OPKO Health, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. OPKO is a diversified healthcare company with diagnostics operations, primarily BioReference Laboratories, and pharmaceutical products and development programs, including Rayaldee and hGH-CTP.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Total revenue | $222.5 million | $254.9 million; down 12.7% |
| Services revenue | $178.9 million | $211.3 million; down $32.4 million |
| Product revenue | $25.3 million | $27.9 million; down $2.6 million |
| IP transfer and other revenue | $18.3 million | $15.7 million; includes $17.4 million from Pfizer |
| Gross profit and margin | $78.4 million; 35.2% | $100.8 million; 39.6% |
| Operating loss | $75.3 million | $42.6 million |
| Net loss | $80.8 million; $0.14 per share | $43.1 million; $0.08 per share |
| Operating cash flow | $(49.0) million | $(35.5) million |
Service revenue fell primarily because of lower clinical-testing reimbursement, including PAMA effects, and higher denial rates and procedural requirements in clinical and genomics testing. One fewer business day also reduced clinical volumes; higher genomics volume partly offset the decline. Rayaldee revenue was $5.8 million, up from $3.7 million, while product revenue overall declined mainly due to lower OPKO Chile sales.
At March 31, cash and cash equivalents were $207.3 million, current assets $435.2 million, and current liabilities $396.1 million. Total liabilities were $812.6 million. Operating cash burn was funded in part by financing proceeds; cash rose from $96.5 million at year-end, primarily reflecting the convertible-note offering.
In February, OPKO issued $200 million principal amount of 4.50% convertible notes due 2025; their carrying value at quarter-end was $142.7 million after discount and issuance costs. Other principal debt included $55 million of 2023 convertible notes, approximately $3 million of 2033 notes remaining after a $28.8 million repurchase, and approximately $110.0 million outstanding on revolving and other lines of credit. BioReference had no additional borrowing availability under its JPMorgan facility at March 31 and was not in compliance with its fixed-charge coverage ratio; the lender granted a limited waiver. In Q2, OPKO repaid a further $39 million under that facility after borrowing-base availability declined.
Material changes and management commentary
- Revenue declined 12.7% year over year, while gross margin fell about 4.4 percentage points and operating and net losses widened.
- SG&A increased to $95.2 million from $91.5 million, including $10.6 million of expenses related to legal matters. R&D rose to $36.5 million from $32.9 million, principally reflecting higher hGH-CTP costs.
- Management reported positive topline Phase 2 results for OPK88003, with statistically significant improvements in HbA1c and weight loss versus placebo. The FDA approved the Sangia Total PSA Test for use with the Claros 1 Analyzer; commercialization strategy was still under evaluation.
- Novitas issued a future non-coverage determination for the 4Kscore test, effective March 20, 2019. OPKO said it was evaluating appeal options and pursuing broader reimbursement coverage, including an FDA-approval strategy.
- Management believed cash on hand, credit-line amounts available and the 2025 note proceeds would cover anticipated operating and debt-service requirements beyond 12 months, but cautioned that assumptions could change and funding might be needed sooner. Management expects substantial R&D spending and SG&A investment to continue. No specific earnings or revenue guidance was provided.
- The company expects to spend $40–$50 million to construct and validate its Waterford, Ireland facility; cumulative spending was about $38.9 million through March 31, 2019. It also reported $93.5 million of open purchase commitments, mostly due during the remainder of 2019.
Risks, contingencies, and unusual items
- BioReference is reviewing U.S. Attorney allegations concerning Medicare and TRICARE billing and physician electronic-health-record subsidies. The company said the outcomes could be material; the filing does not provide a clear estimate of potential losses.
- OPKO’s 2018 SEC case was settled and court-approved in January 2019, without admitting or denying allegations; the company paid a $100,000 penalty. Related class and derivative actions remained pending, and a separate MabVax lawsuit was filed in April 2019.
- Former Claros shareholders sued over a claimed $2.375 million milestone payment following FDA approval of the PSA test and alleged future milestone obligations. OPKO disputes the claims.
- OPKO recorded $4.8 million of contingent-consideration expense, primarily due to revised assumptions about OPKO Renal milestones. It also recorded a $0.7 million impairment charge related to FineTech intangible assets.
- The 2025 notes were issued with a share-lending arrangement; 29.25 million shares had been issued under it by quarter-end. The filing excludes these shares from EPS calculations and reports 49.7 million potential shares excluded as antidilutive.
- OPKO identified risks including continued operating losses and cash burn, access to financing, reimbursement pressure and litigation, as well as clinical, regulatory, commercialization, partner-performance and international-operation risks. Management stated that disclosure controls were effective; lease-accounting adoption materially affected or was reasonably likely to affect internal controls.
Key investor verification points
- Track cash burn, cash runway, borrowing-base availability, covenant compliance, and the effect of the additional $39 million Q2 credit-facility repayment.
- Assess whether BioReference can stabilize reimbursement and denial rates, particularly following the 4Kscore non-coverage determination.
- Monitor the status and potential financial exposure of the federal investigations, related securities litigation, and Claros milestone dispute.
- Verify progress, cost-sharing arrangements, and regulatory strategy for hGH-CTP, alongside OPK88003 follow-up data and Rayaldee sales and partner milestones.
- Review dilution and future obligations associated with convertible notes, the share-lending arrangement, contingent consideration, and construction commitments.