OPKO Health, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Financial statements are unaudited. OPKO is a multinational biopharmaceutical and diagnostics company, combining development programs with operating pharmaceutical, API, and laboratory businesses.
Key financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $20.6 million | $11.8 million | $75.8 million | $30.8 million |
| Gross profit / margin | $8.7 million / 42.1% | $4.3 million / 36.5% | $39.0 million / 51.5% | $11.8 million / 38.2% |
| Operating loss | $19.0 million | $9.4 million | $43.8 million | $27.6 million |
| Net loss | $60.8 million | $9.6 million | $99.9 million | $28.5 million |
| Net loss per share | $0.17 | $0.03 | $0.29 | $0.10 |
Gross profit and margins are calculated from reported revenue and cost of revenue. Loss per share is basic and diluted.
- Q3 revenue growth reflected acquired businesses, higher sales in Chile and Israel, and Pharmsynthez-related collaboration revenue. Nine-month revenue included $12.5 million of non-cash consideration for the transfer of RNAi assets to RXi.
- For the nine months, selling, general and administrative expense was $39.9 million and R&D expense was $30.6 million, versus $17.4 million and $12.9 million, respectively, in 2012. Increased acquisition-related activity and development spending contributed to the increases.
- Q3 other expense included a $26.9 million non-cash charge from fair-value changes in embedded derivatives on the convertible notes and an $8.7 million loss on early partial conversion. The nine-month derivative charge was $41.8 million. These items materially widened the net loss.
- Net cash used in operations was $32.1 million for the nine months, compared with $19.7 million in 2012. Investing activities used $8.6 million; financing provided $169.1 million, principally from the notes offering.
Financial position and liquidity
- At September 30, 2013, cash and cash equivalents were $155.8 million and marketable securities were $25.0 million, or $180.8 million combined. Current assets were $241.3 million and current liabilities $71.4 million.
- Total assets were $1.383 billion, including $793.3 million of in-process R&D and $222.3 million of goodwill. Goodwill and other intangible assets together were approximately 79% of total assets, making asset valuations and impairment assumptions significant.
- Total liabilities were $515.1 million. OPKO had $11.4 million outstanding on short-term credit lines and $5.1 million in mortgage and other debt. The January 2013 3.00% convertible notes had $158.1 million principal outstanding after a $16.9 million conversion; their balance-sheet carrying amount, including embedded derivative accounting, was $208.9 million.
- Management stated that available cash, securities, and borrowing capacity were expected to fund operations and debt service beyond the next 12 months, while cautioning that assumptions could change. The company expected substantial operating losses for several years and might need additional funding.
Material changes and developments
- OPKO acquired PROLOR in August in an all-stock transaction, issuing 63.7 million shares valued at $540.6 million. It also acquired Cytochroma in March, whose lead programs include Phase 3 candidates Rayaldy and Alpharen. Acquisitions and operations added revenue but also increased expenses, R&D commitments, and reported intangible assets.
- OPKO issued $175 million of 3.00% convertible senior notes in January, receiving net cash proceeds of $170.2 million. Embedded conversion and redemption features are remeasured at fair value each reporting period and can cause substantial earnings volatility.
- Common shares issued increased to 408.9 million at September 30 from 305.6 million at year-end, principally reflecting acquisitions and conversions. The filing reported 407,989,487 shares outstanding as of October 31.
- Series D preferred stock was converted into common stock in March after a $3.0 million cash dividend; no Series D shares remained outstanding at September 30.
Outlook, risks, and unusual items
- Management expected continued operating losses, substantial R&D spending, and increased selling and administrative costs as the company developed products and expanded commercial infrastructure. OPKO had not yet generated revenue from its diagnostic or pharmaceutical product candidates.
- Management identified funding availability, clinical-trial results and timing, regulatory approvals, commercialization, competition, and execution of acquisitions as significant uncertainties. A failure to obtain financing could require delaying or reducing development programs.
- Potential milestone and contingent consideration obligations were material: contingent consideration recorded was $69.2 million, and additional contingent payments across acquisitions could aggregate up to $213.5 million, payable in cash or stock depending on terms.
- IPR&D and goodwill valuations rely on estimates of clinical and regulatory success, future sales, and discount rates; the filing warns that adverse developments could trigger material impairment charges.
- A putative class action concerning the PROLOR merger sought damages and other relief. OPKO denied the allegations; the company said it was too early to estimate the outcome or any loss. A former OURLab employee separately sought damages of up to $20 million; the filing likewise said the outcome could not yet be assessed.
- The company recorded a $2.7 million reduction in R&D expense to correct an equity-compensation calculation error. It stated the error was not material to prior periods or the 2013 financial statements.
- Management reported disclosure controls and procedures were effective. Integration-related changes to internal financial controls following acquisitions materially affected, or were reasonably likely to materially affect, internal control over financial reporting.
Investor verification priorities
- Confirm the sources and durability of revenue growth, including acquired-business contributions and non-cash or collaboration-related revenue.
- Track operating cash burn, available liquidity, funding needs, and any further share issuance or convertible-note conversions.
- Review Phase 3 progress, costs, and regulatory prospects for Rayaldy, Alpharen, and hGH-CTP.
- Assess the assumptions behind the convertible-note derivative valuation and the resulting quarterly earnings volatility.
- Monitor contingent acquisition payments, litigation developments, and impairment risk in the large IPR&D and goodwill balances.