OPKO Health, Inc. — Q3 2019 Form 10-Q
Business context and period. OPKO is a diversified healthcare company with diagnostics operations, principally BioReference Laboratories, and pharmaceutical products and development programs. This unaudited report covers the quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods. Amounts below are in millions unless otherwise stated.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $228.8 | $249.8 | $677.6 | $768.4 |
| Gross profit | $86.9 | $98.9 | $247.4 | $313.3 |
| Gross margin | 38.0% | 39.6% | 36.5% | 40.8% |
| Operating loss | $(39.0) | $(33.5) | $(161.6) | $(81.2) |
| Net loss | $(62.0) | $(27.7) | $(202.6) | $(77.0) |
| Loss per share | $(0.11) | $(0.05) | $(0.35) | $(0.14) |
Service revenue fell 10.7% in Q3 and 14.6% for the nine-month period. Product revenue was broadly flat; intellectual-property and other revenue was also broadly flat in Q3 and increased 4.4% year to date. Pfizer-related revenue contributed $19.5 million in Q3 and $55.1 million in the first nine months. Gross margins contracted, while operating losses widened, particularly year to date.
Cash flow and balance sheet. Operating cash use was $126.5 million for the first nine months, versus $74.5 million in 2018; investing cash use was $9.5 million, and financing provided $104.6 million. Cash declined to $64.7 million from $96.5 million at year-end 2018. Current assets were $292.8 million and current liabilities $270.1 million. Total assets were $2.37 billion; total liabilities were $727.6 million and shareholders’ equity $1.64 billion.
At September 30, OPKO had $200 million principal of 2025 convertible notes, $55 million of 2023 convertible notes, $3 million of 2033 senior notes, and $56.1 million outstanding on revolving and other lines of credit. The 2025 notes carry a 4.5% coupon, but the reported effective interest rate is 11.2% due to discount amortization. Interest expense rose to $16.0 million for the first nine months from $7.9 million.
Material changes, outlook and risks
- Lower diagnostic reimbursement, higher denial rates, PAMA-related pricing effects, and the Novitas non-coverage decision for 4Kscore weighed on service revenue. Management cited reduced clinical test volumes, partly offset by higher genomics volumes and cost-reduction efficiencies at BioReference.
- Management reported that GeneDx received notice of a Medicare payment suspension effective September 27, 2019, potentially lasting up to 180 days. Medicare reimbursements to GeneDx were approximately $10 million in 2018; OPKO said the suspension could materially harm GeneDx and planned to seek its removal.
- Q3 other expense included investment fair-value movements; nine-month other expense was $20.4 million, primarily unrealized losses on equity investments. Nine-month SG&A included $12.6 million of legal expenses. A $0.7 million impairment was recorded against FineTech intangible assets.
- After quarter-end, Pfizer and OPKO announced that the pediatric Phase 3 Somatrogon trial met its non-inferiority primary endpoint. Full study analyses, including immunogenicity, remained ongoing. OPKO noted development costs exceeded estimates and the agreed cap, and that negotiations with Pfizer over cost overruns and other obligations remained important.
- On October 29, 2019, OPKO issued 50 million shares at $1.50 per share, receiving approximately $70 million net. Management said cash on hand, available credit and offering proceeds were expected to cover anticipated operating and debt-service needs beyond 12 months, while warning estimates depend on assumptions and additional funding may be needed.
- Key exposures include the AMCA data-security incident and related litigation and inquiries; prior SEC-related litigation and other class and derivative suits; government scrutiny of laboratory billing and reimbursement; reimbursement uncertainty; and potential goodwill or in-process R&D impairment. The filing says no impairment resulted from the interim evaluation, but a significant decline in stock price and market capitalization could be an impairment indicator.
- Management expects substantial R&D spending and SG&A investment. Open purchase commitments were approximately $77.5 million; the filing also identifies potential contingent consideration of up to $149.1 million, subject to milestones.
Most important facts for investors to verify
- Whether Novitas finalized 4Kscore coverage terms and whether reimbursement and test volumes recover.
- The duration and financial impact of the GeneDx Medicare suspension, and any further government-payor actions.
- Whether BioReference meets credit-facility requirements and maintains adequate borrowing availability after the facility amendment.
- Somatrogon’s complete trial results, regulatory progress, and allocation of development costs with Pfizer.
- Cash burn, financing needs, dilution from the October offering and convertible notes, and any impairment or litigation developments.