OPKO HEALTH, INC. quarterly report, Q1 FY2020

OPKO Health, Inc. — Q1 2020 Form 10-Q

Reporting period: Three months ended March 31, 2020; unaudited consolidated results. OPKO operates pharmaceutical and diagnostics businesses, including BioReference Laboratories, Rayaldee and partnered drug-development programs.

Financial performance and liquidity

Metric	Q1 2020	Q1 2019
Total revenue	$211.5 million	$222.5 million
Operating loss	$40.8 million	$75.3 million
Net loss	$59.1 million	$80.8 million
Basic and diluted loss per share	$0.09	$0.14
Cash used in operating activities	$43.4 million	$49.0 million
Cash and cash equivalents, March 31	$34.5 million	$207.3 million at March 31, 2019

• Gross profit, calculated as revenue less service and product costs, was approximately $71.2 million, or 33.7% of revenue, versus $78.4 million, or 35.2%, in Q1 2019.
• Service revenue declined 4.5% to $170.8 million; product revenue increased 22.8% to $31.1 million. Revenue from intellectual-property transfers and other declined to $9.6 million from $18.3 million, principally reflecting lower revenue recognized under the Pfizer agreement.
• Rayaldee net product revenue rose to $9.9 million from $5.8 million. The company reported $22.7 million in gross Rayaldee sales and sales allowances and accruals equal to 56% of gross sales.
• Cash fell $50.9 million during the quarter. Current assets were $274.5 million and current liabilities $245.1 million. Cash used in investing activities was $5.6 million, primarily capital expenditures; financing activities used a net $1.6 million.
• At March 31, total liabilities were $683.9 million. The balance sheet reported $213.8 million of convertible notes and $50.2 million outstanding on BioReference and other lines of credit, in addition to current maturities of lines of credit and notes payable. BioReference’s JPMorgan facility had $10.7 million available.
• The company entered into a new $100 million unsecured line of credit with an affiliate of CEO Phillip Frost, bearing 11% annual interest and maturing in 2025; no amount was drawn at quarter-end. OPKO reported $5.5 million of interest expense.

Changes versus prior year

• Revenue decreased $11.0 million, while operating loss narrowed by $34.6 million and net loss narrowed by $21.6 million. Lower SG&A and R&D contributed to the improved operating result; Q1 2019 also included higher contingent-consideration expense and an impairment charge.
• Diagnostics revenue declined $8.1 million, and the segment operating loss improved to $18.1 million from $33.6 million, reflecting lower expenses as well as reduced volumes.
• Pharmaceutical revenue declined $2.9 million: higher Rayaldee sales were offset by lower Pfizer-related IP revenue. The pharmaceutical operating loss improved to $14.1 million from $29.5 million, primarily due to lower R&D and a reversal of contingent-consideration expense.
• Other expense was $12.3 million versus other income of $1.0 million, principally due to unrealized losses on equity investments. This partly offset the improvement in operating loss.

Outlook, commentary and material risks

• COVID-19: BioReference expanded molecular testing and began nationwide antibody testing in late April. The company reported nearly 700,000 diagnostic tests performed since mid-March and capacity of 35,000 molecular tests per day; it anticipated antibody capacity of 400,000 tests per day by mid-May. These are management-reported capacity and activity figures, not financial guidance.
• Routine clinical and genomics testing volumes declined 6.6% in Q1, including the offset from COVID-19 testing; routine volumes were down 60%–65% from normal daily levels at quarter-end. April total volumes were down 10% year over year, including COVID-19 testing, with early May showing year-over-year increases. Management expected routine volumes to trend toward normalization as restrictions eased, but warned that the pandemic could continue to harm volumes, collections, cash flows and operations.
• OPKO received approximately $14 million through the CMS accelerated-payment program, which is repayable through offsets against future claims, and approximately $6 million in provider relief funds in April 2020. The filing also describes payroll-tax deferral and temporary relief from certain laboratory reimbursement requirements.
• Management stated that quarter-end cash and available credit were expected to meet anticipated operating and debt-service needs beyond the next 12 months, subject to assumptions that could change. OPKO has not generated sustained positive operating cash flow and warned that additional financing may be needed; unavailable or unfavorable financing could require reductions or delays to programs or other activities.
• Key business risks include COVID-related disruption and supply constraints, reimbursement and payor-denial risk, regulatory investigations, litigation, and the possibility of material impairment of goodwill or intangibles if forecasts deteriorate. BioReference goodwill was $434.8 million; management cited an approximately 11% fair-value cushion in its 2019 impairment test.
• Legal matters include government inquiries concerning laboratory billing and physician electronic-health-record subsidies, and litigation following the SEC’s 2018 complaint. The SEC matter was settled in 2019 without admission or denial, with a $100,000 company penalty. BioReference’s payment suspension for GeneDx was lifted in February 2020, but CMS stated that this was not a positive determination on billing; potential recoupment remained possible. AMCA-related class actions against BioReference were dismissed without prejudice in April 2020, while government inquiries continued.
• After quarter-end, an amendment to the Vifor agreement changed Rayaldee territory and milestone terms: OPKO became eligible for up to $20 million in regulatory milestones and $210 million in sales milestones. These amounts are contingent, not assured revenue.
• Product and development milestones include expected final results from a Rayaldee Phase 4 study in the second half of 2020 and topline results from a Phase 2 dialysis study in Q1 2021. Somatrogon had met its Phase 3 pediatric trial primary endpoint; regulatory approvals and commercialization remained subject to risk.

Investor facts to verify

• Whether COVID-19 testing revenue and capacity offset continued declines in routine testing, and how collections and receivables develop.
• Cash burn, availability and terms of credit facilities, and the company’s need for additional financing; note the 11% related-party line and BioReference credit-facility covenants.
• Rayaldee sales growth, discount and rebate levels, partner milestones, and progress toward reimbursement and commercialization.
• Status and potential financial exposure of laboratory billing inquiries, payor audits and litigation; the filing does not provide a clear estimate of loss for several matters.
• Assumptions supporting goodwill and intangible-asset valuations, particularly for BioReference and development-stage assets.