OPKO Health, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports unaudited fourth-quarter results; it is an annual report, not a standalone quarterly filing. Dollar amounts below are in millions unless stated otherwise.
Business context
OPKO is a multinational pharmaceutical and diagnostics company combining research and development with pharmaceutical operations in Chile and Mexico and, following its December acquisition, specialty API manufacturing in Israel. Its pipeline includes molecular and point-of-care diagnostics, therapeutics, and vaccines. It reported one operating segment, pharmaceutical; its ophthalmic instrumentation business was sold in October 2011 and classified as discontinued operations.
Financial performance and liquidity
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Revenue | $27.979 | $28.494 |
| Product revenue | $27.844 | $21.763 |
| Gross margin | $10.736 (38.4%) | $14.999 (52.6%) |
| Operating loss from continuing operations | $(23.189) | $(11.136) |
| Continuing-operations loss | $(6.464) | $(12.676) |
| Net loss | $(1.283) | $(18.926) |
| Net loss attributable to common shareholders | $(3.662) | $(21.550) |
| Cash used in operating activities | $(18.500) | $(18.712) |
- Product revenue rose as Chilean and Mexican pharmaceutical sales expanded, but total revenue edged down because 2010 included $6.7 million of TESARO license revenue. Gross margin fell as the high-margin license revenue did not recur and cost of goods sold increased.
- R&D expense increased to $11.352 million from $5.949 million, primarily reflecting molecular diagnostics, CURNA, and point-of-care development. SG&A rose to $19.169 million from $18.133 million.
- FY 2011 included a $19.358 million income-tax benefit, principally associated with deferred taxes on acquired intangible assets and a reduction in the valuation allowance. The instrumentation sale generated a $10.597 million gain within discontinued operations. These items materially affected reported net loss.
- Unaudited Q4 revenue was $5.794 million and gross margin was $1.636 million. Q4 reported continuing-operations income of $10.381 million and net income attributable to common shareholders of $17.884 million, in contrast to losses in the first three quarters. The filing’s quarterly results include the instrumentation sale gain and annual tax-accounting effects; it does not clearly allocate the full tax benefit by quarter.
- At year-end, cash and cash equivalents were $71.516 million, versus $18.016 million a year earlier. Working capital was $80.804 million; total assets were $229.489 million and shareholders’ equity was $160.882 million. Cash increased chiefly following a $104.828 million net public offering, alongside acquisitions and operating cash use.
- Year-end current borrowings and notes were $8.757 million, down from $14.690 million. The Chilean credit lines carried an average rate of about 6% and were generally short-term; the company also had an undrawn $12 million related-party credit line at 11%, maturing March 31, 2012. Total long-term liabilities were $25.443 million.
Material changes and unusual items
- OPKO raised $104.8 million net in a March 2011 public offering of 29.4 million shares. It also repurchased 2.4 million shares for $7.8 million and paid $4.7 million in Series D preferred dividends.
- Acquisitions included CURNA for about $10.6 million, Claros for about $32.5 million in initial cash and stock consideration (plus potential milestone stock), and FineTech for about $28.2 million in estimated purchase consideration (plus potential sales-milestone payments). These transactions substantially increased intangible assets and goodwill.
- The sale of the ophthalmic instrumentation business brought $17.5 million cash at closing; OPKO may receive up to $22.5 million in royalties on future sales. The business had generated operating losses before sale.
- Year-end contingent consideration liabilities for CURNA, Claros, and FineTech totaled approximately $18.0 million. Acquisition purchase-price allocations were estimates and remained subject to adjustment.
Outlook, commentary, and risks
Management expected operating losses and substantial R&D spending to continue for the foreseeable future and did not expect near-term profitability. Management believed year-end cash and available credit would fund operations and debt service for more than 12 months, but noted this estimate depended on assumptions and that additional acquisitions, trials, or faster development could require more funding.
- Management targeted completion of a broader Alzheimer’s test validation study by mid-2012 and expected to begin marketing in 2013; an initial cancer-test validation was expected in 2012, with a potential launch in 2014. It planned a European PSA point-of-care launch in the second half of 2012 and a U.S. FDA 510(k) submission by year-end 2012, with U.S. marketing expected in 2013. These are forward-looking expectations, not assurances.
- Key risks include early-stage and unproven technologies, clinical or regulatory failure or delay, uncertain market adoption and reimbursement, competition, dependence on third-party manufacturers and collaborators, and the need for additional capital, potentially dilutive financing.
- Additional exposures include international, currency, and Israeli operating risks; acquisition integration and contingent-payment obligations; intellectual-property disputes; related-party transactions; and dependence on CEO Phillip Frost. The filing states that directors, officers, principal stockholders, and affiliates held a majority of voting securities.
- OPKO reported no legal proceedings it considered material and no unresolved SEC staff comments. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. FineTech was excluded from management’s internal-control assessment because it was acquired late in 2011; controls at FineTech were being implemented.
Important facts for investors to verify
- Whether diagnostic validation, FDA clearance, and commercialization milestones are achieved on the stated timelines, and whether results support clinical utility and adoption.
- Cash burn and financing needs against management’s greater-than-12-month liquidity estimate, including the status and terms of the related-party credit line and short-term Chilean facilities.
- Revenue quality and gross-margin trajectory as product sales replace nonrecurring license revenue and the instrumentation business is no longer consolidated as continuing operations.
- Final acquisition valuations, contingent consideration and milestone payments, and the performance and integration of Claros and FineTech.
- Potential dilution and governance implications from share issuance, warrants, Series D preferred stock, related-party dealings, and concentrated ownership.