##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2010
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 001-34475
 OMEROS CORPORATION
 (Exact name of registrant as specified in its charter)
 Washington
    
    91-1663741(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)
 1420 Fifth Avenue, Suite 2600Seattle, Washington
    
    98101(Address of principal executive offices)
    
    (Zip Code)
 (206) 676-5000
(Registrants telephone number, including area code)
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



OMEROS CORPORATION
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2010
 INDEX
 PagePart I  Financial InformationItem 1. Financial Statements
    
    
    3Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009
    
    
    3Consolidated Statements of Operations for the Six Months Ended June 30, 2010 and
2009 and for the period from June 16, 1994 (inception) through June 30, 2010
    
    
    4Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and
2009 and for the period from June 16, 1994 (inception) through June 30, 2010
    
    
    5Notes to the Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    24Item 4. Controls and Procedures
    
    
    25Part II  Other InformationItem 1. Legal Proceedings
    
    
    25Item 1A. Risk Factors
    
    
    25Item 6. Exhibits
    
    
    45Signatures
    
    
    46EX-10.2EX-31.1EX-31.2EX-32.1EX-32.2
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 OMEROS CORPORATION
(A Development Stage Company)
 
 CONSOLIDATED BALANCE SHEETS
(In thousands)
 June 30,
    
    
    December 31,2010
    
    
    2009(unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    2,873
    
    
    $
    820Short-term investments
    
    
    39,010
    
    
    
    59,485Grant and other receivables
    
    
    935
    
    
    
    248Prepaid expenses and other current assets
    
    
    214
    
    
    
    111Total current assets
    
    
    43,032
    
    
    
    60,664Property and equipment, net
    
    
    1,498
    
    
    
    1,086Restricted cash
    
    
    193
    
    
    
    193Other assets
    
    
    63
    
    
    
    119Total assets
    
    $
    44,786
    
    
    $
    62,062Liabilities and shareholders equityCurrent liabilities:Accounts payable
    
    $
    1,100
    
    
    $
    2,620Accrued expenses
    
    
    3,267
    
    
    
    2,837Deferred revenue
    
    
    478
    
    
    
    702Current portion of notes payable
    
    
    5,269
    
    
    
    4,931Total current liabilities
    
    
    10,114
    
    
    
    11,090Notes payable, less current portion
    
    
    4,874
    
    
    
    7,827Commitments and contingenciesShareholders equity:Preferred stock, par value $0.01 per share: authorized shares  20,000,000; issued and outstanding  none
    
    
    
    
    
    
    Common stock, par value $0.01 per share:Authorized shares  150,000,000 at June 30, 2010 (unaudited) and December 31, 2009;Issued and outstanding shares21,434,491 and 21,285,577 at June 30, 2010 (unaudited) and December 31, 2009, respectively
    
    
    214
    
    
    
    213Additional paid-in capital
    
    
    162,385
    
    
    
    161,227Accumulated other comprehensive income
    
    
    
    
    
    
    41Deficit accumulated during the development stage
    
    
    (132,801
    )
    
    
    (118,336
    )Total shareholders equity
    
    
    29,798
    
    
    
    43,145Total liabilities and shareholders equity
    
    $
    44,786
    
    
    $
    62,062
  3




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OMEROS CORPORATION
(A Development Stage Company)
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(unaudited)
 Period fromJune 16,1994(Inception)Three Months Ended
    
    
    Six Months Ended
    
    
    throughJune 30,
    
    
    June 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009
    
    
    2010Grant revenue
    
    $
    497
    
    
    $
    371
    
    
    $
    875
    
    
    $
    568
    
    
    $
    5,712Operating expenses:Research and development
    
    
    6,120
    
    
    
    4,577
    
    
    
    11,202
    
    
    
    8,599
    
    
    
    90,365Acquired in-process research and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,891General and administrative
    
    
    2,011
    
    
    
    1,475
    
    
    
    3,732
    
    
    
    2,885
    
    
    
    41,488Total operating expenses
    
    
    8,131
    
    
    
    6,052
    
    
    
    14,934
    
    
    
    11,484
    
    
    
    142,744Loss from operations
    
    
    (7,634
    )
    
    
    (5,681
    )
    
    
    (14,059
    )
    
    
    (10,916
    )
    
    
    (137,032
    )Investment income
    
    
    21
    
    
    
    61
    
    
    
    38
    
    
    
    142
    
    
    
    5,415Interest expense
    
    
    (409
    )
    
    
    (575
    )
    
    
    (861
    )
    
    
    (1,165
    )
    
    
    (3,692
    )Other income, net
    
    
    218
    
    
    
    86
    
    
    
    417
    
    
    
    348
    
    
    
    2,508Net loss
    
    $
    (7,804
    )
    
    $
    (6,109
    )
    
    $
    (14,465
    )
    
    $
    (11,591
    )
    
    $
    (132,801
    )Basic and diluted net loss per common share
    
    $
    (0.36
    )
    
    $
    (2.09
    )
    
    $
    (0.68
    )
    
    $
    (3.96
    )Weighted-average shares used to compute basic and diluted net loss per common share
    
    
    21,381,216
    
    
    
    2,929,690
    
    
    
    21,337,556
    
    
    
    2,929,397
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OMEROS CORPORATION
(A Development Stage Company)
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
 Period fromJune 16, 1994(Inception)Six Months Ended
    
    
    throughJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010Operating activitiesNet loss
    
    $
    (14,465
    )
    
    $
    (11,591
    )
    
    $
    (132,801
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    261
    
    
    
    245
    
    
    
    2,263Stock-based compensation expense
    
    
    1,000
    
    
    
    939
    
    
    
    12,652Change in fair value of preferred stock warrant values and success fee liability
    
    
    
    
    
    
    55
    
    
    
    (253
    )Non-cash interest expense
    
    
    82
    
    
    
    125
    
    
    
    390Realized loss on sale of investment securities
    
    
    33
    
    
    
    8
    
    
    
    275Write-off of deferred public offering costs
    
    
    
    
    
    
    
    
    
    
    1,948Acquired in-process research and development
    
    
    
    
    
    
    
    
    
    
    10,891Changes in operating assets and liabilities, net of nura acquisition in 2006:Grant and other receivables
    
    
    (687
    )
    
    
    (363
    )
    
    
    365Prepaid expenses and other current and noncurrent assets
    
    
    (68
    )
    
    
    80
    
    
    
    (198
    )Deferred public offering costs
    
    
    
    
    
    
    (557
    )
    
    
    (1,948
    )Accounts payable and accrued expenses
    
    
    (1,158
    )
    
    
    30
    
    
    
    3,707Deferred revenue
    
    
    (224
    )
    
    
    1,037
    
    
    
    (822
    )Net cash used in operating activities
    
    
    (15,226
    )
    
    
    (9,992
    )
    
    
    (103,531
    )Investing activitiesPurchases of property and equipment
    
    
    (605
    )
    
    
    (51
    )
    
    
    (2,677
    )Purchases of investments
    
    
    (5
    )
    
    
    (3,200
    )
    
    
    (148,109
    )Proceeds from the sale of investments
    
    
    20,117
    
    
    
    950
    
    
    
    63,833Proceeds from the maturities of investments
    
    
    323
    
    
    
    573
    
    
    
    45,026Cash paid for acquisition of nura, net of cash acquired of $87
    
    
    
    
    
    
    
    
    
    
    (212
    )Net cash provided by (used in) investing activities
    
    
    19,830
    
    
    
    (1,728
    )
    
    
    (42,139
    )Financing activitiesProceeds from issuance of common stock upon initial public offering, net of offering costs of $6,388
    
    
    
    
    
    
    
    
    
    
    61,812Proceeds from borrowings under note payable, net of loan origination costs
    
    
    
    
    
    
    
    
    
    
    16,928Payments on notes payable
    
    
    (2,710
    )
    
    
    (1,581
    )
    
    
    (9,286
    )Proceeds from issuance of common stock upon exercise of stock options
    
    
    159
    
    
    
    10
    
    
    
    829Proceeds from issuance of convertible preferred stock, net of issuance costs
    
    
    
    
    
    
    1,851
    
    
    
    78,234Other, net
    
    
    
    
    
    
    (3
    )
    
    
    26Net cash (used in) provided by financing activities
    
    
    (2,551
    )
    
    
    277
    
    
    
    148,543Net (decrease) increase in cash and cash equivalents
    
    
    2,053
    
    
    
    (11,443
    )
    
    
    2,873Cash and cash equivalents at beginning of period
    
    
    820
    
    
    
    12,726
    
    
    
    Cash and cash equivalents at end of period
    
    $
    2,873
    
    
    $
    1,283
    
    
    $
    2,873Supplemental cash flow informationCash paid for interest
    
    $
    746
    
    
    $
    1,041
    
    
    $
    3,209Preferred stock and common stock issued in connection with nura acquisition
    
    $
    
    
    
    $
    
    
    
    $
    14,070
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Note 1  Organization and Significant Accounting Policies
 Organization
  Basis of Presentation
    Use of Estimates
  Recent Accounting Pronouncements
   6




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Note 2  Net Loss Per Common Share
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009HistoricalNumerator:Net loss
    
    $
    (7,804
    )
    
    $
    (6,109
    )
    
    $
    (14,465
    )
    
    $
    (11,591
    )Denominator:Weighted-average common shares outstanding
    
    
    21,381,216
    
    
    
    2,953,074
    
    
    
    21,337,556
    
    
    
    2,953,494Less: Weighted-average unvested common shares subject to
repurchase
    
    
    
    
    
    
    (23,384
    )
    
    
    
    
    
    
    (24,097
    )Denominator for basic and diluted net loss per common share
    
    
    21,381,216
    
    
    
    2,929,690
    
    
    
    21,337,556
    
    
    
    2,929,397Basic and diluted net loss per common share
    
    $
    (0.36
    )
    
    $
    (2.09
    )
    
    $
    (0.68
    )
    
    $
    (3.96
    )
  June 30,2010
    
    
    2009Convertible preferred stock
    
    
    
    
    
    
    11,514,506Outstanding options to purchase common stock
    
    
    3,560,260
    
    
    
    2,819,594Warrants to purchase common stock and convertible preferred stock
    
    
    209,017
    
    
    
    234,230Common stock subject to repurchase
    
    
    
    
    
    
    23,385Total
    
    
    3,769,277
    
    
    
    14,591,715
 Note 3  Cash, Cash Equivalents and Investments
   7




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Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(in thousands)Gross interest income
    
    $
    48
    
    
    $
    63
    
    
    $
    71
    
    
    $
    150Gross realized gains on investments
    
    
    3
    
    
    
    
    
    
    
    3
    
    
    
    Gross realized losses on investments
    
    
    (30
    )
    
    
    (2
    )
    
    
    (36
    )
    
    
    (8
    )Total investment income
    
    $
    21
    
    
    $
    61
    
    
    $
    38
    
    
    $
    142
  Note 4  Fair Value Measurements
      June 30, 2010Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total(in thousands)Assets:Money market funds
    
    $
    3,066
    
    
    $
    
    
    
    $
    
    
    
    $
    3,066Money market funds classified as short term investments
    
    
    39,010
    
    
    
    
    
    
    
    
    
    
    
    39,010Total
    
    $
    42,076
    
    
    $
    
    
    
    $
    
    
    
    $
    42,076
 December 31, 2009Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total(in thousands)Assets:Money market funds
    
    $
    57,073
    
    
    $
    
    
    
    $
    
    
    
    $
    57,073Mortgage-backed securities
    
    
    
    
    
    
    2,979
    
    
    
    
    
    
    
    2,979Total
    
    $
    57,073
    
    
    $
    2,979
    
    
    $
    
    
    
    $
    60,052
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Note 5  Certain Balance Sheet Accounts
 Accrued Expenses
  June 30,
    
    
    December 31,2010
    
    
    2009(in thousands)Clinical trials
    
    $
    1,850
    
    
    $
    1,868Contract preclinical research
    
    
    111
    
    
    
    60Employee compensation
    
    
    620
    
    
    
    324Other accruals
    
    
    686
    
    
    
    585Accrued expenses
    
    $
    3,267
    
    
    $
    2,837
 Comprehensive Loss
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(in thousands)Net loss
    
    $
    (7,804
    )
    
    $
    (6,109
    )
    
    $
    (14,465
    )
    
    $
    (11,591
    )Unrealized gain on available-for-sale securities
    
    
    
    
    
    
    63
    
    
    
    
    
    
    
    155Comprehensive loss
    
    $
    (7,804
    )
    
    $
    (6,046
    )
    
    $
    (14,465
    )
    
    $
    (11,436
    )
 Note 6 Revenue
    9




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Note 7  Commitments and Contingencies
     10




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Note 8  Stock-Based Compensation
 Stock Options
  
    
    five percent of the outstanding shares of our common stock on the last day of the
immediately preceding fiscal year;
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
    
    1,785,714 shares; and
    
    such other amount as our board of directors may determine.
   Weighted-AverageShares
    
    
    
    
    
    
    ExerciseAvailable for
    
    
    Options
    
    
    Price perGrant
    
    
    Outstanding
    
    
    ShareBalance at December 31, 2009
    
    
    1,013,256
    
    
    
    2,847,549
    
    
    $
    1.94Authorized increase in 2008 Plan shares
    
    
    1,095,074
    
    
    
    
    
    
    
    Expired
    
    
    (30,795
    )
    
    
    
    
    
    
    Granted
    
    
    (1,018,185
    )
    
    
    1,018,185
    
    
    
    6.15Exercised
    
    
    
    
    
    
    (148,914
    )
    
    
    1.07Cancelled
    
    
    156,560
    
    
    
    (156,560
    )
    
    
    9.85Balance at June 30, 2010
    
    
    1,215,910
    
    
    
    3,560,260
    
    
    $
    2.84
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Expected volatility
    
    
    77
    %
    
    
    75
    %
    
    
    77
    %
    
    
    71% - 75
    %Expected term (in years)
    
    
    6.08
    
    
    
    6.08
    
    
    
    6.08
    
    
    
    6.08Risk-free interest rate
    
    
    2.45
    %
    
    
    2.64
    %
    
    
    2.45% - 2.77
    %
    
    
    2.13% -2.64
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
 Stock-Based Compensation Summary.
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(in thousands)Research and development
    
    $
    81
    
    
    $
    217
    
    
    $
    378
    
    
    $
    437General and administrative
    
    
    446
    
    
    
    274
    
    
    
    622
    
    
    
    502Total
    
    $
    527
    
    
    $
    491
    
    
    $
    1,000
    
    
    $
    939
  Note 9  Related-Party Transactions
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Note 10  Subsequent Events
    
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, which are subject to the safe harbor created by those sections.
Forward-looking statements are based on our managements beliefs and assumptions and on information
currently available to our management. All statements other than statements of historical facts are
forward-looking statements for purposes of these provisions. In some cases you can identify
forward-looking statements by terms such as may, will, should, could, would, expect,
plan, anticipate, believe, estimate, project, predict, and potential, and similar
expressions intended to identify forward-looking statements. Examples of these statements include,
but are not limited to, statements regarding:
 
    
    our ability to advance our PDE10 program through the completion of Phase 1
clinical trials with the funding we may receive from The Stanley Medical Research
Institute;
    
    our ability to release the results from our ongoing Phase 3 clinical program
of OMS103HP for ACL reconstruction surgery by year-end 2010;
    
    our ability to market OMS103HP by 2012, at the earliest;
    
    our expectations regarding the clinical benefits of our product candidates,
including whether OMS103HP will be the first commercially available drug delivered
directly to the surgical site to improve function following arthroscopic surgery;
    
    our capability to continue high-throughput de-orphanization of orphan GPCRs
and to develop product candidates that act at these new potential drug targets;
    
    our estimates regarding our future net losses, revenues, research and
development expenses and general and administrative expenses;
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
    
    our estimate regarding how long our existing cash, cash equivalents and
short-term investments will be sufficient to fund our anticipated operating expenses,
capital expenditures and note payments; and
    
    our involvement in potential claims and legal proceedings, the expected
course and costs of existing claims and legal proceedings, and the potential outcomes and
effects of both existing and potential claims and legal proceedings on our business,
prospects, financial condition and results of operations.
 Our actual results could differ materially from those anticipated in these forward-looking
statements for many reasons, including the risks, uncertainties and other factors described in this
Quarterly Report on Form 10-Q under the heading Risk Factors and in our other filings with the
Securities and Exchange Commission. Given these risks, uncertainties and other factors, you should
not place undue reliance on these forward-looking statements. Also, these forward-looking
statements represent our managements estimates and assumptions only as of the date of the filing
of this Quarterly Report on Form 10-Q . You should read this Quarterly Report on Form 10-Q
completely and with the understanding that our actual future results may be materially different
from what we expect. Except as required by law, we assume no obligation to update these
forward-looking statements publicly, or to update the reasons actual results could differ
materially from those anticipated in these forward-looking statements, even if new information
becomes available in the future.
 The following discussion and analysis should be read in conjunction with the unaudited
consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on
Form 10-Q.
 Overview
 Background
    14




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g g
   Revenue
  Research and Development Expenses
  
    
    employee and consultant-related expenses, which include salaries and benefits;
    
    external research and development expenses incurred pursuant to agreements with
third-party manufacturing organizations, contract research organizations and clinical trial
sites;
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
    
    facilities, depreciation and other allocated expenses, which include direct
and allocated expenses for rent and maintenance of facilities and depreciation of leasehold
improvements and equipment; and
    
    third-party supplier expenses including laboratory and other supplies.
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(in thousands)Clinical Research and DevelopmentSalaries, benefits and related costs
    
    $
    886
    
    
    $
    989
    
    
    $
    1,704
    
    
    $
    1,911Clinical Trials
    
    
    719
    
    
    
    610
    
    
    
    1,076
    
    
    
    1,162Manufacturing services, consulting, laboratory
supplies, and other costs
    
    
    1,386
    
    
    
    380
    
    
    
    2,322
    
    
    
    712Other costs
    
    
    260
    
    
    
    292
    
    
    
    538
    
    
    
    576Stock-based compensation
    
    
    43
    
    
    
    129
    
    
    
    203
    
    
    
    259Total Clinical Research and Development Expenses
    
    
    3,294
    
    
    
    2,400
    
    
    
    5,843
    
    
    
    4,620Preclinical Research and DevelopmentSalaries, benefits and related costs
    
    
    917
    
    
    
    647
    
    
    
    1,650
    
    
    
    1,331Research and preclinical studies, consulting,
laboratory supplies, and other costs
    
    
    1,556
    
    
    
    1,052
    
    
    
    2,840
    
    
    
    1,711Other costs
    
    
    316
    
    
    
    390
    
    
    
    694
    
    
    
    759Stock-based compensation
    
    
    37
    
    
    
    88
    
    
    
    175
    
    
    
    178Total Preclinical Research and Development Expenses
    
    
    2,826
    
    
    
    2,177
    
    
    
    5,359
    
    
    
    3,979Total Research and Development Expenses
    
    $
    6,120
    
    
    $
    4,577
    
    
    $
    11,202
    
    
    $
    8,599
   16




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##### Table of Contents



General and Administrative Expenses
  Interest Expense
  Other Income (Expense)
  Critical Accounting Policies and Significant Judgments and Estimates
   
    
    revenue recognition;
    
    research and development expenses, primarily clinical trial expenses;
    
    stock-based compensation;
    
    preferred stock warrant liability; and
    
    fair value measurement of financial instruments.
 17




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##### Table of Contents



Revenue Recognition
   Research and Development Expenses
  Stock-Based Compensation
   Three Months Ended

    
    Six Months EndedJune 30,
    
    June 30,2010
    
    2009
    
    2010
    
    2009Expected volatility
    
    
    77
    %
    
    
    75
    %
    
    
    77
    %
    
    
    71% - 75
    %Expected term (in years)
    
    
    6.08
    
    
    
    6.08
    
    
    
    6.08
    
    
    
    6.08Risk-free interest rate
    
    
    2.45
    %
    
    
    2.64
    %
    
    
    2.45% - 2.77
    %
    
    
    2.13% -2.64
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
 18




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##### Table of Contents



Expected Volatility.
 Expected Term.
 Risk-free Interest Rate.
 Expected Dividend Yield.
   Fair Value Measurement of Financial Instruments
    19




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Results of Operations
 Comparison of Three Months Ended June 30, 2010 and June 30, 2009
 Revenue.
 Research and Development Expenses.
 General and Administrative Expenses.
 Investment Income.
 Interest Expense.
 Other Income (Expense).
 Comparison of Six Months Ended June 30, 2010 and June 30, 2009
 Revenue.
 Research and Development Expenses.
 20




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General and Administrative Expenses.
 Investment Income.
 Interest Expense.
 Other Income (Expense).
 Liquidity and Capital Resources
   Operating activities.
 Investing activities.
 Financing activities.
 21




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22




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Funding Requirements
  
    
    the progress and results of our clinical trials for OMS103HP, OMS302, OMS201
and our Addiction program;
    
    costs related to manufacturing services;
    
    whether the hiring of a number of new employees to support our continued
growth during this period will occur at salary levels consistent with our estimates;
    
    the scope, rate of progress, results and costs of our preclinical testing,
clinical trials and other research and development activities for additional product
candidates;
    
    the terms and timing of payments of any collaborative or licensing agreements
that we have or may establish, including pursuant to our agreements with Daiichi-Sankyo
Company, Limited, Helion Biotech, ApS and North Coast Biologics;
    
    market acceptance of our approved products;
    
    the cost, timing and outcomes of the regulatory processes for our product
candidates;
    
    the costs of commercialization activities, including product manufacturing,
marketing, sales and distribution;
    
    the number and characteristics of product candidates that we pursue;
    
    the cost of establishing clinical and commercial supplies of our product
candidates;
    
    the cost of preparing, filing, prosecuting, defending and enforcing patent
claims and other intellectual property rights;
    
    the extent to which we acquire or invest in businesses, products or
technologies, although we currently have no commitments or agreements relating to any of
these types of transactions other than our right to acquire assets for our GPCR program
from Patobios Limited for $10.8 million CAD in cash and stock;
    
    whether we receive grant funding for our programs;
    
    our degree of success in commercializing OMS103HP and other product
candidates; and
    
    the extent to which we draw down funds under our committed equity line
financing facility.
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Contractual Obligations and Commitments
  Off-Balance Sheet Arrangements
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  24




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ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  
 PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
   
 ITEM 1A. RISK FACTORS
 Our business, prospects, financial condition or operating results could be materially
adversely affected by any of the risks described below, as well as other risks not currently known
to us or that we currently deem immaterial. You should carefully consider these risks before making
an investment decision. The trading price of our common stock could decline due to any of these
risks and you may lose all or part of your investment. In assessing the risks described below, you
should also refer to the other information contained in this Quarterly Report on Form 10-Q .
 25




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Risks Related to Our Product Candidates and Operations
 Our success largely depends on the success of our lead PharmacoSurgery tm product candidate, OMS103HP, and we cannot be certain that it will receive regulatory approval or
be successfully commercialized. If we are unable to commercialize OMS103HP, or experience
significant delays in doing so, our business will be materially harmed.
   Our success is also dependent on the success of our additional PharmacoSurgery product candidates,
OMS302 and OMS201, and we cannot be certain that either will advance through clinical testing,
receive regulatory approval or be successfully commercialized.
   We have a history of operating losses and we may not achieve or maintain profitability.
  26




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We are subject to extensive government regulation, including the requirement of approval before our
products may be marketed.
      27




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If our clinical trials are delayed, we may be unable to develop our product candidates on a timely
basis, which will increase our development costs and delay the potential commercialization of our
products and the subsequent receipt of revenue from sales, if any.
  
    
    discussions with the FDA or comparable foreign authorities regarding the scope or
design of our clinical trials;
    
    delays or the inability to obtain required approvals from IRBs or other governing
entities at clinical sites selected for participation in our clinical trials;
    
    delays in enrolling patients into clinical trials;
    
    lower than anticipated retention rates of patients in clinical trials;
    
    the need to repeat or conduct additional clinical trials as a result of problems such
as inconclusive or negative results, poorly executed testing or unacceptable design;
    
    an insufficient supply of product candidate materials or other materials necessary to
conduct our clinical trials;
    
    the need to qualify new suppliers of product candidate materials for FDA and foreign
regulatory approval;
    
    an unfavorable FDA inspection or review of a clinical trial site or records of any
clinical investigation;
    
    the occurrence of drug-related side effects or adverse events experienced by
participants in our clinical trials; or
    
    the placement of a clinical hold on a trial.
  
    
    failure to conduct the clinical trial in accordance with regulatory requirements or
our clinical protocols;
    
    inspection of the clinical trial operations or trial sites by the FDA or other
regulatory authorities resulting in the imposition of a clinical hold;
    
    unforeseen safety issues or any determination that a trial presents unacceptable
health risks; or
    
    lack of adequate funding to continue the clinical trial, including the incurrence of
unforeseen costs due to enrollment delays, requirements to conduct additional trials and
studies and increased expenses associated with the services of our contract research
organizations, or CROs, and other third parties.
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If we are unable to raise additional capital when needed or on acceptable terms, we may be unable
to complete the development and commercialization of OMS103HP and our other product candidates, or
continue our other preclinical development programs.
  
    
    complete the Phase 3 clinical program of OMS103HP for use in arthroscopic ACL
reconstruction surgery and begin related commercialization activities;
    
    initiate, conduct and complete the Phase 3 clinical trials of OMS103HP for use in
arthroscopic partial  meniscectomy surgery, should we elect to proceed with these Phase 3 clinical
trials;
    
    conduct and complete the clinical trials of OMS302 for use during lens replacement
surgery;
    
    conduct and complete the clinical trials of OMS201 for use in endoscopic surgery of
the urological tract;
    
    continue our research and development;
    
    make milestone payments to our collaborators;
    
    make principal and interest payments due under our debt facility with BlueCrest
Venture Finance Master Fund Limited, or BlueCrest;
    
    initiate and conduct clinical trials for other product candidates; and
    
    launch and commercialize any product candidates for which we receive regulatory
approval.
   The terms of our debt facility place restrictions on our operating and financial flexibility and if
we raise additional capital through debt financing the terms of any new debt could further restrict
our ability to operate our business.
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Our lead product candidate OMS103HP or future product candidates may never achieve market
acceptance even if we obtain regulatory approvals.
  
    
    our ability to provide acceptable evidence of safety and efficacy;
    
    availability, relative cost and relative efficacy of alternative and competing
treatments;
    
    the effectiveness of our marketing and distribution strategy to, among others,
hospitals, surgery centers, physicians and/or pharmacists;
    
    prevalence of the surgical procedure or condition for which the product is approved;
    
    acceptance by physicians of each product as a safe and effective treatment;
    
    perceived advantages over alternative treatments;
    
    relative convenience and ease of administration;
    
    the availability of adequate reimbursement by third parties;
    
    the prevalence and severity of adverse side effects;
    
    publicity concerning our products or competing products and treatments; and
    
    our ability to obtain sufficient third-party reimbursement for our products.
  30




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We rely on third parties to conduct portions of our preclinical research and clinical trials. If
these third parties do not perform as contractually required or otherwise expected, we may not be
able to obtain regulatory approval for or commercialize our product candidates.
  If we are unable to establish sales and marketing capabilities or enter into agreements with third
parties to market and sell our product candidates, we may be unable to generate product revenue.
  
    
    our inability to recruit and retain adequate numbers of effective sales and marketing
personnel;
    
    the inability of sales personnel to obtain access to or persuade adequate numbers of
hospitals, surgery centers, physicians and/or pharmacists to purchase, use or prescribe
our approved product candidates;
    
    the lack of complementary products to be offered by sales personnel, which may put us
at a competitive disadvantage relative to companies with more extensive product lines; and
    
    unforeseen costs and expenses associated with creating an independent sales and
marketing organization.
  We have no ability to manufacture clinical or commercial supplies of our product candidates and
currently intend to rely solely on third parties to manufacture clinical and commercial supplies of
all of our product candidates.
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If the contract manufacturers that we rely on experience difficulties with manufacturing our
product candidates or fail FDA inspections, our clinical trials, regulatory submissions and ability
to commercialize our product candidates and generate revenue may be significantly delayed.
    32




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Ingredients necessary to manufacture our PharmacoSurgery product candidates may not be available on
commercially reasonable terms, if at all, which may delay the development and commercialization of
our product candidates.
  We may need licenses for active ingredients from third parties so that we can develop and
commercialize some products from some of our current preclinical programs, which could increase our
development costs and delay our ability to commercialize products.
  Our ability to pursue the development and commercialization of product candidates from our MASP-2
program depends on the continuation of licenses from third parties.
  33




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Our ability to pursue the development and commercialization of product candidates from our MASP-2
program depends on third-party antibody developers and manufacturers.
  Our programs may not produce product candidates that are suitable for clinical trials or that can
be successfully commercialized.
  Because we have a number of development programs and are considering a variety of product
candidates, we may expend our limited resources to pursue a particular candidate or candidates and
fail to capitalize on candidates or indications that may be more profitable or for which there is a
greater likelihood of success.
  It is difficult and costly to protect our intellectual property and our proprietary technologies,
and we may not be able to ensure their protection.
  34




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##### Table of Contents




    
    we might not have been the first to make the inventions covered by any of our
patents, if issued, or our pending patent applications;
    
    we might not have been the first to file patent applications for these inventions;
    
    others may independently develop similar or alternative technologies or products or
duplicate any of our technologies or products;
    
    we may not be able to generate sufficient data to fully support patent applications
that protect the entire breadth of developments expected to result from our development
programs including the GPCR program;
    
    it is possible that none of our pending patent applications will result in issued
patents or, if issued, that   these patents will be sufficient to protect our technology or
provide us with a basis for commercially viable products or  provide us with any
competitive advantages;
 35




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##### Table of Contents




    
    if our pending applications issue as patents, they may be challenged by third parties
as not infringed, invalid or unenforceable under U.S. or foreign laws;
    
    if issued, the patents under which we hold rights may not be valid or enforceable; or
    
    we may develop additional proprietary technologies or products that are not
patentable and which are unlikely to be adequately protected through trade secrets if, for
example, a competitor were to independently develop duplicative, similar or alternative
technologies or products.
   We may incur substantial costs as a result of litigation or other proceedings relating to patent
and other intellectual property rights.
    36




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We use hazardous materials in our business and must comply with environmental laws and regulations,
which can be expensive.
  The loss of members of our management team could substantially disrupt our business operations.
  We rely on highly skilled personnel and, if we are unable to retain or motivate key personnel or
hire qualified personnel, we may not be able to maintain our operations or grow effectively.
  37




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Our former chief financial officer has filed a lawsuit against us and our current and former
directors, the defense of which may consume our time and resources, harm our reputation and the
reputations of our current and former directors, and materially negatively affect our financial
position and cause our stock price to decline.
   As a public company we incur increased costs and demands on management as a result of complying
with the laws and regulations affecting public companies, which could affect our operating results.
   38




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Risks Related to Our Industry
 Our competitors may develop products that are less expensive, safer or more effective, or which may
otherwise diminish or eliminate the commercial success of any potential products that we may
commercialize.
   
    
    develop and market products that are less expensive or more effective than any future
products developed from our product candidates;
    
    commercialize competing products before we can launch any products developed from our
product candidates;
    
    operate larger research and development programs, possess commercial-scale
manufacturing operations or have substantially greater financial resources than we do;
    
    initiate or withstand substantial price competition more successfully than we can;
    
    have greater success in recruiting skilled technical and scientific workers from the
limited pool of available talent;
    
    more effectively negotiate third-party licenses and strategic relationships; and
    
    take advantage of acquisition or other opportunities more readily than we can.
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##### Table of Contents



Our product candidates could be subject to restrictions or withdrawal from the market and we may be
subject to penalties if we fail to comply with regulatory requirements, or if we experience
unanticipated problems with our product candidates, if and when any of them are approved.
  
    
    restrictions on such product candidates or manufacturing processes;
    
    withdrawal of the product candidates from the market;
    
    voluntary or mandatory recalls;
    
    fines;
    
    suspension of regulatory approvals;
    
    product seizures; or
    
    injunctions or the imposition of civil or criminal penalties.
  Failure to obtain regulatory approval in foreign jurisdictions would prevent us from marketing our
products internationally.
  40




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##### Table of Contents



If we are unable to obtain adequate reimbursement from governments or third-party payors for any
products that we may develop or if we are unable to obtain acceptable prices for those products,
they may not be purchased or used and, as a result, our revenue and prospects for profitability
could suffer.
  
    
    a covered benefit under its health plan;
    
    safe, effective and medically necessary;
    
    appropriate for the specific patient;
    
    cost-effective; and
    
    neither experimental nor investigational.
  Product liability claims may damage our reputation and, if insurance proves inadequate, these
claims may harm our business.
 41




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##### Table of Contents



Risks Related to Our Common Stock
 Our stock price has been and may continue to be volatile, and the value of an investment in our
common stock may decline.
  
    
    results from our clinical trial programs, including our ongoing Phase 3 clinical
program for OMS103HP for use in ACL reconstruction surgery, our ongoing Phase 2b clinical
trial for OMS302, our ongoing Phase 1/Phase 2 clinical trial for OMS201, and our ongoing
Phase 2 clinical trial for our Addiction program;
    
    FDA or international regulatory actions, including failure to receive regulatory
approval for any of our product candidates;
    
    announcements regarding the progress of our GPCR program;
    
    failure of any of our product candidates, if approved, to achieve commercial success;
    
    quarterly variations in our results of operations or those of our competitors;
    
    our ability to develop and market new and enhanced product candidates on a timely
basis;
    
    announcements by us or our competitors of acquisitions, regulatory approvals,
clinical milestones, new products, significant contracts, commercial relationships or
capital commitments;
    
    third-party coverage and reimbursement policies;
    
    additions or departures of key personnel;
    
    commencement of, or our involvement in, litigation;
    
    our ability to meet our repayment and other obligations under our debt facility with
BlueCrest, pursuant to which we had a notes payable balance of $10.1 million as of June 30, 2010;
    
    changes in governmental regulations or in the status of our regulatory approvals;
 42




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##### Table of Contents




    
    changes in earnings estimates or recommendations by securities analysts;
    
    any major change in our board or management;
    
    general economic conditions and slow or negative growth of our markets; and
    
    political instability, natural disasters, war and/or events of terrorism.
   We expect that we will seek to raise additional capital in the future; however, such capital may
not be available to us on reasonable terms, if at all, when or as we require additional funding. If
we issue additional shares of our common stock or other securities that may be convertible into, or
exercisable or exchangeable for, our common stock, our existing shareholders would experience
further dilution.
  If we sell shares of our common stock under our committed equity line financing facility, our
existing shareholders will experience immediate dilution and, as a result, our stock price may go
down.
  43




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##### Table of Contents



Future sales of shares by existing shareholders could cause our stock price to decline.
  Anti-takeover provisions in our charter documents and under Washington law could make an
acquisition of us, which may be beneficial to our shareholders, more difficult and prevent attempts
by our shareholders to replace or remove our current management.
  Our management has broad discretion over the use of the net proceeds we received from our initial
public offering and that we may receive under our committed equity line financing facility, and we
and may not use the net proceeds in ways that increase the value of our stock price.
  We have never declared or paid dividends on our capital stock, and we do not anticipate paying
dividends in the foreseeable future.
 44




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##### Table of Contents



ITEM 6. EXHIBITS
 ExhibitNumber
    
    Description10.1*
    
    Second Amended and Restated Employment Agreement between the registrant and Gregory A. Demopulos, M.D.
dated April 7, 2010.10.2
    
    Exclusive License Agreement between the registrant and Helion Biotech ApS entered into on April 23, 2010.31.1
    
    Certification of Principal Executive Officer Pursuant to Rule 13-14(a) or Rule 15d-14(a) of the
Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Principal Financial Officer Pursuant to Rule 13-14(a) or Rule 15d-14(a) of the
Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Incorporated by reference from Exhibit 10.1 to the registrants Current Report on Form 8-K
filed on April 12, 2010 (File No. 001-34475).
    
    Confidential treatment has been requested for portions of this exhibit. These portions are
omitted from this Quarterly Report on Form 10-Q and have been filed separately with the
Securities and Exchange Commission. 45




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##### Table of Contents



SIGNATURES
  OMEROS CORPORATIONDate: August 10, 2010
    /s/ Gregory A. DemopulosGregory A. Demopulos, M.D.President, Chief Executive Officer
and Chairman of the Board of Directors 46




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##### Table of Contents



INDEX OF EXHIBITS
 ExhibitNumber
    
    Description10.1*
    
    Second Amended and Restated Employment Agreement between the registrant and Gregory A. Demopulos, M.D.
dated April 7, 2010.10.2
    
    Exclusive License Agreement between the registrant and Helion Biotech ApS entered into on April 23, 2010.31.1
    
    Certification of Principal Executive Officer Pursuant to Rule 13-14(a) or Rule 15d-14(a) of the
Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Principal Financial Officer Pursuant to Rule 13-14(a) or Rule 15d-14(a) of the
Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Incorporated by reference from Exhibit 10.1 to the registrants Current Report on Form 8-K
filed on April 12, 2010 (File No. 001-34475).
    
    Confidential treatment has been requested for portions of this exhibit. These portions are
omitted from this Quarterly Report on Form 10-Q and have been filed separately with the
Securities and Exchange Commission. 47