OPKO Health, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. The filing was signed August 7, 2018. OPKO operates pharmaceutical and diagnostics businesses, including BioReference Laboratories, Rayaldee and partnered drug-development programs. Comparative 2017 results were retrospectively adjusted for adoption of ASC 606.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $263.7 million | $292.6 million | $518.6 million | $559.0 million |
| Operating loss | $5.1 million | $25.8 million | $47.7 million | $71.0 million |
| Net loss | $6.2 million | $16.9 million | $49.3 million | $51.4 million |
| Basic loss per share | $0.01 | $0.03 | $0.09 | $0.09 |
| Cash used in operating activities | — | $52.6 million | $56.6 million |
- Q2 revenue fell 9.9% year over year; first-half revenue fell 7.2%. Service revenue declined 7.6% in Q2 and 7.6% in the first half, principally from lower clinical-testing reimbursement rates, including PAMA effects, and lower first-half testing volume. Product revenue increased 10.1% in the first half, including $8.5 million from Rayaldee.
- Operating losses narrowed as lower SG&A and a favorable contingent-consideration revaluation more than offset lower revenue. Q2 included $15.4 million of contingent-consideration income, versus $4.4 million of expense a year earlier; management attributed the change primarily to revised timing assumptions for OPKO Renal milestones.
- Q2 net loss included $7.2 million of losses from investees. Other income included unrealized gains on equity securities. These and the contingent-consideration revaluation make reported earnings sensitive to non-operating and valuation items.
- At June 30, cash and cash equivalents were $80.4 million, down from $91.5 million at year-end 2017. Current assets were $321.6 million and current liabilities $306.9 million. Total assets were $2.53 billion; shareholders’ equity was $1.81 billion.
- Debt included $55.0 million principal of 5% convertible notes issued in February, $31.9 million principal of 3% senior notes, and $109.5 million outstanding under lines of credit, plus $9.3 million of other notes and debt. The 2023 notes are convertible at $5 per share; related-party executives participated in the issuance. Senior-note holders may require repurchase on February 1, 2019, subject to the note terms.
- First-half investing cash outflow was $11.7 million, including $12.8 million of capital expenditures. Financing provided $53.2 million, mainly from the new notes, partly offset by line-of-credit repayments. Cash declined by $11.1 million overall.
Changes, outlook and risks
- Diagnostics remained pressured by reimbursement and volume trends. Segment operating results improved: Q2 pharmaceutical and diagnostics reported operating income of $2.2 million and $1.5 million, respectively, while corporate operations had an $8.7 million operating loss. First-half segment results remained loss-making for pharmaceutical and diagnostics.
- ASC 606 adoption, applied retrospectively, reduced December 31, 2017 accumulated equity by $29.8 million and increased contract liabilities. The filing says 2017 comparisons shown here reflect the revised accounting.
- Management said cash on hand, stated borrowing availability and the 2023 notes proceeds were expected to fund operations and debt service beyond the next 12 months, but cautioned that assumptions could change and cash might be needed sooner. OPKO continued to report negative operating cash flow and dependence on financing.
- Management expects R&D expense to increase as programs advance and SG&A to rise with sales, marketing and infrastructure expansion. No specific revenue, earnings or cash-flow guidance was provided.
- Key development and commercial uncertainties include Rayaldee uptake and reimbursement, hGH-CTP’s regulatory path, and clinical and regulatory execution across the pipeline. The adult hGH-CTP Phase 3 trial missed its primary endpoint; post-hoc analyses were mixed, and OPKO and Pfizer agreed OPKO could discuss a possible BLA submission with FDA.
- Subsequent to quarter-end, OPKO reported that VFMCRP received Health Canada approval to market Rayaldee. OPKO also reported completion of enrollment in the Phase 2b OPK88003 trial in June.
- BioReference faces a potentially material False Claims Act matter concerning alleged historical Medicare and TRICARE billing at certain hospitals; the company had not determined the merits or potential liability. The filing also describes ongoing document requests and inquiries relating to laboratory operations.
- Other exposures include payer audits and recoupments, pricing and reimbursement pressure, clinical and regulatory risk, foreign-exchange movements, and potential impairment of substantial goodwill and intangible assets. A possible VA Community Care Network arrangement could involve a $50 million credit facility if the bid is awarded; the award and final facility terms were uncertain.
- OPKO expected to spend $40–$45 million on the Waterford, Ireland facility, with completion expected in 2019; cumulative spending was approximately $37 million through June 30. Contractual obligations disclosed totaled $378.1 million, excluding certain contingent, clinical-trial and royalty obligations.
Investor verification priorities
- Track BioReference’s reimbursement rates, PAMA effects, test volumes, payer mix and accounts-receivable collections.
- Assess Rayaldee net sales, gross-to-net deductions, market access and partner milestones and royalties; verify the commercial impact of the Canadian approval.
- Review operating cash burn, cash runway, actual borrowing availability and the timing of the senior-note repurchase right in 2019.
- Monitor hGH-CTP discussions with FDA and Pfizer, and clinical milestones and funding needs across OPKO’s pipeline.
- Follow the False Claims Act matter and other regulatory inquiries for changes in estimated exposure, penalties or settlement terms.
- Evaluate the assumptions supporting contingent-consideration revaluations and the recoverability of goodwill, intangible assets and in-process R&D.