OPKO Health, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. OPKO operates pharmaceutical and diagnostics businesses, including BioReference laboratories, Rayaldee, and the ModeX development pipeline.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 / prior date |
|---|---|---|
| Total revenue | $237.6 million | $329.2 million; down 28% |
| Service revenue | $132.4 million | $286.6 million; down 54% |
| Product revenue | $40.4 million | $36.7 million; up 10% |
| IP transfer and other revenue | $64.8 million | $6.0 million |
| Operating loss | $30.6 million | $72.4 million |
| Net loss | $18.3 million; loss per share $0.02 | $55.4 million; loss per share $0.08 |
| Cash and cash equivalents | $110.8 million | $153.2 million at Dec. 31, 2022 |
| Total debt | $244.6 million | $256.3 million at Dec. 31, 2022 |
Combined cost of service and product revenue was $138.3 million, implying a consolidated gross profit of approximately $99.3 million, or 41.8% of revenue, compared with approximately $85.3 million, or 25.9%, in Q1 2022. This blended measure includes the effect of the changing revenue mix.
Operating cash use was $22.6 million, compared with $19.9 million in Q1 2022. Investing cash use was $7.7 million, including a $5.0 million GeneDx Holdings share purchase and $3.0 million of capital expenditures. Financing cash use was $13.1 million. Cash declined by $42.4 million during the quarter. Current assets were $406.4 million and current liabilities $222.4 million at quarter-end.
Debt included $142.4 million of 2025 Notes, $69.0 million of convertible notes due in 2025, and $22.3 million drawn on revolving and international lines of credit. The BioReference revolving facility had $16.2 million available at March 31, 2023. The company redeemed the remaining $3.0 million of 2033 Senior Notes during the quarter.
Material changes and business drivers
- Diagnostics service revenue fell $154.2 million year over year, primarily because of lower COVID-19 testing demand and reimbursement, and the 2022 sale of GeneDx. BioReference performed 68,000 COVID-19 molecular tests in Q1 2023, versus 1.981 million in Q1 2022. Excluding COVID-19, routine clinical test volume increased 6.8%.
- Pharmaceutical revenue rose to $105.2 million from $42.6 million, driven mainly by collaboration and milestone revenue. Product revenue increased, including Rayaldee sales of $6.6 million versus $5.1 million.
- Pharmaceutical operating income was $19.0 million, versus an $18.1 million loss a year earlier. Diagnostics continued to report an operating loss, $40.0 million versus $43.5 million.
- Research and development expense increased to $32.6 million from $18.3 million, largely due to ModeX and a $12.5 million Sanofi-related accrual. Selling, general and administrative expense declined to $75.6 million from $117.5 million, in part reflecting the GeneDx divestiture and cost reductions.
- Q1 revenue included $50.0 million from Merck for a ModeX Epstein-Barr Virus vaccine collaboration, $7.0 million triggered by German pricing approval for Rayaldee, and $2.5 million tied to Nicoya’s China investigational drug application submission. OPKO received the Merck upfront payment in April 2023, after quarter-end.
Outlook, risks and contingencies
OPKO provided no quantified quarterly or full-year financial guidance. Management stated that cash on hand and available credit were expected to cover anticipated operating and debt-service needs beyond the next 12 months, while cautioning that assumptions could change. The company has historically not generated sustained positive cash flow and says additional funding may be needed depending on operating results, development activity, acquisitions, and legal or regulatory outcomes.
- Somatrogon (NGENLA) is approved in several markets, but the FDA issued a Complete Response Letter in January 2022; OPKO and Pfizer were working with the agency on next steps. Failure to obtain U.S. approval could contribute to impairment risk.
- OPKO recorded $17.0 million of other income, including an $8.3 million fair-value gain on its GeneDx Holdings investment and $8.5 million related to GeneDx achieving 2022 revenue targets. These items supported the reported net result and are not equivalent to recurring operating earnings.
- An Israel Tax Authority assessment against a subsidiary is approximately $246 million including interest; OPKO is appealing it. Management says it cannot assure a favorable outcome.
- Texas authorities raised potential Medicaid claims concerning BioReference, with the potential liability not determined. A separate Texas Medicaid matter involving former subsidiary GeneDx includes a stated potential repayment of approximately $784,000. A relator filed an amended complaint in April 2023 after an earlier case was dismissed in March.
- OPKO disclosed ongoing regulatory, payor and litigation inquiries, and potential exposure to reimbursement recoupments. It also reported $52.8 million of ordinary-course purchase commitments for 2023 and contingent consideration that could aggregate up to $141.8 million.
- Goodwill, in-process research and development, and other intangible assets are substantial; management warned that weaker-than-expected performance or development setbacks could result in material impairment charges. COVID-19 testing demand, foreign exchange, reimbursement pressure, financing access and execution of the ModeX acquisition are additional risks.
Key facts for investors to verify
- Whether routine clinical testing growth and cost reductions can offset the continued decline in COVID-19-related revenue, and the resulting trajectory of BioReference profitability.
- How much of Q1 pharmaceutical revenue and earnings reflects milestone or collaboration payments rather than recurring product sales; confirm the timing and cash receipt of the Merck payment.
- Liquidity, operating cash burn, credit-facility availability and debt maturities, including the amended convertible-note maturity and conversion terms.
- Developments in the FDA review of Somatrogon, commercial progress for Rayaldee and NGENLA, and the clinical and commercial milestones under the Merck agreement.
- Updates on the contested Israel tax assessment, Texas Medicaid matters, other investigations and potential reimbursement liabilities.
- The nature and collectability of the increase in other current receivables, from $13.1 million at year-end to $74.3 million at March 31, 2023.