OPKO Health, Inc. — Q3 2020 Form 10-Q
Business context and reporting period. This unaudited quarterly filing covers the three and nine months ended September 30, 2020. OPKO operates diagnostics businesses, principally BioReference Laboratories, and pharmaceutical businesses, including Rayaldee and partnered drug-development programs such as hGH-CTP (somatrogon). The quarter’s results were significantly affected by COVID-19 testing demand.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $428.1 million | $228.8 million | $940.7 million | $677.6 million |
| Operating income (loss) | $21.9 million | $(39.0) million | $8.4 million | $(161.6) million |
| Net income (loss) | $23.7 million | $(62.0) million | $(1.7) million | $(202.6) million |
| Operating cash flow | Not separately reported for the quarter | $5.2 million | $(126.5) million | |
| Cash and cash equivalents | September 30, 2020: $36.3 million | December 31, 2019: $85.5 million |
- Q3 revenue rose about 87% year over year; nine-month revenue rose about 39%. Service revenue drove the increase, principally through COVID-19 testing. Product revenue was $28.7 million in Q3 and $89.1 million year to date.
- Calculated operating margin was approximately 5.1% in Q3 2020 versus negative 17.1% in Q3 2019; for the nine-month periods it was approximately 0.9% versus negative 23.8%. These calculations use reported revenue and operating income.
- Q3 net income included $4.7 million of other income, principally realized gains on sales of VBI investments. Nine-month other income was $10.6 million, principally reflecting investment gains, partly offset by unrealized losses.
- At September 30, current assets were $428.1 million and current liabilities $335.9 million. Accounts receivable was $241.5 million, up from $134.6 million at year-end; inventory was $111.9 million, up from $53.4 million.
- Reported convertible notes were $219.2 million on the balance sheet. The 2025 Notes had $200 million principal and $154.1 million carrying value; the filing also describes $55 million of 2023 Convertible Notes and $3 million of 2033 Senior Notes. OPKO reported $11.0 million outstanding on Chilean and Spanish lines of credit; the JPMorgan facility and the $100 million affiliate credit line were undrawn at quarter-end. The filing does not provide a single consolidated total-debt figure in the presented data.
Material changes versus prior comparable periods
- Diagnostics service revenue increased $201.4 million in Q3 and $265.8 million for the first nine months, primarily from COVID-19 testing. COVID-19 tests represented 63% of BioReference’s Q3 test volume and 48.9% of its nine-month volume.
- COVID-19 testing gains partly offset weakness in routine testing: excluding COVID-19, diagnostics volume declined 9.1% in Q3 and 20.4% year to date versus 2019. Routine clinical and genomic reimbursements also declined.
- Pharmaceutical revenue from products increased, including Rayaldee sales of $8.1 million in Q3 and $26.7 million year to date, versus $7.4 million and $18.8 million, respectively, in 2019. However, pharmaceutical segment operating losses persisted: $14.4 million in Q3 and $34.5 million year to date.
- Revenue from intellectual property and other declined to $16.9 million in Q3 from $21.5 million, and to $47.3 million for nine months from $59.0 million. Pfizer-related revenue was $3.1 million in Q3 and $25.8 million year to date, versus $19.5 million and $55.1 million in 2019.
- Research and development expense declined to $18.5 million in Q3 from $30.0 million and to $57.9 million year to date from $94.8 million, primarily due to lower hGH-CTP costs after completion of its Phase 3 study.
Outlook, risks, contingencies and unusual items
- Management said cash, operating cash generation and available credit were expected to cover anticipated requirements beyond the next 12 months. It cautioned that this outlook depends on assumptions and that cash-flow sustainability is uncertain, particularly because COVID-19 testing demand, pricing and reimbursement may change.
- OPKO reported capacity for up to 400,000 antibody tests and more than 70,000 molecular tests per day. Management noted that routine testing volumes were trending toward normalization, but could fall again if restrictions return. The company added about 2,000 employees to support testing and continued routine-volume recovery.
- CARES Act-related items included $16.2 million of provider grants recognized in revenue for the first nine months ($10.0 million in Q3), and approximately $14 million of Medicare accelerated payments received in Q2 that are loans to be offset against future claims and repaid in 2021.
- Rayaldee sales growth was constrained by pandemic-related difficulty onboarding patients. OPKO initiated a Phase 2 trial of Rayaldee for mild-to-moderate COVID-19. Somatrogon Phase 3 studies reported positive results; regulatory approvals remained pending. The filing described potential future milestone and royalty payments, not guaranteed proceeds.
- Legal matters include a proposed $16.5 million class-action settlement, subject to court approval, with insurers covering a significant portion; a $3.1 million derivative settlement was to be paid by individual defendants’ insurance if approved. BioReference’s approximately $11.5 million federal billing settlement was approved in September 2020; related attorneys’ fees remained under negotiation. The OCR closed its AMCA data-incident file, but state inquiries could continue.
- Open purchase commitments totaled approximately $196.1 million, with $195.2 million scheduled in the remaining three months of 2020. Contingent consideration and other milestone obligations may also require future cash or shares. Goodwill and intangible assets are significant, including $590.2 million of in-process research and development; management warned that adverse development or commercial outcomes could lead to material impairment charges.
- Other risks include payer denials or recoupments, declining reimbursement, supply constraints, litigation and regulatory inquiries, and reliance on uncertain financing. OPKO reported that disclosure controls were effective at September 30, 2020.
Important facts for investors to verify
- Whether COVID-19 testing demand and collections persist, and whether routine clinical and genomic testing recovers enough to offset any decline.
- How much of the sharp increase in receivables and inventory is collected or converted to revenue, and whether payer denials, reimbursement changes or purchase commitments pressure cash.
- Cash needs and debt-service capacity, including note maturities, available borrowing capacity, and the repayment of approximately $14 million in accelerated Medicare payments in 2021.
- Rayaldee’s commercial trajectory and reimbursement, and the timing, regulatory status and economics of somatrogon and partner milestones.
- Final court approval, insurance coverage and any remaining company cash exposure for the class-action settlement, derivative matter and other regulatory or payer proceedings.
- Whether the company’s substantial goodwill, intangible assets and in-process research and development remain recoverable as product and market expectations evolve.