OPKO Health, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing; selected Q4 results are included below. OPKO operates diagnostics, principally BioReference Laboratories, and pharmaceuticals, including Rayaldee and a partnered development pipeline.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $901.9 million | $990.3 million |
| Gross profit / gross margin | $329.5 million / 36.5% | $385.6 million / 38.9% |
| Operating loss | $274.1 million | $171.2 million |
| Net loss | $314.9 million | $153.0 million |
| Basic and diluted loss per share | $0.53 | $0.27 |
| Cash used in operating activities | $172.5 million | $109.1 million |
- Revenue fell 8.9%. Service revenue declined $96.8 million, mainly from lower reimbursement, increased denials and policy changes, PAMA impacts, and reduced 4Kscore revenue during Medicare noncoverage. Product revenue rose $5.1 million, led by Rayaldee; intellectual-property revenue rose $3.4 million.
- Rayaldee net product revenue increased to $31.4 million from $20.3 million. Fourth-quarter prescriptions rose approximately 141% year over year and 17% sequentially; the company reported coverage for more than 83% of U.S. covered lives at year-end.
- Research and development expense was $117.9 million, down from $125.6 million. Selling, general and administrative expense was $343.3 million, down from $358.3 million. Asset impairment charges increased to $92.4 million from $21.8 million.
- Cash and cash equivalents were $85.5 million at year-end, versus $96.5 million. Current assets were $324.0 million and current liabilities $249.1 million, a current ratio of approximately 1.30. Total assets were $2.31 billion and shareholders’ equity $1.61 billion.
- Year-end debt included $200 million principal of 2025 convertible notes, $55 million of 2023 convertible notes, $3 million of 2033 senior notes, and $52.1 million drawn on lines of credit and other facilities. The 2025 notes’ balance-sheet carrying value was $148.1 million after discount and issuance costs; reported interest expense was $21.5 million.
- FY2019 financing included $200 million principal of 2025 notes and a common-stock offering that generated approximately $76 million net. Shares issued rose to 670.4 million from 586.9 million.
Fourth-quarter results and material changes
- Q4 2019 revenue was $224.3 million, compared with $221.9 million in Q4 2018. Net loss widened to $112.4 million from $76.1 million; loss per share was $0.18 versus $0.13.
- Diagnostics service revenue was $716.4 million for the year, down from $813.2 million. Pharmaceutical operating loss widened to $109.1 million from $82.6 million, while diagnostics operating loss widened to $123.4 million from $44.9 million.
- The $92.4 million impairment included $44.8 million for OPK88003 and CURNA in-process research and development, $26.2 million of goodwill, and $20.7 million for the Claros Analyzer. The company cited liquidity constraints, longer development timelines and competitive changes.
- Cash used in operations increased by $63.4 million year over year. The filing attributes cash use to corporate, research and development, and Rayaldee commercialization activities.
Outlook, risks and notable developments
- Management said cash and expected available resources were sufficient for anticipated operating needs and debt service beyond 12 months, while warning that assumptions could change and that additional financing may be needed. No specific revenue, earnings or cash-flow guidance is provided.
- After year-end, OPKO obtained a $100 million unsecured line of credit from an affiliate of CEO Phillip Frost, at 11% annual interest, maturing in 2025. BioReference’s revolving credit agreement was also amended to waive testing of a fixed-charge coverage requirement for the quarter ended December 31, 2019, subject to conditions.
- Somatrogon (hGH-CTP), partnered with Pfizer, met the primary non-inferiority endpoint in a pediatric Phase 3 trial. Pfizer was expected to submit a pediatric BLA in the second half of 2020. The adult Phase 3 study did not meet its primary endpoint; post-hoc analyses were mixed. Development costs exceeded the agreed funding cap, and cost-sharing discussions remained a risk.
- Rayaldee’s Novitas Medicare coverage determination with defined criteria became effective December 30, 2019. OPKO’s 4Kscore PMA submission was accepted for FDA review in January 2020. The company also disclosed a CMS Medicare-payment suspension for GeneDx that was lifted in February 2020; CMS reported audit findings of overpayments, which OPKO was evaluating.
- Material exposures include ongoing securities class and derivative actions following the SEC case (settled by OPKO for a $100,000 penalty, paid, without admission or denial); government inquiries into BioReference billing and physician EHR subsidies; AMCA-related data-breach litigation and investigations; and a disputed foreign tax assessment of approximately $66 million.
- Other risks include recurring operating losses and cash burn, reimbursement pressure and payor audits, product and regulatory uncertainty, significant goodwill and intangible assets vulnerable to impairment, related-party financing and governance considerations, and dependence on key partners and management. The auditor issued an unqualified opinion on the financial statements and internal controls; management reported effective controls at year-end.
Important facts for investors to verify
- Whether BioReference can stabilize reimbursement, denials, service volumes and cash generation, and the outcome of the CMS GeneDx audit and other billing inquiries.
- Whether Rayaldee growth and coverage translate into durable net revenue and improved economics after rebates, discounts and other sales deductions.
- Somatrogon’s full pediatric trial data, BLA timing and regulatory outcome; adult-indication strategy; and Pfizer cost-sharing and commercialization arrangements.
- Available liquidity, actual borrowing and covenant status under the credit facilities, including the terms and use of the related-party $100 million line.
- Potential financial effects of the pending lawsuits, AMCA incident, government investigations and disputed tax assessment.
- Whether impairment assumptions for BioReference and the remaining goodwill and intangible assets remain supportable; BioReference’s reported fair value exceeded carrying value by approximately 11% in the 2019 test.