OPKO Health, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. OPKO operates pharmaceutical and diagnostics businesses, including BioReference Laboratories, Rayaldee and partnered drug-development programs. Amounts below are in U.S. dollars; financial statements are unaudited.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $249.8 million | $246.0 million | $768.4 million | $805.0 million |
| Operating loss | $33.5 million | $47.8 million | $81.2 million | $118.8 million |
| Net loss | $27.7 million | $35.9 million | $77.0 million | $87.3 million |
| Loss per share, basic and diluted | $0.05 | $0.06 | $0.14 | $0.16 |
| Operating cash flow | Not separately presented | Not separately presented | $(74.5) million | $(94.2) million |
Q3 gross profit was approximately $98.9 million, or 39.6% of revenue; nine-month gross profit was approximately $313.3 million, or 40.8%. Q3 revenue increased 1.5% year over year, while nine-month revenue declined 4.5%. Q3 improvement in operating and net losses was supported in part by lower SG&A and lower contingent-consideration expense versus the prior-year quarter.
- Revenue mix: Q3 services revenue was $202.8 million, product revenue $25.4 million, and intellectual-property and other revenue $21.6 million. Nine-month amounts were $630.2 million, $81.8 million, and $56.5 million, respectively.
- Drivers and pressure: Q3 service revenue was nearly flat. Management cited lower test volumes, PAMA-related clinical reimbursement reductions, lower genomics reimbursement and payor accruals, partly offset by improved collections. For the first nine months, service revenue fell $33.2 million; product revenue rose $7.8 million, including $14.3 million from Rayaldee; IP revenue fell $11.2 million, largely reflecting lower Pfizer-related revenue and fewer licensee milestone revenues.
- Expenses: Q3 SG&A was $84.1 million versus $103.2 million; nine-month SG&A was $263.2 million versus $318.7 million. R&D was $30.2 million in Q3 and $92.3 million for nine months, broadly level year over year for the nine-month period. Nine-month contingent-consideration income was $12.4 million, a noncash fair-value benefit.
Financial position, cash flow and debt
- At September 30, cash and cash equivalents were $43.7 million, down from $91.5 million at December 31, 2017. Current assets were $289.8 million and current liabilities $317.8 million.
- Nine-month cash used in operations was $74.5 million; investing activities used $23.2 million, including $24.8 million in capital expenditures. Financing provided $50.2 million, including issuance of $55.0 million of convertible notes. Cash declined by $47.8 million over the period.
- Outstanding borrowings included $109.7 million under lines of credit, $55.0 million principal of 2023 convertible notes at 5%, and $31.9 million principal of 2033 senior notes at 3%, plus other debt. The 2033 notes had a holder put date of February 1, 2019. BioReference’s revolving facility matures in November 2020; $10.7 million of additional capacity was available under that facility at quarter-end.
- Goodwill, in-process R&D and other intangible assets totaled approximately $2.0 billion, about 80% of total assets, creating material impairment sensitivity to development, regulatory and commercial assumptions.
Material changes, outlook and key risks
- OPKO adopted Topic 606 retrospectively in 2018. The adoption reduced accumulated equity at December 31, 2017 by $29.8 million and changed the presentation of service revenue and related expenses. Investors should use the restated comparative figures in assessing trends.
- Management said it expected research and development and commercial operating expenses to increase. It believed quarter-end cash, available credit and the November equity financing would fund anticipated operations and debt service for more than 12 months, while cautioning that assumptions may change and additional funding may be needed.
- After quarter-end, OPKO agreed to sell approximately 26.5 million shares for $92.5 million, subject to Nasdaq listing approval. Buyers included an affiliate of CEO Phillip Frost ($70 million) and Vice Chairman Jane Hsiao ($2 million). OPKO also entered into a $60 million unsecured line of credit from a Frost affiliate, bearing 10% interest and maturing in 2023.
- Rayaldee generated $5.8 million of Q3 net product revenue and $14.3 million for the nine months. A Phase 2 study in dialysis patients began in September; initial cohort data were expected in 2019. Canadian approval was obtained through partner VFMCRP. Additional milestone, royalty and partner revenue opportunities remain contingent on development, approvals and sales.
- OPKO disclosed the SEC’s September 2018 lawsuit alleging, among other claims, that the Company aided and abetted an alleged securities “pump and dump” scheme and failed to make required ownership filings. The Company said the complaint did not allege issues with OPKO’s financial statements or business practices and stated it would defend itself. Related class and derivative litigation followed; OPKO could not estimate a possible loss range.
- Other material risks include a federal inquiry concerning BioReference billing to Medicare and TRICARE, a payor-overpayment liability of approximately $32.5 million, reimbursement and collection uncertainty, PAMA rate reductions, and potential loss or limitation of 4Kscore coverage. A draft Medicare coverage determination had proposed no 4Kscore coverage in a relevant jurisdiction; reimbursement continued at the filing date.
- OPKO committed to $85.7 million of ordinary-course purchase orders, principally due in the remaining three months of 2018. Construction of its Waterford, Ireland facility was expected to cost $40–$45 million in total; approximately $38.8 million had been spent through September 30, with completion expected in 2019.
Most important facts for investors to verify
- Completion and Nasdaq approval of the $92.5 million private placement, and actual availability and use of the $60 million related-party credit line.
- Cash burn, BioReference collections and reimbursement trends, including PAMA impacts, the $32.5 million payor-overpayment liability and 4Kscore coverage decisions.
- Outcome, insurance coverage and potential financial exposure from the SEC action, related shareholder suits and healthcare billing inquiries.
- Rayaldee sales growth and trial progress; Pfizer hGH-CTP regulatory pathway and milestones; and whether contingent partner payments and royalties materialize.
- Repurchase/refinancing plans for the 2033 notes with the February 2019 holder put, borrowing availability and covenant compliance.
- Impairment assumptions for the substantial goodwill and intangible-asset balances, and whether the Ireland facility remains within expected cost and timing.