OPKO Health, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Amounts below are in U.S. dollars; financial statement amounts are unaudited. OPKO operates diagnostics, principally BioReference Laboratories, and pharmaceutical businesses, including Rayaldee and development programs.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $385.8m | $428.1m | $1,373.4m | $940.7m |
| Operating income | $37.8m | $21.9m | $81.8m | $8.4m |
| Net income (loss) | $28.7m | $23.7m | $43.6m | $(1.7)m |
| Operating cash flow | Not separately presented | Not separately presented | $44.0m | $5.2m |
Q3 gross profit was approximately $141.9m, or 36.8% of revenue, compared with approximately $155.3m, or 36.3%, in Q3 2020. For the nine-month periods, gross profit was approximately $473.0m (34.5% of revenue) versus $365.1m (38.8%). These figures are calculated from reported revenue and cost of revenue.
- Revenue mix: Q3 services revenue was $340.2m, product revenue $36.9m, and intellectual-property and other revenue $8.8m. Nine-month services revenue was $1,244.3m, product revenue $106.5m, and intellectual-property and other revenue $22.6m.
- Cash and liquidity: Cash and equivalents were $148.6m at September 30, up from $72.2m at December 31, 2020. Current assets were $557.5m and current liabilities $283.0m (approximately $274.5m working capital).
- Cash flows, nine months: Investing activities provided $44.6m, primarily reflecting $66.0m proceeds from the facility sale, partly offset by $25.4m of capital expenditures. Financing activities used $11.2m, principally net line-of-credit repayments.
- Debt: Total reported debt was $202.6m, down from $251.2m at year-end 2020. Convertible notes had a $185.5m carrying value; other short-term credit lines and notes totaled approximately $14.9m current and $2.2m long-term. The 2025 Notes’ carrying value was $117.7m, compared with $179.0m estimated fair value.
- Segments: Q3 operating income was $19.7m for diagnostics and $28.6m for pharmaceuticals; the pharmaceutical result included the facility-sale gain. For nine months, diagnostics generated $116.7m operating income, while pharmaceuticals recorded a $4.3m operating loss.
Material changes versus prior periods
- Q3 revenue declined 10%, mainly due to lower COVID-19 testing; services revenue fell $42.3m. COVID-19 testing revenue declined by $92.2m, partly offset by better reimbursement and growth in routine clinical and genomic testing. Excluding COVID-19 tests, genomic volume rose 19.1% and routine clinical volume 0.7% year over year.
- Nine-month revenue increased 46%, substantially reflecting higher COVID-19 testing volumes and reimbursement, alongside growth in routine and genomic testing. The company recorded $36.0m of positive adjustments to prior-period service revenue estimates, primarily from improved COVID-19 test reimbursement estimates.
- Operating income improved, but Q3 and nine-month 2021 results included a $31.5m gain on the sale of EirGen’s Waterford facility. The $65m cash sale closed in Q3; the facility’s sterile-fill-finish business was no longer considered core.
- Q3 2020 included $10.0m of CARES Act grant revenue; nine-month 2020 included $16.2m. This contributed to lower intellectual-property and other revenue comparisons in 2021.
- In May 2021, holders exchanged $55.4m principal of 2025 Notes for 19.1m common shares. OPKO recorded an $11.1m non-cash loss on the exchange. Shares issued during the nine months also included approximately 19.1m shares in this conversion.
Outlook, commentary, risks and unusual items
- Management said cash on hand, operating cash, the facility-sale proceeds, and available credit were expected to cover anticipated operating and debt-service needs beyond the next 12 months. It cautioned that COVID-19 testing demand and reimbursement are uncertain, and that cash-flow sustainability is not assured.
- The FDA extended its review of Pfizer-partnered Somatrogon for pediatric growth hormone deficiency by three months; the PDUFA goal date moved to January 2022 following additional data submission.
- Rayaldee sales were $8.5m in Q3 and $19.3m for nine months, versus $8.1m and $26.7m, respectively. Management cited pandemic-related difficulty onboarding new patients; the nine-month comparison also reflects lower sales.
- OPKO completed enrollment of 171 subjects in a Phase 2 Rayaldee trial for mild-to-moderate COVID-19; topline results were expected later in 2021. The filing provides no trial outcome.
- New commercial arrangements included a LeaderMed joint venture for selected Asian markets (OPKO’s 47% interest; partner responsible for funding), a CAMP4 license with upfront consideration and contingent milestones/royalties, and a Nicoya license for Rayaldee in Greater China. Future milestone and royalty amounts are contingent, not assured.
- BioReference’s DOJ investigation concerns alleged unlawful remuneration and claims under the Anti-Kickback Statute, Stark law and False Claims Act. The parties had verbally agreed on an anticipated settlement of approximately $10m, excluding attorney fees; the filing does not state that a final settlement had been executed. Other audits, inquiries and proceedings could result in additional material costs.
- Other risks include dependence on COVID-19 testing volumes and reimbursement, payer recoupments and billing compliance, product approval and commercialization, competition, financing availability, foreign exchange exposure, and potential impairment of goodwill or intangible assets. Goodwill was $674.6m and in-process R&D was $590.2m at September 30.
- Open purchase commitments totaled approximately $223.7m, mostly due in the remainder of 2021. Management also disclosed up to $144.1m of contingent acquisition consideration dependent on future milestones.
Important facts for investors to verify
- How quickly COVID-19 testing demand and reimbursement decline, and whether routine and genomic testing growth can offset that decline.
- Whether operating cash flow remains positive without pandemic-related testing; nine-month 2021 cash flow benefited from COVID-19 testing and the facility sale boosted investing cash flow.
- The final Somatrogon regulatory decision and commercial timing, and the progress and economics of Rayaldee partnerships and licensing deals.
- Status, final terms and payment timing of the anticipated DOJ settlement, plus exposure from other payor and regulatory matters.
- Debt maturities, conversion dilution and credit-facility availability; the filing reports $64.3m available under BioReference’s amended revolving facility at quarter-end.
- Potential changes in the value or recoverability of substantial goodwill, intangible assets and in-process R&D, and the extent to which reported earnings depend on asset-sale gains, reimbursement estimates and other nonrecurring items.