Why Omeros Corporation Shares Sank

Omeros shares dip after reporting its fourth-quarter results and announcing a share offering. Does this drop make sense?

Mar 14, 2014 at 1:05PM

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Omeros (NASDAQ:OMER), a clinical-stage biopharmaceutical company focused on developing therapies to treat inflammation, coagulopathies, and central nervous system disorders, fell as much as 11% after announcing a share offering of common stock and reporting its fourth-quarter earnings results after the closing bell last night.

So what: For the quarter, Omeros reported revenue of $169,000 and a considerably smaller net loss of just $1.85 million, or $0.05 per share, compared to $7.73 million, or $0.30 per share in the year-ago period. It should be noted, however, that the receipt of a settlement with CCIC, a former insurer, reduced its quarterly loss by $0.41 per share.

The bigger story, though, appears to be the common stock offering of 3,043,479 shares, which priced at $11.50, or 6.5% below yesterday's closing price. Omeros' stock offering should raise a gross of $35 million in funds, which it plans to use for the potential commercialization of Omidria (formerly OMS302) and to further the clinical research of other pipeline products, such as OM824 and OMS721.

Now what: What we're seeing here today is the classic example of the risk of dilution associated with the biotech sector. Because many clinical-stage companies are far too prideful to partner up their lead drugs, they often turn to secondary share offerings to raise the required capital. While this does keep them afloat, it also exposes shareholders to the constant threat of dilution. The simple fact that the share offering priced 6.5% below yesterday's close gives investors a clue that demand simply wasn't there for those shares. Overall, Omeros' share offering will increase the number of shares outstanding by 10% and shares are down by close to 10% today, so it seems like a pretty fair trade-off.

Omeros shares have soared over the past year, but even it could struggle to keep up with this top stock in 2014
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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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