OPKO Health, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; balance sheet compared with December 31, 2011. Dollar amounts are in millions unless otherwise stated. The filing is unaudited.
Business context
OPKO is a multinational pharmaceutical and diagnostics company. Revenue primarily came from pharmaceutical operations in Chile, Mexico and Israel; research and development includes pharmaceutical, diagnostic and vaccine programs. The company said its product candidates were not generating revenue. It operates as one reportable segment.
Key financial metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $10.2 | $8.4 | $19.0 | $15.4 |
| Gross margin, excluding intangible amortization | $3.7 | $3.5 | $7.4 | $6.3 |
| Gross margin percentage | 35.8% | 42.0% | 39.2% | 41.0% |
| Operating loss | $(9.3) | $(4.8) | $(18.2) | $(8.9) |
| Net loss | $(10.2) | $(5.7) | $(18.9) | $(11.5) |
| Net loss attributable to common shareholders | $(10.8) | $(6.4) | $(20.0) | $(12.7) |
| Basic and diluted net loss per share | $(0.04) | $(0.02) | $(0.07) | $(0.05) |
Cash flow and liquidity: For the six months, net cash used in operating activities was $17.8 million, investing activities used $22.4 million, and financing activities provided $6.8 million. Cash and cash equivalents were $38.2 million at June 30, down from $71.5 million at year-end; marketable securities were $17.1 million, for combined cash and securities of $55.3 million. Current assets were $92.3 million and current liabilities $31.7 million.
Debt and preferred stock: Current lines of credit and notes payable totaled $14.6 million at June 30. OPKO reported $6.8 million of additional borrowing availability on Chilean credit lines, with an approximately 7% weighted-average rate; these short-term facilities generally mature within three months. Series D preferred stock had a $29.5 million liquidation value.
Changes versus prior comparable periods
- Q2 revenue rose about 21% year over year; six-month revenue rose about 23%. Growth reflected the acquired Israeli API business, ALS in Chile for Q2, and other revenue from collaboration and consulting arrangements. Lower Mexican revenue partly offset Q2 growth.
- Gross margin dollars increased, but gross margin percentage declined year over year in both periods. Management cited Chilean inventory reserves and lower Mexican revenue as offsets to improved Israeli contribution.
- Operating losses widened materially. Six-month R&D expense increased to $9.3 million from $3.8 million, primarily due to OPKO Diagnostics and expanded CURNA and molecular-diagnostics work. Higher amortization and $2.1 million of contingent-consideration expense also contributed.
- Cash and cash equivalents declined $33.3 million from year-end. Financing cash inflows were much lower than in the prior-year period, which included substantial common-stock issuance.
- The 2011 comparison included losses from the ophthalmic instrumentation business, sold in October 2011; no discontinued-operations loss was reported for 2012.
Outlook, risks and unusual items
- Management expected operating losses and substantial R&D spending to continue for the foreseeable future and said it did not expect near-term profitability. It stated that June 30 cash, securities and available credit were expected to cover anticipated operations and debt service beyond 12 months, while noting assumptions could change and additional funding might be needed.
- Management identified the need for capital to support development, trials, acquisitions and commercialization. Funding may be unavailable or require dilution; absent funding, programs or trials could be delayed, reduced or discontinued.
- On August 2, 2012, after quarter-end, OPKO acquired Spain-based Farmadiet for €13.5 million (reported as approximately $16.8 million): half paid in cash at closing and half payable later in cash or stock. Additional milestone and stock consideration also applies.
- In Q2, the TESARO IPO enabled OPKO to mark its investment to market, recording a $5.3 million unrealized gain in other comprehensive income. The six-month results also included fair-value movements on BZNE and Neovasc investments and $2.1 million of contingent-consideration expense.
- Other notable risks include clinical and regulatory uncertainty, dependence on collaborators and licensed intellectual property, international and currency exposures, acquisition integration, and related-party relationships. Management reported disclosure controls were effective; FineTech control procedures were being implemented following its acquisition.
- OPKO reported ordinary-course litigation that it did not expect to have a material adverse effect, and no material changes to the risk factors in its 2011 Form 10-K.
Important facts for investors to verify
- Whether revenue growth and gross-margin performance can be sustained, particularly in Chile, Mexico and the Israeli API business.
- Cash burn, short-term credit-line renewals, and the actual duration of liquidity given expected operating losses and planned investment.
- Clinical, regulatory and commercial progress for diagnostics and pharmaceutical candidates, which were not yet producing revenue.
- Farmadiet’s post-close funding needs, deferred and milestone consideration, and any dilution from stock-settled payments.
- Valuations and potential recoverability of investment assets, contingent acquisition payments, and the effect of related-party transactions.