OPKO Health, Inc. — FY 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also reports unaudited quarterly results; Q4 2020 ended December 31, 2020. OPKO operates diagnostics, primarily BioReference Laboratories, and pharmaceuticals, including Rayaldee and a development pipeline. The financial statements received an unqualified audit opinion, and the auditor also reported effective internal control over financial reporting.
Financial performance
| Metric | FY 2020 | FY 2019 |
|---|---|---|
| Total revenue | $1,435.4 million | $901.9 million |
| Operating income (loss) | $57.7 million | $(274.1) million |
| Net income (loss) | $30.6 million | $(314.9) million |
| Diluted earnings (loss) per share | $0.05 | $(0.53) |
| Net cash from (used in) operations | $39.5 million | $(172.5) million |
| Cash and cash equivalents at year-end | $72.2 million | $85.5 million |
| Total debt | $251.2 million | $270.3 million |
Revenue increased 59%, driven primarily by pandemic-related testing. Revenue from services rose 76% to $1,262.2 million; product revenue increased 7% to $120.0 million; intellectual-property and other revenue fell 27% to $53.2 million. Gross profit was approximately $541.0 million, or 37.7% of revenue, versus $329.0 million, or 36.5%, in 2019. Operating margin was 4.0%, compared with a 30.4% operating loss margin in 2019. Net margin was 2.1%, compared with a 34.9% net loss margin.
COVID-19-related testing contributed to a $545.8 million increase in service revenue. BioReference performed 10.1 million molecular diagnostic and 0.8 million antibody COVID-19 tests; COVID-19 tests represented 57% of total testing volume. Excluding COVID-19 testing, diagnostics volumes declined 17%. Routine clinical and genomics testing revenue also faced lower volumes and reimbursement. Rayaldee sales rose to $36.8 million from $31.4 million, but fourth-quarter prescriptions declined approximately 15.9% year over year and 10.2% sequentially.
Diagnostics reported $138.9 million of operating income, versus a $123.4 million operating loss in 2019, with $1,278.5 million of segment revenue. Pharmaceuticals reported a $43.5 million operating loss on $156.9 million of revenue, versus a $109.1 million loss on $184.7 million in 2019. Consolidated R&D expense fell 36% to $75.3 million, largely reflecting reduced Somatrogon development spending after completion of its global pediatric Phase 3 trial.
Liquidity, debt and cash flow
- Operating cash flow was positive, largely because of COVID-19 testing. Investing activities used $18.3 million, including $33.7 million in capital expenditures partly offset by $15.1 million of investment-sale proceeds; financing activities used $35.1 million, principally net line-of-credit repayments.
- Year-end current assets were $523.2 million and current liabilities were $375.5 million. Accounts receivable rose to $286.3 million from $134.6 million and inventory to $132.3 million from $53.4 million.
- Total debt of $251.2 million included $156.2 million carrying value of 2025 convertible notes, $62.8 million of 2023 convertible notes, $3.1 million of 2033 notes, and $23.0 million of credit lines. The 2025 and 2023 notes carry stated interest rates of 4.5% and 5%, respectively; the 2025 notes’ reported effective interest rate is 11.2%.
- BioReference’s $75 million secured revolving facility matures November 5, 2021; $7.1 million was drawn and $57.6 million remained available at year-end. The company also reported $22.95 million outstanding on short-term lines of credit. A separate $100 million unsecured affiliate line bearing 11% interest was undrawn at year-end.
- Management said cash, operating cash flow and available credit were expected to cover operating needs and debt service beyond 12 months, but emphasized that COVID-19 testing demand and associated cash generation were uncertain. Contractual obligations included $342.2 million of open purchase orders, $38.8 million of operating lease payments, and $214.2 million of convertible-note obligations.
Material changes, outlook and key risks
- Quarterly trend: Unaudited Q4 revenue was $494.7 million and net income was $32.3 million, versus $224.3 million revenue and a $112.4 million net loss in Q4 2019. Q4 2020 operating costs and expenses were $445.3 million.
- COVID-19 dependence: Management noted that testing demand, reimbursement and pricing could decline, while core diagnostics volumes had already fallen. A decline in COVID-19 testing not offset by recovery in core testing could materially affect revenue, profit and cash flow. Routine and genomic testing volumes were trending toward normalization as restrictions eased, but further restrictions could reverse that trend.
- Pipeline and commercial outlook: FDA accepted Pfizer’s pediatric Somatrogon BLA for review in January 2021, with an October 2021 target action date; Pfizer also submitted a Japanese application. European submission was expected in the first half of 2021. European partners had received Rayaldee approvals in eleven countries and planned launches later in 2021. These were forward-looking expectations, not reported outcomes.
- Other development uncertainties: Rayaldee’s Phase 2 COVID-19 trial was underway; the bariatric-surgery Phase 2 study was postponed. The adult Somatrogon Phase 3 trial missed its primary endpoint, with post-hoc analyses mixed. The Claros testosterone program was suspended after technical challenges, and the OPK88004 BPH study was suspended after measurement variability and liver-enzyme findings.
- Impairment exposure: No impairment charge was recorded in 2020, following $92.4 million of impairment charges in 2019. Goodwill and other intangible assets totaled approximately $1.7 billion, including $590.2 million of in-process R&D; management warned future impairment remained possible. Rayaldee goodwill valuation was identified as a critical audit matter.
- Legal, regulatory and tax matters: A $16.5 million securities class-action settlement awaited final court approval at filing; insurance carriers were expected to cover a significant portion. A $3.1 million derivative settlement was paid by the individual defendants’ insurer. BioReference paid approximately $11.5 million to settle federal allegations involving historical billing and electronic-health-record subsidies. A foreign tax authority issued an approximately $66 million assessment, including interest, which OPKO is contesting. New U.S. and New Jersey labor inquiries were disclosed, with potential loss not estimable.
- Other risks: Significant exposure to reimbursement, billing and collections, laboratory payor audits, privacy and cybersecurity, regulatory approvals, competition, foreign currency, and reliance on Pfizer and other partners. OPKO also disclosed a history of losses and uncertainty about sustaining positive cash flow after pandemic-driven testing demand subsides.
Important facts for investors to verify
- How much of 2020’s revenue and operating-income improvement was attributable to COVID-19 testing and whether core laboratory volumes and margins have recovered.
- Subsequent cash collections on the sharp increase in receivables and inventory, and the extent of any payor denials, recoupments or reimbursement changes.
- Refinancing or repayment plans for the JPMorgan facility maturing in November 2021, and liquidity after COVID-related advances and other obligations.
- Somatrogon FDA and international regulatory decisions, the adult-indication strategy, and any milestone or commercial economics under the Pfizer agreement.
- Rayaldee’s prescription trajectory, European launch progress, coverage, and the effect of partner agreement changes on milestones and royalties.
- Final disposition and financial exposure for the class-action settlement, tax assessment, labor inquiries and other government or payor investigations.
- Assumptions supporting the value of the $1.7 billion goodwill and intangible-asset balance, including the Rayaldee reporting unit.