OPKO Health, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; unaudited. OPKO is a multinational pharmaceutical and diagnostics company, with operating revenue primarily from pharmaceutical businesses in Chile and Mexico and ophthalmic instrumentation. Its diagnostic and pharmaceutical candidates were not yet generating revenue.
Financial results
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Revenue | $10.1 million | $7.5 million | $18.8 million | $15.4 million |
| Gross margin, excluding intangible amortization | $3.9 million; 38.8% | $2.6 million; 34.9% | $7.0 million; 37.0% | $5.0 million; 32.5% |
| Operating loss | $(5.2) million | $(5.5) million | $(10.2) million | $(9.6) million |
| Net loss | $(5.7) million | $(6.2) million | $(11.5) million | $(10.9) million |
| Net loss attributable to common shareholders | $(6.4) million | $(6.9) million | $(12.7) million | $(12.2) million |
| Loss per share, basic and diluted | $(0.02) | $(0.03) | $(0.05) | $(0.05) |
Cash flow and liquidity: First-half operating cash use was $8.6 million, versus $11.3 million in the prior-year period. Investing activities used $66.1 million, including $55.0 million net purchases of marketable securities and $10.5 million for acquisitions. Financing provided $95.4 million, principally from the stock offering. Cash and cash equivalents were $38.8 million at quarter-end; marketable securities were $55.0 million, for combined cash, equivalents and securities of approximately $93.8 million.
Debt and balance sheet: Current lines of credit totaled $14.6 million, primarily short-term Chilean facilities averaging approximately 8% interest; about $3.3 million was unused. A separate $12.0 million related-party Frost Group credit line was undrawn and available through March 2012 at 11% interest. Total liabilities were $23.1 million and total assets were $160.4 million at June 30, 2011. Series D preferred stock had a $34.2 million liquidation value.
Material changes versus the prior comparable period
- Q2 revenue rose 36% year over year, mainly from growth in the Chilean and Mexican pharmaceutical businesses. First-half revenue rose 22%; the comparison also reflects that Exakta-OPKO contributed only after its February 2010 acquisition in the prior-year period.
- Instrumentation revenue declined, primarily due to lower international OCT/SLO sales. Pharmaceutical product revenue increased: $8.4 million in Q2 versus $5.3 million, and $15.4 million for the half versus $10.6 million.
- Gross margin increased in both comparison periods, driven by the pharmaceutical businesses. Q2 operating loss narrowed, but first-half operating loss widened as R&D and SG&A costs increased.
- R&D expense increased to $3.2 million in Q2 and $4.8 million for the half, reflecting molecular diagnostics work, CURNA technology development and other programs. First-half SG&A rose to $10.5 million, partly due to distribution costs and a full period of Mexican operations.
- In January 2011, OPKO acquired CURNA for $10.0 million cash plus assumed liabilities and contingent consideration; acquired technology and patents were recorded as intangible assets. In March, OPKO issued 29.4 million shares at $3.75 per share, generating $104.8 million net proceeds. It repurchased 2.4 million shares for $7.8 million in June and redeemed Series A preferred stock for $1.8 million.
- Common shares outstanding increased from 255.4 million at December 31, 2010 to 287.9 million at June 30, 2011.
Outlook, risks and unusual items
- Management expected operating losses and substantial R&D spending to continue for the foreseeable future; it did not provide numerical revenue or earnings guidance. The company stated that quarter and half-year results were not necessarily indicative of full-year results.
- Management believed quarter-end cash, securities and available credit were sufficient for anticipated operating needs and debt service beyond 12 months, but emphasized that this estimate depends on assumptions. Acquisitions, faster development or additional clinical trials could require further funding; unavailable financing could force program delays, reductions or cancellations.
- Key risks include early-stage, unproven technologies; clinical and regulatory uncertainty; reliance on future diagnostic commercialization and collaboration partners; need for additional capital and potential dilution; competition; intellectual-property and litigation exposure; and limited sales and distribution capabilities. The filing states there were no material changes to the risk factors in the 2010 Form 10-K.
- OPKO reported a history of losses and did not expect near-term profitability. It had not generated sufficient gross margin to cover operating and other expenses.
- A settlement with Nidek in April 2011 resolved the service-obligation dispute and was not material. Other ordinary-course litigation was not expected by management to have a material adverse effect. The filing also describes related-party investments, financing, leases and other transactions, including purchases of offering shares by entities associated with company insiders.
- Disclosure controls and procedures were deemed effective; the company reported no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether pharmaceutical revenue growth in Chile and Mexico is sustainable and can offset lower instrumentation sales.
- Cash burn, investment spending and the availability and terms of short-term credit; management’s liquidity assessment depends on assumptions.
- Progress, costs and potential commercial value of molecular diagnostics, CURNA technology and other development programs, none of which generated product-candidate revenue in the period.
- Effects of share issuance, repurchases, preferred-stock obligations and potential conversion of Series D preferred stock on future dilution.
- Related-party transaction terms and governance considerations, including the Frost Group credit facility and insider-associated offering purchases.