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

Good afternoon and thank you for joining in 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 quarterly report on Form 10-Q, which was filed today with the SEC, for a discussion of these risks and uncertainties. Dr. Gregory Demopulos, Chairman and CEO of Omeros, will take you through a corporate update; and then, Michael Jacobsen, our Chief Accounting Officer, will provide an overview for third quarter financial results. We have some time reserved for questions after the financial overview. Now I would like to turn the call over to Dr. Demopulos.

Thank you Jennifer, and good afternoon, everyone. We appreciate you taking the time to join us on the call today. During the third quarter, OMIDRIA sales continued to climb. Net revenue in the third quarter were $21.7 million, an increase of 26% over the second quarter of this year and up 92% compared to the third quarter of 2016. Units sold to our wholesalers, or sell in, also increased substantially, 26% quarter-over-quarter and 125% year-over-year. We continued to see growth across all dimensions of our market during the third quarter. Sales increased meaningfully in both ambulatory surgery centers and in hospitals. Market penetration of OMIDRIA also increased in both breadth and depth, with a number of purchasing facilities expanding 8% versus the previous quarter and the average number of vials purchased per facility up 12%. The third quarter is historically one of the weaker quarters for cataract surgery volume across the country, yet OMIDRIA sales grew rapidly. This sales momentum is further accelerated into the fourth quarter. Based on sales data over the past several weeks, annualized net revenue from OMIDRIA is running in excess of $90 million. Several factors are contributing to the growth of OMIDRIA. First, doctors are becoming more steadfastly confident in the benefits that they and their patients experience with OMIDRIA. These benefits have been further demonstrated in a number of additional well conducted investigator initiated clinical studies all of which are in various stages of manuscript preparation or review by peer reviewed journals. The studies, uniformly show the superior performance and outcomes of OMIDRIA compared to investigators' previous standard practice, including epinephrine and compounded products across traditional surgery cases, femtosecond laser-assisted procedures and high-risk cases such as intraoperative floppy iris syndrome. Second, there is growing discomfort and dissatisfaction with alternative products, including those obtained from…

Thanks, Greg. As Greg noted, revenues for the third quarter were $21.7 million, all from OMIDRIA product sales; and our net loss was $7.5 million or $0.16 per share, which includes the non-cash expenses of $4.2 million or $0.09 per share. Here are some specifics regarding the third quarter results as compared to the second quarter of this year. Our reported revenue for the third quarter increased by 26% or $4.5 million from the second quarter, while unit sales of OMIDRIA by our wholesalers to ASCs and hospitals, or more commonly sell-through, increased by 20%. The difference between reported revenue growth and sell-through unit growth was attributable to an increase in inventory required to support the growth in a wholesaler's consignment program. This increase in our wholesaler's inventory is a result of consigned units of OMIDRIA being recognized as sell through only when used in surgery, as opposed to when shipped to customer facilities. Taking this into consideration, wholesale inventory levels at the end of the third quarter remain at OMIDRIA historical norms. As we expected, the overall amount that we received per unit of OMIDRIA sold in the third quarter was consistent with the prior quarter. We expect Q4 will be similar with -- as the third quarter with regards to the net amount we receive per unit sold. Cost and expenses for the third quarter were $26.8 million, a $2.3 million decrease from the second quarter. Specific variations from the second quarter included reductions in expenses related to the Par lawsuit, which was settled on October 4; a reduction in regulatory costs associated with the onetime standard user fee for the filing of the supplemental NDA related to completion of the OMIDRIA pediatrics trial, and a reduction in employee-related costs due to the timing of payments. These decreases…

Thanks, Mike. We can go ahead now, I think, operator, and open the line to questions.

Thank you. [Operator Instructions]. Your first question comes from the line of Steve Brozak with WBB. Your line is open.

Hey, good afternoon, Greg, I've got three questions here, and I'd like to -- the first one is coming over modeling. Looking at the numbers that we've been going over here internally, we are looking at, pretty much, you should be close to or closing in on breakeven. Can you give us any kind of color, and I'm not looking for any kind of guidance into the future, but right now where you stand and what you're looking at on OMIDRIA sales? And I'll follow up after that, please.

Sure, Steve. Thanks. In the third quarter, as I think I noted, we had a operating loss of about $11.3 million, I believe -- $11.2 million or $11.3 million. And if you back out the accrued liabilities there, the accrued revenues for us, that'll leave you substantially reduced from that number. So yes, we came quite close to being neutral this quarter. I don't want to guide going forward. I think we probably want to be careful about guiding, as you know. But I think, certainly, revenues from OMIDRIA have continued to grow substantially for all the reasons that we discussed.

Okay. And that brings to the next question. You just mentioned like the number that you've seen increased in terms of your market penetration is 8%. Now the way we've looked at it is your goal has always been to become standard of care. And that's a good trade-off in terms of depth of expansion and also what you're talking about in terms of revenue. You'd just mentioned that you're focused on making sure that the product sees expanded use. Between whatever you're looking at on legislative -- how should I put it, on any kind of legislative progress and then also on the continuation of CMS pass-through, what are your thoughts in terms of penetration? Can you give -- what I'm looking for is, how do you look at that? How do you focus on that, because standard of care obviously brings in a critical kind of revenue and makes a big difference? Whatever color you can provide on that would be terrific.

Yes. I think I understand the question. Let me respond in this way. First, I think that we showed, as you noted, growth, both in depth and breadth, in the facilities using OMIDRIA, so increased number of facilities using OMIDRIA in the third quarter relative to the second quarter, also, increased utilization even within the facilities. So that can mean either greater utilization within a specific set of docs who are using it on more cases or actually a broader utilization within that specific facility across a number of docs. So I think that, certainly, that growth continues. When you talk about Standard of Care, we've got to be careful there. Standard of Care, of course, implies medical-legal implications that I think we'd like to steer away from. But certainly, I think our objective here is to increase the utilization. We'd like to see OMIDRIA become more broadly used. I think certainly that's happening. With respect to other options, I'm not sure what specifically you're referencing. So can you help me there?

Yes. It's one of those things where I think that the clinical community has accepted or is beginning to accept the advantages that OMIDRIA offers. In terms of going out there, you've taken all the steps you can to make sure that you're protecting your revenue on that front. But at some point, any kind of price point, whatever happens into the future, when you're looking at reception, any kind of price point where you would see an increase would provide you with increased revenue. So I assume that you've modeled that into your calculations as well. Is that a fair way to look at it?

Sure. Sure we have, Steve. Look, we have known that pass-through is expiring or is slated to expire as of January 2018, since we received pass-through in 2015. But one would expect, certainly, that we have modeled it, planned for it and are ready for it should it occur. The question is, at this point, really, will it occur? And as I've said I think previously, we continue to remain optimistic that there will be continued separate payment for OMIDRIA beyond January 1, 2018. That can follow one of two routes. That can follow a CMS route. That can follow a legislative route. We're pursuing both. The question, I think, that you're asking is one of what if that doesn't occur? What if pass-through disappears on January 1 of 2018, and there is no additional separate payment? Look, certainly, we have modeled that. We understand it. If you look at the increased utilization of the product, if you look at the data around the product, this is a very different situation that we are in today versus the one that we were in 2015 or 2016 or even earlier this year. The expectation around the clinical benefits that this product holds relative to anything else available, the risks that are becoming increasingly recognized and appreciated around compounding products, all of that, we think, translates pretty favorably. And we think that again there -- that you're right, at some point, there is the potential here for standard of use with OMIDRIA.

Okay. And I'll ask -- yes, great. I'll ask my last question and jump back in the queue. On 721, in terms of the -- please correct me if I'm wrong, but in using proteinuria as the endpoint, that's going to -- it's pretty much we've looked, and that's the first time FDA is basically allowing for that standard. So you guys are going to basically be -- I'm sure you're comfortable with it, but you're going out there and you're going to be using something that is quantifiable where you've got defined guidelines, where you've got whatever you're looking at. But FDA is going to be using you as an example. Is that also a good way to look at it? And I'll -- as much as you can tell us on that, it'd be terrific. And I'll hop back in the queue. Thank you.

I can't speak to whether FDA is using us as an example. I can simply say that you are correct. This is the first time that the FDA has indicated willingness and actually stated that they would be willing to accept proteinuria data for full approval. And so we're excited about that. We think that, that provides a more rapid path to full approval. I would not lose sight of the fact that there is also the possibility here for accelerated approval. So we're really talking about two different layers; one which is full approval, and then beneath that, accelerated approval. We're designing our trial so that we can potentially avail ourselves of either of those options, which I think would be pretty clear that what we're trying to do is maximize the likelihood that we can get this product approved as quickly as possible. FDA has been cooperative, very cooperative, with us. They've been very helpful. We're finalizing the protocol for the Phase III program, and we'll let everyone know once that is finalized and once we're underway.

Congratulations on all those news. Obviously everyone’s been expecting this kind of quarter. So, thank you. And I’ll look forward to the follow-up.

Thanks, Steve.

Thank you. Your next question comes from Tyler Van Buren with Cowen and Company. Your line is open.

Hi, good afternoon, guys. A lot of really great information on the call, those were really helpful. So I have several questions, but hopefully they just have brief answers. The first, I guess, on 721 with respect to the IgA brand, you mentioned that the steroid-naive data would come in the middle of next year, which appears to be a new development, because previously, we weren't sure if we would see that data reported or not. So, can you just confirm that the middle of next year, we'll definitively get a data report out with the 535 [ph] placebo-controlled trial in steroid-naïve patients? And also, is that -- could you -- is that representative of the future planned Phase III patient population?

Answer to your first question, the data that we would plan to put out in mid-2018 may not be the full data, given the extended follow-up on those patients, Tyler. But we do expect data to be out in mid-2018 from that study. There are a number of parameters within that study that mirror what we're doing in the Phase III program. So I think that it will give us -- it's going to help plan some of the follow-up that's done in that Phase III program as well.

Yes. So does that mean that we may get some -- like some initial [Indiscernible] data after like three months as opposed to six, nine or 12 months?

I can't give you the duration of the follow-up at this point. I'm just simply telling you that we will put the data out that we have at that time. And we expect that, that will include proteinuria data and some follow-up data as well on those patients.

Okay, that's helpful. And on the Phase III program where we're still awaiting additional details, you mentioned full versus accelerated approval, and it could get accelerated approval if there are meaningful reductions in proteinuria. So how should we think about the magnitude of proteinuria reductions? And what would be required for accelerated versus full approval on a percentage basis?

Yes. I think that, ultimately, as you know, that decision is going to reside with the FDA, not with us. But I think that certainly there's a level of reduction in proteinuria. And I think that you'd also have to incorporate other findings around those patients -- concurrent findings around those patients. And the total picture that would be generated around those patients, I think there is clearly a level at which full approval would be granted. If it's something below that, in total picture again, then I think that, clearly, the option for accelerated approval remains. And what that would allow is, as you know, the marketing of the product while we continue to collect additional data to support full approval. And that full approval would likely involve eGFR data and other longer-term follow-up. I think, again, the important part of accelerated approval, which I know you understand well, Tyler, is that you're able to market the drug while you collect the data to support the full approval.

Great. And for the last question on the pipeline, obviously, you're going to have three Phase III programs underway soon and mentioned a ramp -- a potential ramp in R&D spending. Can you just help us understand the magnitude of that potential ramp versus this year? What we might see next year and how we should expect it to increase over the next year or two?

Yes. We haven't guided to that yet. And so I think, that question, I'll defer for now. We would expect it to come up some, but if you've seen how we've been running programs and you understand how we have been managing the dollars here, those will continue to be tightly managed.

Got it. And just finishing on OMIDRIA, again, a lot of detail on stocking, there is clearly a good number for the quarter. Can you give us an understanding of how many weeks of inventory are currently in the channel, and what the magnitude of stocking was out of that $21.7 million number for the quarter?

Yes. The channels remained, I think as Mike told you, at historical norms. So in the channel consistently are two to two and a half weeks of inventory, and that's been pretty standard now, I believe. I'd have to go back and look, but I believe that's been pretty much our standard for several quarters.

Okay. Seems reasonable. And on the legislative process, potential bill for reimbursement. Is there any additional color you can give us there to get confidence that we could see something before year-end?

I don't think so. I don't think it would be appropriate for me to comment on that. I've told you, I've told everyone on this call, what we're doing, both from a CMS perspective and from a legislative perspective. I think what I can say is to underscore, I believe, what I've already said, which is extension of pass-through as one option is good policy. I think that's understood bicamerally and across the aisle, so bipartisan support, bicameral support for that. I think we'll need to wait and see how things play out and what vehicles come along that allow such legislation to be passed. But again, I -- we remain optimistic that there will be continued separate payment for OMIDRIA beyond January 1, 2018. As I said earlier, there are no guarantees for that, Tyler, and I'm not going to state any guarantee now. I'll simply tell you that we remain optimistic that, that will take place.

Okay. And my last question is just mechanistically, I guess, in a worst-case scenario, assuming that the C-code doesn't get extended and there's no separate mechanism for reimbursement, doctors that are currently being reimbursed via the C-code, via CMS right now, how, I guess, mechanically does that reimbursement process change? And do they need to change their system? Or how does that process change? And currently, for each bottle, what are you guys netting in terms of price? And assuming that they increase the bundle a little bit, and, if I'm correct, the generic bottles are somewhere in between $50 and $100, where could you see the price going to from the current net?

Yes. First of all, the reimbursement process for the facilities and for the physicians, frankly, would simplify. Physicians and facilities would no longer need to select patients or identify patients that are reimbursable for use of OMIDRIA. They would simply purchase the product, and then the product would be paid for under the increased packaged amount tied to cataract surgery. So -- and remember, this is for CMS patients. So everything we're talking about with respect to pass-through, I know you understand but I'll just say publicly so everyone gets it, is relevant only to CMS or Medicare patients. So in fact, the process would be simplified. The ability to use the product, I think, for some physicians would broad -- again price dependent. Where -- I think you asked about what the net on the product is currently? For net...

The current net and where it might go eventually.

Yes. The current net, I think you can calculate, is about 3.40 [ph], 3.50 [ph] with a 25% gross to net. So that's where we currently are. Where it would go, look, I'm not going to speculate today on where that price would be. I certainly believe that price would be substantially higher than it would have been in 2015, 2016 or even early 2017. So clearly, we believe we can do -- we can continue a revenue stream that would be meaningful to the company under any of these scenarios.

Thank you very much for entertaining the questions.

Thanks Tyler.

Thank you. Your next question comes from Jason Kolbert with Maxim Group. Your line is open.

Hi, there. Michael Okunewitch on behalf of Jason Kolbert. Congratulations on the great quarter.

Thanks, Mike.

I just want to ask regarding OMS721. So as you look to advance towards the pivotal program in TMAs, can you discuss which patients you may target, such as the Soliris-refractory, treatment-naive, patients with coexisting GvHD, and how this might affect the trial parameters?

Sure. Good question. Well, first of all, as you know, Soliris is not approved for stem cell-associated TMA. There is no approved product for stem cell-associated TMA. We would be focusing on patients similar to those that we have already treated. These are patients who have undergone stem cell transplantation, have then developed a thrombotic microangiopathy, or TMA. The patients that we have treated have already undergone modulation of calcineurin inhibitors, and those patients have very high mortality rates. As I said earlier, greater than 90%, in some reports closely approximating 100%. So those are the types of patients that we'd be looking for. We would likely take, and again I don't want to over-speak for our clinical team, but I will say that we would likely take those patients who might have seen Soliris previously and were refractory to it. I don't think that, that would be a large portion of those patients that we would be treating, however. So I expect that the parameters around which we would be enrolling those patients are very similar to those on which we've enrolled the patients to date.

All right. Thank you. And then just staying with the TMA thing, will the Phase II trial continue to enroll more patients? And will patients that already completed the treatment stay on OMS721?

Let me answer that in the reverse order. Those patients who have been treated with 721 for stem cell transplant-associated TMA, this is not a chronic disorder. So those patients respond. And as we said, eight of the 14 patients that we have treated did respond. Two of the patients are still in treatment. Four of the 14 patients did not complete treatment, only had two to three weeks, and three of those four subsequently died in line with kind of the severity of this disease or this disorder. So likely, those patients will not remain on long-term therapy with OMS721. Going back to your earlier question with respect to, will we continue to enroll patients in the Phase II trial? We will continue to enroll those patients until the Phase III trial is up and running. It, frankly, does not make a lot of sense to us to stop that trial and lose the ability to, number one, help patients; number two, gain additional insights or information from the treatment of those patients in the Phase II trial. So the -- I think the likelihood here is that you will see the Phase II trial continue to enroll stem cell transplant-associated TMA patients until the Phase III is up and running.

All right. Well, thank you very much for taking my questions.

Thanks Mike.

Thank you. Your next question comes from Ram Selvaraju with H.C. Wainwright. Your line is open.

Hi. Thank you for taking my question. This Julian [ph] calling in for Ram. Regarding 824, when are the Phase II trials expected to yield data? And how do you plan to develop this asset in future studies?

824, our PDE10 inhibitor, those clinical trials are currently suspended, Julian, as we've led out previously. They were suspended secondary to findings in rat, which generated some concern at the FDA. And so we suspended those trials. As I think I alluded to in the prepared comments that we have additional in vivo data, those data suggest that the rat data may not be relevant to the human. We need to discuss that with FDA. We need to lay those data out, discuss what we're thinking there, get FDA's input, and then we'll have more to say about the PDE10 program. Right now our focus, frankly, is the multiple OMS721 programs that are driving forward and the OMS527 program, which -- the PDE7 program, which we expect to have in the clinic in the first half of next year.

Great. Thank you.

Thanks.

And I'm showing no further questions at this time. I'd like to turn the call back over to Dr. Demopulos for closing remarks.

All right. Well, that wraps up the call for today. Appreciate everyone's questions. Appreciate everyone listening in. As always, we appreciate your continued interest and your continued support. Have a good rest of the day, and we look forward to sharing more news with you as the weeks and months progress.

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