OPKO Health, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited consolidated results. OPKO operates pharmaceutical and diagnostics businesses, including BioReference laboratories, Rayaldee, and partnered drug-development programs.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $179.7 | $385.8 | $818.9 | $1,373.4 |
| Operating income (loss) | $(87.8) | $37.8 | $(171.0) | $81.8 |
| Net income (loss) | $(86.1) | $28.7 | $(243.2) | $43.6 |
| Basic and diluted earnings (loss) per share | $(0.11) | $0.04 | $(0.34) | $0.07 |
| Cash from (used in) operations | Not stated for quarter | Not stated for quarter | $(63.6) | $44.0 |
Margins: Calculated from reported figures, gross margin was approximately 17.4% in Q3 2022 versus 36.8% in Q3 2021, and 28.4% for the first nine months versus 34.4% a year earlier. Operating margin was approximately (48.9)% and 9.8% for the respective third quarters, and (20.9)% and 6.0% for the nine-month periods.
- Revenue mix: Q3 service revenue was $142.9 million, product revenue $32.4 million, and intellectual-property and other revenue $4.5 million. For nine months, the respective amounts were $616.3 million, $104.9 million, and $97.7 million.
- Cash and liquidity: Cash and equivalents were $180.8 million at September 30, 2022, up from $134.7 million at year-end 2021. Current assets were $414.0 million and current liabilities $267.3 million, implying working capital of approximately $146.7 million.
- Debt: Total reported debt was $245.0 million, compared with $205.3 million at December 31, 2021. Cash exceeded debt by approximately $64.1 million. The $202.5 million in convertible notes included $70.6 million classified as current; the 2023 notes mature in 2023 and the 2025 notes in 2025. BioReference’s revolving facility had $32.7 million available to borrow.
- Cash flows: Nine-month investing cash flow was $98.9 million, primarily reflecting $115.4 million in proceeds from the GeneDx sale, partly offset by $18.2 million of capital expenditures. Financing cash flow was $12.8 million.
Material changes versus comparable periods
- Total revenue fell 53% in Q3 and 40% in the first nine months year over year. Management attributed the service-revenue decline principally to lower COVID-19 testing volume and reimbursement; nine-month service revenue fell $628.1 million.
- BioReference performed 0.2 million COVID-19 molecular tests in Q3 2022 versus 2.2 million in Q3 2021. For the nine-month periods, it performed 3.0 million versus 9.1 million. Excluding COVID-19, routine clinical test volume decreased 2.2% in the first nine months.
- The GeneDx sale closed in April 2022. It generated $115.4 million of cash proceeds and an $15.4 million gain; OPKO also received 80 million Sema4 shares. The company recognized a $101.8 million nine-month loss from declines in the fair value of its Sema4 investment, including $30.6 million in Q3.
- OPKO acquired ModeX in May 2022, issuing shares valued at $221.7 million for the acquisition. The acquisition added $195.0 million of in-process research and development and $65.9 million of goodwill; ModeX contributed $4.6 million of net loss from acquisition through September 30.
- Pharmaceutical revenue rose 57% for the first nine months, mainly reflecting $85.0 million in Pfizer milestone revenue after NGENLA sales commenced in Europe and Japan, plus a $3.0 million Rayaldee milestone. Product revenue was broadly flat for the period; Rayaldee sales were $18.2 million versus $19.3 million.
- Amortization expense increased to $66.2 million for the first nine months from $37.8 million, including amortization following the transfer of $590.2 million of Somatrogon development assets to finite-lived intangibles after approvals in Europe and Japan.
Outlook, risks, and unusual items
- Management expected COVID-19 testing demand to continue declining in 2022. HRSA stopped accepting claims for testing and treatment of uninsured individuals after March 22, 2022; such claims had represented about 5.4% of nine-month COVID-19 testing revenue.
- Management stated cash on hand and available credit were expected to meet anticipated operating and debt-service needs beyond the next 12 months, while cautioning that estimates depend on assumptions and cash may be needed sooner. OPKO has not historically generated sustained positive operating cash flow. No quantified revenue or earnings guidance is provided in the filing.
- Somatrogon (NGENLA) had approvals in Europe, Japan, Canada, and Australia, but the U.S. FDA issued a Complete Response Letter in January 2022. OPKO and Pfizer were evaluating the FDA’s comments and next steps. Further approvals, commercialization, and milestone or royalty receipts remain uncertain.
- OPKO settled a healthcare-program investigation and entered a five-year Corporate Integrity Agreement (CIA) for BioReference, effective July 14, 2022. The agreement included a $10.0 million settlement payment and compliance, audit, training, and reporting obligations. Failure to comply could result in penalties or exclusion from federal healthcare programs.
- A separate Texas Medicaid inquiry concerning former subsidiary GeneDx remained under investigation; the state identified approximately $784,000 of potential repayment. OPKO said it could not assess the likelihood or range of loss. Other False Claims Act and healthcare-related matters also remain potential risks.
- Other notable items include $27.8 million of negative nine-month revenue adjustments for prior-period service estimates, primarily lower COVID-19 reimbursement estimates; $5.7 million of diagnostics severance costs; and $5.8 million of Q3 foreign-exchange transaction losses.
- The filing reports adoption of convertible-debt accounting standard ASU 2020-06, but the stated increase in convertible notes differs between the financial-statement note ($21.6 million) and MD&A ($25.6 million). This discrepancy merits confirmation.
Important facts for investors to verify
- Whether BioReference can adjust costs and restore profitability as COVID-19 testing revenue declines, and whether routine clinical volumes stabilize.
- The timing and requirements for a U.S. Somatrogon resubmission, and the commercial uptake and economics of NGENLA and Rayaldee in approved markets.
- The value and liquidity of OPKO’s Sema4 holding, the potential GeneDx milestone consideration, and the resulting effects on earnings and cash resources.
- Cash burn, availability under borrowing facilities, convertible-note repayment or conversion needs, and management’s liquidity assumptions.
- Compliance with the BioReference CIA and outcomes of the Texas Medicaid inquiry and other legal, payor, and regulatory matters.
- The ASU 2020-06 adoption amount discrepancy and potential dilution: 772.7 million common shares were outstanding as of October 31, 2022.