OPKO Health, Inc. — Q3 2017 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and nine months ended September 30, 2017. OPKO operates diagnostics and pharmaceutical businesses, including BioReference Laboratories, Rayaldee, and a development-stage drug pipeline. Dollars below are in millions unless noted.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $263.5 | $298.0 | $873.8 | $946.2 |
| Operating loss | $(58.3) | $(23.6) | $(126.4) | $(22.9) |
| Net loss | $(46.4) | $(15.0) | $(95.0) | $(11.4) |
| Loss per share | $(0.08) | $(0.03) | $(0.17) | $(0.02) |
- Revenue mix: Q3 service revenue was $229.0 million, product revenue $22.8 million, and intellectual-property and other revenue $11.7 million. For the nine months, the corresponding figures were $741.0 million, $74.0 million, and $58.8 million.
- Margins and costs: Combined gross margin, calculated from service and product revenue less their respective costs, was approximately 42.6% in Q3 versus 49.3% a year earlier, and 47.0% for nine months versus 52.2%. Nine-month SG&A was $396.4 million and R&D was $90.9 million. The filing reports $5.0 million of inventory obsolescence expense for the nine months, primarily related to the Rayaldee launch.
- Cash flow: Nine-month operating cash use was $94.2 million, versus $1.7 million provided in 2016. Investing used $32.7 million, including $32.1 million of capital expenditures; financing provided $56.8 million, chiefly from net line-of-credit borrowings. Cash declined $68.4 million to $100.4 million.
- Liquidity and debt: Current assets were $430.6 million and current liabilities $258.9 million at September 30. Outstanding lines of credit were $105.9 million; OPKO also reported $31.9 million principal outstanding on its 2033 Senior Notes. The notes carry a 3% coupon. Management said cash on hand and available borrowing capacity should cover anticipated operating and debt-service needs beyond 12 months, while noting this depends on assumptions and future financing availability.
- Balance sheet: Total assets were $2.72 billion, including $715.6 million of goodwill and $648.4 million of in-process R&D; shareholders’ equity was $2.09 billion. Accounts receivable, net, was $233.9 million, with an allowance for doubtful accounts of $57.6 million.
Changes versus the prior comparable period
- Q3 revenue fell $34.5 million (11.6%); nine-month revenue fell $72.4 million (7.7%). Management attributed service-revenue declines mainly to lower pricing at BioReference’s GeneDx division.
- Nine-month product revenue increased $10.7 million, principally from OPKO Chile and EirGen. Intellectual-property revenue declined $46.5 million, largely reflecting the $50.0 million Vifor upfront payment recognized in 2016; 2017 included a $10.0 million TESARO milestone.
- Losses widened materially. Nine-month operating results also reflected higher SG&A, R&D and amortization, partly offset by a $4.5 million contingent-consideration benefit, compared with $15.6 million of expense in 2016.
- Rayaldee was launched in the U.S. in November 2016, but OPKO recognized no Rayaldee product revenue in the first nine months of 2017 because it could not yet reasonably estimate rebates, other sales deductions, and returns. Customer payments received in advance, $6.5 million, remained deferred.
Outlook, risks and notable items
- Management expects R&D spending to rise as programs and trials expand, and SG&A to increase with commercial and infrastructure investment. It cautioned that additional funding may be needed for acquisitions, accelerated development, or additional trials; insufficient funding could force program delays, reductions, or cancellations.
- Rayaldee’s U.S. commercial performance and access, BioReference results, clinical and regulatory outcomes, and financing availability are key uncertainties. OPKO cited hGH-CTP Phase 3 results with no statistically significant primary-endpoint difference versus placebo; post-hoc analyses excluding outliers were significant, while other analyses were mixed. OPKO planned an additional adult study and a pre-BLA discussion with FDA.
- After quarter-end, OPKO licensed Rayaldee rights in Japan to Japan Tobacco. The agreement provides a $6 million upfront payment, another $6 million upon initiation of a planned U.S. Phase 2 dialysis study, potential development/regulatory milestones of up to $31 million, sales milestones of up to $75 million, and royalties.
- OPKO committed to provide or arrange a potential $50 million, five-year facility for VACG if its affiliate wins a VA contract; the facility could be drawn only after an award, and final documentation remained to be negotiated. The VA decision was anticipated in Q4 2017 but was not assured.
- BioReference is assessing SDNY allegations that it improperly billed Medicare and TRICARE for certain hospital inpatient laboratory services. OPKO said potential liability could be material but could not then estimate the outcome. The filing also describes ongoing government inquiries and document requests involving laboratory operations.
- Other items: OPKO reversed $6.8 million of previously recorded derivative income related to its 2033 Notes in Q3 and reclassified a $13.6 million embedded-derivative balance to additional paid-in capital. The filing says the prior-period adjustments were not significant to those earlier periods. OPKO reported effective disclosure controls, but said ERP implementation changes materially affected, or could materially affect, internal control over financial reporting.
Important facts for investors to verify
- Whether BioReference service revenue, GeneDx pricing, collections, and the increased doubtful-account allowance improve or deteriorate.
- When OPKO can reliably estimate Rayaldee deductions and returns and begin recognizing product revenue, and whether uptake supports the launch investment.
- Operating cash burn, remaining borrowing availability, debt covenant compliance, and the ability to fund R&D and the Waterford facility without additional financing.
- Progress and regulatory prospects for hGH-CTP, Rayaldee indications and partnerships, and other pipeline candidates; distinguish potential milestones from earned revenue.
- Developments in the SDNY matter, other government inquiries, and the potential VA-related $50 million facility commitment.
- Effects of ERP implementation on financial reporting controls, and any future impairment or valuation changes to the substantial goodwill, intangible assets, and IPR&D balances.