OPKO HEALTH, INC. quarterly report, Q1 FY2016

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OPKO Health, Inc. — Q1 2016 Form 10-Q

Business context and reporting period. Unaudited results cover the three months ended March 31, 2016, compared with the same period in 2015. OPKO operates pharmaceutical and diagnostics businesses. The 2016 results include Bio-Reference, acquired in August 2015; the prior-year comparison does not.

Financial performance and position

MetricQ1 2016Q1 2015 / comparison
Total revenue$291.0 million$30.1 million; up $261.0 million
Operating loss$27.5 million$56.9 million loss
Net loss attributable to common shareholders$12.0 million; $0.02 per share$117.1 million; $0.26 per share
Cash from operating activities$(9.2) million$238.8 million
Cash from investing activities$(10.1) million$(0.4) million
Cash from financing activities$0.1 million$13.8 million
  • Revenue included $252.5 million from services, $19.9 million from products and $18.6 million from intellectual-property transfers and other. Bio-Reference contributed $251.0 million of revenue and $4.6 million of net income in the quarter. Pfizer-related revenue was $17.7 million.
  • Cost of service and product revenue totaled $147.5 million. Operating expenses included $128.0 million of SG&A and $27.8 million of R&D. The filing does not report a consolidated gross-margin measure.
  • SG&A included $17.2 million of Bio-Reference executive severance expense, including $8.9 million from accelerated stock-option vesting. Bad-debt provision was $19.6 million, versus $0.2 million a year earlier.
  • Cash and cash equivalents were $175.0 million at March 31, down from $193.6 million at year-end. Current assets were $453.5 million and current liabilities $267.2 million.
  • Credit facilities and other lines had $82.8 million outstanding against stated capacity of $189.5 million. The 2033 Senior Notes had $32.2 million principal outstanding; their reported balance, including embedded derivatives and net of discount, was $49.6 million. Other notes and debt totaled approximately $5.0 million.
  • Total assets were $2.79 billion and total liabilities $795.3 million. Goodwill, intangible assets and in-process R&D together were approximately $2.17 billion.

Material changes versus the prior period

  • The $261.0 million revenue increase was principally attributable to Bio-Reference, which accounted for $251.0 million. Accordingly, headline growth is not a like-for-like comparison.
  • Operating loss narrowed by $29.4 million. Net loss improved substantially, mainly as Q1 2015 included $25.9 million of grant-repayment expense and $49.8 million of net derivative losses, compared with $1.4 million of derivative losses in Q1 2016.
  • Operating cash flow declined from $238.8 million provided to $9.2 million used. The prior-year inflow included the $295.0 million Pfizer upfront payment, whose revenue is being recognized over time; Q1 2016 operating cash flow also reflected a $17.8 million reduction in deferred revenue.
  • Q1 2016 included $13.4 million of intangible amortization, versus $2.7 million a year earlier, reflecting acquired assets. Equity-based compensation rose to $17.3 million from $7.4 million.

Outlook, commentary, risks and unusual items

  • Management stated that cash on hand and available borrowing capacity were expected to cover anticipated operating and debt-service needs beyond the next 12 months. This estimate depends on assumptions; acquisitions, expanded trials or accelerated development could require additional funding. Management expects R&D and SG&A expenses to increase.
  • The FDA issued a complete response letter for Rayaldee in March, citing deficiencies observed at a third-party contract manufacturer—not Rayaldee-specific safety, efficacy or labeling issues—and did not request additional studies. OPKO reported that it resubmitted the NDA, accepted April 22, 2016, with an October 22, 2016 PDUFA date.
  • In May 2016, OPKO’s EirGen subsidiary signed a Rayaldee development and license agreement with Vifor Fresenius Medical Care Pharma: a $50 million initial payment, up to $232 million in additional milestones and tiered double-digit royalties for specified territories. Vifor also received an option for certain U.S. dialysis-patient rights, with up to $555 million in additional milestones and royalties if exercised. These are subsequent events, not Q1 revenue.
  • Other key programs included hGH-CTP, in Phase 3 and partnered with Pfizer; VARUBI, launched in the U.S. by TESARO in November 2015; and a Phase 3 IV VARUBI formulation. OPKO recognized $17.7 million of Pfizer-related revenue in Q1 and had $211.8 million of Pfizer-related deferred revenue at quarter-end. Up to $275 million of Pfizer regulatory milestones remained eligible, subject to achievement.
  • Risks include continued losses, clinical and regulatory uncertainty, reimbursement and pricing pressure, laboratory billing and collections, acquisition integration, financing needs, and international and currency exposures. The filing also describes government inquiries and subpoenas involving laboratory operations; management said the Tennessee False Claims Act matter was not expected to have a financial impact. Potential losses in certain matters were not accrued because they were not considered probable or could not be reasonably estimated.
  • OPKO reported disclosure controls were effective at quarter-end. Integration of Bio-Reference and EirGen was ongoing and had materially affected, or was reasonably likely to materially affect, internal control over financial reporting.

Most important facts for investors to verify

  • Whether Rayaldee’s manufacturing observations were resolved and whether FDA action occurred by the stated October 22, 2016 target date.
  • Bio-Reference’s ongoing revenue, operating performance, reimbursement trends and receivables quality, including the sharp increase in the doubtful-account allowance.
  • Cash burn and liquidity relative to management’s greater-than-12-month assessment, available borrowing capacity, and any financing or dilution needs.
  • Progress, costs and milestone prospects for hGH-CTP, VARUBI and other pipeline programs, and the timing and recognition of collaboration revenue.
  • Potential financial exposure from government inquiries, other litigation, contingent consideration and the secured Bio-Reference credit facility.