OPKO Health(OPK) - 2022 Q4 - Annual Report

Part I Business OPKO Health is a diversified healthcare company with Diagnostics and Pharmaceuticals segments, focusing on product development and international expansion Overview - OPKO is a diversified healthcare company with a diagnostics business (BioReference Laboratories) and a pharmaceutical business (Rayaldee®, Somatrogon)[20] - The diagnostics arm, BioReference, is one of the largest full-service laboratories in the U.S., offering a comprehensive test menu including the 4Kscore® prostate cancer test[20][21] - The pharmaceutical arm features Rayaldee® for SHPT in CKD patients and Somatrogon (NGENLA®), a once-weekly human growth hormone partnered with Pfizer, which has received marketing authorization in the EU, Japan, Canada, and Australia[20] - In May 2022, OPKO acquired ModeX Therapeutics to expand its pipeline with multi-specific immune therapies for cancer and infectious diseases[20] - The company operates in two reportable segments: diagnostics (BioReference clinical labs) and pharmaceuticals (operations in Chile, Mexico, Ireland, Israel, Spain, U.S., and global R&D)[30] Growth Strategy - Continue to enhance commercialization capability in the U.S. and internationally[30] - Obtain regulatory approval and compile clinical data for advanced product candidates[30] - Continue marketing Rayaldee and potentially expand its label to additional indications[30] - Support Pfizer's efforts to secure U.S. regulatory approval for Somatrogon (hGH-CTP)[30] - Leverage the acquisition of ModeX to expand the pharmaceutical product line with its MSTAR platform for multispecific antibodies[27] - Expand BioReference's core laboratory services and seek new strategic ventures with large healthcare groups[31] Current Products and Services - The company's business is divided into two main areas: Diagnostics and Pharmaceuticals[32][48] - Diagnostics are primarily driven by BioReference, one of the largest full-service labs in the U.S., offering routine and esoteric testing, and the 4Kscore test for prostate cancer[32][43] - The pharmaceutical portfolio includes the commercial product Rayaldee for kidney disease, and a pipeline of candidates including Somatrogon (hGH-CTP) for growth hormone deficiency, assets from the ModeX acquisition for oncology and infectious diseases, and other early-stage biologics and therapeutics[48][60][75] - The company also has international commercial operations in Europe and Latin America, and an API manufacturing subsidiary in Israel[88][92] Research and Development Expenses R&D Expense | Year | R&D Expense (in millions) | | :--- | :--- | | 2022 | $73.9 | | 2021 | $76.9 | | 2020 | $75.3 | - Research and development expenses primarily consisted of development programs for hGH-CTP and Rayaldee[99] Intellectual Property - The company employs a comprehensive intellectual property strategy, seeking protection through U.S. and foreign patents, trademarks, trade secrets, and contractual arrangements[100][101] - Rayaldee is protected by multiple U.S. patent families with expiration dates extending to at least 2034[103][104] - Somatrogon (hGH-CTP) is covered by multiple U.S. patent families, with some expiring in 2027/2028 and others, if granted, extending to 2033[105] - Patents for OPK88003 (oxyntomodulin) and OPK88004 (SARM) expire in December 2030 and November 2027, respectively, without extensions[106] Competition - The pharmaceutical and diagnostic testing industries are highly competitive, characterized by rapid technological advancements and a strong emphasis on proprietary products[110] - Competitors include major pharmaceutical companies, specialty pharma, biotech firms, and large reference laboratories like Quest Diagnostics and Laboratory Corporation of America, most of whom have substantially greater financial and operational resources[111][114] - Rayaldee competes with activated vitamin D analogs and vitamin D supplements[112] - Long-acting hGH-CTP faces competition from several companies developing sustained-release growth hormone products and existing generic daily hGH products[113] Government Regulation - The company's operations are subject to extensive regulation by U.S. federal, state, and local authorities, including the FDA and CMS, as well as similar agencies in other countries[116][117] - Clinical laboratory operations must comply with the Clinical Laboratory Improvement Amendments (CLIA), which mandate specific standards for quality, personnel, and inspections[118][119] - Drug development is a lengthy and costly process requiring preclinical studies and multi-phase clinical trials to establish safety and efficacy before FDA approval can be sought via a New Drug Application (NDA) or Biologics License Application (BLA)[121][122][123] - The company is subject to healthcare fraud and abuse laws, including the Anti-Kickback Statute, the Stark law, and the False Claims Act, which carry significant civil and criminal penalties for violations[146][148][150] - Privacy and security of patient information are governed by HIPAA and other regulations like GDPR in Europe, with substantial penalties for non-compliance[143][145] Human Capital Resources - As of December 31, 2022, the company had 4,196 full-time employees worldwide[160] - The company focuses on employee health and safety, complying with OSHA, CLIA, and College of American Pathologists requirements[161] - OPKO is committed to competitive pay, benefits, diversity, inclusion, and talent development, and has adopted a Code of Business Conduct and Ethics for all employees[162][163][165][166] Risk Factors The company faces risks from operating losses, R&D outcomes, regulatory hurdles, competition, and reliance on key personnel and third parties Risks Related to Our Business - The company has a history of operating losses and may not achieve profitability, especially as COVID-19 testing revenue declines[169] - Additional funding may be required but may not be available on acceptable terms, if at all[171][174] - The business is substantially dependent on the commercial success of its laboratory operations and key pharmaceutical products like Somatrogon (hGH-CTP), which has not yet received FDA approval in the U.S.[187][195] - The company faces intense competition from larger, better-resourced companies in the pharmaceutical and diagnostics industries[200] - Success is highly dependent on the involvement and reputation of Chairman and CEO, Phillip Frost, M.D.[219] - Failure to obtain and enforce patent protection for products could materially harm the business[243] Risks Related to Regulatory Compliance - Failure to maintain CLIA certification and comply with its requirements could lead to the suspension or revocation of the laboratory's ability to conduct business[268] - The regulatory approval process for drugs and devices is expensive, time-consuming, and uncertain, and may prevent the commercialization of product candidates[270] - The company is subject to complex healthcare laws (e.g., Anti-Kickback, Stark, False Claims Act), and failure to comply could result in significant penalties and exclusion from federal healthcare programs[280] - Changes in healthcare reimbursement policies, particularly from Medicare and Medicaid, could adversely affect the profitability of diagnostic services[294][298] - Failure to maintain the security of patient-related information under HIPAA and other privacy laws could damage reputation and result in substantial costs and litigation[282] Risks Related to International Operations - Marketing products abroad requires separate regulatory approvals in each jurisdiction, which is a complex and uncertain process[304] - Foreign governments often impose strict price controls, which may adversely affect future profitability[305] - Operations in Israel expose the company to potential political, economic, and military instability in the region[306] - A significant portion of revenue comes from international sales, subjecting the company to risks from currency exchange rate fluctuations[307] - The company is subject to the U.S. Foreign Corrupt Practices Act (FCPA), and violations could lead to severe penalties[310] Risks Related to Acquisitions and Investments - The company has a large amount of goodwill and other intangible assets ($1.6 billion at Dec 31, 2022) that are subject to periodic impairment evaluations, which could result in significant non-cash charges[317] - Underperformance of assets like Rayaldee or failure to gain U.S. approval for Somatrogon could trigger a material impairment charge[318][319] Risks Related to Ownership of Our Common Stock - The trading price of the company's common stock may fluctuate significantly due to various factors, including clinical trial results, regulatory developments, and market conditions[320] - As of February 15, 2023, directors, executive officers, and affiliates beneficially owned approximately 47.4% of voting securities, with Chairman and CEO Dr. Phillip Frost owning about 31.6%, concentrating significant control[321] - A historically significant short position in the stock (4.7% as of Jan 31, 2023) could create downward pressure and volatility in the stock price[323] - Failure to maintain effective internal controls could lead to a loss of investor confidence and a decline in stock price[325] Properties The company leases its corporate office in Miami and owns key manufacturing facilities in Mexico and Spain, with other significant properties leased globally Key Property Overview | Location | Purpose | Occupancy | | :--- | :--- | :--- | | Miami, FL | Corporate Headquarters | Leased | | Elmwood Park, NJ | Main Laboratory | Leased | | Guadalajara, Mexico | Pharmaceutical Manufacturing | Owned | | Banyoles, Spain | Pharmaceutical Manufacturing | Owned | | Waterford, Ireland | Pharmaceutical Manufacturing | Leased | | Nesher, Israel | API Manufacturing | Leased | Legal Proceedings The company is involved in significant legal matters, including a potential Texas Medicaid fraud violation and a ~$246 million Israeli tax assessment - In February 2023, the Texas Attorney General's Office alleged that BioReference may have violated the Texas Medicaid Fraud Prevention Act from 2005 to the present[333] - On December 29, 2022, the Israel Tax Authority issued a tax assessment of approximately $246 million (including interest) against OPKO Biologics for tax years 2014-2020, which the company is appealing[334] - The company is responding to a Civil Investigative Demand (CID) from the U.S. Department of Justice regarding potential violations of the False Claims Act and Anti-Kickback Statute, in which the government has declined to intervene but a private relator's complaint has been served[337] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities OPKO's stock (OPK) trades on NASDAQ and Tel Aviv, has not paid dividends, and has underperformed the S&P 500 and NASDAQ Biotechnology Index - The company's common stock is traded on the NASDAQ Stock Market and the Tel Aviv Stock Exchange under the symbol "OPK"[342] - As of February 15, 2023, there were approximately 374 holders of record of the Common Stock[343] - The company has not declared or paid any cash dividends on its Common Stock and does not anticipate doing so in fiscal 2023[343] Five-Year Stock Performance Comparison | Index | 12/31/2017 | 12/31/2022 | | :--- | :--- | :--- | | OPKO Health, Inc. | $100.00 | $25.50 | | S&P 500 | $100.00 | $156.80 | | NASDAQ Biotechnology | $100.00 | $129.50 | Management's Discussion and Analysis of Financial Condition and Results of Operations A 43% revenue decline in 2022 to $1.0 billion, driven by lower COVID-19 testing, resulted in a $226.3 million operating loss Results of Operations - The COVID-19 pandemic significantly impacted results, with high testing volumes boosting revenue in 2020 and 2021, followed by a sharp decline in 2022 as demand waned[353][354] Financial Performance Summary | (In thousands) | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Total revenues | $1,004,196 | $1,774,718 | (43)% | | Total costs and expenses | $1,230,449 | $1,755,968 | (30)% | | Income (loss) from operations | $(226,253) | $18,750 | (1307)% | - Diagnostics segment revenue decreased by 53% in 2022 to $755.6 million, primarily due to lower demand and reimbursement for COVID-19 testing[360] - Pharmaceuticals segment revenue increased by 48% in 2022 to $248.6 million, largely driven by $85.0 million in regulatory milestone payments from Pfizer for NGENLA® (Somatrogon)[371] - Net loss for 2022 was $328.4 million, compared to a net loss of $30.1 million in 2021, influenced by lower operating income and a $150.9 million expense from the decrease in fair value of the company's investment in GeneDx Holdings[383][517] Liquidity and Capital Resources - As of December 31, 2022, the company had cash and cash equivalents of $153.2 million[414] - Key cash inflows in 2022 included $115.4 million net proceeds from the sale of GeneDx and $85.0 million in milestone payments from Pfizer for NGENLA®[414][418] - The company has several convertible notes outstanding, including $142.1 million of 4.50% notes due 2025 and $55.0 million of 5% notes due 2023 (subsequently extended to 2025)[419][422][423] - As of December 31, 2022, the company had total credit line commitments of $63.2 million, with $31.8 million drawn; BioReference's secured revolving credit facility had $16.8 million available for borrowing[424][425] - Management believes that cash on hand and available credit are sufficient to meet cash requirements for operations and debt service beyond the next 12 months[429] Critical Accounting Policies and Estimates - Goodwill and Intangible Assets: Goodwill and indefinite-lived intangible assets are tested for impairment annually or when triggering events occur; this process requires significant judgment in estimating fair value, and impairment charges may occur if future results do not meet estimates, particularly for the diagnostics segment and the Somatrogon IPR&D asset[436][442] - Revenue Recognition: Revenue from laboratory services is recognized when test results are reported, net of variable consideration such as contractual allowances and implicit price concessions; revenue from product sales (e.g., Rayaldee) is recognized upon delivery, net of estimated rebates, chargebacks, and returns; revenue from intellectual property involves complex judgments on performance obligations, transaction price, and timing of recognition for upfront fees, milestones, and royalties[446][456][460] - Contingent Consideration: Obligations from prior acquisitions are revalued to fair value each period, with changes recorded in earnings; this requires significant judgment regarding the probability and timing of milestone achievements and the discount rates used[477][478] - Income Taxes: Deferred tax assets and liabilities are recognized for future tax consequences; a valuation allowance is established against deferred tax assets if it is more-likely-than-not that they will not be realized[474] Quantitative and Qualitative Disclosures about Market Risk The company is exposed to market risks from foreign currency exchange rates, primarily the Chilean Peso and Euro, and interest rate changes - The company is exposed to foreign currency exchange rate risk, primarily from the Chilean Peso and the Euro, as 21.6% of 2022 revenue was denominated in non-USD currencies[481][484] - To manage currency risk, the company uses foreign exchange forward contracts to hedge forecasted cash flows, particularly for inventory purchases[482] - Interest rate risk affects cash and investments, as well as variable-rate borrowings; the investment portfolio consists of short-term, low-risk instruments to minimize this risk[486] - As of December 31, 2022, the company had $31.8 million in variable-rate debt with a weighted average interest rate of approximately 5.5%; the upcoming phase-out of LIBOR presents uncertainty for this debt[487][488] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for FY2022, including the independent auditor's report from Ernst & Young LLP Report of Independent Registered Public Accounting Firm - Ernst & Young LLP issued an unqualified opinion on OPKO Health's consolidated financial statements for the year ended December 31, 2022, stating they are presented fairly in conformity with U.S. GAAP[495] - The firm also issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2022[496][505] - A Critical Audit Matter was identified concerning the estimation of variable consideration in determining revenue from services, due to the complexity and judgment required in evaluating factors like reimbursement regulations and collection experience[502] Consolidated Financial Statements Consolidated Balance Sheet Highlights (in thousands) | | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Assets | $2,167,259 | $2,399,715 | | Cash and cash equivalents | $153,191 | $134,710 | | Goodwill & Intangibles | $1,614,371 | $1,432,484 | | Total Liabilities | $605,611 | $714,589 | | Convertible notes | $213,421 | $187,935 | | Total Shareholders' Equity | $1,561,648 | $1,685,126 | Consolidated Statement of Operations Highlights (in thousands) | | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total revenues | $1,004,196 | $1,774,718 | $1,435,413 | | Operating income (loss) | $(226,253) | $18,750 | $57,714 | | Net income (loss) | $(328,405) | $(30,143) | $30,586 | | EPS (basic and diluted) | $(0.46) | $(0.05) | $0.05 | Consolidated Statement of Cash Flows Highlights (in thousands) | | 2022 | 2021 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(95,189) | $38,337 | | Net cash provided by investing activities | $91,038 | $35,949 | | Net cash provided by (used in) financing activities | $22,971 | $(10,350) | | Net increase in cash | $18,481 | $62,499 | Notes to Consolidated Financial Statements - In May 2022, OPKO acquired ModeX Therapeutics for a purchase price of $300 million, paid entirely in OPKO common stock; the acquisition added $195 million in IPR&D assets and $80.4 million in goodwill[532][593] - In April 2022, OPKO completed the sale of its subsidiary GeneDx to Sema4 (now GeneDx Holdings) for $150 million in cash and 80 million shares of GeneDx Holdings stock, recognizing a gain of $18.6 million[534][535][537] - The company adopted ASU 2020-06 on January 1, 2022, which simplified the accounting for convertible instruments; this resulted in an increase to the carrying value of the 2025 Convertible notes by $21.6 million and adjustments to retained earnings and additional paid-in capital[583][584] - As of Dec 31, 2022, the company had federal, state, and foreign net operating loss carryforwards of approximately $423.8 million, $774.5 million, and $83.8 million, respectively; a valuation allowance is maintained against deferred tax assets not expected to be realized[663] - In July 2022, the company and BioReference entered into a settlement agreement with the U.S. Department of Justice and other parties, agreeing to pay approximately $10 million to resolve allegations related to certain overpayments for office space rentals that occurred prior to OPKO's acquisition of BioReference[696][697] Controls and Procedures Management and the independent auditor concluded that the company's disclosure controls, procedures, and internal control over financial reporting were effective - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[787] - Based on an evaluation using the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2022[789] - The independent registered public accounting firm, Ernst & Young LLP, audited and provided an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2022[790] - No changes to the company's internal control over financial reporting occurred during the fourth quarter of 2022 that materially affected, or are reasonably likely to materially affect, these controls[791] Part III Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, and Principal Accounting Fees Required information for Items 10-14 is incorporated by reference from the company's 2023 definitive proxy statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the registrant's definitive proxy statement for its 2023 Annual Meeting of Stockholders[8][796] Part IV Exhibits, Financial Statement Schedules This section lists all exhibits filed with the Form 10-K, including material contracts, debt indentures, and executive certifications - This section contains the index to financial statements, financial statement schedules, and a comprehensive list of exhibits filed with the report[799][800] - Key exhibits listed include the Agreement and Plan of Merger with ModeX Therapeutics, Inc., the Amended and Restated Development and Commercialization License Agreement with Pfizer, and various debt-related indentures and credit agreements[801][802][803] - Certifications by the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are included as exhibits[804]