Business context and reporting period
OPKO Health, Inc. is a multinational biopharmaceutical and diagnostics company, with pharmaceutical operations in several countries, a U.S. clinical laboratory business, and drug and diagnostic development programs. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2013; comparisons are to the corresponding 2012 periods.
Financial results and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $23.8 million | $10.2 million | $55.2 million | $19.0 million |
| Operating loss | $18.0 million | $9.3 million | $24.8 million | $18.2 million |
| Net loss attributable to common shareholders | $3.4 million | $10.8 million | $38.0 million | $20.0 million |
| Basic and diluted loss per share | $0.01 | $0.04 | $0.12 | $0.07 |
Product revenue was $18.6 million in Q2 and $34.1 million for the first half. Six-month revenue included $12.5 million of noncash revenue from transferring substantially all RNAi assets to RXi. Reported gross profit was $10.7 million in Q2 and $30.3 million for the first half; respective gross margins were approximately 45% and 55%, compared with 36% and 39% in 2012. The first-half margin benefited from revenue mix, including the RXi transaction.
Operating cash use was $20.7 million in the first half, versus $17.8 million in 2012. Investing activities used $53.8 million, largely for marketable securities and investments; financing activities provided $166.3 million, principally from the convertible-note issuance. At June 30, cash and cash equivalents were $119.1 million and marketable securities were $50.0 million, or approximately $169.1 million combined. Current assets were $230.1 million and current liabilities $59.5 million.
Total assets were $641.1 million and total liabilities $328.6 million. The company issued $175 million of 3.00% convertible senior notes, due 2033, and had $13.3 million outstanding on short-term credit lines. The balance-sheet note liability includes the separately valued embedded derivative; the filing reports $188.5 million for the combined liability, including a $74.1 million derivative and a $114.4 million net host-note carrying amount. Contingent consideration was $68.9 million at fair value, including obligations tied to Cytochroma.
Material changes versus prior comparable periods
- Revenue increased substantially, reflecting acquisitions and expanded operations, RXi asset-transfer revenue, and licensing and collaboration activity. Acquired businesses contributed significantly, including Farmadiet, OURLab and SciVac.
- Operating expenses rose: first-half selling, general and administrative expense increased to $26.3 million from $10.1 million, and research and development to $19.5 million from $9.3 million. The company cited acquired operations, higher staffing and professional costs, and Cytochroma clinical development.
- Six-month common-shareholder loss widened despite lower Q2 loss. Results included significant noncash fair-value movements: a $14.9 million first-half charge related to convertible-note embedded derivatives, partly offset in Q2 by a $9.9 million gain, as well as investment-sale gains and other valuation changes.
- Acquisitions and financing expanded the balance sheet: Cytochroma was acquired for 20.5 million OPKO shares, with up to $190 million of additional milestone consideration; Series D preferred stock was converted into 11.3 million common shares. Common shares issued rose to 339.0 million at June 30 from 305.6 million at year-end 2012.
Outlook, commentary and risks
Management expects operating losses and substantial R&D and infrastructure spending for the foreseeable future, and says OPKO does not currently generate revenue from its pharmaceutical or diagnostic product candidates. It stated that cash, cash equivalents, marketable securities and available credit were expected to meet anticipated operating and debt-service needs beyond 12 months, while cautioning that assumptions could change and additional funding may be needed.
Rayaldy and Alpharen were in Phase 3 development; the filing identifies clinical, regulatory, commercialization and funding outcomes as major uncertainties. OPKO expected its approximately $480 million all-stock PROLOR acquisition to close in the second half of 2013, subject to shareholder and other conditions. A consolidated shareholder lawsuit sought to enjoin or rescind that merger; OPKO denied the allegations and said the outcome and any loss could not yet be assessed. Other contingencies include a former OURLab employee claim seeking up to $20 million and ongoing Medicare billing appeals; outcomes were uncertain.
Risks also include milestone-linked contingent payments that may aggregate up to $213.3 million, possible dilution or additional financing needs, acquisition integration, impairment risk for substantial acquired intangible assets and in-process R&D, foreign-exchange exposure, and reliance on clinical and regulatory success. Management concluded disclosure controls were effective; acquisition-related changes to internal financial controls had materially affected or were reasonably likely to materially affect controls.
Important facts for investors to verify
- How much recurring revenue and cash generation came from existing businesses, excluding RXi transfer revenue and other collaboration or licensing items?
- Whether spending, clinical-trial progress and cash burn support management’s liquidity estimate, and whether additional financing will be required.
- The terms, fair-value assumptions and potential dilution or cash impact of the convertible notes, acquisition milestone obligations and contingent consideration.
- The status, shareholder approval and litigation outcome of the proposed PROLOR merger, and the associated related-party considerations.
- Clinical and regulatory progress for Rayaldy, Alpharen and other candidates, along with impairment exposure from acquired IPR&D and other intangible assets.