and development expenses will be related to our Phase 3 and Phase 2 clinical programs for OMS721 and the continuation of the technical transfer of OMIDRIA commercial manufacturing to Hospira.

Research and development expenses are likely to grow during Q4 compared to Q3. Selling, general and administrative expenses for 2016 are expected to increase in Q4 compared to Q3 due to the legal costs associated with enforcing our patents against Par and additional costs related to headcount and expanded marketing programs.

With regards to the new CRG loan, we anticipate we will record a $5.6 million loss on early extinguishment of debt, primarily associated with fully amortizing the remaining discounts on the Oxford, East West loan. With that, I'd like to turn the call back over to Greg.

Thanks, Mike. Let's open up the call to questions.

(Operator Instructions) And our first question comes from Tyler Van Buren of Cowen and Company. Your line is now open.

Just a question related to the pipeline on 721. I guess, first on aHUS, when will we get -- well, so first of all, will the study be conducted in both the U.S. and Europe or just one of those territories? And based upon the study design, can you help us better understand what the dosing regimen might be? And also if you look at the Soliris registration trials, I believe that they enrolled patients specifically with complement mutations. So it would be helpful to understand maybe any type of inclusion criteria around pathology of disease in these patients.

Yes. First of all, the trials will have sites for the Phase 3 program both in the U.S. and ex-U.S., that includes Europe and Asia and potentially other regions of the U.S. as well -- I'm sorry, of the world as well. Your other question was with respect to dosing. We've not put out the dose other than to say that we will be running that study, we fully expect, with a subcutaneous dose for 721.

With respect to the inclusion criteria, I think that was your other question. We are enrolling both Soliris-naive and Soliris-treated patients. I do not expect that we are limiting them with respect to genetic mutations. In fact, frankly, we'd be looking for a specific genetic mutation.

As you know, there is a genetic mutation most prevalent in Asians, frankly highest in the Japanese population, about 4% of the Japanese population, which has a mutation which does -- it's a mutation in C5, which does not allow Soliris to bind C5. So this obviously would have no impact or should have no impact on OMS721. Does that help you?

Okay. Yes, that's super helpful. And what are we thinking about approximate timeline to data? And will we potentially see an update on the Phase 2 data that we've seen so far prior to that?

Yes, we've not put out the timeline to completion of the study. You had mentioned the U.S. and European designs for the study. As we have made public, the Europeans guided to a 40-patient trial in total, and we would be looking for something similar to that with accelerated approval in the U.S.

Let us get the study beginning to enroll. As I said, we plan to be open for enrollment in that study later this year. And once we start to enroll that study and see how our sites are doing, we have a large number of sites lined up, we would be able to speak more credibly, I think, about timelines.

Okay, that's great. And with respect to the kidney program, specifically in the IgA nephropathy, it was great to see the reductions on those endpoints in those patients with, obviously, a very severe disease. But curious with respect to the study. Maybe you could just help us understand the lead-in period for the study with respect to steroid use? Were they on stable, flat levels of steroids for the months leading up to the study? Or was that kind of [open ended] --

Yes, they were on levels of -- they were on stable levels of -- or stable dosing of steroids for a number of months prior to initiation of 721. So in addition to the improvements that we saw in the end points, I think we also mentioned in the press release that we had reduced the levels of steroids that the patients were taking.

That's great. And lastly on R&D expenses. Given all the activity, how should we expect things to change for the following next few years and particularly next year?

Yes, again, as Mike mentioned, we do expect that the OpEx will increase. It's hard not to when we now have really five different indications that we're exploring for OMS721. But remember, these are likely going to be single studies, registration studies for each of those indications. And that's going to help, I think, manage those costs.

We'll continue to make all of you aware, keep you up-to-date on what those expenses we expect will look like. But I can say, if you look historically, we've been able to run pretty complex clinical trials and still keep a pretty good lid on our operating expenses. That is something that I think is ingrained here, and I really don't see that changing either philosophically or practically here. So I think we'll continue to manage the expense as well.

And our next question comes from Steve Brozak of WBB Securities. Your line is now open.

This is obviously a very exciting time for Omeros. But I did have two questions that frankly, I'll bifurcate them. The first one is with OMIDRIA. Correct me if I'm wrong, but you had said basically that you are running at a $55 million revenue run rate, is that correct?

I'm saying that yes, at our current annualized run rate, weekly sales -- and remember, we're looking at weekly sales, really, weekly. At our current annualized sales, we're running at about a $55 million net revenue run rate, and we expect that to continue to increase.

Now going along with that -- because obviously one thing that piqued my curiosity was the fact that you're looking at the hospital sales and the differential between -- the differential that is hospital sales and the stickiness of that sales. Can you give us much color as you can on that? Because obviously, you had started talking about it but I would like to know more about that because obviously, that helps in terms of building the run rate into the future.

It's a good question, Steve. Yes. We really considered and consider Q3 as, in good part, an investment in the future of OMIDRIA. As I mentioned in the initial comments, we had really focused on ASCs, and the hospitals were, in good part, left underrepresented, underserved by OMIDRIA. And that's really a function of just how long it takes to get hospitals up and running when you have the multiple layers of approval, you have the P&T committees. Most or all of that is really missing in an ASC or absent in an ASC. So that the ASCs allow really quite rapid uptake.

But our focus for Q3 on our commercial team was to get after the hospitals because just as you're pointing out, there is a stickiness associated with hospitals. Once that drug is through the P&T committee and once it's in use, that product tends to be pretty sticky within the hospital setting. You also have the recurring benefit, which is the -- which are residents.

As I think I mentioned and I think we all know that -- and having been one, I can speak firsthand about this. When you leave residency or any fellowship, you tend to do, at least for several years, what you were trained to do in your training program. And if you have used a specific drug and you see the benefits of that when you leave that training program, you know you really do use the same equipment, you use the same drugs, it's everything that you're familiar with, you understand those benefits.

And so really, what this allows us to do is if we're in the hospitals, every year, we are seeding new customers, which are then leaving those residency programs and moving into private practice or into other academic centers, carrying with them the standard of use, hopefully, for OMIDRIA. And it's a very effective way to grow the business, and that's why we focus there. And I think as we said, Q2 to Q3 grew by 41%. We're very pleased with that growth.

And I think I also might have said this but perhaps too quickly, which when you look at our overall sales, ASCs versus hospitals, those sales for OMIDRIA now directly mirror or are effectively directly superimposable on that same split for cataract surgery across the country, 65% in ASCs, 35% in HOPDs or hospital outpatient departments. That's the split for cataract surgery, that is now the split for OMIDRIA sales. And I think that really needs to be underscored because I think that's an important point.

No. Look, that obviously gives you building blocks to look at. So obviously, these next quarters are going to be terribly important and obviously very, very refreshing in terms of the data. Let me switch from that part to 721 because you'd mentioned something. Obviously, you've got one, two -- five shots on goal, as you put it, and they're orphan. The one question I had in terms of these single studies, because the one thing, obviously, people always want to make sure is what are the precursor information on the single studies that you've seen in the past, for instance, from -- in some cases, competing products? What are we looking at in terms of regulatory acceptance? And what are the hurdles that you're looking at? And again obviously, this all leads back to the cost of the studies, which you really probably don't want to tell us about, but it also leads to the acceptance of the data from the studies and how you can go forward on that. And just one follow-up after that.

Well, I think I'm going to answer this at a high level because I think it will take a little longer than we probably have to go through each one of them. But certainly, we expect to qualify for expedited programs across all of those indications. We already know where we stand with aHUS. As I think we've released publicly, we have already had discussions about IgA nephropathy with the FDA. We have already had discussions with the FDA also about hematopoietic stem cell-associated TMA, and we certainly will expect to be back at some point talking with the FDA about membranous and about C3 glomerulopathy as well.

So I think with respect to precedent, aHUS, that's pretty clear, Soliris is a clear precedent there. And frankly, we're quite pleased with what the FDA, and EMA frankly, proposed relative to what Alexion had to do for Soliris.

When you also look at these other indications, remember, for all of those other indications, all four of them, there is no approved treatment, so we're going to be obviously very interested in pursuing breakthrough designation. In fact, we've already had discussions with the FDA about breakthrough both for IgA and for stem cell transplant-related TMA.

There are other products, as you know, that have been in development for IgA. So with respect to end point, there have been discussions. We believe that will allow us to lever end points for OMS721. There is a pretty significant difference, too, between -- there's been a question that I received with respect to, "Gee, doesn't IgA take a long time? Aren't those long studies?" That really is a function of how the drug works, and there's a specific reference to a very difficult-to-enroll study. What one needs to understand there is largely that, that drug holds the progression of IgA stable and then waits for the control patients to move away to worsen beyond that sort of stable IgA progression or halted progression on the treatment side.

That's a very different situation than what we're seeing so far with OMS721, which with 12 weeks of dosing, we're knocking down both the urine albumin-to-creatinine ratios and also the 24-hour proteinurias. So it's a very different situation. We think we'll be able to enroll these expeditiously, and again, across all of them, we expect that we're going to be able to take advantage of an expedited approval process.

And you're actually -- just my last part of this question and I'll hop back in the queue. You had mentioned, you're dealing with highly sophisticated clinicians here that are laser-like focused, again, I'll use that word, in these indications. What kind of feedback do you think you're starting to see? Because obviously, the data that you're coming back with is different than what would be expected, and the response from the regulators are as good as you could ask for. So what do you think the clinicians are seeing? And obviously, you've got a compassionate use vehicle as well, but what are your thoughts there on the clinician sophistication in terms of when you actually do start to get closer to everything you're looking at, what do you expect to see there based on the feedback you've already had?

Yes, very quickly, I think the answer to that is we're seeing excitement. We're seeing excitement and enthusiasm. It's manifest in the number of requests we get for compassionate use. And that's compassionate use for patients who, for one reason or another, don't qualify for our clinical trials. It also includes compassionate use for patients who have completed the clinical trial but their docs want to keep them -- their treating physicians want to keep them on the drug because of the benefits that they're seeing.

So I think -- and as an example, just the C3 glomerulopathy patient, that information came to us from an investigator who had seen those biopsy data. So I think it's a safe comment for me to make that there is significant enthusiasm, there's significant excitement across these indications for what 721 is doing.

As I did say, it's pretty clear, we certainly believe, investigators certainly believe that 721 is truly saving lives. And that's a pretty -- that's a pretty daunting statement. It also is a pretty wonderful one. And all of us here are very excited about the prospects for the drug.

And our next question comes from Serge Belanger of Needham & Company. Your line is now open.

Just two really quick questions for me. First one on OMIDRIA. Can you talk a little bit more about the sales in the third quarter? You mentioned there was some summer slowdown, but I guess, give us a little more details in what you saw in growth re-acceleration coming out of the quarter to give us confidence that we'll see growth that matches a little bit more what we saw in the second quarter.

Yes. I think there is a summer slowdown associated with surgical procedures, surgical products. Many speak of it. I think we experienced it. July and the first half of August were pretty slow and variable, right, spotty. Orders from accounts would be larger, and then effectively diminish or disappear for a bit and then come back. And what we found was that those were likely tied to vacations or -- not only for the surgeons but for patients and just decreased patient numbers. Second half of August, those numbers started to pick up. They continued accelerating through September and they've continued to do so.

I think I noted that in September, we had a 21% increase over June, so on that three-quarter basis -- I'm sorry, on that three-month basis. So yes, we do expect that the increase coming out of the summer months is going to continue. As I said, that our current annualized run rate based on net sales only is in excess of that $55 million, so clearly, we've continued to grow, and we expect we will continue to do so.

Okay, I think in the press release, you mentioned that after the CRG debt facility, I guess you have a pro forma cash balance of around $55 million and that provides you about a 12-month runway. Just want to know what that includes in terms of taking some of these shot on goals forward. For the OMS721 that's five of them, and there's a few more.

So yes, it's a good question. What we said there was holding our -- with cash on hand, holding our current revenues fixed, so not growing them, just holding them fixed and holding our OpEx fixed, we had in excess -- we've got at least 12 months of working capital. I do not expect -- and again, this is not guidance, this is simply my statement. I certainly don't expect that OMIDRIA sales are going to stay fixed where they currently are.

The product is gaining traction. We're seeing it in the hospitals, we're seeing it in the ASCs, we're seeing it in the very large facilities where a large number of procedures are done. The clinical advantages are clear. The docs understand that well. And interestingly, the administrators are beginning to understand that well also, and I think that's serving us very well. But that statement is based on holding everything fixed where we are, including OpEx.

OpEx will increase. As with the kind of opportunities we have on 721 and other drugs, we're clearly going to prosecute those opportunities. I think that we can do that in a cost-effective way. I think again, based on track history, we've done quite a good job, I think would be an understatement. We've done quite a good job of managing expenses and moving programs forward. I don't see any change in our ability to do that with these programs as well.

And our next question comes from Jason Kolbert of Maxim. Your line is now open.

I'm calling for Jason. This is Dr. Lauren Chung. I have a couple of questions. One is OMIDRIA sales effort OUS, and secondly, OMIDRIA's FDA-required clinical trial in pediatric clinical study and where that is and when do we expect to see the data? And a little more update on OMS824 in Huntington's disease.

Okay. Let me first answer your question about ex-U.S. We do have sales that we expect to begin this quarter in the Middle East, and we will provide an update on that once those are initiated and when we have something substantial to say about it. But we do expect sales to begin in the Middle East this quarter.

With respect to Europe, our objective has always been to build the U.S. markets, to drive better terms, pricing in Europe. We continue to hold to that same strategy, and we will update everyone when we have something to report on Europe.

With respect to the pediatric study, I do expect that there will be upcoming news that we'll be putting out on that pediatric study.

What specifically was the question on 824? I didn't catch that question --

Just clinical update on when we expect to see more progress in that -- those studies.

Yes, with respect to 824, this has been a program where we have not wanted to repeat what Pfizer has already done. Pfizer is running a very good-sized and complex study, a Phase 2 program on their PDE10 inhibitor, according to clinicaltrials.gov. And I have really no better information than you do just by accessing that. But the information that we have based on what is public is that Pfizer apparently has completed enrollment in that study. So we are expecting -- don't know if they've had data lock yet, but we are expecting data from that study at some point in the relatively near future.

Based on those data, we'll make a decision about how we want to progress with respect to our PDE10 inhibitor. As part of that, frankly, we're also looking Takeda's PDE10 study in schizophrenia and again assessing what those data look like and will look like relative to our OMS824.

And just lastly on the compassionate use for OMS721. Is it being used right now in all five of those indications that you mentioned?

I think, boy, this would be a better question for our clinical team. I do know that we have patients on -- in compassionate use who have the following indications -- aHUS, stem cell transplant-related TMAs, C3 glomerulopathy. I don't believe that we have a patient currently on compassionate use for IgA, although I know there are -- have been requests that have come in for continued treatment with 721 for IgA and I -- that we may have a similar situation for membranous, I just frankly don't recall or did not know.

And our next question comes from Elemer Piros of Cantor. Your line is now open.

What I'd like to ask you, have you noticed any attrition, some accounts that stopped ordering for some reason?

What we have seen is sort of a temporary attrition. So what we'll see are patients -- I'm sorry, are facilities who are ordering. And some of these -- and it's not a large number but we are certainly on top of it. Some of these patients may have delays in reimbursement. And based on those delayed reimbursements will sort of suspend ordering until they see that those reimbursements have been cleared, have been received and everybody's comfortable, then they reorder again.

So I think that's -- we have seen that occasionally and we do everything we can through our OMIDRIAssure program, also through our reimbursement team, to facilitate in any way we can and assist the facilities in obtaining the appropriate reimbursements.

And do you see OMIDRIAssure growing linearly, proportionately to overall sales?

It's good question, and I don't have a good answer for you. I know that OMIDRIAssure is growing, and the use of it is becoming more facile and the facilities are becoming more comfortable with the use of OMIDRIAssure. So I think it's becoming more seamless and as a result of that, and frankly, as a result of the increased volumes that we're selling, we're seeing an increased utilization of OMIDRIAssure. Whether that is frankly directly linear or whether there is some curve to that slope, I can't answer, Elemer. I would have to go speak to our clinical and commercial teams to get you that answer, but it's -- both are growing.

Okay, okay. So the fact -- what would be the explanation for the difference between volume growth and revenue growth? Is it almost entirely due to the fact that you have introduced the product to hospitals this quarter?

Yes, I mean, primarily, that's the reason. Remember, we have worked very hard to protect ASP and we've done a very good job of it. With respect to our fees, what we are able to characterize as bona fides, we have worked assiduously, I would say, to protect our ASP. You know that we do not take an ASP hit when we sell either to government agencies, VAs or under the 340B program. It does not affect our ASP in any way but it does affect revenue.

There is a discount that 340B has received that is government mandated at about 23.9%, I think 23%-something. And then we have actually increased that discount somewhat modestly for the 340B facilities, all 340B facilities. So that does hit our gross-to-net spread.

Okay, okay. And I have just one OMS721 question. The patients that you reported on, the aHUS patients, are they continuously being treated? And can they just roll into the Phase 3 trial? Or have they been treated for a period of time and now they are waiting for the sites to open up for the Phase 3?

No, remember that we have several stages in our current aHUS trial. And so we have built into the protocol the ability to treat patients, aHUS patients, for longer term. And it is possible that those patients would roll into the Phase 3 clinical trial. How many of them we would roll in, we would have to see because they'd have to meet all of the inclusion, exclusion criteria, which will be similar, but there could be some differences there and we'll have to see how many we can meet.

And I wanted to make just one more point on that OMIDRIA question that you asked because I think I see where you're -- I want to make sure I'm answering your question. I want to be clear that our focus on hospitals is not out of a desire to lose money. So the reason that we're focused on the hospitals is because once we're in there, we are selling broadly. And once you're in some, you are selling in others. And it is -- we can take a bit of a hit in terms of the revenue per hospital, but overall, given cost of goods and everything else that comes to bear in this calculation, clearly, it is a commercially viable, not just viable, but commercially very attractive approach for us to be selling into the hospitals, and that's why we're focused there as well.

And our next question comes from Thomas Yip of FBR & Company. Your line is now open.

Greg, congratulations on a very eventful third quarter 2016 for both Omeros and 721 specifically. First, a couple of questions about OMIDRIA. You mentioned that OMIDRIA as of now has $55 million annualized revenue based on weekly sales run rate. Did you measure this run rate? You mentioned slower sales in the summer months, so did you measure this run rate in, say, August or September?

We probably did. I mean, I think we've given -- those are included in the data that we provided. Those were in the $11.3 million. What we're reporting now is effectively a snapshot of where we currently are running. And as I mentioned, I think, in response to Serge's question, we found July and the first half of August to be relatively spotty, and just the variability, sales continued to grow over the second quarter but it was variable. When we came out of the first half of August, moving into the second half of August, we stabilized and those sales just continued to grow.

So again, what I'm giving you with that "in excess of $55 million" is effectively, Thomas, a snapshot of where we currently stand on a net revenue basis.

Sure. That makes sense, and it's good to see growth pick up in the fourth quarter. With that said, are there any updates on ex-U.S. markets that OMIDRIA can tap into in 2017?

Again, yes, it's good question. We expect that we will have sales in Q4, don't expect those to be enormous sales coming out of the Middle East. We're going to be ramping up in the Middle East, but we expect those sales to begin in Q4 and then move through obviously, 2017 and beyond.

With respect to Europe, we really don't discuss our partnering efforts other than that we do maintain a presence in Europe. We're maintaining a presence in Europe for a reason, and that is that we do expect to commercialize OMIDRIA in Europe and potentially in other regions. So with that, I'll tell you we'll update you when we've got something, something more meaningful to tell you.

Sure. That's reasonable. One final question, just want to make sure we understand the pro forma cash calculation correctly. So you ended the quarter with $47.4 million and then $10.8 million in restricted cash. So with the new loan agreement that will be in addition -- an addition of $3 million in that cash plus $5 million is now freed up from the $10.8 million in restricted cash, am I --

You got it. So that puts you with another $8 million, which puts you at about $50 million -- $55 million, $55.5 million.

And the next question comes from Liana Moussatos of Wedbush Securities. Your line is now open.

Congratulations on all your progress, pipeline expansion. So with all of these clinical trials going on, which ones are going to have data releases in 2017?

Oh, boy. Now you've got me having to think about just specifically what -- I expect that we -- you will see additional data coming out of the 721 program in 2017. I think that there could certainly be, in the nearer term, data coming out of the renal program, there could be data coming out of the stem cell program. The aHUS program will be enrolling in Phase 3. I'm not sure whether our clinical team will be putting out data from the aHUS program next year. But I think that we would expect to see, if not out of aHUS -- and again, we'd want to defer to clinical on that. But I would certainly expect that there's a reasonable likelihood that we would see data coming out of the renal program, data coming out of the stem cell program.

What about addiction?

That's a possibility as well. And when addiction, you mean the PPAR-gamma program. That is a possibility. The PDE7 program, we expect to have in IND or CTA in the latter part of next year. So any data coming out of that program would be the mechanistic data or the preclinical data, the animal data. And we do plan, as I think I mentioned, to have a publication which will be detailing not only the animal data but the mechanism. And the mechanism is very exciting.

PDE7 is a very exciting target for addiction. And that is -- I think that's a sentiment that is shared by a number of the experts in addiction.

Okay. And then when does the pass-through reimbursement end? And what are the minimum market caps required for that credit facility?

Two very different questions. Let me answer the first one. Pass-through, we -- our pass-through period ends midnight, December 31, 2017. We are working diligently. And frankly, the day we received pass-through, we turned our attention to how do we secure long-term reimbursement for the product. We remain optimistic about our chances of getting that done. We'll update people as, again, we have something to say specifically there.

With respect to the market cap, it is dependent on the amount that we have taken down. I think that it's about 6.4 times the aggregate principal outstanding. So on the $80 million, it's about $512 million. But just any amount we have taken down or the outstanding principal remaining on that loan, it's just 6.4 times that amount. It was a very mathematical approach to determining what those numbers would be.

And that completes the Q&A part of the call. I'd like to turn the call back over to Dr. Demopulos for closing remarks.

Thank you, operator, and thanks again to everyone for taking the time to listen in. I know we had a lot of material today. We very much appreciate your patience as we went through all of that. As you know, it's been a busy quarter and when we recap that, there is just an awful lot to talk about. But we do expect to provide additional information on a number of our programs before year-end. And as always, we appreciate your continued interest and your support of Omeros. Everyone, please have a good day. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.