OPKO Health, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet comparisons are to December 31, 2013. Figures are unaudited. OPKO is a multinational biopharmaceutical and diagnostics company with pharmaceutical operations and a U.S. clinical laboratory.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 / prior date |
|---|---|---|
| Revenue | $22.3 million | $31.4 million |
| Gross profit and margin | $9.9 million; 44.4% | $19.6 million; 62.5% |
| Operating loss | $30.3 million | $6.8 million |
| Net loss attributable to common shareholders | $44.6 million; $0.11 per share | $34.6 million; $0.11 per share |
| Operating cash flow | $(29.0) million | $(14.7) million |
| Cash and cash equivalents | $156.4 million | $185.8 million at Dec. 31, 2013 |
| Current assets / current liabilities | $205.3 million / $84.5 million | $242.7 million / $91.9 million at Dec. 31, 2013 |
| Total assets / total liabilities | $1.356 billion / $524.4 million | $1.392 billion / $518.5 million at Dec. 31, 2013 |
Cash declined by $29.4 million in the quarter. Investing activities used $0.3 million; financing activities used $0.1 million. The filing reports $8.1 million outstanding on Chilean and Spanish credit lines, at a weighted-average rate of approximately 5.9%, and $3.7 million of mortgages and other debt. The 2033 Senior Notes had $158.1 million principal outstanding; their reported balance-sheet amount of $224.8 million includes the separately measured embedded derivatives and debt discount.
Changes versus the prior-year quarter
- Revenue fell $9.1 million, principally because Q1 2013 included $12.5 million of non-recurring, non-cash intellectual-property transfer revenue related to the RXi transaction.
- Product revenue increased $4.3 million, including growth in FineTech, Spain, and Mexico. Service revenue fell $1.1 million; management attributed OPKO Lab’s decline principally to lower reimbursement rates and specimen volume.
- Research and development expense more than doubled to $21.0 million from $9.9 million, primarily reflecting acquired businesses and development programs. The filing cites approximately $3.0 million of external Phase 3 trial costs for Rayaldee and hGH-CTP.
- Operating loss widened to $30.3 million from $6.8 million. Other expense improved to $12.1 million from $24.1 million, partly because the non-cash charge from fair-value changes in the 2033 Notes’ embedded derivatives was smaller: $11.1 million versus $24.8 million.
- Cash used in operations increased to $29.0 million from $14.7 million. Net loss per share remained $0.11, while weighted-average common shares increased to 412.9 million from 312.9 million.
Outlook, risks, and notable matters
- Management expects operating losses and substantial R&D spending to continue for the foreseeable future and does not expect near-term profitability. OPKO reported no revenue from its pharmaceutical or diagnostic product candidates.
- Management stated that cash, cash equivalents, marketable securities, and available credit were expected to cover anticipated operating needs and debt service beyond 12 months, but cautioned that estimates depend on assumptions. Additional funding may be needed, particularly for acquisitions, accelerated development, or new trials.
- OPKO began selling its 4Kscore prostate test through its Nashville laboratory in March 2014. The company described clinical-validation results as positive; full data were scheduled for presentation in May. On April 17, 2014, after quarter-end, OPKO agreed to acquire Inspiro Medical for $10 million, comprising $1 million cash and $9 million in OPKO shares.
- Up to $213.5 million of additional contingent consideration may be payable upon specified milestones, generally in cash or shares at OPKO’s option. $71.0 million was recorded as contingent consideration at quarter-end. Fair-value estimates involve significant judgment.
- The 2033 Notes’ embedded derivatives generated material, non-cash earnings volatility. Their estimated fair value increased by $11.1 million during the quarter, recorded as expense.
- Goodwill and intangible assets, including in-process R&D, totaled approximately $1.1 billion—about 80% of total assets. The filing warns that clinical, regulatory, commercial, or other changes could lead to impairment charges.
- Disclosure controls were deemed ineffective because a material weakness in the Chilean subsidiary’s financial close process—particularly inventory and accounts-receivable controls—had not been fully remediated. Management was implementing remediation measures and could not assure effectiveness by year-end.
- A class action concerning the PROLOR merger was dismissed without prejudice on May 5, 2014, after quarter-end. OPKO Lab continued appealing alleged Medicare overpayments; the outcome was uncertain.
Key facts for investors to verify
- Whether product and service growth can offset the loss of prior-period licensing revenue, and the trajectory of OPKO Lab volumes and reimbursement.
- Cash burn and funding needs as Phase 3 trials, commercialization, and acquisition activity proceed.
- Progress, timelines, costs, and regulatory outcomes for Rayaldee, hGH-CTP, the 4Kscore test, and other development programs.
- Remediation and testing of the Chilean internal-control material weakness, including whether controls are effective by year-end.
- Potential dilution or cash use from milestone obligations, the 2033 Notes, and equity-funded transactions; also monitor derivative fair-value volatility.
- Support for carrying values of substantial in-process R&D, goodwill, and other intangible assets, and developments in the Medicare appeal.