OPKO HEALTH, INC. annual report, FY2013

OPKO Health, Inc. — 2013 Form 10-K

Reporting period: Fiscal year ended December 31, 2013. This is an annual report, not a standalone fourth-quarter filing; quarterly figures are provided where relevant. OPKO is a multinational biopharmaceutical and diagnostics company, combining pharmaceutical and laboratory businesses with a largely developmental product pipeline.

Financial performance

Metric	FY 2013	FY 2012
Revenue	$96.5 million	$47.0 million
Cost of revenue	$48.9 million	$27.9 million
Gross profit and margin	$47.7 million; 49.4%	$19.2 million; 40.7%
Operating loss	$(79.6) million	$(37.3) million
Net loss	$(117.3) million	$(29.5) million
Net loss per share, basic and diluted	$(0.32)	$(0.11)
Cash used in operating activities	$(58.2) million	$(25.4) million
Cash and cash equivalents at year-end	$185.8 million	$27.4 million
Working capital	$150.9 million	$26.3 million

Revenue increased 105%, primarily from acquired businesses and a $12.5 million non-cash payment in RXi shares for transferred RNA-interference assets. Revenue also included $3.8 million related to Pharmsynthez technology rights. Research and development expense rose to $53.9 million from $19.5 million, including spending on Rayaldy and hGH-CTP Phase 3 programs. Annual operating margin was approximately negative 82.5%, compared with negative 79.2% in 2012.

Fourth-quarter 2013 revenue was $20.7 million, versus $16.3 million in fourth-quarter 2012. Fourth-quarter net loss was $17.4 million, versus $1.0 million; the quarterly table reports total costs and expenses of $56.6 million in Q4 2013.

Balance sheet, liquidity and debt

• Year-end total assets were $1.392 billion and total liabilities were $518.5 million. Cash and cash equivalents were $185.8 million; current assets were $242.7 million against current liabilities of $91.9 million.
• The company reported $158.1 million principal outstanding on its 3.00% convertible senior notes due 2033 after a $16.9 million principal conversion. The balance sheet presents $211.9 million for the notes, net of discount and including the accounting effect of embedded derivatives; derivative fair-value changes materially affected earnings.
• Additional borrowings included $9.1 million drawn on short-term lines of credit, generally due within three months, and $5.2 million in mortgages and other debt. Management said cash, cash equivalents, marketable securities and available credit were expected to cover operations and debt service beyond the next 12 months, while cautioning that assumptions could change.
• Operating cash outflow increased from 2012. Financing cash flow included $170.2 million net proceeds from the convertible-note issuance and $23.4 million from option and warrant exercises. Investing activities included $30.6 million of proceeds from sales of equity securities.
• Goodwill, intangible assets and in-process R&D totaled approximately $1.095 billion, about 79% of total assets. No goodwill impairment was recorded in the 2013 annual test; acquired in-process R&D remains exposed to impairment if development or commercial prospects weaken.

Material changes and notable items

• OPKO acquired Cytochroma in March 2013 and PROLOR in August 2013, adding late-stage renal candidates and the CTP protein-extension platform. PROLOR was acquired in an all-stock transaction; OPKO issued 63.7 million shares valued at $540.6 million.
• Cytochroma consideration included 20.5 million OPKO shares valued at $146.9 million, plus up to $190 million in additional cash or shares upon development and revenue milestones.
• OPKO converted its outstanding Series D preferred stock into common stock in March 2013 and paid approximately $3.0 million in preferred dividends. Common shares issued increased to 414.8 million at year-end from 305.6 million a year earlier.
• Other income and expense included a $43.1 million non-cash charge from changes in the fair value of embedded note derivatives and an $8.7 million loss on early note conversion, partly offset by a $29.9 million gain on strategic investment sales. The company also recorded $11.5 million in losses from investees.
• Revenue growth included acquired operations: OPKO Lab, Farmadiet and SciVac contributed substantially more revenue in 2013 than in 2012 because 2012 reflected partial-year ownership. Chilean and FineTech sales also grew. No customer accounted for more than 10% of 2013 revenue.

Outlook, pipeline and principal risks

• Management expected continued operating losses and substantial R&D and commercialization spending; it did not provide a quantified revenue or earnings forecast. The filing states OPKO did not expect to become profitable in the near future.
• Management expected top-line results from Rayaldy Phase 3 trials in mid-2014. The remaining Phase 3 program for Alpharen was being finalized with U.S. and European regulators. hGH-CTP was in a Phase 3 adult trial and Phase 2 pediatric trial.
• OPKO planned a first-quarter 2014 U.S. laboratory-developed test launch for 4Kscore, subject to completion of its study and CLIA validation. It also planned to seek FDA clearance and CLIA waiver for a point-of-care testosterone test in fourth-quarter 2014, and anticipated a U.S. PSA test launch in 2015. These were forward-looking plans, not assured outcomes.
• TESARO reported that rolapitant achieved the primary endpoint in each of two Phase 3 chemotherapy-induced nausea and vomiting trials in December 2013. OPKO may receive milestone payments, royalties and other license benefits, but these depend on successful development and commercialization.
• Key risks include clinical-trial failure or delay, regulatory and reimbursement uncertainty, the need for further financing and potential dilution, dependence on partners and third-party manufacturing, competition, international and currency exposure, and possible impairment of acquired assets. Contingent consideration was $71.6 million at year-end, with additional obligations potentially payable in cash or shares.
• Six consolidated putative class actions challenged the PROLOR merger, seeking damages and equitable relief; OPKO denied the allegations, and the filing said the outcome and any loss could not yet be estimated. OPKO Lab continued to appeal remaining alleged Medicare overpayments following an audit; no outcome was assured.
• Ernst & Young issued an unqualified opinion on the consolidated financial statements but an adverse opinion on internal control over financial reporting. A material weakness concerned controls over inventory and accounts receivable in the Chilean subsidiary; PROLOR’s controls were excluded from management’s assessment following its acquisition.

Most important facts for investors to verify

• Whether Rayaldy and hGH-CTP clinical results, Alpharen’s development plan and the 4Kscore launch/reimbursement timetable met the company’s stated milestones.
• Cash burn and financing needs against the $185.8 million year-end cash balance, short-term credit availability and the company’s stated runway assumptions.
• The reported Chilean control remediation and whether future filings identify any additional control deficiencies or financial-statement corrections.
• Potential dilution and debt effects, including note conversion terms, derivative valuation volatility, outstanding warrants and milestone consideration payable in shares or cash.
• Progress and possible financial exposure from the PROLOR merger litigation and OPKO Lab’s Medicare billing appeal.
• Valuation assumptions supporting the approximately $1.095 billion of goodwill, intangible assets and in-process R&D, and any subsequent impairment indicators.