Omeros Made Errors on NIH Grant, But Feds Accepted Internal Investigation Saying They Weren’t Overbilled

Xconomy Seattle — 

Omeros, the Seattle biotech company accused by its former chief financial officer of filing false time records on grant work for the National Institutes of Health, disclosed late last night in a federal court filing that it alerted the government to its internal mistakes, and that the NIH accepted the results of an internal investigation that concluded the company didn’t overbill the government.

Omeros, which is defending itself while simultaneously seeking to raise as much as $80 million in an initial public offering this week, provided a detailed response to charges raised in U.S. District Court on Sept. 21 by Richard J. Klein, its former finance chief. Omeros acknowledged it made mistakes in keeping track of how much time its scientists spent working on an NIH grant to search for new targets for anxiety treatments, but the company spotted the errors and corrected them before it submitted bills to NIH, according to a letter from Omeros general counsel Marcia Kelbon to a federal compliance officer dated May 14. The company ended up underbilling the federal government by $55,000 after it discovered the mistakes in keeping track of its employees’ time.

An assistant compliance officer at NIH, Kathy Hancock, appeared satisfied with Omeros’s summary of what had happened, according to documents disclosed in federal court late last night.

“This email confirms NIH’s review of the report and our acceptance of the corrective actions taken by Omeros,” Hancock wrote in an e-mail on June 29, which was attached in the Omeros federal court filing. “We appreciate you calling this error to our attention.” Hancock added, “We commend your organization for its actions taken to address this issue and to ensure compliance with federal requirements.”

A spokesman for Omeros declined to comment, citing an ongoing “quiet period” mandated by the Securities and Exchange Commission for companies preparing to go public. The NIH’s Hancock and an attorney for Klein didn’t immediately respond to requests for comment.

The letter from Omeros’s Kelbon to the NIH describes what happened with the company’s timekeeping practices in more significant detail than the company’s previous filings. The grant was originally assigned to Seattle-based Primal, a company that was absorbed into Omeros, which assumed responsibility for the grant in 2006. Scientists at the companies were responsible for carrying out work on G-protein coupled receptors as targets for anxiety treatment.

The second year of the grant provided $450,000 in funding from April 1, 2008, through March 31, 2009, according to the Omeros letter to NIH. The scientists’ time on the project was recorded based on daily entries into an electronic timekeeping system called Dovico Timesheets. After Klein learned of mistakes in the company’s timekeeping practices, he reported them under the company whistleblower policy in December, contending that certain employees reported they spent more time working on the grant than they actually had, according to the Omeros account.

The company’s audit committee, helped by outside counsel, investigated the matter, according to the Omeros report. The investigators discovered that a supervisor told employees to estimate how long the work would take them before they started, and enter those amounts of time into the electronic system, instead of waiting to enter their time after the work was done, in an attempt to simplify timekeeping records, Omeros said in its account. This system of predetermined time amounts caused errors, the company audit committee found.

“The supervisor did not intend to overcharge the Grant, and in fact, as discussed below, the Grant was undercharged for salary,” the company wrote in its summary to the NIH. “The supervisor now understands that time allocations must reflect actual time spent, on an after-the-fact reporting basis, rather than advance estimates or other allocations of time.”

From April to September of 2008, Omeros recorded that it was owed about $231,000 in salary and wages for work on the grant, but the company’s investigation found that if the time were correctly calculated, it really invested time worth about $179,000 in wages and salaries, according to the Omeros account. The grant’s budget for salaries was actually much lower—$126,000—and after discovering its internal timekeeping errors, Omeros only charged the NIH for about $71,000 worth of employee work time on the grant, according to the company’s summary of the situation.

Omeros also reviewed salaries and wage charges on its other four NIH grants that it worked on during 2008. That review found “no overstatements” of time recorded versus actual time spent doing the work, the company said.

After the audit committee investigation, Omeros revised its timekeeping policy and distributed it to all employees on Jan. 12, according to last night’s filing. For more information on the case, the case number is 2:09-cv-01342-JCC Klein v. Demopulos et al.