OPKO Health, Inc. — Q2 2017 Form 10-Q
Business context and period. OPKO is a diversified healthcare company with diagnostics operations, principally BioReference, and pharmaceutical products and development programs. This unaudited report covers the quarter and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $314.2 | $357.1 | $610.3 | $648.1 |
| Operating income (loss) | $(26.4) | $28.3 | $(68.2) | $0.7 |
| Net income (loss) | $(17.5) | $15.5 | $(48.5) | $3.6 |
| Basic earnings (loss) per share | $(0.03) | $0.03 | $(0.09) | $0.01 |
| Operating cash flow | Not separately provided | Not separately provided | $(56.6) | $33.6 |
- Revenue mix and changes: Q2 services revenue was $256.7 million, products $29.0 million, and intellectual-property and other revenue $28.6 million. For the first half, the respective amounts were $512.0 million, $51.2 million, and $47.2 million.
- Costs and margins: Q2 service and product costs totaled $157.4 million; first-half costs were $312.2 million. A simple total-revenue-less-service-and-product-cost calculation gives gross profit of $156.8 million (49.9%) in Q2 and $298.1 million (48.9%) for the first half. These percentages are affected by intellectual-property revenue and are not directly comparable as product or service margins.
- Key expenses: SG&A was $128.3 million in Q2 and $265.0 million in the first half, up from $117.5 million and $245.5 million, respectively. R&D was $32.6 million in Q2 and $58.6 million for the first half. First-half intangible amortization was $35.9 million.
- Cash and liquidity: Cash and equivalents were $130.5 million at June 30, 2017, down $38.2 million from year-end 2016. Current assets were $472.5 million and current liabilities $283.1 million (current ratio approximately 1.67). First-half investing cash outflow was $16.4 million, including $16.8 million of capital expenditures; financing provided $33.9 million, primarily from net line-of-credit borrowings.
- Debt: Outstanding lines of credit totaled $80.7 million; principal on the 2033 Senior Notes was $31.9 million, and other notes and debt totaled $5.7 million. The filing reports $120.2 million of total availability under the credit agreement and other lines, with $80.7 million outstanding. The revolving facility matures in 2020; the Senior Notes carry a 3% coupon and mature in 2033.
- Balance sheet: Total assets were $2.77 billion and total liabilities $661.9 million. Goodwill, intangible assets, and in-process R&D together represented substantial assets; management notes their valuation and impairment depend on uncertain forecasts and development outcomes.
Material changes versus prior period
- Q2 revenue declined $42.9 million year over year; first-half revenue declined $37.8 million. Lower BioReference GeneDx pricing, partly offset by higher testing volumes, reduced service revenue.
- Intellectual-property revenue fell by about $39.7 million in both Q2 and the first half, mainly because the $50 million Vifor Fresenius upfront Rayaldee license payment was recognized in 2016. The 2017 periods included $10 million of TESARO milestone revenue, as well as Pfizer-related revenue.
- Product revenue increased, principally from OPKO Chile and FineTech. However, no Rayaldee product revenue was recognized in the first half despite its U.S. launch; customer receipts before revenue recognition were deferred.
- Operating results moved from profit to loss. Higher SG&A, cost of revenue, and amortization contributed; lower contingent-consideration expense and interest expense partly offset the increase. First-half operating cash flow swung from $33.6 million provided to $56.6 million used.
Outlook, commentary, risks, and unusual items
- Management said cash on hand and borrowing availability were expected to cover anticipated operating and debt-service needs beyond the next 12 months, but noted assumptions could change. It expects substantial R&D spending and higher SG&A as it expands commercial and administrative activities.
- Management expects to expand the Rayaldee sales and marketing team in the second half of 2017 as market access and prescription trends improve. Rayaldee revenue recognition remains constrained by the company’s inability to reasonably estimate rebates, discounts, returns, and other sales deductions.
- For hGH-CTP, post-hoc analyses excluding outliers showed a statistically significant difference from placebo on the primary endpoint; analyses retaining outliers were mixed. The filing cautions that post-hoc analyses carry less evidentiary weight than the prespecified primary analysis.
- The Waterford, Ireland research, development, and manufacturing facility is expected to cost $30–$40 million, with completion anticipated in 2019; funding is expected from cash or third-party sources.
- BioReference is reviewing allegations from the U.S. Attorney’s Office for the Southern District of New York that it improperly billed Medicare and Tricare for certain hospital inpatient laboratory services from 2006 onward. The company could not determine the merits or potential liability; the outcome could be material. Other regulatory inquiries and laboratory-related document requests are also disclosed.
- Contingent consideration was $51.5 million at quarter-end; additional contingent payments could aggregate up to $159.1 million, depending on future milestones. The company also disclosed $107.5 million of open purchase orders and substantial contractual commitments.
- Fair-value movements in the embedded derivatives of the Senior Notes generated $9.5 million of first-half non-cash income, largely reflecting a decline in OPKO’s share price. First-half inventory-obsolescence expense was $4.8 million, primarily related to Rayaldee. A $0.6 million impairment charge was recorded on the Xenetic investment.
- Management stated disclosure controls were effective at June 30, 2017. ERP implementation and integration of Transition Therapeutics materially affected, or were reasonably likely to materially affect, internal control over financial reporting.
Important facts for investors to verify
- Whether BioReference’s reimbursement allegations lead to a settlement, penalties, or other material liabilities.
- Whether Rayaldee prescriptions, market access, and sales-deduction estimates support revenue recognition and commercial growth.
- Whether OPKO can sustain liquidity and fund operating cash needs, the Waterford project, and clinical programs without additional financing.
- Clinical and regulatory progress for hGH-CTP and other pipeline candidates, particularly given the mixed post-hoc analyses.
- Whether line-of-credit borrowing availability, covenant compliance, contingent consideration, and debt obligations remain manageable.
- Potential impairment exposure from goodwill, intangible assets, and in-process R&D, and the effects of evolving revenue-recognition estimates.