OPKO Health, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unaudited consolidated results. OPKO is a multinational biopharmaceutical and diagnostics company, with operating pharmaceutical businesses and diagnostic services alongside substantial product-development programs.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $19.8 million | $20.6 million | $65.6 million | $75.8 million |
| Gross profit / gross margin | $8.7 million / 43.8% | $8.7 million / 42.1% | $29.5 million / 45.0% | $39.0 million / 51.5% |
| Operating loss | $48.2 million | $19.0 million | $113.4 million | $43.8 million |
| Net loss attributable to common shareholders | $48.7 million | $60.0 million | $118.7 million | $98.0 million |
| Loss per share, basic and diluted | $0.11 | $0.17 | $0.28 | $0.29 |
| Net cash used in operations | Not stated for the quarter | $65.6 million | $29.6 million |
Quarterly revenue declined 4.2%; nine-month revenue declined 13.5%. Pharmaceutical product revenue rose, while service revenue and intellectual-property transfer revenue fell. The prior-year nine-month comparison included $12.5 million of non-cash revenue from the RXi asset transfer. Quarterly gross profit was nearly flat, but nine-month gross margin contracted, reflecting the changed revenue mix and lower laboratory revenue.
Quarterly operating loss widened substantially, principally alongside higher R&D and contingent-consideration expense. Q3 net loss improved year over year in part because the 2013 quarter included a large non-cash derivative loss on the convertible notes. Nine-month net loss worsened despite lower derivative-related expense.
Financial position and liquidity
- Cash and cash equivalents were $118.3 million at September 30, 2014, down $67.5 million from year-end 2013. Operating cash outflow was $65.6 million for the first nine months.
- Current assets were $163.1 million and current liabilities $76.8 million. Total assets were $1.295 billion; total liabilities were $407.9 million.
- Debt included $87.6 million principal outstanding on 3% senior notes due 2033, $7.8 million under short-term credit lines, and $3.1 million of mortgages and other debt. The balance-sheet carrying amount for the senior notes was $114.9 million, reflecting accounting for embedded derivatives and discount; it is not the same as principal outstanding.
- Contingent consideration liabilities totaled $71.2 million. Potential future milestone payments across acquisitions may reach $213.5 million, payable in cash or shares at OPKO’s option.
Developments, outlook and risks
- OPKO reported successful top-line results from two pivotal Phase 3 Rayaldee trials; it planned an FDA New Drug Application submission by year-end 2014. The positive trials increased the estimated fair value of OPKO Renal milestone obligations, generating $19.6 million of quarterly contingent-consideration expense.
- OPKO launched its 4Kscore prostate test in the U.S. in March and Europe in September 2014. The company also began a pivotal Phase 3 adult trial of hGH-CTP and reported positive interim pediatric Phase 2 results.
- Management expects operating losses and substantial R&D spending to continue for the foreseeable future. It stated that available cash and credit lines were expected to meet anticipated needs beyond 12 months, but cautioned that assumptions could change and additional financing may be required for acquisitions or accelerated development.
- A $70.4 million principal amount of 2033 notes was exchanged for 10.97 million common shares and approximately $0.8 million cash interest in June 2014. The exchange reduced debt but increased share count.
- On October 21, 2014, OPKO received a Civil Investigative Demand from the U.S. Attorney’s Office concerning alleged false claims related to government healthcare program services. The company said it would cooperate; outcome and potential loss were not estimable.
- Disclosure controls were deemed ineffective because a material weakness in the Chilean subsidiary’s financial close process—particularly inventory and receivables controls—had not been fully remediated. Management was working toward remediation and testing.
- Other key risks include ongoing losses and funding needs; clinical, regulatory and commercialization uncertainty; foreign-exchange exposure; valuation sensitivity of contingent consideration and embedded note derivatives; and impairment risk in substantial goodwill and acquired in-process R&D assets.
Guidance: The filing provides no specific revenue or earnings guidance. Management’s stated outlook is for continued operating losses and substantial development spending.
Most important facts for investors to verify
- Whether Rayaldee’s planned FDA filing and subsequent regulatory review proceed as expected, and how milestones affect contingent consideration.
- Cash burn and financing needs relative to management’s stated liquidity runway, including future milestone payments and potential dilution.
- Progress and commercial adoption of 4Kscore, and clinical and regulatory milestones for hGH-CTP and other pipeline programs.
- Status of the Chilean internal-control material weakness and any further reporting or remediation findings.
- Developments in the government investigation and Medicare billing appeals, including any estimable exposure.
- Changes in the fair value of note derivatives, contingent liabilities, and the assumptions supporting acquired IPR&D and goodwill valuations.