OPKO Health, Inc. — Q1 2012 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2012; balance-sheet comparisons are with December 31, 2011. OPKO is a multinational pharmaceutical and diagnostics company, with operating pharmaceutical businesses in Chile, Mexico and Israel and development programs in diagnostics, pharmaceuticals and vaccines. The company reported one segment.
Key financial results
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Total revenue | $8.8 million | $7.0 million, up 26% |
| Gross margin, excluding intangible amortization | $3.8 million; 43.2% | $2.8 million; 39.9% |
| Operating loss from continuing operations | $8.8 million | $4.1 million |
| Net loss | $8.6 million | $5.7 million |
| Net loss attributable to common shareholders | $9.2 million; $0.03 per share | $6.3 million; $0.02 per share |
| Cash used in operating activities | $11.5 million | $4.7 million |
| Cash and cash equivalents | $47.1 million | $71.5 million at December 31, 2011 |
| Cash, cash equivalents and marketable securities | $62.1 million | — |
| Total liabilities | $52.2 million | $44.2 million at December 31, 2011 |
Revenue growth primarily reflected the FineTech API business acquired in December 2011. Product sales were $5.7 million in Chile, $1.6 million in Israel and $1.3 million in Mexico; there were no U.S. product sales. Gross margin improved with contributions from Israel and Mexico, partly offset by Chilean inventory reserves. The reported Q1 2012 gross margin included a $0.4 million benefit from correcting the classification of certain inventory procurement costs.
Operating expenses included $4.8 million of research and development (versus $1.1 million), $4.7 million of selling, general and administrative expense (versus $5.1 million), $1.1 million of contingent-consideration expense and $2.0 million of other operating expenses, principally amortization. The larger R&D and amortization expenses reflected the Claros and FineTech acquisitions and increased development activity. Other income included a $1.1 million fair-value gain on Biozone warrants; this helped offset, but did not prevent, a larger operating loss. Discontinued operations contributed no loss in Q1 2012, compared with a $1.0 million loss in Q1 2011 following the 2011 sale of the instrumentation business.
Liquidity, debt and capital resources
Q1 cash declined by $24.4 million to $47.1 million. Operating activities used $11.5 million and investing activities used $17.9 million, including $15.0 million invested in marketable securities and $2.7 million invested in businesses; financing activities provided $4.9 million. At March 31, the company had $14.2 million outstanding under short-term Chilean lines of credit, averaging approximately 7%, and reported another $5.2 million available. The lines generally mature within three months and support working capital and inventory purchases. OPKO said available cash, securities and borrowing capacity were expected to cover anticipated operations and debt service beyond 12 months, while cautioning that assumptions could change and additional funding might be needed.
Shareholders’ equity was $155.0 million. Series D preferred stock had a $28.9 million liquidation value and was convertible into approximately 11.7 million common shares. The company reported 297.6 million common shares issued at quarter-end and 295.1 million outstanding as of May 1, 2012.
Developments, outlook and risks
- In April 2012, OPKO completed its acquisition of Chilean pharmaceutical company ALS for up to $4.0 million in cash, including escrowed consideration and a further payment contingent on registration of certain trademarks and product registrations.
- OPKO announced a LabCorp collaboration to complete development and commercialize laboratory testing services for Alzheimer’s disease; OPKO retained rights to continue developing in-vitro diagnostic tests and companion diagnostic applications.
- Management expects substantial operating losses for the foreseeable future as R&D and commercialization infrastructure expand. OPKO reported that its diagnostic and pharmaceutical product candidates were not generating revenue and that it had limited commercialization capabilities.
- Further capital may be required. Management identified possible delays, reductions or cancellations of trials, R&D programs or acquisitions if funding is unavailable on acceptable terms.
- Key risks include uncertain clinical and regulatory outcomes, development and commercialization execution, dependence on collaborators and third-party manufacturers, competition, intellectual-property protection, international operations and foreign exchange exposure. The filing reported no material change to the prior annual report’s risk factors.
- The company reported ordinary-course litigation not expected to have a material adverse effect and stated that disclosure controls were effective. FineTech control integration work was ongoing.
Important facts for investors to verify
- Whether revenue growth and gross-margin improvement can continue, particularly after accounting for the $0.4 million inventory-cost reclassification and Chilean inventory reserves.
- Cash burn, the timing of near-term Chilean credit-line maturities, and the assumptions supporting management’s stated liquidity runway.
- Potential cash or stock obligations from acquisition milestones and contingent consideration, including the Claros and FineTech arrangements.
- Clinical, regulatory and commercial progress for OPKO’s pipeline and the LabCorp collaboration, neither of which generated product-candidate revenue in the quarter.
- Potential dilution from preferred-stock conversion, options and warrants; 27.4 million potential common shares were excluded from Q1 diluted loss-per-share calculations as anti-dilutive.
- Related-party investment and governance relationships disclosed for ChromaDex, Biozone, Neovasc and other entities, and their implications for capital allocation and conflicts of interest.