OPKO Health, Inc. — Q2 2023 Form 10-Q
Business context and reporting period. This unaudited quarterly filing covers the three and six months ended June 30, 2023. OPKO operates pharmaceutical and diagnostics businesses, including BioReference laboratories, Rayaldee, and the partnered NGENLA (somatrogon) program. The FDA approved NGENLA for pediatric growth hormone deficiency in June 2023. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $265.4 | $309.9 | $503.0 | $639.1 |
| Operating income (loss) | $7.0 | $(10.7) | $(23.6) | $(83.2) |
| Net loss | $(19.6) | $(101.7) | $(37.9) | $(157.1) |
| Loss per share, basic and diluted | $(0.03) | $(0.14) | $(0.05) | $(0.23) |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $(23.0) | $(31.3) |
- Q2 revenue from services fell 32% to $127.1 million, mainly due to lower COVID-19 testing and reimbursement and the prior-year comparison including GeneDx. Product revenue rose 21% to $43.5 million; intellectual-property and other revenue was $94.9 million.
- Six-month revenue declined 21%. The $214.0 million decrease in service revenue primarily reflected lower COVID-19 testing and reimbursement, plus the GeneDx disposition. Product revenue increased 16%, and intellectual-property and other revenue increased 71%.
- Q2 consolidated gross margin was approximately 47.7% and six-month gross margin approximately 44.8%, calculated as revenue less cost of services and products. Operating margin was approximately 2.6% in Q2 and negative 4.7% for the six months.
- In Q2, pharmaceuticals reported $63.6 million of operating income; diagnostics reported a $44.3 million operating loss. For the six months, pharmaceuticals reported $82.6 million of operating income and diagnostics an $84.3 million loss.
- Cash and cash equivalents were $108.1 million at June 30, down from $153.2 million at year-end. Current assets were $433.8 million and current liabilities $226.5 million. The current ratio was approximately 1.9.
- Total debt was $249.5 million, down from $256.3 million at December 31, 2022; cash less reported debt was approximately $(141.4) million. Debt included $142.7 million of 2025 Notes and $69.6 million of 2023 Convertible Notes. The 2023 notes were amended to mature January 2025; the 2025 Notes mature February 2025.
- Six-month investing cash use was $13.2 million and financing cash use $9.7 million. Cash declined $45.1 million overall. The filing says the $90 million Pfizer approval milestone recognized in Q2 was expected to be received in August 2023 and was not included in June 30 cash.
Material changes and notable items
- The $90 million Pfizer milestone for U.S. FDA approval of NGENLA was recognized as revenue in Q2. NGENLA had approvals in more than 40 markets, according to the filing.
- ModeX’s March 2023 agreement with Merck generated a $50 million upfront payment for rights to a preclinical Epstein-Barr virus vaccine candidate. OPKO may receive up to $872.5 million in additional development and commercial milestones, plus tiered royalties; these amounts are contingent, not assured. OPKO paid Sanofi $12.5 million in Q2 under an in-license arrangement.
- Rayaldee product revenue was $7.7 million in Q2 and $14.4 million for the six months, versus $6.2 million and $11.4 million in the comparable 2022 periods. The filing reports significant sales allowances: 56% of Q2 2023 gross Rayaldee sales.
- OPKO recorded a $19.9 million Q2 expense from the decline in fair value of its GeneDx Holdings investment; the six-month expense was $8.3 million. This investment valuation is a significant source of period-to-period earnings volatility.
- The diagnostics business continued cost reductions as COVID-related testing declined. Six-month BioReference service revenue was down 45%, while the segment’s operating loss narrowed to $84.3 million from $101.1 million.
- The JPMorgan credit facility was amended in June: revolving commitments were reduced from $75 million to $50 million, LIBOR was replaced by a SOFR-based benchmark, and maturity was extended to August 2025 subject to an earlier-maturity provision. OPKO reported $13.3 million available under the facility at June 30.
Outlook, risks, and contingencies
- Management said cash on hand and available credit were expected to fund operations and debt service beyond the next 12 months, while warning that assumptions could change. OPKO has historically not generated sustained positive operating cash flow and may need additional financing.
- No specific revenue, earnings, or cash-flow guidance was provided. Future cash needs depend on product commercialization, BioReference performance, R&D and clinical programs, financing availability, and possible acquisitions or dispositions.
- Material exposures include an approximately $246 million Israeli tax assessment for 2014–2020, which OPKO is appealing; management states it believes the disputed issues lack merit except for reserved uncertain tax positions. The filing does not establish the ultimate outcome or full potential exposure.
- Texas authorities informed BioReference they believe it may have violated the Texas Medicaid Fraud Prevention Act in claims dating from 2005; OPKO had not determined the merits or potential liability. Other payor, regulatory, and False Claims Act matters remain, including an amended relator complaint after an earlier dismissal.
- Other risks include reimbursement reductions and recoupments, reliance on partners and licensees, product-development and regulatory uncertainty, potential goodwill/intangible-asset impairments, foreign exchange exposure, and debt maturities. Approximately $46.4 million of ordinary-course purchase commitments were outstanding for 2023.
- Management reported disclosure controls were effective as of June 30, 2023, with no material changes to internal control over financial reporting during the quarter. No material changes to previously disclosed risk factors were reported.
Key investor verification points
- Confirm collection timing and cash impact of the $90 million Pfizer milestone, and assess the quality and recurrence of licensing and milestone revenue.
- Track BioReference’s non-COVID test volumes, reimbursement, collection estimates, and progress toward reducing its operating loss.
- Review cash burn, borrowing availability and covenants, and the company’s capacity to address the 2025 note maturities without sustained positive cash flow.
- Monitor the Israeli tax appeal, Texas Medicaid inquiry, and other payor or litigation matters for potential changes in exposure.
- Evaluate the commercial progress and contingent economics of NGENLA, Merck’s ModeX collaboration, Rayaldee, and other partnered programs; milestones and royalties remain uncertain.
- Consider dilution: approximately 82.4 million potential shares were excluded from six-month diluted loss per share as antidilutive; common shares outstanding were 773.1 million as of July 27, 2023.