OPKO Health, Inc. — 2015 Form 10-K Summary
Business context and reporting period
OPKO is a diversified healthcare company with diagnostics and pharmaceutical segments. This Form 10-K covers the fiscal year ended December 31, 2015; it is an annual report, not a standalone fourth-quarter filing. The year included the August acquisition of Bio-Reference Laboratories and the May acquisition of EirGen, materially changing the company’s scale and business mix.
Financial performance and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $491.7 million | $91.1 million |
| Operating loss | $98.5 million | $145.8 million |
| Net loss attributable to common shareholders | $30.0 million | $171.7 million |
| Loss per share, basic and diluted | $0.06 | $0.41 |
| Operating cash flow | $164.0 million provided | $90.4 million used |
Revenue less cost of revenue was $256.5 million, or approximately 52.2% of revenue; this calculated gross margin is affected by the mix of laboratory, product and intellectual-property revenue. Revenue included $329.7 million from services, $80.1 million from products and $81.9 million from intellectual-property transfers and other items. The filing reports fourth-quarter 2015 revenue of $276.2 million and net income of $1.6 million.
Cash and cash equivalents were $193.6 million at year-end, versus $96.9 million a year earlier. Current assets were $454.1 million and current liabilities $251.9 million. Management said cash and available credit were expected to cover anticipated operating needs and debt service for more than 12 months, while noting that estimates depend on assumptions and could change.
At year-end, $32.2 million principal amount of 2033 Senior Notes remained outstanding; their balance-sheet carrying amount, including accounting for embedded derivatives and discounts, was $49.4 million. Credit lines had $82.7 million outstanding against $189.8 million of capacity. Operating cash flow included the $295.0 million Pfizer upfront payment; $229.5 million remained deferred at year-end, so operating cash flow should not be read as recurring earnings. Investing cash flow used $99.2 million, including acquisitions, and financing cash flow provided $33.0 million.
Material changes versus the prior comparable period
- Revenue increased by $400.6 million year over year. Bio-Reference contributed $321.9 million from its acquisition date through year-end; EirGen contributed $13.5 million in that period. The Pfizer transaction contributed $65.5 million of recognized revenue, and a $15.0 million TESARO milestone was recognized.
- Operating loss narrowed, but the company remained loss-making. The 2015 net loss was substantially reduced by a $113.7 million income-tax benefit, including a $93.4 million release of the U.S. deferred-tax valuation allowance following the Bio-Reference merger.
- Cash from operations swung to positive, principally reflecting Pfizer’s upfront cash payment and changes in deferred revenue. Research and development expense rose to $99.5 million from $83.6 million; selling, general and administrative expense rose to $196.6 million from $57.9 million, substantially reflecting acquired operations and expansion.
- Total assets increased to $2.80 billion from $1.27 billion, and shareholders’ equity to $1.98 billion from $835.7 million, primarily reflecting the acquisitions and share issuance. Shares issued increased to 546.2 million from 433.4 million.
Outlook, commentary, risks and unusual items
- Rayaldee’s FDA review had a PDUFA target date of March 29, 2016; OPKO expected a U.S. launch in the second half of 2016 if approved. Approval and successful commercialization were not assured.
- hGH-CTP was in a global Phase 3 adult trial, with a pediatric Phase 3 trial anticipated in the second half of 2016. OPKO leads and funds development for key indications under its Pfizer agreement; Pfizer holds worldwide commercialization rights. Up to $275 million in additional regulatory milestones and future royalties or profit sharing are contingent on development and commercial success.
- TESARO launched VARUBI in the U.S. in November 2015. OPKO is eligible for royalties and further commercial milestones, but TESARO controls commercialization and may terminate the license on notice.
- Management expected operating losses and research and development spending to continue, with research and development and commercial infrastructure costs potentially increasing. It also identified acquisition integration, reimbursement pressure, clinical and regulatory uncertainty, competition, financing needs, and international currency and operating risks.
- Unusual financial items included $39.1 million of net expense from fair-value changes in derivative instruments, principally the embedded derivatives in the convertible notes, and a $25.9 million repayment to Israel’s Office of the Chief Scientist related to grants. A $15.9 million gain was recorded on deconsolidation of SciVac.
- Contingencies include a U.S. Attorney’s Office investigation concerning alleged false healthcare claims; OPKO said it was cooperating and that the potential loss could not yet be assessed. Bio-Reference’s reimbursement lawsuit against Horizon sought more than $20 million, with litigation pending. A 2014 patient-information exposure involving a Bio-Reference server was reported to regulators; the filing said the company awaited further OCR investigation and action.
- The financial-statement audit opinion was unqualified. Management and the auditor reported effective internal control over financial reporting, but the assessment and audit excluded Bio-Reference and EirGen, which represented 15% of assets and 68% of 2015 revenue; integration of their controls was ongoing.
Important facts for investors to verify
- Whether Rayaldee received FDA approval and achieved launch, and whether subsequent clinical and regulatory milestones for hGH-CTP were met.
- How much of reported revenue and operating cash flow is recurring, versus acquisition contributions, Pfizer upfront-payment recognition, and milestone income.
- Bio-Reference integration, laboratory collections and bad-debt trends: the allowance for doubtful accounts rose to $25.2 million from $1.9 million.
- Available liquidity after near-term commitments, including $48.3 million in open purchase orders and $83.3 million of lines of credit shown due in 2016 in the contractual-obligations table.
- Developments in the false-claims investigation, Horizon dispute and OCR matter, as well as the control-integration status of acquired businesses.