OPKO Health, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. OPKO is a multinational biopharmaceutical and diagnostics company, combining development-stage programs with pharmaceutical operations and a U.S. clinical laboratory. Financial amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 / period-end comparison |
|---|---|---|
| Total revenue | $30.1 million | $22.3 million |
| Operating loss | $56.9 million | $30.3 million loss |
| Net loss attributable to common shareholders | $117.1 million; $0.26 per share | $44.6 million; $0.11 per share |
| Cash from (used in) operating activities | $238.8 million | $(22.6) million |
| Cash and cash equivalents | $348.2 million at March 31 | $96.9 million at December 31, 2014 |
| Total assets / total liabilities | $1.512 billion / $699.7 million | $1.268 billion / $431.9 million at December 31, 2014 |
- Revenue comprised $15.5 million of product sales, $2.1 million of services and $12.5 million from intellectual-property transfer. Pfizer-related revenue represented 42% of total revenue.
- Product revenue declined to $15.5 million from $19.8 million. Management cited a planned Mexican plant shutdown and sales disruption in Europe while negotiating a long-term supply agreement.
- Operating costs included $25.5 million of R&D, $17.4 million of SG&A, $5.2 million of contingent-consideration expense and a one-time $25.9 million grant repayment. R&D and SG&A increased year over year.
- Net loss included $49.8 million of net derivative fair-value expense, principally a $53.7 million non-cash increase in the estimated value of embedded derivatives in the convertible notes. Interest expense was $2.6 million.
- Operating cash flow benefited substantially from the $295 million Pfizer upfront payment. OPKO recognized $12.5 million of it as revenue in the quarter and reported $282.5 million as deferred revenue; therefore, reported positive operating cash flow should not be read as evidence of operating profitability.
- Q1 investing cash outflow was $0.4 million; financing cash inflow was $13.8 million, including $12.7 million from option and warrant exercises. Cash increased by $251.3 million overall.
- At March 31, current liabilities were $182.8 million and current assets were $394.0 million. Current liabilities included $74.8 million of deferred revenue and $52.8 million of contingent consideration.
Material changes and capital structure
- Revenue increased 35% year over year, primarily due to Pfizer agreement revenue, while operating and net losses widened. The larger net loss was driven in significant part by the non-cash note-derivative revaluation and grant repayment.
- In March, holders exchanged $36.4 million principal amount of 2033 Senior Notes for 5.36 million common shares plus accrued interest. At quarter-end, remaining principal was $51.2 million; the balance-sheet carrying amount was $106.7 million, including the embedded derivative and debt discount.
- Other borrowings included $7.9 million outstanding under Chilean and Spanish lines of credit and $2.5 million of mortgages and other debt. The notes carry a 3% coupon; the lines of credit averaged approximately 5.9% interest.
- Common shares issued were 459.3 million at March 31; 458.4 million were outstanding as of April 30. Q1 option and warrant exercises issued 20.5 million shares, in addition to shares issued in the note exchange.
- Goodwill was $223.2 million and in-process research and development was $793.0 million at quarter-end. Management highlighted impairment risk and substantial valuation judgment for these assets.
Outlook, risks and unusual items
- Management expects operating losses and substantial R&D spending to continue for the foreseeable future, with R&D and SG&A expected to rise. It stated that quarter-end cash and available credit were sufficient for anticipated requirements beyond 12 months, while warning that assumptions may change and additional funding may be needed.
- Under the Pfizer agreement, OPKO received a non-refundable $295 million upfront payment, recognized over an expected performance period through 2019. It may receive up to $275 million in regulatory milestones. OPKO remains responsible for funding specified clinical programs; Pfizer funds commercialization and certain other development and post-marketing activities.
- hGH-CTP was in a global Phase 3 adult trial and a global Phase 2 pediatric trial, according to management. Clinical, regulatory, commercialization and partner-execution outcomes remain uncertain. No formal financial guidance was provided.
- On May 5, 2015, after quarter-end, OPKO agreed to acquire EirGen Pharma for approximately $135 million—about $100 million cash and $35 million in stock. The acquisition was not reflected in the March 31 balance sheet.
- Other disclosed exposures include up to $218.5 million of acquisition-related contingent consideration, up to $25 million of potential Merck milestone payments, $13.9 million of open purchase orders, and uncertain tax positions related to the Pfizer transaction. The filing states the ultimate tax exposure could range from zero to approximately $50 million.
- OPKO disclosed a government investigation concerning alleged false claims and an ongoing appeal of a Medicare post-payment review. Management said it was too early to assess the investigation’s outcome or any possible loss. These matters are described in the notes despite the Part II “Legal Proceedings” item stating “None.”
- Foreign-exchange movements, clinical-trial and regulatory failure, dependence on key collaborations, contingent-liability estimates, and possible impairment of goodwill or acquired development assets are material risks. Management reported disclosure controls were effective at March 31, 2015.
Important facts for investors to verify
- How much of future operating cash flow reflects underlying commercial operations versus recognition or timing of collaboration payments, particularly Pfizer deferred revenue.
- Progress, costs and milestone timing for hGH-CTP trials, and the assumptions behind Pfizer revenue recognition through 2019.
- The remaining principal and fair-value volatility of the 2033 Senior Notes, including conversion activity after quarter-end.
- Cash and debt impact of the EirGen acquisition, as well as its subsequent operating contribution and integration costs.
- Developments in the government investigation, Medicare appeal and uncertain tax positions, including whether any loss or additional payment becomes estimable.
- Whether contingent consideration, IPR&D and goodwill valuations change materially as clinical, commercial and regulatory assumptions evolve.