OPKO Health, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Unaudited consolidated results. OPKO is a multinational biopharmaceutical and diagnostics company with pharmaceutical and diagnostics segments.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $42.4m | $23.5m | $72.5m | $45.8m |
| Operating loss | $(25.4)m | $(34.9)m | $(82.3)m | $(65.2)m |
| Net loss attributable to common shareholders | $(42.8)m | $(25.5)m | $(159.9)m | $(70.0)m |
| Loss per share, basic and diluted | $(0.09) | $(0.06) | $(0.35) | $(0.17) |
| Operating cash flow | Not separately stated for quarter | $204.7m | $(44.5)m |
- Revenue growth was driven chiefly by the Pfizer hGH-CTP transaction: OPKO recognized $17.7m in Q2 and $30.2m in the first half. EirGen contributed $2.3m from its May acquisition date.
- Reported gross margin was approximately 66% in Q2 and 45% in the prior-year quarter; first-half margin was approximately 66% versus 45%. The increase largely reflects intellectual-property revenue, rather than only product sales.
- Q2 research and development expense rose to $29.6m from $16.2m; first-half expense rose to $55.1m from $37.2m. Management attributed the increase mainly to hGH-CTP development and manufacturing costs and $2.3m of Rayaldee NDA-related expense.
- Q2 SG&A was $20.9m versus $14.9m; first-half SG&A was $38.4m versus $28.7m, reflecting staffing, infrastructure, equity compensation, and transaction-related professional fees.
Balance sheet, cash flow and financing
- At June 30, 2015, cash and cash equivalents were $221.2m, up from $96.9m at year-end 2014. Current assets were $278.3m and current liabilities $180.5m.
- Total assets were $1.525bn; total liabilities were $698.5m. Goodwill was $289.6m and in-process R&D was $812.4m, making asset values materially dependent on development and valuation assumptions.
- First-half operating cash flow of $204.7m was driven substantially by the $295m Pfizer upfront payment, most of which remained deferred revenue. OPKO paid $25.9m to repay Israeli government grants. Investing cash use was $98.5m, including $94.7m net cash for EirGen; financing provided $18.5m, mainly from option and warrant exercises.
- OPKO reported $46.2m principal outstanding on its 3% senior notes due 2033, plus $8.4m drawn on short-term credit lines. The notes’ embedded conversion derivative creates significant non-cash earnings volatility; its fair value was $73.6m at June 30. The six-month derivative remeasurement produced $66.3m of expense.
- Management said cash and available credit were expected to cover operating needs and debt service beyond 12 months, while noting assumptions may change and additional funding could be needed.
Changes, outlook and material items
- Compared with the prior-year quarter, revenue rose 80%, but common-shareholder net loss widened; for the first half, revenue rose 58% while net loss more than doubled. Derivative remeasurement and higher R&D and SG&A contributed to the loss.
- In January 2015, OPKO received $295m upfront from Pfizer for worldwide hGH-CTP development and commercialization rights. OPKO recognizes the upfront payment over an expected performance period through 2019; up to $275m in regulatory milestones and royalties or profit sharing may also be earned. Milestones had not been recognized as revenue by June 30.
- OPKO acquired EirGen for approximately $133.8m, including $100.2m cash and $33.6m in stock. The Bio-Reference merger agreement, announced in June, proposed an all-stock exchange of 2.75 OPKO shares per Bio-Reference share and was valued at approximately $1.3bn using the stated OPKO share price. It remained subject to shareholder approval and other conditions; completion was not assured.
- OPKO submitted the Rayaldee NDA in May; FDA acceptance occurred in July. Management expected operating losses and substantial R&D spending to continue for several years and expected R&D expense to increase.
- Risks include clinical and regulatory failure, limited commercialization capabilities, funding needs, currency and market exposure, and potential impairment of substantial goodwill and R&D assets. Four lawsuits challenged the proposed Bio-Reference merger; OPKO denied the allegations, and the outcome and potential loss were not estimable. A U.S. Attorney’s Office investigation concerning alleged false healthcare claims and a Washington University dispute over the Pfizer sublicense payment were also disclosed.
- Other notable items: $74.3m of acquisition-related contingent consideration was recorded; additional contingent payments could aggregate up to $214.6m under specified milestones. OPKO disclosed a possible tax exposure range of $0–$50m and had accrued $2.3m for uncertain tax positions.
Investor verification points
- Check whether Pfizer-related revenue recognition, remaining deferred revenue, development obligations, and potential milestones progress as expected.
- Verify Bio-Reference merger status, final consideration and share dilution, and the resolution or effect of merger litigation.
- Monitor cash burn excluding the Pfizer upfront-payment effect, acquisition spending, and whether management’s liquidity assessment remains supportable.
- Track 2033 note conversions, derivative valuation sensitivity, and outstanding credit-line balances.
- Assess Rayaldee’s regulatory outcome and other clinical milestones, as well as impairment risk for goodwill and in-process R&D.
- Follow the healthcare-claims investigation, Medicare billing appeals, Washington University sublicense-payment review, contingent obligations, and uncertain tax exposure.