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Here's Why Omeros Corporation Fell as Much as 24.5% Today

By Maxx Chatsko – Nov 9, 2018 at 12:12PM

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The struggling drug developer reported third-quarter 2018 operating results and raised $210 million in debt.

What happened

Shares of Omeros Corporation (OMER -2.17%) fell more than 24% today after the company announced and discussed its performance in the third quarter of 2018. Last month, the company's hyped-up lead drug candidate, OMS721, didn't deliver the goods in an early-stage study. In fact, it didn't prove any more effective than placebo. That reset investor confidence that an ongoing, 430-patient study will yield successful results when it wraps up in 2020.

Therefore, it would be wise for the company to begin investing more resources in one of its earlier-stage drug candidates, especially considering the balance sheet sported just $55 million in cash and cash equivalents at the end of September. So Omeros Corporation paired its quarterly update with an announcement that it raised $210 million in a debt offering, but that comes with its own set of risks investors shouldn't overlook.

As of 11:55 a.m. EST, the stock had settled to an 18.7% loss.

A finger tracking a chart showing losses displayed on a touchscreen.

Image source: Getty Images.

So what

Omeros Corporation has coughed up an operating loss of nearly $94 million in the first nine months of 2018. That sour figure is mostly explained by an 85% decline in revenue and a 60% increase in R&D spending compared to the year-ago period. It's clearly unsustainable for a business with just $55 million in cash on hand.

On the one hand, adding $210 million in cash from the debt offering will extend the company's runway and buy it time to develop its pipeline. That includes getting more answers on OMS721 and earlier-stage pipeline drugs OMS824 and OMS405. Given the recent data hinting that the lead drug candidate might not have a blockbuster future, those unique and separate drug candidates might prove very important in the coming months.

On the other hand, Omeros Corporation had a book value of negative $89 million at the end of September. As the cash from the debt offering is used up and the debt stays put, the company's balance sheet will look downright grotesque in the next year or two. If OMS721 proves to be a complete bust, the business may not have the financial flexibility to recover.

Now what

It might be wise for Omeros Corporation to cut its losses on OMS721 sooner rather than later if the data suggest doing so. For instance, if upcoming peeks at interim results suggest the drug candidate is unlikely to work, then writing it off before trials conclude would save a significant amount of cash that could be used elsewhere. That would be easier to do if OMS824 or OMS405 delivers a big win in a mid-stage trial. Either way, this stock is too risky for individual investors at this time.

Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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