OPKO Health, Inc. — Form 10-Q Summary
Business context and reporting period
Quarter ended September 30, 2011; filed November 9, 2011. OPKO is a multinational pharmaceutical and diagnostics company, with commercial pharmaceutical operations in Chile and Mexico and development programs in pharmaceuticals, molecular diagnostics, and vaccines. Ophthalmic instrumentation is reported as discontinued operations following an agreement to sell that business.
Financial results and liquidity
Amounts below are in millions of dollars unless otherwise stated. Revenue and results are for continuing operations unless noted.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $6.8 | $5.7 | $22.2 | $16.3 |
| Gross margin, excluding intangible amortization | $2.8 (41.0%) | $2.3 (41.0%) | $9.1 (41.0%) | $6.1 (37.6%) |
| Operating loss | $(5.8) | $(4.2) | $(14.7) | $(11.9) |
| Net loss | $(8.2) | $(7.4) | $(19.7) | $(18.3) |
| Net loss attributable to common shareholders | $(8.8) | $(8.0) | $(21.5) | $(20.2) |
| Loss per share, basic and diluted | $(0.03) | $(0.03) | $(0.08) | $(0.08) |
- Q3 revenue rose about 20%; nine-month revenue rose about 36%. Management attributed growth mainly to Chilean and Mexican pharmaceutical sales, including the full-period contribution of the Mexican business in 2011.
- Research and development expense increased to $3.3 million in Q3 from $1.5 million, and to $7.1 million for nine months from $3.6 million. Higher spending included molecular diagnostics and technology acquired from CURNA.
- For the nine months, cash used in operating activities was $11.9 million: $7.6 million from continuing operations and $4.3 million from discontinued operations. Continuing-operations cash use improved from $16.3 million in the prior-year period.
- Cash and cash equivalents were $47.2 million and marketable securities were $40.2 million at September 30, 2011, totaling $87.4 million. Cash increased $29.2 million from year-end 2010, primarily reflecting $104.8 million net proceeds from a share offering, partly offset by investing and operating outflows.
- Current liabilities were $20.2 million, including $12.5 million of short-term Chilean credit lines; total liabilities were $22.4 million. About $3.5 million of Chilean credit capacity was unused. A separate $12.0 million related-party credit line was undrawn and scheduled to expire March 31, 2012, with 11% interest on borrowings.
- Shareholders’ equity was $102.5 million; Series D preferred stock was presented separately, with a $34.8 million liquidation value. The company had 288.1 million common shares issued at quarter-end and 290.3 million outstanding as of November 1, 2011.
Material changes, outlook, and risks
- OPKO said it expects substantial operating losses for the foreseeable future and does not expect near-term profitability. It expects research and development and selling, general and administrative costs to rise. Management said available cash, securities, and credit availability should fund anticipated needs beyond 12 months, while noting this estimate depends on assumptions and could change.
- On October 11, after quarter-end, OPKO completed the sale of its ophthalmic instrumentation businesses to OPTOS for $17.5 million cash, with potential future royalties of up to $22.5 million. The company anticipated recording a gain; the filing does not provide a realized gain amount.
- On October 13, OPKO acquired Claros Diagnostics for $10.0 million cash and $20.0 million in stock, with up to $19.125 million additional stock consideration tied to milestones. A portion of the stock consideration was placed in escrow.
- On November 3, the board declared an approximately $4.7 million cash dividend to Series D preferred holders. This was subsequent to the balance-sheet date.
- The March 2011 common-stock offering raised $104.8 million net; OPKO also repurchased 2.4 million shares for $7.8 million and redeemed Series A preferred stock for $1.8 million. Weighted average shares increased year over year, reflecting share issuance.
- The company invested $2.0 million in Neovasc, a company with management and director relationships to OPKO. The filing also describes related-party connections involving other investees, financing, and facilities; governance and conflict-of-interest disclosures merit review.
- Risks include continued losses, need for additional funding, uncertain clinical and regulatory outcomes, dependence on partners and third-party manufacturing, and limited commercialization capabilities. A major continuing-operations customer represented 18% of nine-month revenue and 35% of receivables at quarter-end.
- OPKO reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. It said ordinary-course litigation was not expected to have a material adverse effect; the Nidek dispute was settled in April 2011 without material impact.
Important facts for investors to verify
- Whether continuing pharmaceutical revenue growth can support improved margins while operating and R&D losses remain substantial.
- Cash burn, utilization and renewal terms of short-term Chilean credit lines, and the assumptions behind management’s beyond-12-month liquidity assessment.
- OPTOS royalty conditions and the accounting gain from the completed instrumentation sale; also Claros milestone payments, dilution, and integration costs.
- Customer concentration and collectability of the significant receivable from the largest customer.
- Related-party transactions and the governance disclosures concerning Neovasc, Fabrus, Cocrystal, and other affiliated entities.
- The cover page marks “No” for having filed all required reports during the preceding 12 months; investors should verify the context and any filing history relevant to that response.