OPKO Health, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Financial statements are unaudited. OPKO is a diversified healthcare company with pharmaceutical, biologics and diagnostics operations.
Financial highlights
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $143.0 million | $19.8 million | $215.5 million | $65.6 million |
| Operating income (loss) | $(8.2) million | $(48.2) million | $(90.5) million | $(113.4) million |
| Net income (loss) attributable to common shareholders | $128.2 million | $(48.7) million | $(31.6) million | $(118.7) million |
| Basic earnings (loss) per share | $0.26 | $(0.11) | $(0.07) | $(0.28) |
| Cash from (used in) operations | Not separately stated | Not separately stated | $173.4 million | $(65.6) million |
Q3 gross profit was approximately $75.7 million, or 52.9% of revenue; nine-month gross profit was approximately $123.5 million, or 57.3%. These margins are affected by substantial changes in business mix and acquisitions. The large Q3 net profit was not reflective of operating profitability: it included a $93.0 million income-tax benefit, principally from a $93.4 million release of the U.S. deferred-tax valuation allowance, a $32.2 million net gain from derivative fair-value changes, and a $17.3 million gain on deconsolidating SciVac/STI.
Liquidity and balance sheet: At September 30, 2015, cash and cash equivalents were $212.1 million and current assets were $517.4 million, against current liabilities of $357.6 million. Total assets were $3.016 billion and total liabilities $1.046 billion. The company reported $77.5 million outstanding on lines of credit and $32.2 million principal on its 2033 Senior Notes; the notes’ balance-sheet carrying amount, including related accounting components, was $44.2 million. Operating cash flow included substantial cash received under the Pfizer agreement and was supported by a $246.3 million increase in deferred revenue.
Material changes versus comparable periods
- Revenue increased sharply, chiefly because OPKO acquired Bio-Reference in August 2015. Bio-Reference contributed $102.1 million of revenue from acquisition through quarter-end. Q3 services revenue was $103.9 million versus $2.5 million a year earlier.
- OPKO acquired EirGen in May 2015 for approximately $133.8 million and Bio-Reference in August for approximately $950.0 million, primarily through issuance of 76.6 million OPKO shares. The acquisitions materially expanded assets, liabilities, goodwill and intangible assets.
- Other revenue included $17.7 million in Q3 and $47.8 million for the nine months recognized from the Pfizer transaction. OPKO received $295 million upfront, recognized over an estimated performance period through 2019; $247.2 million remained deferred at September 30.
- Q3 operating loss narrowed year over year, while nine-month operating loss also improved. However, SG&A and R&D rose: nine-month SG&A was $93.6 million versus $42.7 million, and R&D was $74.0 million versus $57.7 million.
- Cash increased from $96.9 million at December 31, 2014 to $212.1 million. The balance sheet also reflected increased borrowings associated principally with Bio-Reference and significant equity issuance.
Outlook, commentary, risks and unusual items
- Management expects operating losses and substantial R&D expense to continue for the foreseeable future, and expects R&D and SG&A to rise as programs and infrastructure expand. Management stated that cash on hand and available borrowing capacity were expected to cover anticipated operating and debt-service needs beyond 12 months, subject to assumptions that could change.
- Rayaldee’s NDA was accepted for FDA review; the filing cited a March 29, 2016 PDUFA date. Oral Varubi was FDA-approved in September 2015, with launch expected through partner TESARO. OPKO’s hGH-CTP program was in Phase 3 and partnered with Pfizer; potential Pfizer regulatory milestones totaled up to $275 million, but none had been recognized as revenue.
- OPKO paid $25.9 million to Israel’s Office of the Chief Scientist in connection with prior grants and the hGH-CTP outlicense. Following Varubi approval, OPKO recorded $25 million of Merck milestone payments as an intangible asset, including $20 million of future payments as a liability.
- After quarter-end, Bio-Reference entered a secured revolving credit agreement with JPMorgan for $175 million, potentially expandable to $275 million, maturing in 2020. It replaced the PNC facility and includes covenants and collateral provisions.
- Key risks include Bio-Reference integration and realization of expected benefits, reimbursement pressure and laboratory competition, clinical and regulatory outcomes, reliance on partners, financing needs, and impairment risk in substantial goodwill and intangible assets. Goodwill and other intangible assets were approximately 74% of total assets.
- Contingencies include a government investigation concerning alleged healthcare-program false claims, a Medicare billing appeal, and a Washington University question about the sublicense payment calculation tied to the Pfizer transaction. The filing says outcomes or loss estimates were not clear for certain matters. Bio-Reference’s Horizon reimbursement lawsuit also remained pending.
- Management reported disclosure controls were effective, while integration of acquired companies’ financial reporting controls was ongoing and had materially affected, or was reasonably likely to affect, internal control over financial reporting.
Most important facts for investors to verify
- How much of reported revenue and operating performance is recurring and attributable to acquired businesses, versus Pfizer upfront-payment revenue recognized over time?
- Whether Bio-Reference integration, reimbursement collections and bad-debt assumptions support expected margins and cash generation.
- Whether OPKO can advance Rayaldee and hGH-CTP through regulatory and clinical milestones, and whether partners commercialize Varubi and hGH-CTP successfully.
- How much cash remains after acquisition, grant-repayment and debt-related uses, and the actual availability and terms of the JPMorgan facility.
- Potential dilution from acquisition shares, note conversions and equity compensation, as well as volatility from the 2033 Notes’ embedded derivative accounting.
- Whether acquired goodwill and intangible-asset valuations remain supportable, and the ultimate outcomes of disclosed legal, regulatory and tax matters.