OPKO Health, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Unaudited consolidated financial statements; amounts below are in U.S. dollars. The filing describes OPKO as a multinational biopharmaceutical and diagnostics company, with pharmaceutical operations, a diagnostics business, and drug and diagnostic programs in development.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Total revenue | $31.4 million | $8.8 million |
| Gross margin, before intangible amortization | $19.6 million; approximately 62.5% of revenue | $3.8 million; approximately 43.2% |
| Operating loss | $6.8 million | $8.8 million |
| Net loss | $34.8 million | $8.6 million |
| Net loss attributable to common shareholders; loss per share | $34.6 million; $0.11 | $9.2 million; $0.03 |
| Cash used in operating activities | $14.7 million | $11.5 million |
Revenue included $12.5 million of noncash income from transferring RNA-interference assets to RXi, recognized as intellectual-property revenue. Product revenue was $15.5 million, compared with $8.6 million. Service revenue was $3.1 million, compared with $0.1 million. The filing attributes much of the year-over-year increase to acquisitions completed after Q1 2012, including ALS, Farmadiet, SciGen and OURLab, as well as the RXi transaction.
Despite higher revenue and improved operating loss, net loss widened chiefly because of a $23.5 million net expense from fair-value changes in derivative instruments, including a $24.8 million noncash increase in the estimated value of embedded conversion features in the new notes. Other notable costs included $9.9 million of research and development, $12.4 million of selling, general and administrative expense, and $3.9 million of losses from investees.
At March 31, 2013, cash and cash equivalents were $181.6 million, total current assets were $237.7 million, and total current liabilities were $58.2 million. Total assets were $653.9 million. Working capital was approximately $179.5 million. The filing reports $16.8 million outstanding on short-term credit lines, generally due within three months, and $5.8 million of Farmadiet mortgages and other debt. OPKO issued $175 million of 3.00% convertible senior notes due 2033; net proceeds were $170.2 million. The balance sheet reports $196.4 million of long-term note-related liabilities, including the separately valued embedded derivatives; the notes’ net carrying amount before that derivative is $112.4 million.
Equity increased to $319.8 million from $178.9 million at year-end, reflecting financing and acquisition-related share issuance, among other items. Common shares issued rose to 338.8 million from 305.6 million; 336.7 million shares were outstanding as of April 30, 2013.
Material changes versus the prior period
- Revenue rose substantially, driven by acquired businesses and the one-time RXi asset transfer; the RXi revenue was noncash and should not be treated as recurring product sales.
- Operating loss narrowed, but common-shareholder loss increased materially due mainly to noncash derivative remeasurement, higher interest expense and increased losses from investees.
- Cash increased from $27.4 million at December 31, 2012, largely following the convertible-note financing. Operating cash use increased from $11.5 million to $14.7 million.
- March 2013 acquisition of Cytochroma added two Phase 3 programs and was funded with 20.5 million OPKO shares valued at $146.9 million, plus contingent consideration initially estimated at $47.7 million. Cytochroma’s agreement provides for up to a further $190 million in cash or shares upon milestones.
- Series D preferred stock was converted into 11.3 million common shares after a $3.0 million cash dividend; no Series D shares remained outstanding at quarter-end.
Outlook, risks and contingencies
- Management expects substantial operating losses for the foreseeable future and says profitability is not expected in the near term. It expects higher R&D spending, including clinical trials, and higher selling, general and administrative costs as the business expands.
- Management stated that cash, cash equivalents, marketable securities and available credit were expected to fund operations and debt service beyond the next 12 months, but cautioned that assumptions may change. Additional funding could be needed for acquisitions, accelerated development or added trials; financing may be unavailable or dilutive.
- Key development risks include clinical-trial outcomes, regulatory approval, commercialization and manufacturing capability, reliance on collaborators, and the possibility of impairment of substantial acquired intangible assets and in-process R&D. CTAP101 Capsules and Fermagate were in Phase 3 development; the filing says their trials were enrolling patients.
- In April 2013, OPKO agreed to acquire PROLOR in an all-stock transaction valued at approximately $480 million based on the stated share price, subject to shareholder approvals and other closing conditions. The companies expected completion in the second half of 2013. Several putative class actions sought to enjoin the transaction and alleged fiduciary-duty violations; OPKO denied the allegations and intended to defend the actions. The filing identifies transaction delay or failure, legal proceedings, disruption and transaction costs as risks. Certain OPKO directors and executives had roles or interests involving PROLOR.
- Other contingencies include a former OURLab employee’s claim seeking up to $20 million, an ongoing Medicare billing appeal, and an indemnity claim related to the sale of OPKO’s ophthalmic instrumentation business. The filing said outcomes or potential losses could not yet be reliably assessed for certain matters.
- Additional acquisition-related payments depend on milestones; the filing reports $66.3 million of contingent-consideration liabilities at quarter-end. These estimates rely on assumptions and can change materially.
Important facts for investors to verify
- How much of reported revenue and gross margin is recurring, particularly relative to the $12.5 million noncash RXi asset-transfer revenue.
- The assumptions and potential earnings volatility associated with the notes’ embedded derivatives and other Level 3 fair-value estimates.
- Cash burn, remaining credit availability, debt-service needs and the timing and amount of any future funding requirement.
- Clinical and regulatory progress for Cytochroma’s Phase 3 programs, and the likelihood and potential dilution or cash cost of acquisition milestone payments.
- Whether the PROLOR merger closes, its final economics and dilution, and the outcome of related litigation and conflicts-of-interest matters.
- The recoverability of acquired goodwill and intangible assets, including $203.0 million of in-process R&D reported at March 31, 2013.