OPKO Health, Inc. — Q2 2020 Form 10-Q
Business context and period. Unaudited results for the three and six months ended June 30, 2020. OPKO operates diagnostics, principally BioReference Laboratories, and pharmaceutical businesses, including Rayaldee and development programs such as Somatrogon (hGH-CTP). Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $301.2 | $226.4 | $512.7 | $448.8 |
| Operating income (loss) | $27.2 | $(47.3) | $(13.6) | $(122.6) |
| Net income (loss) | $33.7 | $(59.8) | $(25.4) | $(140.6) |
| Basic and diluted earnings (loss) per share | $0.05 | $(0.10) | $(0.04) | $(0.24) |
| Operating cash flow | Not presented by quarter | $(57.8) | $(102.6) |
Revenue grew 33% in Q2 and 14% for the first half year over year. Approximate gross margin, calculated as revenue less cost of service and product revenue, was 46% in Q2 versus 36% a year earlier, and 41% for the first half versus 36%. Q2 operating profitability and net income do not indicate the same trend for the full first half: the half-year remained loss-making. Q2 net income included $18.2 million of other income, principally unrealized gains on equity investments; first-half other income was $5.9 million.
Balance sheet at June 30: Cash and cash equivalents were $21.6 million, down from $85.5 million at December 31, 2019. Current assets were $360.1 million and current liabilities $279.5 million. Accounts receivable rose to $214.4 million from $134.6 million; 37.6% of receivables were due from states, cities and other municipalities for COVID-19 testing. Inventory was $73.0 million, up from $53.4 million.
Six-month investing cash outflow was $17.1 million, largely capital expenditures; financing provided $11.3 million net. Cash declined $63.8 million during the half. Reported borrowings across convertible notes, lines of credit and other notes were approximately $287 million, excluding lease liabilities; cash was $21.6 million. BioReference’s revolving facility had $51.5 million drawn and $15.3 million available. A separate $100 million unsecured related-party credit line committed in February at 11% interest had no borrowings at quarter end.
Material changes and operating drivers
- COVID-19 testing sharply increased diagnostic services revenue, while routine clinical and genomics volumes fell. In Q2, BioReference performed about 2.2 million molecular and 331,600 antibody tests; COVID tests were 28.1% of its total test volume. Excluding COVID tests, diagnostic segment volumes were down 46.5% year over year in Q2.
- Q2 diagnostic services revenue rose $72.5 million year over year. This included $10.9 million from the successful Medicare appeal for previously denied 4Kscore tests and a $6.2 million CARES Act provider grant recorded in revenue. COVID-related labor and materials raised diagnostic cost of revenue by $44.9 million in Q2.
- Rayaldee product sales rose to $8.6 million in Q2 and $18.6 million in the first half, from $5.7 million and $11.5 million in the comparable periods. Management said pandemic-related patient onboarding challenges limited sales growth versus expectations.
- Pharmaceutical revenue from intellectual property was lower, principally reflecting Pfizer-related revenue of $13.9 million in Q2 and $22.7 million in the first half, versus $18.2 million and $35.6 million a year earlier. Pharmaceutical R&D expense fell year over year as hGH-CTP Phase 3 work declined after trial completion.
- Management cited cost reductions and lower legal expenses as factors in lower SG&A. R&D expense was $39.4 million in the first half versus $64.8 million a year earlier.
Outlook, risks and contingencies
No formal numerical financial guidance is provided. Management said it anticipates cash generation from operations if COVID-19 testing demand continues and routine testing volumes keep moving toward normalization, but emphasized that sustainability is uncertain. Management believed cash, operating cash flow and available credit would cover anticipated requirements beyond 12 months, subject to assumptions that may change. It warned that renewed restrictions, reduced routine testing, weaker collections, limited financing access or credit-covenant pressure could adversely affect liquidity.
Somatrogon met primary and secondary objectives in a Japanese Phase 3 study, consistent with the global Phase 3 results. Management expected to submit for U.S. approval in 2020 and in Europe and Japan thereafter. Pfizer and OPKO amended their agreement to share manufacturing activity costs. The Vifor Rayaldee agreement was amended in May, changing territories and milestones; Vifor had not exercised its separate U.S. dialysis indication option.
Significant exposures include ongoing government and payor inquiries concerning laboratory billing and reimbursement, including a False Claims Act matter under negotiation. CMS lifted GeneDx’s Medicare payment suspension in February, but noted that this was not a favorable determination on billing. A proposed $16.5 million settlement of class-action claims related to the SEC matter remained subject to court approval; the company expected insurance to cover a significant portion. The AMCA patient-data incident and related regulatory inquiries also remained unresolved, and potential loss was not estimable. The filing additionally reports $154.2 million of ordinary-course purchase commitments and contingent consideration that could aggregate up to $149.1 million.
Other risks include potential impairment of substantial goodwill and intangible assets, clinical and regulatory execution, reimbursement and pricing pressure, supply constraints, litigation, and the uncertain effects of COVID-19. Management reported disclosure controls were effective at June 30, 2020.
Key facts for investors to verify
- Whether COVID-19 testing revenue and collections persist, and how quickly routine diagnostics volumes recover.
- Cash conversion and collection of the sharp increase in receivables, especially amounts owed by government and municipal COVID-19 testing clients.
- The portion and timing of insurance proceeds for the proposed $16.5 million settlement, and the outcome of pending billing investigations and other legal matters.
- Somatrogon regulatory submission and approval progress, Pfizer cost-sharing and commercial terms; and Vifor’s Rayaldee launch and milestone progress.
- Available borrowing capacity, covenant compliance and refinancing needs, including the cost and related-party nature of the 11% credit commitment.
- Potential asset impairments and the effects of COVID-19 on clinical programs, Rayaldee adoption and future financing access.