OPKO Health(OPK) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides the company's unaudited condensed consolidated financial information, including statements, notes, and management's discussion and analysis Item 1. Financial Statements Presents unaudited condensed consolidated financial statements and detailed notes for periods ended June 30, 2020 and 2019 Condensed Consolidated Balance Sheets Snapshot of financial position, highlighting changes in assets, liabilities, and equity as of June 30, 2020 | Metric | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | Change (in thousands) | | :----- | :--------------------------- | :------------------------------- | :-------------------- | | Cash and cash equivalents | $21,612 | $85,452 | $(63,840) | | Accounts receivable, net | $214,352 | $134,617 | $79,735 | | Total current assets | $360,054 | $324,045 | $36,009 | | Total assets | $2,323,734 | $2,309,272 | $14,462 | | Total current liabilities | $279,543 | $249,119 | $30,424 | | Total liabilities | $735,391 | $694,513 | $40,878 | | Total shareholders' equity | $1,588,343 | $1,614,759 | $(26,416) | Condensed Consolidated Statements of Operations Details revenues, expenses, and net income/loss for Q2 and H1 2020, showing improved performance | Metric (3 months ended June 30) | 2020 (in thousands) | 2019 (in thousands) | Change (in thousands) | | :------------------------------ | :------------------ | :------------------ | :-------------------- | | Total revenues | $301,207 | $226,368 | $74,839 | | Total costs and expenses | $274,028 | $273,628 | $400 | | Operating income (loss) | $27,179 | $(47,260) | $74,439 | | Net Income (loss) | $33,703 | $(59,806) | $93,509 | | Income (loss) per share | $0.05 | $(0.10) | $0.15 | | Metric (6 months ended June 30) | 2020 (in thousands) | 2019 (in thousands) | Change (in thousands) | | :------------------------------ | :------------------ | :------------------ | :-------------------- | | Total revenues | $512,674 | $448,820 | $63,854 | | Total costs and expenses | $526,255 | $571,397 | $(45,142) | | Operating income (loss) | $(13,581) | $(122,577) | $108,996 | | Net Income (loss) | $(25,429) | $(140,568) | $115,139 | | Income (loss) per share | $(0.04) | $(0.24) | $0.20 | Condensed Consolidated Statements of Comprehensive Income (Loss) Presents net income/loss and other comprehensive income/loss, including foreign currency adjustments | Metric (3 months ended June 30) | 2020 (in thousands) | 2019 (in thousands) | | :------------------------------ | :------------------ | :------------------ | | Net income (loss) | $33,703 | $(59,806) | | Change in foreign currency translation and other comprehensive income (loss) | $4,435 | $2,878 | | Comprehensive income (loss) | $38,138 | $(56,928) | | Metric (6 months ended June 30) | 2020 (in thousands) | 2019 (in thousands) | | :------------------------------ | :------------------ | :------------------ | | Net income (loss) | $(25,429) | $(140,568) | | Change in foreign currency translation and other comprehensive income (loss) | $(3,682) | $(220) | | Comprehensive income (loss) | $(29,111) | $(140,788) | Condensed Consolidated Statements of Equity Details changes in shareholders' equity for Q2 and H1 2020, including common stock and accumulated deficit | Metric | Balance at Dec 31, 2019 (in thousands) | Equity-based compensation (in thousands) | Net loss (in thousands) | Other comprehensive loss (in thousands) | Balance at Jun 30, 2020 (in thousands) | | :----- | :------------------------------------- | :--------------------------------------- | :---------------------- | :-------------------------------------- | :------------------------------------- | | Total shareholders' equity | $1,614,759 | $4,037 | $(25,429) | $(3,682) | $1,588,343 | Condensed Consolidated Statements of Cash Flows Reports cash flows from operating, investing, and financing activities for H1 2020, showing decreased cash | Metric (6 months ended June 30) | 2020 (in thousands) | 2019 (in thousands) | Change (in thousands) | | :------------------------------ | :------------------ | :------------------ | :-------------------- | | Net cash used in operating activities | $(57,793) | $(102,619) | $44,826 | | Net cash used in investing activities | $(17,084) | $(7,323) | $(9,761) | | Net cash provided by financing activities | $11,277 | $124,599 | $(113,322) | | Net increase (decrease) in cash and cash equivalents | $(63,840) | $14,642 | $(78,482) | | Cash and cash equivalents at end of period | $21,612 | $111,115 | $(89,503) | Notes to Condensed Consolidated Financial Statements Detailed explanations and disclosures for financial statements, covering policies, instruments, debt, and contingencies NOTE 1 BUSINESS AND ORGANIZATION OPKO Health is a diversified healthcare company with diagnostics and pharmaceutical segments operating internationally - OPKO Health operates two main segments: Diagnostics (BioReference Laboratories, including 4Kscore test) and Pharmaceuticals (Rayaldee, OPK88004, OPK88003, hGH-CTP)[32] - International pharmaceutical platforms are located in Ireland, Chile, Spain, and Mexico, with an API manufacturer in Israel[34] NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Outlines key accounting principles, policies, and the impact of COVID-19 on financial reporting Impact of COVID-19 COVID-19 impacted BioReference operations, increasing COVID-19 testing while decreasing routine volumes - BioReference Laboratories performed approximately 331.6 thousand serology antibody tests and 2.2 million diagnostic molecular tests for COVID-19 during Q2 2020, representing 28.1% of total test volume[39] - Excluding COVID-19 tests, diagnostics segment volumes were down 46.5% in Q2 2020 compared to Q2 2019 due to the pandemic[41] - Sales of Rayaldee were adversely affected, not meeting expected growth due to challenges in onboarding new patients during the COVID-19 pandemic[41] - Received approximately $14 million under The Centers for Medicare & Medicaid Services (CMS) Accelerated and Advance Payment Program and $6.2 million in grants under the CARES Act[43] Cash and cash equivalents Defines cash and cash equivalents as short-term, interest-bearing instruments with 90-day maturities - Cash and cash equivalents include short-term, interest-bearing instruments with original maturities of 90 days or less[45] Inventories Inventories valued at lower of cost or net realizable value; $1.7 million obsolescence expense in H1 2020 - Inventory obsolescence expense for the six months ended June 30, 2020, was $1.7 million, up from $1.3 million in 2019[46] Pre-launch inventories Pre-launch inventories are expensed due to the inherent risk of non-approval by the FDA - Pre-launch inventories are expensed due to the risk that products may not receive timely FDA approval[47] Goodwill and intangible assets Goodwill and intangible assets totaled $1.8 billion, subject to annual impairment testing | Asset Type | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | | :--------- | :--------------------------- | :------------------------------- | | Goodwill | $671,599 | $671,940 | | Intangible assets, net (excluding goodwill) | $499,125 | $528,962 | | In-process research and development (IPR&D) | $590,200 | $590,200 | | Total Goodwill, IPR&D, and other intangible assets | $1,800,924 | $1,791,102 | - Amortization expense for definite-lived intangible assets was $29.9 million for the six months ended June 30, 2020, down from $33.0 million in 2019[54] Fair value measurements Financial instruments measured at fair value using a three-tier hierarchy on a recurring basis - Fair value measurements categorize assets and liabilities into Level 1 (quoted prices), Level 2 (observable inputs), and Level 3 (unobservable inputs)[123] | Asset/Liability (in thousands) | Level 1 (June 30, 2020) | Level 2 (June 30, 2020) | Level 3 (June 30, 2020) | Total (June 30, 2020) | | :----------------------------- | :---------------------- | :---------------------- | :---------------------- | :-------------------- | | Equity securities | $24,777 | $— | $— | $24,777 | | Common stock options/warrants | $— | $51 | $— | $51 | | Forward contracts | $— | $215 | $— | $215 | | Contingent consideration | $— | $— | $9,934 | $9,934 | Contingent consideration Contingent consideration from acquisitions is revalued to fair value, with changes impacting expenses - Contingent consideration is revalued each period based on probabilities of milestone achievement, timing, and discount rates, with significant judgment involved[57] Derivative financial instruments Derivative financial instruments recorded at fair value, with changes recognized in operations - Derivative financial instruments, primarily foreign currency forward contracts, are recorded at fair value, and changes are recognized in the statement of operations because they do not qualify for hedge accounting[58][130] Property, plant and equipment Property, plant, and equipment recorded at cost and depreciated straight-line; $14.4 million expense in H1 2020 - Depreciation expense was $14.4 million for the six months ended June 30, 2020, consistent with $14.5 million in 2019[59] Impairment of long-lived assets Long-lived assets reviewed for impairment by comparing carrying value to undiscounted future cash flows - Long-lived assets are tested for impairment by comparing carrying amount to estimated undiscounted future cash flows[60] Income taxes Income taxes use asset-and-liability method; valuation allowances and earnings mix affect tax rate - Valuation allowances are established against certain U.S. and non-U.S. deferred tax assets when realization of tax benefits is not "more-likely-than-not"[62] - The tax rate for Q2 and H1 2020 differed from the 21% U.S. federal statutory rate due to valuation allowances, mix of earnings/losses in different jurisdictions, and discrete tax events[63] Revenue recognition Revenue recognized using a five-step model when customer obtains control of goods or services - Revenue recognition follows a five-step model, recognizing revenue when performance obligations are satisfied[64][65] Concentration of credit risk and allowance for credit losses Credit risk concentrated in healthcare receivables, with COVID-19 testing receivables significant - Receivables from Medicare and Medicaid were 11% of consolidated Accounts receivable, net, at June 30, 2020, up from 6% at December 31, 2019[67] - Receivables from states, cities, and municipalities for COVID-19 testing were 37.6% of consolidated Accounts receivable, net, at June 30, 2020[67] - The allowance for credit losses was $1.6 million at June 30, 2020, down from $1.9 million at December 31, 2019[69] Equity-based compensation Equity-based compensation expense measured at grant-date fair value and recognized over service period - Equity-based compensation expense was $4.0 million for the six months ended June 30, 2020, down from $7.6 million in 2019[70] Research and development expenses R&D expenses are expensed as incurred, except for capitalized in-process R&D from acquisitions - Research and development expenses are expensed as incurred, except for capitalized in-process R&D acquired in business combinations[72][73] Segment reporting Operations managed in pharmaceutical and diagnostics segments, with performance evaluated by operating profit/loss - Operations are managed in two reportable segments: pharmaceutical and diagnostics[74] Shipping and handling costs Shipping and handling costs are classified as Cost of revenues and not charged to customers - Shipping and handling costs are included in Cost of revenues and not charged to customers[75] Foreign currency translation Foreign operations' financial statements translated using local currency as functional currency - Foreign currency transaction gains/losses are reflected in Other income (expense), net, while translation gains/losses are in Comprehensive Income (Loss)[76] Variable interest entities Consolidation of a VIE required when enterprise has controlling financial interest and absorbs losses - Consolidation of a VIE requires both power to direct activities and obligation to absorb significant losses[77] Investments Strategic investments recorded as equity method or equity securities based on ownership and influence - Investments are classified as equity method or equity securities based on ownership and significant influence[78] Recently adopted accounting pronouncements Adoption of ASU 2016-13 on January 1, 2020, had no significant impact on financial statements - Adoption of ASU 2016-13 on January 1, 2020, had no significant impact on financial statements[79] NOTE 3 EARNINGS (LOSS) PER SHARE Details basic and diluted EPS calculations, excluding antidilutive potential shares for both periods - 69.5 million and 69.3 million potential shares were excluded from diluted net loss per share for the three and six months ended June 30, 2020, respectively, due to being antidilutive[81] NOTE 4 COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS Detailed breakdowns of accounts receivable, inventories, intangible assets, and other liabilities | Account (in thousands) | June 30, 2020 | December 31, 2019 | | :--------------------- | :------------ | :---------------- | | Accounts receivable, net | $214,352 | $134,617 | | Inventories, net | $72,965 | $53,434 | | Other current assets and prepaid expenses | $51,125 | $50,542 | | Intangible assets, net | $499,125 | $528,962 | | Accrued expenses | $210,111 | $164,925 | | Other long-term liabilities | $91,653 | $87,804 | | Goodwill by Reporting Unit (in thousands) | Balance at Jan 1, 2020 | Foreign exchange and other | Balance at Jun 30, 2020 | | :-------------------------------------- | :--------------------- | :------------------------- | :---------------------- | | Pharmaceuticals | $237,131 | $(341) | $236,790 | | Diagnostics | $434,809 | $— | $434,809 | | Total Goodwill | $671,940 | $(341) | $671,599 | NOTE 5 INVESTMENTS Details equity method investments, equity securities, and warrants/options, accounted for by ownership and influence | Investment Type (in thousands) | Investment Carrying Value (June 30, 2020) | | :----------------------------- | :---------------------------------------- | | Equity method investments | $561 | | Variable interest entity, equity method | $836 | | Equity securities | $24,777 | | Equity securities with no readily determinable fair value | $35 | | Warrants and options | $51 | | Total carrying value of investments | $26,260 | - Equity method investments include Pharmsynthez (9%), Cocrystal Pharma, Inc. ("COCP") (5%), InCellDx, Inc. ("InCellDx") (29%), and others, where OPKO has significant influence[90] - Equity securities include Phio Pharmaceuticals (0.02%), VBI Vaccines Inc. ("VBI") (3%), ChromaDex Corporation ("ChromaDex") (0.1%), MabVax Therapeutics Holdings, Inc. ("MabVax") (1%), and Eloxx Pharmaceuticals, Inc. ("Eloxx") (3%), where OPKO does not have significant influence[91] - Net unrealized gains of $5.9 million were recognized on equity securities for the six months ended June 30, 2020[91] - OPKO holds a 29% ownership in Zebra Biologics, a variable interest entity (VIE), and accounts for it under the equity method due to significant influence, but not control[96][97] NOTE 6 DEBT Details debt instruments, including credit lines, convertible notes, and a secured revolving credit facility - Entered into a $100 million unsecured line of credit with an affiliate of Dr. Frost, bearing 11% interest, maturing February 25, 2025. No funds were borrowed as of June 30, 2020[98][131] - Issued $200 million aggregate principal amount of 4.50% Convertible Senior Notes due 2025, convertible into common stock under certain conditions[99][100] - The 2025 Notes have an initial conversion rate of 236.7424 shares per $1,000 principal amount (equivalent to approximately $4.22 per share)[101] - BioReference has a $75 million secured revolving credit facility with JPMorgan Chase Bank, N.A., maturing November 5, 2021. $51.5 million was outstanding as of June 30, 2020[114][117] - Issued $55 million aggregate principal amount of 5% Convertible Promissory Notes due 2023, convertible at $5.00 per share[108] - $3.0 million aggregate principal amount of 3.0% Senior Notes due 2033 remained outstanding after repurchases[111] | Lender | Interest Rate (June 30, 2020) | Credit Line Capacity (in thousands) | Balance Outstanding (June 30, 2020, in thousands) | Balance Outstanding (Dec 31, 2019, in thousands) | | :----- | :---------------------------- | :---------------------------------- | :------------------------------------------------ | :------------------------------------------------ | | JPMorgan Chase | 3.67% | $75,000 | $51,489 | $44,750 | | Other Banks (Chile/Spain) | 1.30% - 6.60% | $26,312 | $12,048 | $7,327 | | Total | | $101,312 | $63,537 | $52,077 | NOTE 7 ACCUMULATED OTHER COMPREHENSIVE LOSS Changes in accumulated other comprehensive loss primarily reflect foreign currency translation adjustments | Metric (in thousands) | Foreign currency translation | | :-------------------- | :--------------------------- | | Balance at December 31, 2019 | $(22,070) | | Other comprehensive loss | $(3,682) | | Balance at June 30, 2020 | $(25,752) | NOTE 8 FAIR VALUE MEASUREMENTS Detailed breakdown of financial assets and liabilities measured at fair value, categorized by input levels | Asset/Liability (in thousands) | Level 1 (June 30, 2020) | Level 2 (June 30, 2020) | Level 3 (June 30, 2020) | Total (June 30, 2020) | | :----------------------------- | :---------------------- | :---------------------- | :---------------------- | :-------------------- | | Equity securities | $24,777 | $— | $— | $24,777 | | Common stock options/warrants | $— | $51 | $— | $51 | | Forward contracts | $— | $215 | $— | $215 | | Contingent consideration | $— | $— | $9,934 | $9,934 | - Contingent consideration is valued using a discounted cash flow model based on estimated timing and revenues, with $2.4 million current and $7.6 million long-term at June 30, 2020[127] NOTE 9 DERIVATIVE CONTRACTS Summarizes fair values of derivative assets and liabilities, with changes recognized in operations | Derivative (in thousands) | Balance Sheet Component | June 30, 2020 | December 31, 2019 | | :------------------------ | :---------------------- | :------------ | :---------------- | | Common Stock options/warrants | Investments, net | $51 | $120 | | Forward contracts | Other current assets/Accrued expenses | $215 | $133 | | Derivative Gain (Loss) (in thousands) | 3 months ended Jun 30, 2020 | 3 months ended Jun 30, 2019 | 6 months ended Jun 30, 2020 | 6 months ended Jun 30, 2019 | | :---------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Common Stock options/warrants | $(7) | $(392) | $(69) | $(24) | | Forward contracts | $(6) | $4 | $677 | $51 | | Total | $(13) | $(388) | $608 | $27 | NOTE 10 RELATED PARTY TRANSACTIONS Details various transactions with related parties, including credit lines, stock purchases, and investments - Entered into a $100 million unsecured line of credit with an affiliate of Dr. Frost, with no funds borrowed as of June 30, 2020[131] - Management (Drs. Frost, Hsiao, Mr. Rubin) purchased 2,415,000 shares in a public offering in October 2019[132] - Reimbursed Dr. Frost $94 thousand for Company-related airplane travel for the six months ended June 30, 2020, down from $160 thousand in 2019[147][149] - Leases office space from Frost Real Estate Holdings, LLC, an affiliate of Dr. Frost, for approximately $89-101 thousand per month[145] - Holds investments in Zebra (29%), Neovasc (2%), COCP (5%), InCellDx (29%), and others, considered related party transactions due to management's interests[141] NOTE 11 COMMITMENTS AND CONTINGENCIES Outlines commitments and contingencies, including contingent consideration, legal proceedings, and government inquiries - $9.9 million recorded as contingent consideration from CURNA, OPKO Diagnostics, and OPKO Renal acquisitions[150] - Stipulated a $16.5 million settlement for class action lawsuits related to SEC allegations, with expected significant insurance coverage[153][331] - BioReference was named in class action lawsuits related to the AMCA data security incident, which were dismissed without prejudice in April 2020[151] - SDNY informed BioReference of potential False Claims Act violations related to Medicare/TRICARE billing (2008-2012) and physician EHR subsidies (pre-2012)[154] - CMS suspended Medicare payments to GeneDx in October 2019 due to alleged overpayments for genetic testing, but lifted the suspension in February 2020[155][156] - Committed to future inventory and other purchases aggregating approximately $154.2 million in 2020[159] NOTE 12 REVENUE RECOGNITION Details revenue recognition policies across service, product, and IP segments, including variable consideration Revenue from services Service revenue recognized upon test result reporting, net of variable consideration; COVID-19 testing increased client payers - Revenue from services is recognized when test results are reported, net of variable consideration like contractual discounts and implicit price concessions[160] | Payor (in thousands) | 3 months ended Jun 30, 2020 | 3 months ended Jun 30, 2019 | 6 months ended Jun 30, 2020 | 6 months ended Jun 30, 2019 | | :------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Healthcare insurers | $84,082 | $106,278 | $183,232 | $211,207 | | Government payers | $15,886 | $28,634 | $42,784 | $59,037 | | Client payers | $141,090 | $38,101 | $180,191 | $76,559 | | Patients | $9,913 | $5,445 | $15,604 | $10,546 | | Total | $250,971 | $178,458 | $421,811 | $357,349 | - Revenue increases due to changes in estimates of implicit price concessions for prior periods were $0.2 million for H1 2020, compared to a reduction of $(14.3) million for H1 2019[166] - Liabilities for payor overpayments were $21.4 million at June 30, 2020, down from $27.3 million at December 31, 2019[169] Revenue from products Product revenue recognized upon delivery, net of sales deductions; Rayaldee sales impacted by COVID-19 - Net product revenue from Rayaldee sales was $8.6 million for Q2 2020 (up from $5.7 million in Q2 2019) and $18.6 million for H1 2020 (up from $11.5 million in H1 2019)[174] - Rayaldee's expected growth trajectory was impacted by challenges in onboarding new patients due to the COVID-19 pandemic[174] | Rayaldee Sales Allowances (in thousands) | Balance at Dec 31, 2019 | Provision related to current period sales (H1 2020) | Credits or payments made (H1 2020) | Balance at Jun 30, 2020 | | :------------------------------------- | :---------------------- | :-------------------------------------------------- | :--------------------------------- | :---------------------- | | Chargebacks, discounts, rebates and fees | $3,194 | $9,293 | $(9,597) | $2,890 | | Governmental | $5,841 | $16,281 | $(15,123) | $6,999 | | Returns | $2,751 | $1,389 | $(310) | $3,830 | | Total | $11,786 | $26,963 | $(25,030) | $13,719 | | Total gross Rayaldee sales (H1 2020) | | | | $45,559 | | Provision as % of gross sales (H1 2020) | | | | 59% | Revenue from intellectual property IP revenue from licenses, development, and collaboration agreements, including Pfizer Transaction and CARES Act grant - Revenue from transfer of intellectual property for Q2 2020 was $13.9 million (Pfizer Transaction) and $6.2 million (CARES Act grant)[185] - Revenue from transfer of intellectual property for H1 2020 was $22.7 million (Pfizer Transaction) and $6.2 million (CARES Act grant)[185] - Total contract liabilities were $17.7 million at June 30, 2020, primarily from CARES Act accelerated payments[185] NOTE 13 STRATEGIC ALLIANCES Details key strategic alliances for product development and commercialization, including Rayaldee and hGH-CTP Japan Tobacco Inc. EirGen granted JT exclusive Rayaldee rights in Japan, with upfront payments, milestones, and royalties - EirGen granted Japan Tobacco Inc. exclusive rights for Rayaldee in Japan, receiving $12 million upfront/initiation payments[187] - Eligible for up to $31 million in regulatory/development milestones and $75 million in sales milestones from JT for Rayaldee in Japan[187] Vifor Fresenius Medical Care Renal Pharma Ltd EirGen partnered with VFMCRP for Rayaldee, with amended territory, milestones, and royalties - EirGen partnered with VFMCRP for Rayaldee's development and commercialization in various international markets (excluding US, Central/South America, Russia, China, Japan, etc.)[190] - May 2020 amendment excluded Mexico, South Korea, Middle East, and Africa from VFMCRP Territory and revised milestone structure[191] - EirGen received $50 million initial payment and $2.0 million for Canadian approval, and is eligible for up to $20 million in regulatory milestones and $210 million in sales milestones, plus tiered royalties[192] - VFMCRP has an option to acquire an exclusive license for Rayaldee in the U.S. for dialysis patients, with potential payments up to $555 million in sales-based milestones and royalties[194] Pfizer Inc. OPKO has exclusive hGH-CTP agreement with Pfizer; Phase 3 met endpoint, with upfront and milestone payments - Global Phase 3 trial for Somatrogon (hGH-CTP) in prepubertal children with GHD met its primary endpoint of non-inferiority to daily Genotropin®[198][305] - Received $295 million in non-refundable upfront payments from Pfizer and is eligible for up to an additional $275 million upon achievement of regulatory milestones[199][306] - Royalties will be tiered, ranging from high teens to mid-twenties, transitioning to regional gross profit sharing upon launch of pediatric GHD in major markets[199][306] - A May 2020 amendment with Pfizer established cost-sharing for manufacturing activities for three indications[197][307] TESARO OPKO out-licensed VARUBI™ to TESARO, with subsequent assignment of rights and European sales cessation - Out-licensed VARUBI™ (rolapitant) to TESARO, receiving $6 million upfront and $30 million in milestone payments, with eligibility for up to $85 million in additional commercial milestones[203] - TESARO assigned U.S./Canada rights to TerSera in 2018 and intends to stop selling VARUBY® in Europe[204] Pharmsynthez OPKO acquired 9% equity in Pharmsynthez, granting technology rights with expected royalties - Acquired a 9% equity method investment in Pharmsynthez and granted technology rights in Russian Federation, Ukraine, Belarus, Azerbaijan, and Kazakhstan, with expected royalties and sublicense income[206] Phio Pharmaceuticals Corp. OPKO sold RNA interference assets to Phio Pharmaceuticals, with potential milestones and tiered royalties - Sold RNA interference assets to Phio Pharmaceuticals, with potential for up to $50 million in milestone payments per Qualified Drug and tiered royalties[207] Other Other strategic deals involve future payment and royalty obligations, with undeterminable amounts and timing - Other strategic deals involve payment and royalty obligations upon achievement of milestones and sales, with timing and amounts currently undeterminable[208] NOTE 14 SEGMENTS Provides financial information for pharmaceutical, diagnostics, and corporate segments for Q2 and H1 2020 | Segment (3 months ended Jun 30, in thousands) | Revenue from services | Revenue from products | Revenue from IP & other | Operating loss | Depreciation & amortization | Loss from investments | | :-------------------------------------------- | :-------------------- | :-------------------- | :---------------------- | :------------- | :-------------------------- | :-------------------- | | Pharmaceutical | $— | $29,356 | $14,686 | $(5,996) | $7,119 | $(189) | | Diagnostics | $250,971 | $— | $6,194 | $40,935 | $15,147 | $— | | Corporate | $— | $— | $— | $(7,760) | $— | $— | | Total | $250,971 | $29,356 | $20,880 | $27,179 | $22,266 | $(189) | | Segment (6 months ended Jun 30, in thousands) | Revenue from services | Revenue from products | Revenue from IP & other | Operating loss | Depreciation & amortization | Loss from investments | | :-------------------------------------------- | :-------------------- | :-------------------- | :---------------------- | :------------- | :-------------------------- | :-------------------- | | Pharmaceutical | $— | $60,430 | $24,239 | $(20,121) | $14,240 | $(323) | | Diagnostics | $421,811 | $— | $6,194 | $22,803 | $30,019 | $— | | Corporate | $— | $— | $— | $(16,263) | $59 | $— | | Total | $421,811 | $60,430 | $30,433 | $(13,581) | $44,318 | $(323) | | Geographic Revenue (in thousands) | 3 months ended Jun 30, 2020 | 3 months ended Jun 30, 2019 | 6 months ended Jun 30, 2020 | 6 months ended Jun 30, 2019 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | United States | $265,890 | $184,310 | $446,761 | $369,203 | | Ireland | $16,847 | $22,174 | $28,749 | $42,707 | | Chile | $11,152 | $9,051 | $22,002 | $16,915 | | Spain | $4,136 | $4,876 | $8,292 | $9,294 | | Israel | $1,183 | $3,768 | $2,890 | $6,884 | | Mexico | $1,866 | $2,058 | $3,708 | $3,589 | | Other | $133 | $131 | $272 | $228 | | Total | $301,207 | $226,368 | $512,674 | $448,820 | | Segment Assets (in thousands) | June 30, 2020 | December 31, 2019 | | :---------------------------- | :------------ | :---------------- | | Pharmaceutical | $1,148,151 | $1,174,639 | | Diagnostics | $1,121,202 | $1,035,112 | | Corporate | $54,381 | $99,521 | | Total | $2,323,734 | $2,309,272 | NOTE 15 LEASES Details operating and finance leases for facilities and equipment, including weighted average lease terms | Lease Metric | June 30, 2020 | December 31, 2019 | | :----------- | :------------ | :---------------- | | Operating lease right-of-use assets (in thousands) | $38,469 | $39,380 | | Finance lease assets (in thousands) | $5,395 | $6,789 | | Current maturities of operating leases (in thousands) | $10,298 | $12,038 | | Operating lease liabilities (long-term, in thousands) | $28,759 | $27,665 | | Weighted average remaining operating lease term | 5.7 years | 5.6 years | | Weighted average operating lease discount rate | 6.4% | 6.3% | | Undiscounted Future Minimum Lease Payments (in thousands) | Operating | Finance | | :------------------------------------------------------ | :-------- | :------ | | July 1, 2020 through December 31, 2020 | $6,604 | $1,404 | | 2021 | $7,479 | $2,186 | | 2022 | $6,506 | $1,175 | | 2023 | $5,845 | $590 | | 2024 | $4,671 | $249 | | Thereafter | $17,374 | $— | | Total undiscounted future minimum lease payments | $48,479 | $5,604 | - Operating lease expense was $9.7 million and finance lease expense was $1.2 million for the six months ended June 30, 2020[215] NOTE 16 SUBSEQUENT EVENTS Favorable Medicare appeal decision in July 2020 for 4Kscore tests resulted in $10.9 million revenue recognition - Received a favorable Medicare appeal decision in July 2020 for previously denied 4Kscore tests from 2019, recognizing $10.9 million in revenue for Q2 and H1 2020[217] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's perspective on financial condition, operations, liquidity, capital resources, and accounting policies OVERVIEW OPKO Health is a diversified healthcare company with diagnostics and pharmaceutical segments, operating internationally - OPKO Health is a diversified healthcare company with diagnostics (BioReference, 4Kscore) and pharmaceutical (Rayaldee, OPK88004, OPK88003, hGH-CTP) businesses[221] - International pharmaceutical platforms in Spain, Ireland, Chile, and Mexico, and an API manufacturer in Israel, are expected to generate positive cash flow and facilitate market entry[222] RECENT DEVELOPMENTS Japan Phase 3 trial for Somatrogon met objectives, showing comparable efficacy and safety in GHD children - Japan Phase 3 clinical trial for Somatrogon (hGH-CTP) met primary and secondary objectives, showing comparable efficacy and safety to daily Genotropin® in GHD children[223] RESULTS OF OPERATIONS Comprehensive analysis of financial performance, highlighting COVID-19 impact and segment results for Q2 and H1 2020 Impact of COVID-19 COVID-19 increased diagnostic testing, impacted Rayaldee sales, and led to CARES Act benefits and workforce adjustments - BioReference performed approximately 331.6 thousand serology antibody tests and 2.2 million diagnostic molecular tests for COVID-19 in Q2 2020, accounting for 28.1% of total test volume[225] - Routine clinical and genomics testing volumes in the diagnostics segment were down 46.5% in Q2 2020 (excluding COVID-19 tests) compared to Q2 2019[227] - Rayaldee sales growth was impacted by challenges in onboarding new patients due to the COVID-19 pandemic[227] - Received $14 million from CMS Accelerated and Advance Payment Program and $6.2 million in grants under the CARES Act[229] - Hired approximately 2,000 additional employees in Q2 2020 to support COVID-19 testing and normalization of routine testing[230] FOR THE THREE MONTHS ENDED JUNE 30, 2020 AND 2019 Consolidated results show significant Q2 2020 improvement in operating and net income, driven by revenue growth | Metric (in thousands) | 2020 | 2019 | Change | | :-------------------- | :--- | :--- | :----- | | Total revenues | $301,207 | $226,368 | $74,839 | | Total costs and expenses | $274,028 | $273,628 | $400 | | Income (loss) from operations | $27,179 | $(47,260) | $74,439 | Diagnostics Diagnostics segment revenue increased from COVID-19 testing and 4Kscore appeal, turning loss to income | Metric (in thousands) | 2020 | 2019 | Change | | :-------------------- | :--- | :--- | :----- | | Total revenues | $257,165 | $178,458 | $78,707 | | Income (loss) from operations | $40,935 | $(28,013) | $68,948 | - Revenue from services increased by $72.5 million, primarily due to COVID-19 testing and $10.9 million from a successful 4Kscore Medicare appeal[234] - Cost of revenue increased by $15.0 million due to labor and material costs for COVID-19 testing, partially offset by reduced other testing volumes and cost reduction initiatives[238] - Selling, general and administrative expenses decreased by $4.6 million due to lower legal matters expenses and cost reduction initiatives[239] Pharmaceuticals Pharmaceutical segment revenue decreased from lower IP transfer, but operating loss improved due to reduced R&D | Metric (in thousands) | 2020 | 2019 | Change | | :-------------------- | :--- | :--- | :----- | | Total revenues | $44,042 | $47,910 | $(3,868) | | Loss from operations | $(5,996) | $(8,556) | $2,560 | - Rayaldee sales increased to $8.6 million in Q2 2020 from $5.7 million in Q2 2019, but growth was below expectations due to COVID-19[245] - Revenue from intellectual property decreased due to lower revenue from the Pfizer Transaction ($13.9 million in Q2 2020 vs. $18.2 million in Q2 2019)[245] - Research and development expenses decreased by $11.0 million, primarily due to reduced hGH-CTP program expenses after Phase 3 study completion[250] - A May 2020 amendment with Pfizer resulted in a reversal of certain previously accrued manufacturing expenses for biological products[251] Corporate Unallocated corporate operations reported reduced operating loss due to decreased legal fees | Metric (in thousands) | 2020 | 2019 | Change | | :-------------------- | :--- | :--- | :----- | | Loss from operations | $(7,760) | $(10,691) | $2,931 | - Decrease in operating loss primarily attributable to a decrease in legal fees[255] Other Other income and expense items include interest, derivative changes, and significant unrealized investment gains - Interest expense remained stable at $5.5 million for Q2 2020 and Q2 2019[257] - Other income (expense), net, was $18.2 million income in Q2 2020 (vs. $(5.9) million expense in Q2 2019), primarily from net unrealized gains on VBI investment[259] - Income tax provision increased to $6.0 million in Q2 2020 from $1.1 million in Q2 2019[260] FOR THE SIX MONTHS ENDED JUNE 30, 2020 AND 2019 Consolidated H1 2020 results show reduced operating loss, driven by increased revenues and decreased expenses | Metric (in thousands) | 2020 | 2019 | Change | | :-------------------- | :--- | :--- | :----- | | Total revenues | $512,674 | $448,820 | $63,854 | | Total costs and expenses | $526,255 | $571,397 | $(45,142) | | Income (loss) from operations | $(13,581) | $(122,577) | $108,996 | Diagnostics Diagnostics segment operating income improved in H1 2020 from COVID-19 testing and 4Kscore appeal | Metric (in thousands) | 2020 | 2019 | Change | | :-------------------- | :--- | :--- | :----- | | Total revenues | $428,005 | $357,349 | $70,656 | | Income (loss) from operations | $22,803 | $(61,582) | $84,385 | - Revenue from services increased by $64.5 million, driven by COVID-19 testing and $10.9 million from the 4Kscore Medicare appeal[264] - Selling, general and administrative expenses decreased by $19.4 million, mainly due to lower legal expenses and cost reduction initiatives[268] - Cost of revenue increased by $8.0 million due to COVID-19 testing, partially offset by reduced other testing volumes[267] Pharmaceuticals Pharmaceutical segment operating loss narrowed in H1 2020 due to reduced R&D, despite lower IP revenue | Metric (in thousands) | 2020 | 2019 | Change | | :-------------------- | :--- | :--- | :----- | | Total revenues | $84,669 | $91,471 | $(6,802) | | Loss from operations | $(20,121) | $(38,033) | $17,912 | - Rayaldee sales increased to $18.6 million in H1 2020 from $11.5 million in H1 2019[272] - Revenue from intellectual property decreased due to lower revenue from the Pfizer Transaction ($22.7 million in H1 2020 vs. $35.6 million in H1 2019)[272] - Research and development expenses decreased by $25.5 million, primarily due to reduced hGH-CTP program expenses[276] Corporate Unallocated corporate operations reported reduced operating loss in H1 2020 due to lower legal fees | Metric (in thousands) | 2020 | 2019 | Change | | :-------------------- | :--- | :--- | :----- | | Loss from operations | $(16,263) | $(22,962) | $6,699 | - Decrease in operating loss primarily attributable to a decrease in legal fees[280] Other Other income and expense items for H1 2020 included increased interest, derivative changes, and investment gains - Interest expense increased to $11.0 million in H1 2020 from $10.3 million in H1 2019[283] - Fair value changes of derivative instruments, net, resulted in $0.6 million income in H1 2020 (vs. $27 thousand income in H1 2019), primarily from foreign currency forward contracts[284] - Other income (expense), net, was $5.9 million income in H1 2020 (vs. $(4.9) million expense in H1 2019), primarily from net unrealized gains on VBI investment[285] - Income tax provision increased to $7.2 million in H1 2020 from $1.9 million in H1 2019[286] LIQUIDITY AND CAPITAL RESOURCES Details cash position, operating and financing cash flows, and sufficiency of capital resources for the next 12 months - Cash and cash equivalents were $21.6 million at June 30, 2020[289] - Net cash used in operating activities was $57.8 million for the six months ended June 30, 2020[289] - Net cash provided by financing activities was $11.3 million for the six months ended June 30, 2020[289] - Has a $100 million unsecured line of credit from an affiliate of Dr. Frost, unused as of June 30, 2020[290] - Total commitments under credit facilities and lines of credit were $93.1 million, with $63.5 million drawn as of June 30, 2020[298] - The company believes current cash, operations, and available credit are sufficient to meet anticipated cash requirements for operations and debt service beyond the next 12 months, but acknowledges significant uncertainties from COVID-19 and product development[309] | Contractual Obligations (in thousands) | Remaining 6 months ending Dec 31, 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | Total | | :----------------------------------- | :------------------------------------- | :--- | :--- | :--- | :--- | :--------- | :---- | | Open purchase orders | $153,623 | $506 | $35 | $— | $— | $— | $154,164 | | Operating leases | $6,392 | $7,137 | $5,938 | $5,001 | $3,735 | $10,856 | $39,059 | | Finance leases | $1,298 | $2,121 | $1,147 | $581 | $247 | $— | $5,394 | | 2033 Senior Notes, 2025 and 2023 Convertible Notes | $— | $— | $— | $— | $3,050 | $207,017 | $210,067 | | Deferred payments | $5,625 | $7,500 | $2,994 | $— | $— | $— | $16,119 | | Mortgages and other debts payable | $1,209 | $944 | $739 | $547 | $458 | $86 | $3,983 | | Lines of credit | $12,048 | $51,489 | $— | $— | $— | $— | $63,537 | | Interest commitments | $340 | $300 | $283 | $14,016 | $259 | $41,389 | $56,587 | | Total | $180,535 | $69,997 | $11,136 | $20,145 | $7,749 | $259,348 | $548,910 | CRITICAL ACCOUNTING POLICIES AND ESTIMATES No material changes to critical accounting policies and estimates since the December 31, 2019 Form 10-K - No material changes to critical accounting policies and estimates since the December 31, 2019, Form 10-K[315] RECENT ACCOUNTING PRONOUNCEMENTS Adoption of ASU 2016-13 on January 1, 2020, had no significant impact on financial statements - Adoption of ASU 2016-13 on January 1, 2020, had no significant impact on condensed consolidated financial statements[316] Item 3. Quantitative and Qualitative Disclosures About Market Risk Discusses exposure to foreign currency and interest rate risks, and strategies for mitigation Foreign Currency Exchange Rate Risk Global operations expose the company to foreign exchange risk, mitigated by forward contracts - Exposed to foreign exchange risk from Chilean Peso, Mexican Peso, Euro, and New Israeli Shekel[319] - Uses foreign exchange forward contracts to economically hedge inventory purchases, with changes in fair value recognized in earnings[320][321] Interest Rate Risk Interest rate risk is minimal for short-term investments and fixed-rate debt - Investment portfolio (money market funds, marketable securities) has minimal interest rate risk due to short-term maturities (average less than three months)[323][326] - Fixed interest rates apply to the $3.0 million 2033 Senior Notes (3%), $55.0 million 2023 Convertible Notes (5%), and $200.0 million 2025 Notes (4.50%)[325] - Weighted average interest rate on BioReference's Credit Agreement and other lines of credit was approximately 4.2% at June 30, 2020[324] Item 4. Controls and Procedures Management evaluated disclosure controls and procedures, concluding effectiveness with no material changes Disclosure Controls and Procedures Management concluded disclosure controls and procedures were effective as of June 30, 2020 - Disclosure controls and procedures were evaluated and deemed effective as of June 30, 2020[327] Changes to the Company's Internal Control Over Financial Reporting No material changes to internal control over financial reporting occurred during the quarter - No material changes to internal control over financial reporting during the quarter[328] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, defaults, and other required disclosures Item 1. Legal Proceedings Updates on legal proceedings, including a $16.5 million settlement and ongoing government inquiries - A $16.5 million settlement was stipulated for class action lawsuits against the Company and Dr. Frost, with expected significant insurance coverage[331] - Class action lawsuits related to the AMCA data security incident against BioReference were dismissed without prejudice in April 2020[151] - The company is responding to various government inquiries, audits, and reviews related to laboratory operations[157] Item 1A. Risk Factors Highlights material adverse impacts of COVID-19 on business, including testing volumes, supply chain, and capital access - COVID-19 has caused a material decline in non-COVID testing volumes, supply chain disruptions, and challenges in commercializing Rayaldee and conducting clinical trials[336][337][338][339] - The pandemic could limit access to capital through bank facilities, lines of credit, or equity/debt issuances[340] - Regulatory submissions and approvals for products like hGH-CTP may be adversely impacted or delayed due to COVID-19[339] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered equity sales or use of proceeds to report - No unregistered sales of equity securities or use of proceeds to report[341] Item 3. Defaults Upon Senior Securities No defaults upon senior securities to report - No defaults upon senior securities to report[342] Item 4. Mine Safety Disclosures Not applicable - Not applicable[343] Item 5. Other Information No other information to report - No other information to report[344] Item 6. Exhibits Lists exhibits filed with Form 10-Q, including agreements and certifications - Includes amendments to Development and License Agreements (Exhibit 10.1, 10.2) and certifications by CEO and CFO (Exhibit 31.1, 31.2, 32.1, 32.2)[345] Signatures Report signed by Adam Logal, Senior Vice President and Chief Financial Officer, on July 31, 2020 - Report signed by Adam Logal, Senior Vice President and Chief Financial Officer, on July 31, 2020[350]