Omeros' Epic IPO Voyage Could be Delayed by a Former CFO's Lawsuit

The Seattle biotech navigates the recession and resuscitates its IPO, but its former CFO is now a whistleblower and has erected a legal hurdle.

The 15-year-old Seattle biotech firm Omeros, named after the ancient Greek poet Homer, is on the verge of testing the IPO market with a $75 million offer. But its big plans face an obstacle worthy of the gauntlets its namesake created for the star-crossed hero Odysseus: allegations by its ousted chief financial officer that the firm improperly billed the federal government for grant money it did not deserve.

Sent packing in January, former CFO Richard Klein filed a wrongful-termination lawsuit Sept. 21, which the company disclosed in its updated prospectus on Oct. 2. Omeros is tentatively scheduled to debut its shares on the public market this week. When asked if the legal action would change the debut schedule, a spokeswoman cited quiet period regulations and declined to comment.

Klein says in his suit he blew the whistle nearly a year ago to the company's audit committee, fingering executives who allegedly ordered scientists to overbill the National Institutes of Health. Klein also charges Omeros executives objected to his attempts to change what he calls "questionable" practices beyond the NIH billing. Klein says chief executive Gregory Demopulos told him to "stop creating problems," according to the lawsuit. Klein was placed on leave in January and dismissed on Jan. 29.

Omeros denies Klein's accusations and has filed a countersuit. In an court filing on Oct. 4, the company admits that its VP of science George Gaitanaris gave scientists incorrect instructions, but the "erroneous time- keeping practices" actually resulted in the company under-billing the NIH. In a letter to the NIH to disclose the problems, the company's general counsel wrote in May that Omeros decided to change the way it tracks employee time spent on grant-based projects. Omeros denies that it retaliated against Klein for his whistleblowing.

Omeros revealed Klein's allegations in its Sept. 16 prospectus update and said they might lead to litigation. That was five days before he filed suit. The previous S-1 update, filed in June, makes no mention of Klein's accusations, although it devotes some space to his pay package and that his "employment with us ended in January 2009."

The Web site Xconomy.com first reported the lawsuit Friday night.

The Klein lawsuit comes to light as Omeros prepares to go public with an offer of 6.8 million shares at $10 to $12 per share. Life-science investors are keen to see market reaction to the first true venture-backed biotech issue since early 2008. Talecris Biotherapeutics debuted successfully last week, but the plasma-making firm is profitable, and its main backers were leveraged-buyout artists seeking to cash out their investment.

Another drug company, Cumberland Pharmaceuticals, also went public this summer, but its specialty focus and in-house ownership also made it apples-to-oranges when compared to development-stage biotechs that, in the past, have counted on a welcoming IPO market to create a full menu of financing options.

Omeros's lead candidate is OMS103HP, a locally administered anti-inflammatory in Phase 3 trials to treat patients during and after reconstructive knee surgery.

In its counterclaims, Omeros said that after Klein blew the whistle, he conducted an "unauthorized personal investigation" of the matter and "bullied and berated the finance department staff, resulting in half the staff tendering or threatening their resignations."

Omeros is countersuing Klein for breach of contract and mishandling company secrets, claiming he removed company files from his work computer. He also has not returned his company-issued Blackberry. "Plaintiff's complaint was made in bad faith and was an attempt at self-preservation, not concern for or about Omeros or its billings to the federal government," Omeros charges in its countersuit.

In addition to the corporation, Klein is suing Demopulos and all six Omeros board members, including Demopulos's brother Peter, a Seattle cardiologist, and biotech pioneer Leroy Hood, a prominent systems biologist who co-founded Amgen Inc. and several other companies. Another defendant, David Mann, left the board in March soon after Klein's dismissal.

Gaitanaris, who is accused in the lawsuit of fraudulent activity, is not named as a defendant. Gaitanaris was co-founder of Nura, a neuroscience-focused discovery firm that Omeros bought in 2006 for $14 million in stock minus the assumption of $2.4 million in debt.

Debt comes into play in Klein's lawsuit. He says he discovered in the fall of 2008 Omeros was six months delinquent in paying debt to Washington state, but when he brought up the debt and other issues to CEO Demopulos, Klein was "rebuffed and told not to worry about them."

The firm's most recent round of venture funding came in early 2007, when it notched a $63 million Series E. It opened a $20 million debt facility in September 2008, and this year it has announced more than $3.5 million in grants and payments from nonprofits. As of June 30, the only institutional investor with reportable ownership was Arch Venture Partners, with 5.1 percent. CEO Demopulos held the most among company officials with 16 percent.

Deutsche Bank is leading a team of six underwriters.

-Alex Lash ( [email protected] )