OPKO Health, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. OPKO is a diversified healthcare company with diagnostics and pharmaceutical operations. Comparative 2017 figures reflect retrospective adoption of ASC 606 unless noted.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total revenue | $254.9 million | $266.4 million |
| Operating loss | $42.6 million | $45.2 million |
| Net loss | $43.1 million | $34.5 million |
| Basic and diluted loss per share | $0.08 | $0.06 |
| Cash used in operations | $35.5 million | $33.9 million |
| Cash and cash equivalents, March 31 | $99.9 million | $131.1 million |
- Revenue from services fell 7.5% to $211.3 million, primarily due to lower BioReference testing volume and reimbursement; GeneDx growth partly offset the decline. Product revenue rose 25.3% to $27.9 million, including $3.7 million of Rayaldee sales. Intellectual-property and other revenue was $15.7 million, principally Pfizer-related revenue.
- Gross profit was approximately $100.8 million, a 39.6% gross margin, compared with $111.6 million and 41.9% in Q1 2017. Operating loss narrowed, but net loss widened, reflecting a smaller income tax benefit and lower non-operating gains, among other factors.
- SG&A declined to $91.5 million from $109.9 million, mainly due to BioReference cost reductions. R&D increased to $32.9 million from $26.6 million, principally due to hGH-CTP manufacturing and development costs.
- Cash from financing was $49.2 million, including $55.0 million raised through new convertible notes. Investing activities used $5.1 million, including $6.0 million of capital expenditures. Cash increased $8.4 million from year-end, despite operating cash burn.
- At March 31, current assets were $349.3 million and current liabilities $318.1 million (about 1.10 current ratio). Total assets were $2.58 billion and total liabilities $755.6 million.
- Debt included $110.9 million outstanding under lines of credit, $55.0 million principal on the new 2023 Convertible Notes, and $31.9 million principal on the 2033 Senior Notes. The credit facility had $12.7 million available to borrow; stated aggregate availability across the facility and other lines was $127.5 million, of which $110.9 million was drawn.
Material changes and significant items
- ASC 606 was adopted retrospectively. For Q1 2017, reported revenue was reduced by $26.7 million for services and $3.0 million for intellectual-property and other revenue, with corresponding presentation changes to SG&A and other items. Adoption reduced opening accumulated equity by $29.8 million at December 31, 2017; comparisons should use the restated figures.
- In February 2018, OPKO issued $55.0 million of 5% convertible notes, due in five years and convertible at $5.00 per share. Purchasers included affiliates of the CEO and vice-chairman.
- Rayaldee generated $3.7 million in U.S. net sales. OPKO’s Japan Tobacco agreement includes potential additional payments and royalties, but these are contingent on study initiation, milestones, and future sales.
- Net contingent consideration was $43.1 million at quarter-end. Goodwill, IPR&D, and other intangible assets together represented approximately 79% of total assets, making valuation assumptions and potential impairment important.
Outlook, risks, and contingencies
- Management said cash on hand, borrowing availability, and the note proceeds were expected to fund operations and debt service beyond the next 12 months, while cautioning that assumptions may change. OPKO has not generated sustained positive operating cash flow and expects substantial R&D spending; SG&A may also rise as commercialization expands.
- Management identified future funding needs as dependent on Rayaldee’s commercial performance, BioReference results, clinical and regulatory progress, potential acquisitions, and legal or government matters. Failure to obtain funding could require delaying or reducing trials or other programs.
- BioReference is responding to allegations from the U.S. Attorney’s Office for the Southern District of New York concerning Medicare and TRICARE billing for certain hospital inpatient laboratory services. OPKO said it could not determine the merits or potential liability; the outcome could be material. The filing also describes other regulator inquiries and laboratory-related subpoenas.
- OPKO committed to provide or arrange a $50 million facility for a veterans-care organization only if its bid receives a Veterans Health Administration award; the award and related obligations were uncertain.
- Construction of the Waterford, Ireland research, development, and manufacturing center was expected to cost $40–$45 million, with completion anticipated in 2019. Funding was expected from cash or third-party sources.
- Further risks include reimbursement and pricing pressure, payer recoupments, clinical or regulatory setbacks, reliance on partners, and possible impairment of substantial goodwill and development assets. TESARO announced in Q1 that it would suspend further distribution of Varubi IV.
Most important facts for investors to verify
- Whether BioReference service volumes, reimbursement, and margins stabilize, and whether planned cost reductions persist.
- Rayaldee prescription growth, net sales after discounts and rebates, and progress on partner-funded development and milestone opportunities.
- Operating cash burn and liquidity relative to debt service, the 2019 put feature on the 2033 Senior Notes, and available borrowing capacity under credit covenants.
- Developments and any estimated exposure from the SDNY billing allegations and other government or payer reviews.
- Clinical and regulatory progress for hGH-CTP and other pipeline programs, along with the assumptions supporting $646.4 million of IPR&D and the company’s other significant intangible assets.
- Execution costs and financing for the Waterford project and any decision or challenge concerning the veterans-care network award.