OPKO Health, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; comparisons are to the corresponding 2013 periods. Amounts below are in U.S. dollars. OPKO is a multinational biopharmaceutical and diagnostics company, with pharmaceutical operations and research and development, diagnostics, and laboratory services.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $23.5 million | $23.8 million | $45.8 million | $55.2 million |
| Gross profit / margin* | $11.0 million / 46.6% | $10.7 million / 45.0% | $20.9 million / 45.5% | $30.3 million / 55.0% |
| Operating loss | $(34.9) million | $(18.0) million | $(65.2) million | $(24.8) million |
| Net loss | $(26.1) million | $(4.4) million | $(71.2) million | $(39.1) million |
| Net loss per share, basic and diluted | $(0.06) | $(0.01) | $(0.17) | $(0.12) |
*Gross profit and margin are calculated as revenue less costs of revenue; margins are approximate.
- Revenue trends: Q2 revenue was broadly flat year over year. Product revenue rose about 15%, led by FineTech, OPKO Spain, and Mexico; lower laboratory service revenue and no comparable Pharmsynthez intellectual-property revenue offset the increase. Six-month revenue declined, principally because the 2013 period included $12.5 million of noncash revenue from the RXi asset transfer. Six-month pharmaceutical product revenue increased 21%.
- Costs and operating results: Research and development expense rose to $16.2 million in Q2 from $9.6 million, and to $37.2 million for six months from $19.5 million, reflecting acquired programs and clinical development, including Rayaldee and hGH-CTP. Q2 also included a $10.1 million acquired in-process R&D charge for Inspiro. SG&A increased to $14.9 million for Q2 and $28.7 million for six months, including higher sales, marketing, and personnel costs. The company reported operating losses in both periods.
- Cash flow and liquidity: Cash and cash equivalents were $134.0 million at June 30, down from $185.8 million at year-end 2013. Operating activities used $44.5 million in the first half, versus $18.1 million in the prior-year period; investing activities used $3.3 million, versus $53.8 million; financing activities used $4.0 million, versus providing $163.8 million. Current assets were $183.0 million and current liabilities $79.4 million (about 2.3x current-asset coverage).
- Debt and equity: In June, a holder exchanged $70.4 million principal amount of 3.00% convertible notes due 2033 for approximately 11.0 million common shares and $0.8 million accrued interest. Remaining note principal was $87.6 million; the balance-sheet amount is affected by debt discount and embedded derivatives. Borrowings under Chilean and Spanish credit lines were $9.5 million, with a weighted-average rate of about 5.8%. OPKO reported 429.2 million common shares outstanding as of August 1, 2014.
- Balance sheet: Total assets were $1.327 billion, total liabilities $414.3 million, and total equity $912.8 million. Goodwill and other intangible assets, including in-process R&D, were substantial; management reported approximately $1.1 billion of goodwill and intangible assets in the relevant discussion.
Material changes, outlook, and risks
- Management said it expects operating losses for the foreseeable future and substantial R&D spending. It considered cash on hand and available credit sufficient for anticipated requirements beyond the next 12 months, but cautioned that assumptions may change and additional funding could be needed, particularly for acquisitions or expanded development.
- After quarter-end, OPKO announced positive top-line results from the first pivotal Phase 3 Rayaldee trial. Results from the second trial were expected in September 2014, and an NDA submission was described as on track for year-end 2014. These were forward-looking expectations, not completed regulatory milestones.
- OPKO began selling its 4Kscore prostate test through its Nashville laboratory in March 2014. Management cited validation results, while laboratory service revenue had declined due to lower specimen volume and reimbursement rates.
- Acquisition-related contingent consideration was $72.9 million at June 30; management noted that estimates depend on milestone probabilities, timing, and revenue assumptions. Potential future contingent payments could total up to $213.5 million, payable in cash or shares at OPKO’s option.
- Disclosure controls were judged ineffective because a material weakness in the Chilean subsidiary’s financial close controls over inventory and accounts receivable had not been fully remediated. Management was working on remediation but could not assure effectiveness by year-end.
- Other risks include ongoing cash burn, clinical and regulatory uncertainty, possible impairment of significant acquired intangible assets, international and foreign-exchange exposure, and reliance on partners and acquired businesses. One customer represented 21% of Q2 revenue and 15% of first-half revenue.
- A putative shareholder class action related to the PROLOR merger was dismissed without prejudice in May 2014; plaintiffs did not appeal or amend the complaint. OPKO Lab continued to appeal remaining alleged Medicare overpayments following a post-payment review; the outcome was uncertain.
Key investor verification points
- Confirm progress and full results from both Rayaldee pivotal trials, the timing and basis for any NDA filing, and subsequent regulatory developments.
- Track cash burn, available credit, financing needs, and any further share issuance or convertible-note activity.
- Assess whether 4Kscore adoption and laboratory reimbursement/specimen trends improve, and whether product growth offsets weaker service and license-related revenue.
- Monitor R&D spending, contingent consideration estimates, and impairment assumptions for the large acquired IPR&D and intangible-asset balances.
- Verify remediation of the Chilean internal-control material weakness and the status of the Medicare audit appeal.