OPKO Health, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012. Financial statements are unaudited. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context
OPKO is a multinational pharmaceutical and diagnostics company. It reported one segment, pharmaceuticals, combining product development with acquired operations in Chile, Spain, Mexico and Israel. Product sales came from those international businesses; the company said it did not yet generate revenue from its diagnostic or pharmaceutical product candidates.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $11.8 | $6.8 | $30.8 | $22.2 |
| Gross margin, before intangible amortization | $4.3 | $2.8 | $11.8 | $9.1 |
| Gross margin percentage | 36.5% | 41.0% | 38.2% | 41.0% |
| Operating loss | $(9.4) | $(5.8) | $(27.6) | $(14.7) |
| Net loss | $(9.6) | $(8.2) | $(28.5) | $(19.7) |
| Net loss attributable to common shareholders | $(10.2) | $(8.8) | $(30.2) | $(21.5) |
| Basic and diluted net loss per share | $(0.03) | $(0.03) | $(0.10) | $(0.08) |
- Revenue growth reflected acquisitions: Q3 included $2.0 million from Farmadiet, $1.5 million from FineTech and higher Chilean sales, including ALS-related revenue. Nine-month growth also included $0.7 million of collaboration-related revenue.
- Operating expenses rose: nine-month R&D increased to $12.9 million from $7.1 million; SG&A increased to $17.4 million from $14.1 million. Amortization and contingent-consideration charges also increased following acquisitions.
- Inventory obsolescence provisions weighed on gross margin, including $0.7 million in Q3 and $1.2 million for the nine-month period, primarily in Chile.
Cash flow, balance sheet and liquidity
- For the nine months, operating cash use was $19.7 million, investing cash use was $33.2 million and financing cash provided was $5.0 million. Cash declined $48.1 million to $23.4 million.
- At September 30, cash and cash equivalents were $23.4 million and marketable securities were $18.9 million, or $42.4 million combined. Cash alone was $71.5 million at December 31, 2011; the filing does not provide a directly comparable combined cash-and-marketable-securities figure for that date.
- Total assets were $250.0 million; total liabilities were $79.4 million. Current assets were $88.0 million and current liabilities $46.4 million. Inventory was $21.5 million, up from $13.3 million at year-end.
- Debt included $15.9 million outstanding on short-term credit lines, with $6.4 million additional availability disclosed. The balance sheet also reported $17.4 million of current lines of credit and notes payable and $4.0 million of long-term debt; the filing does not clearly reconcile these balance-sheet amounts to the disclosed $15.9 million line balance. Credit-line rates averaged about 7% for the nine months.
- Series D preferred stock had a $30.0 million liquidation value and was convertible into approximately 12.1 million common shares. Common shares outstanding were approximately 298.2 million at September 30.
Changes, outlook and material items
- OPKO acquired ALS in April and Farmadiet in August 2012; FineTech and OPKO Diagnostics had been acquired in late 2011. Acquisition-related assets, amortization, contingent consideration and deferred payments affected results and the balance sheet.
- After quarter-end, OPKO agreed to acquire OURLab for $40.0 million, comprising $9.4 million cash and $30.6 million in shares, subject to stated escrow provisions. Management said the laboratory would support a U.S. launch of its 4Kscore prostate-cancer test. OPKO also completed a 45% investment in an Israeli hepatitis B vaccine company.
- Management expected substantial operating losses for the foreseeable future and said it believed available cash, marketable securities and credit availability would cover anticipated operating and debt-service needs beyond the next 12 months. That assessment depends on assumptions; additional funding may be required, and availability on acceptable terms is not assured.
- Management cited research, clinical development, commercialization infrastructure, acquisitions and financing needs as key cash requirements. It warned that insufficient funding could force delays or reductions to development programs or acquisitions.
- OPKO received an indemnity claim letter from Optos after the sale of its ophthalmic instrumentation business. Management said the outcome was too early to assess but did not currently expect a material financial impact. The filing also reports ordinary-course litigation without identifying a matter expected to be material.
- Other notable exposures include $21.9 million of acquisition contingent consideration, related-party investments and transactions, and fair-value estimates for certain investments and acquisition liabilities. The filing states disclosure controls were effective; integration controls at Farmadiet and FineTech were being implemented.
Most important facts for investors to verify
- Whether cash burn, acquisition spending and working-capital needs remain consistent with management’s beyond-12-month liquidity assessment, especially after the OURLab agreement.
- The composition and maturity of borrowings, the reconciliation of credit-line disclosures to balance-sheet debt, and continued access to short-term credit.
- Whether acquired businesses can sustain revenue and improve margins, given lower reported gross-margin percentages and inventory obsolescence charges.
- Progress, funding requirements and regulatory milestones for 4Kscore and other development programs; no specific financial guidance or launch timetable is provided here.
- The terms, potential dilution and cash impact of deferred acquisition payments, contingent consideration, the Series D preferred stock and post-quarter acquisitions.
- Developments in the Optos indemnity claims and the valuation and performance of OPKO’s investments, including related-party matters.