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 will be available on the company's website for 1 week from today. I'll turn the call over to Mr. Mark Metcalf at Omeros.

Thank you. Good afternoon, and thanks 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 10-Q filed with the SEC earlier today 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, Mark, and good afternoon, everyone. Also with me today is Mike Jacobsen, our Chief Accounting Officer. I'll start today's call with a corporate update, and then Mike will provide an overview of our second quarter financial results. We have some time reserved for questions after the financial overview. I'll begin with an update on the U.S. launch of our FDA approved product, Omidria. As most of you know, Omidria prevents intraoperative miosis or pupil constriction and reduces postoperative pain, providing consistent and predictable management of these problems for ophthalmic surgeons and their patients. Following our controlled launch in February, we initiated the broad launch of Omidria in mid-April, making product available through the specialty groups of the 3 major wholesalers in the U.S. As Mike will discuss further in the financial update, our second quarter Omidria net sales were $3.1 million. Now I will discuss some of the specifics. First, what is required to convert a surgeon or a facility to an Omidria user? Efficacy reports from surgeons have been outstanding. In the majority of cases, the key is reimbursement. The initial selling cycle for the product is generally around 10 to 12 weeks following the decision to try Omidria. Once that decision has been made, the next step usually is obtaining and performing a select number of cases with product samples. This allows the surgeon to experience firsthand the significant benefits of Omidria. Next, generally a single digit number of vials is ordered, used and run through the reimbursement process. While the reimbursement from Medicare is relatively quick, on the order of 2 to 3 weeks, any commercial component, including a Medicare secondary payer in this early launch phase, can take as long as 6 to 8 weeks. The second order usually occurs only after reimbursement is…

Thanks, Greg. For the quarter ended June 30, 2015, we reported a net loss of $16.7 million or $0.44 per share. This included noncash expenses of $2.7 million or $0.07 per share. This compares to a net loss of $18 million or $0.53 per share for the same period in 2014, including noncash expenses of $2.2 million or $0.06 per share. Revenue for the quarter was $3.2 million, $3.1 million of which was Omidria product revenue. As Greg mentioned earlier, we began the broad U.S. launch in mid-April, began selling Omidria primarily to the wholesaler channel at that time. Our general policy is to recognize revenue upon Omidria receipt by the wholesalers, the sell-in method. During the second quarter, we also entered into agreements, which allow 340B-eligible hospitals and federal agencies to purchase under the Federal Supply Schedule to purchase Omidria at a discount. We estimate a reserve for these discounts and rebates when we recognize revenue on the sale to the wholesaler. Total cost and operating expenses for the second quarter were $19.2 million compared to $17.3 million one year ago. The increase was primarily due to sales and marketing expenses related to the U.S. commercial launch of Omidria. This increase was partially offset by reduced research and development expenses as a result of the timing of manufacturing clinical drug supplies last year compared to this year and the suspension of clinical trials related to OMS824. As of June 30, we had cash, cash equivalents and short-term investments of $51.4 million. With that, I'd like to turn the call back over to Greg.

Okay, so I guess, at this point now, what we can do is open the question up -- the call up to some questions. Operator, can you assist us with that?

[Operator Instructions] Our first question comes from the line of Liana Moussatos of Wedbush.

Congratulations on a strong first quarter launch, it doesn't happen very often. What part of the $3.1 million in sales of Omidria was due to demand versus channel fill and inventory stocking?

Yes, as we said, we do it on a sell-in method. But I can tell you, at June, it was a pretty standard one month in the channel.

Okay. And is that going to be the inventory level maintained going forward, one month?

Yes, Liana, we expect that, that will be the amount that is in the channel going forward.

Our next question comes from the line of Steve Brozak of WBB.

I'll make this pretty broad because, candidly, you're starting with information that is imperfect. Can you tell us what the difference has been between the controlled time period that you were talking about initially and what it is today? And also the follow up on that would also be, can you explain what the previous standard of care was in terms of compounding as it is today? And I'll hop back into the queue.

Sure. The first question that you had is what's the difference, I think, between the controlled launch and the broad launch?

Yes, that's right.

The controlled launch, remember was a program that we began in mid-February. And the idea there was to really pressure test reimbursement and any sort of issues that might arise at the clinic with respect to utilization of Omidria. It was a program that included a small number of our thought leaders. And again, the idea there was really just to make sure that all of the processes were in place, both with respect to our ability to get drug to the facilities, the facilities' ability to bring the drug in, use it and then to secure reimbursement after the drug was used. Beginning in mid-April, we converted that to really this broad launch, which, of course, as you would expect was nationwide. It was across the country that we were launching the product. And so that's really the difference. Does that answer your question there, Steve?

Yes, no, no, it absolutely does. So basically this is a continued follow up. And in terms of the next part, how does it compare to the control? Specifically how do you go out there and start to talk about what the previous standard of care was, which was obviously, compounding compared to what the standard of care is today?

Right. Well, per prior to Omidria, I'm not sure that there was really any standard of care. Compounding was the only option. But the numbers and types of drugs were quite large and varied. So it's a little difficult to compare, frankly, Omidria to those compounded products. What I can do is, I can reference our Phase II full factorial study, where specifically we look at Omidria versus phenylephrine alone versus ketorolac alone. And as you know, one of the most commonly compounded products today is epinephrine. Epinephrine is similar to phenylephrine, the difference being that phenylephrine is alpha 1 selected, epinephrine is both alpha and beta active. We chose phenylephrine for its alpha-1 selectivity for inclusion in Omidria. When we ran the Phase IIb full-factorial study looking at Omidria versus, in this case, specifically, phenylephrine, Omidria was nearly 4x better in preventing pupil diameters of less than 6 millimeters. Now that's an important number, because that's a number that, frankly Dr. Chambers, Wiley Chambers, at the FDA asked us to examine. And the reason for that is simply that pupils less than 6 millimeters in diameter are associated with a multiply increased risk of complications. So again, looking at Omidria versus phenylephrine, Omidria nearly 4x better. I believe the difference was 22% versus 6% with Omidria. So there is no compounded product like Omidria. Omidria contains both phenylephrine and ketorolac. And remember, it is the ketorolac that is doing potentially here the yeoman's share in preventing that pupil from coming down because it's actually the ketorolac that stops the mioses or construction. Phenylephrine, ephrine [ph], epinephrine, any of these midriatic agents dilate the pupil only. They do nothing to prevent constriction. It's the ketorolac that prevents the constriction. And that constriction is, as you know, is the result of really prostaglandins that just are released during surgery. They are kind of the natural byproduct of surgical trauma.

And the -- candidly, you pretty much went over everything. It's the question now becomes what are the clinicians saying when they start to see Omidria? And obviously, the benefits and, obviously, you focused on ensuring that payment and repayment is there. What are you -- what's the last word you're getting back from the clinicians? And I'll hop back in the queue?

Well, look, the response from the physicians, from the clinical perspective has just been outstanding. Even, frankly, I believe that most physicians, most surgeons, when they use the product, even if they are expecting it to work, are surprised by how well it works. And that seems to be a consistent theme. The whole story here is really, for us, reimbursement. It is can we make the facilities, not just the surgeons, but the facilities, and specifically the administrators, the directors, the CEOs of those facilities, can we make them comfortable that they are going to be reimbursed? And looking at the data to date, certainly seems to be that the answer to that is pretty favorable. With the patient assistance program, with the commercial co-pay program, again our focus there is how do we help the patient? As I said in the overview, and we genuinely believe this, look, if we believe in the product, and we certainly believe in the product, we ought to be willing to do what we need to do to make sure that all patients can access it. And that's the reason for the patient assistance program, that's the reason for the commercial co-pay program. We think that when we put all of these things together, I think, kind of the overall picture becomes pretty clear to not only the surgeons who want the best for their patients, but frankly also the facility administrators who want to make sure that in the end of all of this, that they are not unduly burdened. And I think that we can really satisfy both sides of that equation.

Our next question comes from the line of Yatin Suneja of Cowen and Company.

First question on Omidria. I'm not sure if you are planning to tell us, but could you give us a sense how many vials were shipped? And then how many procedures were performed in Q2? And then you made a lot of progress in securing reimbursement from private payers. So could you help us understand if there is any pricing differential between Commercial versus Medicare? And then I have one more on OMS721.

Right. Let me answer the questions in the order in which you presented them. Yatin, I think, first, no, we won't be able to provide the specific number of procedures performed. Second, with respect to the difference in pricing. When you say pricing, I'm going to answer the question from both ends. The price of the product is set across all patients, all providers effectively at the same price, which is currently the $465. As you know, I gave some examples of specific areas where we may be providing discounts, and those are discounts really that are federally mandated. 340B, the VA system, DoD, those types of purchasers received by federal mandate discounts, and we are complying with those. So I think, with respect to now the other end of this, the reimbursement piece, the commercial payers have been paying, have been reimbursing well for Omidria. So that has not presented any problem. In fact, as I said often, that reimbursement is higher than the Medicare reimbursement, which is, again, is a passthrough product based on that set reimbursement WAC plus 6% converting on October 1 of this year to ASP plus 6%.

Great. And then on OMS721, could you tell us how many patients are on compassionate use right now? And then how far have they gone in terms of what's the duration of treatment so far they have received with the OMS721.

Yes, we haven't -- I don't think we've put that out yet publicly. But as I said, we do plan to provide some more detailed information on the 721 program. As I said in our corporate overview, we do understand that there's been a request from some for more detailed data from the Phase II program. And we will be -- we do expect that we will be sharing that, as I said on the near-term or maybe [indiscernible]. You'll find some of the answers that you are looking for.

Our next question comes from the line of Serge Belanger of Needham & Company.

First, a question, you mentioned that the current selling process is a 10 to 12 week process from initial introduction to sales conversion. So I imagine at this point, most of these clinics and physician groups are still in this cycle? What steps are being taken to shorten this cycle at this point?

Yes, I think -- that's a great question. Look, we'd like that sales cycle to be shorter as well. I think when taking 3 steps back, it's understandable. This is a cost that facilities are concerned. They could incur in large numbers because again there are a lot of these procedures performed. And they just want to be confident in kind of what that reimbursement picture looks like. So everything is sort of tested in small steps until they become comfortable. Now once they see the reimbursement coming as it has been and as we reported it to be, their comfort level increases. Their confidence increases. And that ordering increases. And also, remember, on the other side of this, you have the payers. And those payers also have to work out the initial kinks associated with Omidria and the reimbursement for that product. And that amount of time should also contract as more and more of these claims come in to specific payers. So we really expect from both ends, from the facility and from the payer side that, that time line should contract with continued utilization.

Okay. And then in terms of the potential European market for Omidria, I know it's early, and we don't have any information on pricing or reimbursement. But just wanted your thoughts on what you think the market can be relative to the U.S. one, and whether compounding is also prevalent across the EU states.

Yes, compounding -- let me start at the back of that. Compounding is prevalent. As they call it over there, it's sort of the kitchen pharmacy approach. Different people do different things. There's no standard, just as there's really -- has been no standard in the U.S. They don't -- the U.S., obviously, with the Drug Quality and Security Act, with the FDA's public statements on compounding, there's substantial scrutiny around compounding now and increasingly, stringent regulations around compounding in the U.S. Europe does not have at present that same level of scrutiny or regulation around compounding. What they do have are physicians who do want a standardized approach to providing the benefits that Omidria provides us. I mentioned in the overview, we are working with a group of the top ophthalmologists across Europe, and the response as in the U.S. has been uniformly positive [indiscernible] product. They get the science, they get the clinical component of it. Reimbursement in Europe, as you know, is going to vary from EU state to EU state. All of that will need to be worked out as we go forward. Our plans in Europe, strategically are to partner for the European market. So that is -- that's the present plan. We do expect that success will have a significant effect on uptake in Europe. And I think, on this -- and I think -- the reverse would be true as well. If we had initially launched in Europe, I would expect that success in Europe would affect our success in the U.S. So this is not a U.S. centric comment. I'm just simply saying that the success we expect will meaningfully impact success in Europe.

Okay. One last one, I'll get into queue. I think, you've mentioned in the past, your ability to dial up or down or up to your OpEx depending on R&D priorities. I'm sure Omidria remains the focus of the company. But when you take of R&D, I guess, does the company have the bandwidth to take 721 and 824 forward?

Yes, it does, both from a sort of, an intellectual resource and also from a capital resource. We are pushing full speed ahead with 721. And 824, as soon as we can get that back and as the clinical trial started, we will be pushing hard on 824 as well. But rest assured that 721 for us is a very high priority right now.

Our next question comes from the line of Thomas Yip of MLV & Co.

Congrats on a very nice quarter, both for Omidria and your other pipeline such as 721. I just want to follow-on on a point that you made earlier. So regarding the early sale cycle of Omidria, so from what what I understand is customers will order, that would be the first cycle, and then they wait for reimbursement before they order the second batch, and that process would take between 8 to 12 weeks from -- if I listen correctly. So should we expect revenue within the next 12 months to be somewhat lumpy between quarter-to-quarter?

No, I don't think, Thomas, that -- it's a good question. But I don't think that we would expect lumpy revenue. And I understand the reason why you might think that. I think that what you've got are really, you've got waves and those waves continue to smooth out over time. So I would expect that once that sales cycle has gone through, as I said, really 1 or 2 sales cycle. By the time someone has or a facility has purchased that second order, I would consider those really are our customers. Those are pretty loyal customers. And I think that, that really levels out any sort of lumpiness that you might be anticipating.

Okay, got you. And one question for 103. So from what -- from what I understand, Fagron has pretty much -- they're pretty much in the driver's seat to take over a program for their -- at least for U.S. market. So what's left for them to do before it can be officially launched in the U.S.?

Yes, they will be gearing up the manufacturing of the product and also, as I mentioned, we are really plugging Fagron into our key opinion leaders or our thought leaders across the country. They are very excited about the product, both the thought leaders and Fagron. They are looking at really multiple applications for it, applications that we had considered as well when the product was with us. So I think, there's some work for them to do, but again, under the agreement, they are obligated to begin sales this year.

Okay, great. Got it. One last question for the European market. You mentioned Omidria should be market only after reimbursement has been established on a country-by-country basis. And also, you plan to out-license from what I assume to be for each specific geographical region. So do you plan to tackle on some of these?

Let me just make sure that I made this clear. I did not mean to imply, and if I did, apologies, that we are going to be partnering region-by-region. That's not -- we've not said that is the strategy. The strategy could very readily be partner for all of Europe. I just want to make sure that I made that clear.

Sure. So do you plan to tackle any of that reimbursement work on your own first, or do you plan to allot the partner a potential partner to kind of lead that effort.

We're going to be more than willing to work with our partner, to support our partner in whatever way our partners and whatever way necessary to address those reimbursement issues. But I think that just realistically the heavy lifting of that is going to be borne, primarily by our partner or partners.

Our next question comes from the line of Elemer Piros from Roth Capital Partners.

Greg, so this almost top 30 or nearly all 30 top tier payers that cover 135 lives, now the next year, would that be a more detailed or a more labor-intensive process or do you think that by virtue of having this nearly 30 would allow the dominoes to fall -- the pieces to fall into place with those other smaller payers?

I think, more the latter, Elemer, remember that -- and we're not making comparisons here. But in general, pharma and, in general, Large Pharma, looks specifically at those top 30 payers across the country. We were able to achieve this kind of coverage, and we're not done yet. As I said, of the 150 covered by those top 30 insurers, commercial payers, we have currently about 133 million of those insured lives covered. Now remember, when I say covered, that can be also plan specific. So if a specific plan, and I'm not going to name anyone just so that I'm not offending anyone, but if a specific retailer, for example, carved out cataract surgery from their specific plan even though the payer covers it, that plan might not then cover cataract surgery and/or Omidria. But the 133 million covered is really, from our perspective, tremendous progress. When you get beyond that number, you start getting into relatively smaller lives covered. Now, again, we have to look at which ones -- there are 2 ways to look at these numbers. One is what are the top 30 and just in terms of number of insured lives and then there is also which ones are really most influential in specific regions. And we're also working through those. I think the takeaway message here is that we've been extremely successful. Then I think, I'd like to take the credit for that, that this is really our team that has done this and give the credit there to our team, and I think it's appropriate. But I think, also, there's credit due to the product itself. It's Omidria, and I think the insurers recognize that, "Gee, it's going to be hard perhaps not to cover that when it is the only FDA approved product for that indication in the market." I think that, that would -- to deny coverage there would be at least a potentially untenable position. So I think it's really a combination of the hard work of our team here at Omeros and also just purely the importance of the product.

Yes. So if you could discuss a little bit about the range of reimbursement. If you think about this $465 list price, if you will, you mentioned that some of the private payers, the actual net revenue that you receive is higher and you have to give government mandated discounts in other instances. If you were to characterize the ranges above and below the $465, how would they -- what would those ranges be? Or...

Are you -- asking I'm sorry, I want to make sure, I understand, Elemer. Are you saying the range in price?

Yes.

Because the price that the provider is paying, the price that we are charging is never higher than $465. It only goes downward with respect to discounts on those, for example, those federally mandated discounts associated with the 340B institutions with respect to the VAs, the DoDs, that type of discount. But we aren't -- there is no upward fluctuation in that pricing. Is that [indiscernible]

And I probably -- because I've heard that in some instances, some private payers reimburse at a level higher.

Well, now we're talking about reimbursement, though. When -- I'm sorry, I might have misunderstood. I thought you were talking about price. With respect to reimbursement, yes, reimbursement can vary. The reimbursement off of the Medicare is really set by Medicare at that rate of WAC plus 6%, which, as of October 1, flips to ASP plus 6%. With respect to commercial payers, the reimbursement amounts have varied. And, as you know, often the reimbursement on the commercial side is based on percent of billed charges. And so it is, at times, higher than the reimbursement rate provided by Medicare, by CMS. But is that...

You're not going above $465?

Yes, that would be above the $465 plus the 6%, yes.

Okay, okay. Now I know that you are not going to -- you stated that you're not going to disclose the volume, or the number of procedures performed. Is there a way for you, internally, to determine what's the true demand for Omidria?

Well, yes, sure there is. I mean, again, I think, the utilization of the product, the number of vials we're selling indicates to us what is the demand and is that demand expanding. I think, again, if we come back to a more global view of how we view the progress of Omidria, how are we doing clinically? Well, when docs use this product, they like this product. So the clinical piece seems to be pretty well put to bed. So the question is reimbursement, reimbursement, reimbursement. And how do we help get the facilities comfortable that these procedures using Omidria will be reimbursed, the product will be reimbursed for use in their procedure. I think what we shared with you today is a pretty positive picture about the overall reimbursement efforts and the overall reimbursement success associated with Omidria. Clearly, that is going to be an area of focus for us. I mean, I think that as that level of confidence in reimbursement increases, I'd have to question what other impediment could there be. You have the only FDA-approved product. When you use it, you like the way it works. In fact, again, these are not controlled studies, but we've had the reports from so many clinicians coming back saying that they have reduced their use of these pupil, these mechanical pupil-expanding devices. In many cases, frankly eliminating them to date. Those cost money, those post risks to patients, they are problem. When you put these things all together, you start to think, "Gee, if that reimbursement piece -- if that confidence level is high, what should be the impediment?" And I'm sure there are some. But I think, overall, you've addressed the 2 large drivers. One is clinical and one is reimbursement. As I said, we think the clinical is pretty clear. And the more the docs learn about the product, frankly, the more they appreciate the clinical benefits. So it's really the reimbursement. And I think, we've helped, at least, I hope we've helped today clarify that situation.

Yes. And just couple of rapid questions here. Do you have a conference in mind where you would present 721 -- OMS721 data?

Yes, I think, that -- though frankly the more detailed 721 data will probably come out as a press release.

Okay, got it. And I noticed that SG&A has dipped by $1 million, which of the S, G or A did go down? If I may address this to Mike. And how should we look at this item for the third and fourth quarters of this year?

I would look at SG&A for the -- as we kind of look forward is the sales force is in place. It's been somewhat associated with the amount of advertising and the conferences and that kind of thing that we go to. It is a little bit adjusted based on time of year because the conferences tend to be in the fall and in the winter versus in the middle of the summer. But if you look at it going forward, sales and marketing should be pretty consistent. G&A migrates a little bit based on the kind of activities we're doing. But generally speaking, I wouldn't look for massive changes in SG&A.

As opposed to or versus the first quarter of this year?

Yes. I mean, we did more stuff in the first quarter, primarily with the sales and marketing stuff getting ready for the launch itself. So the first quarter, the sales and marketing numbers were a little bit higher than they were in the second quarter.

Got it, got it. And one last question. Greg, do you expect to have any patents issued related to the GPCR platform this year?

You are asking me to predict a date. Let me answer it this way, Elemer. I do expect that we will have patents that -- and this is my personal expectation, which is I know what you are asking me. I do personally expect that we will have patents that do issue around the GPCR program. That is not a position that has changed for me, that position has remained constant. When that occurs, I would like that to be soon. I would like that to be very soon. But, unfortunately, I don't -- and our team does not fully control that timeline. So we need a cooperative U.S. PTO to work with us on that. And again, my expectation is we will ultimately have patents around the GPCR program.

But importantly, you are to blame because you overloaded their capacity.

Our next question comes from the line of David Cohen of M.S. Howells [ph].

I had a couple of questions. Unfortunately, I see your queue is up, which is fantastic. I get to ask a couple of questions. In the inventory line, you have 633,000. Was that all Omidria?

Yes.

[indiscernible] It was? Well, so, Greg, if you only had 10 weeks of sales and you did $3.1 million, that's approximately $310,000 a week. In response to an earlier question, we suggested you had 4 weeks of inventory in the channel. And that works out to about 2 weeks. Did I miss something?

The inventory on the balance sheet doesn't reflect the inventory as a channel. So...

So there's not?

No, that's...

What was the actual channel inventory at the end of the quarter?

So we have said that we had about one month.

$1.2 million?

Inventory in the wholesaler channel, but that's on the wholesaler books, not on our books as we recognize the revenue on the sell-in method.

Okay, got you. Got you. Okay. With respect to the cost of goods sold, the margins appear to be just under 90%. Did you allow your sales people to distribute samples to any of the doctors? And if, in fact, you did, were they given a sample pack of 2? Were they given 1? How did that work.

We did a lot sampling. We do a lot sampling, David. And that number, frankly, varies from group to group. And that can be anywhere from 4 to 8, usually.

Yes. And David, the cost samples recorded in the SG&A expense is not the cost of goods sold.

Excellent. I appreciate that. And then is there any data on follow-on orders from docs? For example, are you able to give us any statistics on the number of doctors who have reordered?

No. We've said the conversion rate is high, David. And I think, we're going to leave it at that.

Excellent. And then, once again, within the last -- you had another approximately 6 weeks since the end of the quarter. Are you seeing any acceleration in demand for the product?

No. We haven't talked about what's happening this quarter. We will talk about that at the next earnings call.

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

Thank you, operator. And as the operator just said, that wraps up our call for the day. Thanks again to everyone for taking the time to listen in. With the sales ramping up and a favorable reimbursement picture becoming increasingly clear, we believe that Omidria will deliver well for us in the future. OMS103 looks to provide a second revenue stream for Omeros. And I would just mention to all to look for upcoming and more detailed data from the Phase II OMS721 trial in aHUS and other TMAs. And from time to time, as has been our routine, we expect to update you on our progress. As always, all of us at Omeros appreciate your continued interest and support. Have a good afternoon, everyone, and thank you again.

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