10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on August 3, 2023
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number
OPKO Health, Inc.
(Exact Name of Registrant as Specified in Its Charter)
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(I.R.S. Employer |
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Securities registered pursuant to Section 12(b) of the Act:
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Trading Symbol |
Name of each exchange on which registered |
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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
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Accelerated filer |
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| Non-accelerated filer |
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Smaller reporting company |
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| Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
As of July 27, 2023, the registrant had
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements,” as that term is defined under the Private Securities Litigation Reform Act of 1995 (“PSLRA”), Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include statements about our expectations, beliefs or intentions regarding our product development efforts, business, financial condition, results of operations, strategies or prospects, operating results, cash flows and/or financial condition. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results as of the date they are made. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described below and in “Item 1A-Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022, and described from time to time in our other filings with the Securities and Exchange Commission (the “SEC”). We do not undertake any obligation to update forward-looking statements, except to the extent required by applicable law. We intend that all forward-looking statements be subject to the safe-harbor provisions of the PSLRA. These forward-looking statements are only predictions and reflect our views as of the date they are made with respect to future events and financial performance.
Risks and uncertainties, the occurrence of which could adversely affect our business, include the following:
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we have had a history of losses and may not generate sustained positive cash flow sufficient to fund our operations and research and development programs; |
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our need for, and ability to obtain, additional financing when needed on favorable terms, or at all; |
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adverse results in material litigation matters or governmental inquiries; |
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the risks inherent in developing, obtaining regulatory approvals for and commercializing new, commercially viable and competitive products and treatments; |
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our research and development activities may not result in commercially viable products; |
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that earlier clinical results of effectiveness and safety may not be reproducible or indicative of future results; |
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that we may fail to successfully commercialize Somatrogon (hGH-CTP); |
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that we may not generate or sustain profits or cash flow from our laboratory operations or substantial revenue from Somatrogon (hGH-CTP), Rayaldee and our other pharmaceutical and diagnostic products; |
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our ability to manage our growth and our expanded operations; |
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that our acquisition of ModeX Therapeutics, Inc. will be successful and the products in the R&D pipeline will ultimately be commercialized; |
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that currently available over-the-counter and prescription products, as well as products under development by others, may prove to be as or more effective than our products for the indications being studied; |
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our ability and our distribution and marketing partners’ ability to comply with regulatory requirements regarding the sales, marketing and manufacturing of our products and product candidates and the operation of our laboratories; |
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the performance of our third-party distribution partners, licensees and manufacturers over which we have limited control; |
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changes in regulation and policies in the U.S. and other countries, including increasing downward pressure on healthcare reimbursement; |
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increased competition, including price competition; |
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our success is dependent on the involvement and continued efforts of our Chairman and Chief Executive Officer; |
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integration challenges for acquired business; |
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changing relationships with payors, including the various state and multi-state programs, suppliers and strategic partners; |
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efforts by third-party payors to reduce utilization and reimbursement for clinical testing services; |
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our ability to maintain reimbursement coverage for our products and services, including Rayaldee and the 4Kscore test; |
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failure to timely or accurately bill and collect for our services; |
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the information technology systems that we rely on may be subject to unauthorized tampering, cyberattack or other data security or privacy incidents that could impact our billing processes or disrupt our operations; |
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failure to obtain and retain new clients and business partners, or a reduction in tests ordered or specimens submitted by existing clients; |
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failure to establish, and perform to, appropriate quality standards to assure that the highest level of quality is observed in the performance of our testing services; |
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failure to maintain the security of patient-related information; |
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our ability to obtain and maintain intellectual property protection for our products; |
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our ability to defend our intellectual property rights with respect to our products; |
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our ability to operate our business without infringing the intellectual property rights of others; |
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our ability to attract and retain key scientific and management personnel; |
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the risk that the carrying value of certain assets may exceed the fair value of the assets causing us to impair goodwill or other intangible assets; |
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our ability to comply with the terms of our 2022 Corporate Integrity Agreement with the U.S. Office of Inspector General of the Department of Health and Human Services; |
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failure to obtain and maintain regulatory approval outside the U.S.; and |
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legal, economic, political, regulatory, currency exchange, and other risks associated with international operations. |
Unless the context otherwise requires, all references in this Quarterly Report on Form 10-Q to the “Company”, “OPKO”, “we”, “our”, “ours”, and “us” refer to OPKO Health, Inc., a Delaware corporation, including our consolidated subsidiaries.
Item 1. Financial Statements
The accompanying unaudited Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
OPKO Health, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share data)
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| ASSETS |
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| Current assets: |
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| Cash and cash equivalents |
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| Accounts receivable, net |
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| Inventory, net |
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| Other current assets and prepaid expenses |
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| Total current assets |
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| Property, plant and equipment, net |
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| Intangible assets, net |
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| In-process research and development |
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| Goodwill |
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| Investments |
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| Operating lease right-of-use assets |
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| Other assets |
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| Total assets |
$ | $ | ||||||
| LIABILITIES AND EQUITY |
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| Current liabilities: |
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| Accounts payable |
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| Accrued expenses |
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| Current maturities of operating leases |
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| Current portion of convertible notes |
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| Current portion of lines of credit and notes payable |
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| Total current liabilities |
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| Operating lease liabilities |
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| Long term portion of convertible notes |
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| Deferred tax liabilities |
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| Other long-term liabilities, principally contract liabilities, contingent consideration and lines of credit |
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| Total long-term liabilities |
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| Total liabilities |
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| Equity: |
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| Common Stock - $ par value, shares authorized; and shares issued at June 30, 2023 and December 31, 2022, respectively |
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| Treasury Stock - shares at June 30, 2023 and December 31, 2022, respectively |
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| Additional paid-in capital |
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| Accumulated other comprehensive loss |
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| Accumulated deficit |
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| Total shareholders’ equity |
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| Total liabilities and equity |
$ | $ | ||||||
The accompanying unaudited Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
OPKO Health, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share data)
| For the three months ended June 30, |
For the six months ended June 30, |
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| 2023 |
2022 |
2023 |
2022 |
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| Revenues: |
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| Revenue from services |
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| Revenue from products |
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| Revenue from transfer of intellectual property and other |
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| Total revenues |
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| Costs and expenses: |
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| Cost of service revenue |
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| Cost of product revenue |
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| Selling, general and administrative |
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| Research and development |
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| Contingent consideration |
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| Amortization of intangible assets |
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| Gain on sale of assets |
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| Total costs and expenses |
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| Operating income (loss) |
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| Other income and (expense), net: |
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| Interest income |
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| Interest expense |
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| Fair value changes of derivative instruments, net |
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| Other income (expense), net |
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| Other income (expense), net |
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| Loss before income taxes and investment losses |
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| Income tax benefit (provision) |
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| Net loss before investment losses |
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| Loss from investments in investees |
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| Net loss |
$ | ( |
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| Loss per share, basic and diluted: |
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| Loss per share |
$ | ( |
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| Weighted average common shares outstanding, basic and diluted |
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The accompanying unaudited Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
OPKO Health, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(In thousands)
| For the three months ended June 30, |
For the six months ended June 30, |
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| 2023 |
2022 |
2023 |
2022 |
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| Net loss |
$ | ( |
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| Other comprehensive income (loss), net of tax: |
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| Change in foreign currency translation and other comprehensive income (loss) |
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| Comprehensive loss |
$ | ( |
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) | $ | ( |
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The accompanying unaudited Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(In thousands, except share data)
For the three and six months ended June 30, 2023
| Accumulated |
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| Additional |
Other |
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| Common Stock |
Treasury |
Paid-In |
Comprehensive |
Accumulated |
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| Shares |
Dollars |
Shares |
Dollars |
Capital |
Loss |
Deficit |
Total |
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| Balance at March 31, 2023 |
$ | ( |
) | $ | ( |
) | $ | $ | ( |
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| Equity-based compensation expense |
— | — | ||||||||||||||||||||||||||||||
| Exercise of common stock options and warrants |
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| Net loss |
— | — | ( |
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| Other comprehensive income |
— | — | ||||||||||||||||||||||||||||||
| Balance at June 30, 2023 |
$ | ( |
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) | $ | $ | ( |
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| Accumulated |
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| Additional |
Other |
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| Common Stock |
Treasury |
Paid-In |
Comprehensive |
Accumulated |
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| Shares |
Dollars |
Shares |
Dollars |
Capital |
Loss |
Deficit |
Total |
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| Balance at December 31, 2022 |
$ | ( |
) | $ | ( |
) | $ | $ | ( |
) | $ | ( |
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| Equity-based compensation expense |
— | — | ||||||||||||||||||||||||||||||
| Exercise of common stock options and warrants |
( |
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| Net loss |
— | — | ( |
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| Other comprehensive income |
— | — | ||||||||||||||||||||||||||||||
| Balance at June 30, 2023 |
$ | ( |
) | $ | ( |
) | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
The accompanying unaudited Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(In thousands, except share data)
For the three and six months ended June 30, 2022
| Accumulated |
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| Additional |
Other |
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| Common Stock |
Treasury |
Paid-In |
Comprehensive |
Accumulated |
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| Shares |
Dollars |
Shares |
Dollars |
Capital |
Loss |
Deficit |
Total |
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| Balance at March 31, 2022 |
$ | ( |
) | $ | ( |
) | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
| Equity-based compensation expense |
— | — | ||||||||||||||||||||||||||||||
| Exercise of common stock options and warrants |
( |
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| ModeX Acquisition |
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| Net loss |
— | — | ( |
) | ( |
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| Other comprehensive loss |
— | — | ( |
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| Balance at June 30, 2022 |
$ | ( |
) | $ | ( |
) | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
| Accumulated |
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| Additional |
Other |
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| Common Stock |
Treasury |
Paid-In |
Comprehensive |
Accumulated |
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| Shares |
Dollars |
Shares |
Dollars |
Capital |
Loss |
Deficit |
Total |
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| Balance at December 31, 2021 |
$ | ( |
) | $ | ( |
) | $ | $ | ( |
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| Equity-based compensation expense |
— | — | ||||||||||||||||||||||||||||||
| Exercise of common stock options and warrants |
602,087 | — | ( |
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| Adoption of ASU 2020-06 |
( |
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| ModeX Acquisition |
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| Net loss |
— | — | ( |
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| Other comprehensive loss |
— | — | ( |
) | ( |
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| Balance at June 30, 2022 |
$ | ( |
) | $ | ( |
) | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
The accompanying unaudited Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
OPKO Health, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| For the six months ended June 30, |
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| 2023 |
2022 |
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| Cash flows from operating activities: |
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| Net loss |
$ | ( |
) | $ | ( |
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| Adjustments to reconcile net loss to net cash used in operating activities: |
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| Depreciation and amortization |
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| Non-cash interest |
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| Amortization of deferred financing costs |
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| Losses from investments in investees |
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| Equity-based compensation – employees and non-employees |
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| Realized loss on disposal of fixed assets and sales of equity securities |
( |
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| Change in fair value of equity securities and derivative instruments |
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| Change in fair value of contingent consideration |
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| Gain on sale of GeneDx |
( |
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| Deferred income tax benefit |
( |
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| Changes in assets and liabilities: |
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| Accounts receivable, net |
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| Inventory, net |
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| Other current assets and prepaid expenses |
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| Other assets |
( |
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| Accounts payable |
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| Foreign currency measurement |
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| Contract liabilities |
( |
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| Accrued expenses and other liabilities |
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| Net cash used in operating activities |
( |
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| Cash flows from investing activities: |
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| Investments in investees |
( |
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| Proceeds from sale of GeneDx |
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| Acquisition of businesses, net of cash |
( |
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| Proceeds from the sale of property, plant and equipment |
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| Capital expenditures |
( |
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| Net cash provided by (used in) investing activities |
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| Cash flows from financing activities: |
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| Issuance of common stock |
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| Proceeds from the exercise of common stock options |
( |
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| Borrowings on lines of credit |
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| Repayments of lines of credit |
( |
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| Redemption of 2033 Senior Notes |
( |
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| Net cash provided by (used in) financing activities |
( |
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| Effect of exchange rate changes on cash and cash equivalents |
( |
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| Net increase (decrease) in cash and cash equivalents |
( |
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| Cash and cash equivalents at beginning of period |
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| Cash and cash equivalents at end of period |
$ | $ | ||||||
| SUPPLEMENTAL INFORMATION: |
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| Interest paid |
$ | $ | ||||||
| Income taxes paid, net of refunds |
$ | $ | ||||||
| Assets acquired by finance leases |
$ | $ | ||||||
| Non-cash financing: |
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| Shares issued upon the conversion of: |
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| Common stock options and warrants, surrendered in net exercise |
$ | $ | ||||||
| Issuance of common stock for acquisition of ModeX |
$ | $ | ||||||
| Fair value of shares included in consideration from GeneDx Holdings |
$ | $ | ||||||
The accompanying unaudited Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
OPKO Health, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1 BUSINESS AND ORGANIZATION
We are a diversified healthcare company that seeks to establish industry-leading positions in large and rapidly growing medical markets. Our diagnostics business includes BioReference Health, LLC (“BioReference”), one of the nation’s largest full service laboratories with a 180-person sales and marketing team to drive growth and leverage new products, and we offer our 4Kscore prostate cancer test through BioReference. Our pharmaceutical business features Rayaldee, a U.S. Food and Drug Administration (“FDA”) approved treatment for secondary hyperparathyroidism (“SHPT”) in adults with stage 3 or 4 chronic kidney disease (“CKD”) and vitamin D insufficiency, and Somatrogon (hGH-CTP), a once-weekly human growth hormone injection for which we completed a successful phase 3 study in August 2019 and partnered with Pfizer Inc. (“Pfizer”) with respect to Somatrogon (hGH-CTP)’s further development. Regulatory applications for Somatrogon (hGH-CTP) have been submitted to the applicable regulatory bodies for review in several countries around the world. In June 2023, the FDA approved NGENLA (Somatrogon) to treat children and adolescents from as young as three years of age with growth disturbance due to insufficient secretion of growth hormone. In February 2022, the European Commission granted marketing authorization in the European Union for Somatrogon (hGH-CTP) under the brand name NGENLA® and has been granted pricing approval in Germany. NGENLA® has been approved in more than 40 markets including the United States, EU Member States, Japan, Canada, and Australia. In May 2022, we acquired ModeX Therapeutics, Inc. (“ModeX”), a biotechnology company focused on developing innovative multi-specific immune therapies for cancer and infectious disease candidates. ModeX has a robust early-stage pipeline with assets in key areas of immuno-oncology and infectious diseases, and we intend to further expand our pharmaceutical product pipeline through ModeX’s portfolio of development candidates.
Through BioReference, we provide laboratory testing services, primarily to customers in the larger metropolitan areas in New York, New Jersey, Florida, Texas, Maryland, California, Pennsylvania, Delaware, Washington, DC, Illinois and Massachusetts, as well as to customers in a number of other states. We offer a comprehensive test menu of clinical diagnostics for blood, urine and tissue analysis. This includes hematology, clinical chemistry, immunoassay, infectious disease, serology, hormones, and toxicology assays, as well as Pap smear, anatomic pathology (biopsies) and other types of tissue analysis, as well as testing for COVID-19. We market our laboratory testing services directly to physicians, geneticists, hospitals, clinics, correctional and other health facilities.
We operate established pharmaceutical platforms in Spain, Ireland, Chile, and Mexico, which are generating revenue and from which we expect to generate positive cash flow and facilitate future market entry for our products currently in development. We have a development and commercial supply pharmaceutical company as well as a global supply chain operation. We also own a specialty active pharmaceutical ingredients (“APIs”) manufacturer in Israel, which we expect will facilitate the development of our pipeline of molecules and compounds for our proprietary molecular diagnostic and therapeutic products.
Our research and development activities are primarily performed at facilities in Natick, Massachusetts, Waterford, Ireland, Kiryat Gat, Israel, and Barcelona, Spain.
On May 9, 2022 (the “Closing Date”), the Company entered into an Agreement and Plan of Merger (the “ModeX Merger Agreement”), in accordance with which we acquired ModeX pursuant to a merger (the "ModeX Merger") in which ModeX survived as a wholly owned subsidiary of the Company. The Company paid the entirety of the $
On January 14, 2022, the Company entered into an Agreement and Plan of Merger and Reorganization (the “GeneDx Merger Agreement”) with GeneDx Holdings Corp. (f/k/a “Sema4 Holdings Corp.”), a Delaware corporation (“GeneDx Holdings”), pursuant to which GeneDx Holdings acquired the Company’s former subsidiary, GeneDx LLC, (f/k/a GeneDx, Inc. “GeneDx”), in a transaction (the “GeneDx Transaction”) that closed on April 29, 2022.
At closing, GeneDx Holdings paid to the Company aggregate consideration of $
In connection with the transactions contemplated by the GeneDx Merger Agreement, on January 14, 2022, the Company entered into a Shareholder Agreement (the “GeneDx Holdings Shareholder Agreement”) with GeneDx Holdings, pursuant to which the Company agreed to, among other things, be subject to a lock-up period with respect to its shares of GeneDx Holdings Common Stock, which expired on April 29, 2023 with respect to the Closing Shares, extends for year with respect to the shares of Class A Common Stock received as Milestone Consideration for the year ended December 31, 2022, and, if earned and received, would extend for six-months from the date of issuance of the second potential Milestone Consideration payments.
Pursuant to the GeneDx Merger Agreement, the Company designated, and GeneDx Holdings nominated for election an individual to serve on the board of directors of GeneDx Holdings, and such nominee was elected by GeneDx Holdings’ stockholders to serve as a director at least until GeneDx Holdings’ 2024 annual meeting of stockholders. In addition, the Company has further agreed to certain standstill provisions whereby, subject to certain exceptions, it is obligated to refrain from taking certain actions with respect to the GeneDx Holdings Common Stock. The Company has also agreed to vote its shares of GeneDx Holdings Common Stock in accordance with the recommendations of GeneDx Holdings’s board of directors for so long as it continues to hold at least
NOTE 2 FOREIGN EXCHANGE RATES
Foreign Currency Exchange Rates
Approximately
We are subject to foreign currency transaction risk for fluctuations in exchange rates during the period of time between the consummation and cash settlement of transactions. We seek to limit foreign currency transaction risk through hedge transactions with foreign currency forward contracts. Under these forward contracts, for any rate above or below the fixed rate, we receive or pay the difference between the spot rate and the fixed rate for the given amount at the settlement date. At June 30, 2023, we had
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation. The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring adjustments or adjustments otherwise disclosed herein) considered necessary to present fairly the Company’s results of operations, financial position and cash flows have been made. The results of operations and cash flows for the six months ended June 30, 2023 are not necessarily indicative of the results of operations and cash flows that may be reported for the remainder of 2023 or any other future periods. The unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2022.
Principles of consolidation. The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of OPKO Health, Inc. and our wholly-owned subsidiaries. All intercompany accounts and transactions are eliminated in consolidation.
Use of estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from these estimates.
Cash and cash equivalents. Cash and cash equivalents include short-term, interest-bearing instruments with original maturities of 90 days or less at the date of purchase. We also consider all highly liquid investments with original maturities at the date of purchase of 90 days or less as cash equivalents. These investments include money markets, bank deposits, certificates of deposit and U.S. treasury securities.
Inventories. Inventories are valued at the lower of cost and net realizable value. Cost is determined by the first-in, first-out method. We consider such factors as the amount of inventory on hand, estimated time required to sell such inventories, remaining shelf-life, and current market conditions to determine whether inventories are stated at the lower of cost and net realizable value. Inventories at our diagnostics segment consist primarily of purchased laboratory supplies, which are used in our testing laboratories. Inventory obsolescence expense for the three and six months ended June 30, 2023, was $
Goodwill and intangible assets. Goodwill represents the difference between the purchase price and the estimated fair value of the net assets acquired accounted for by the acquisition method of accounting. Refer to Note 5. Goodwill, in-process research and development (“IPR&D”) and other intangible assets acquired in business combinations, licensing and other transactions was $
Assets acquired and liabilities assumed in business combinations, licensing and other transactions are generally recognized at the date of acquisition at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recognized as goodwill. At acquisition, we generally determine the fair value of intangible assets, including IPR&D, using the “income method.”
Subsequent to their acquisition, goodwill and indefinite lived intangible assets are tested at least annually as of October 1 for impairment, or when events or changes in circumstances indicate it is more likely than not that the carrying amount of such assets may not be recoverable.
Estimating the fair value of a reporting unit for goodwill impairment is highly sensitive to changes in projections and assumptions and changes in assumptions could potentially lead to impairment. We perform sensitivity analyses around our assumptions in order to assess the reasonableness of the assumptions and the results of our testing. Ultimately, potential changes in these assumptions may impact the estimated fair value of a reporting unit and result in an impairment if the fair value of such reporting unit is less than its carrying value. Goodwill was $
Net intangible assets other than goodwill was $
Upon obtaining regulatory approval, IPR&D assets are then accounted for as a finite-lived intangible asset and amortized on a straight-line basis over its estimated useful life. If the project is abandoned, the IPR&D asset is charged to expense. Finite lived intangible assets are tested for impairment when events or changes in circumstances indicate it is more likely than not that the carrying amount of such assets may not be recoverable. The testing includes a comparison of the carrying amount of the asset to its estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, then an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. We believe that our estimates and assumptions in testing goodwill and other intangible assets, including IPR&D, for impairment are reasonable and otherwise consistent with assumptions that marketplace participants would use in their estimates of fair value. Based on the current financial performance of our diagnostic segment, if future results are not consistent with our estimates and assumptions, then we may be exposed to impairment charges, which could be material.
During the first quarter of 2022, we reclassified $
We amortize intangible assets with definite lives on a straight-line basis over their estimated useful lives, ranging from
Fair value measurements. The carrying amounts of our cash and cash equivalents, accounts receivable, accounts payable and short-term debt approximate their fair value due to the short-term maturities of these instruments. Investments that are considered equity securities as of June 30, 2023 and December 31, 2022 are predominately carried at fair value. Our debt under the Credit Agreement (as defined below) approximates fair value due to the variable rate of interest applicable to such debt.
In evaluating the fair value information, considerable judgment is required to interpret the market data used to develop the estimates. The use of different market assumptions and/or different valuation techniques may have a material effect on the estimated fair value amounts. Accordingly, the estimates of fair value presented herein may not be indicative of the amounts that could be realized in a current market exchange. Refer to Note 9.
Contingent consideration. Each period we revalue the contingent consideration obligations associated with applicable acquisitions to their respective fair values and record increases in fair value as contingent consideration expense and decreases in fair value as a reduction in contingent consideration expense. Changes in contingent consideration result from changes in the assumptions regarding probabilities of successful achievement of related milestones, the estimated timing in which the milestones are achieved and the discount rate used to estimate the fair value of the liability. Contingent consideration may change significantly as our development programs progress, revenue estimates evolve and additional data is obtained, impacting our assumptions. The assumptions used in estimating fair value require significant judgment. The use of different assumptions and judgments could result in a materially different estimate of fair value which may have a material impact on our results from operations and financial position.
Derivative financial instruments. We record derivative financial instruments on our Condensed Consolidated Balance Sheet at their fair value and recognize the changes in the fair value in our Condensed Consolidated Statement of Operations when they occur, the only exception being derivatives that qualify as hedges. For the derivative instrument to qualify as a hedge, we are required to meet strict hedge effectiveness and contemporaneous documentation requirements at the initiation of the hedge and assess the hedge effectiveness on an ongoing basis over the life of the hedge. At June 30, 2023 and December 31, 2022, our foreign currency forward contracts held to economically hedge inventory purchases did not meet the documentation requirements to be designated as hedges. Accordingly, we recognized all changes in the fair values of our derivatives instruments, net, in our Condensed Consolidated Statement of Operations. Refer to Note 10.
Property, plant and equipment. Property, plant and equipment are recorded at cost or fair value if acquired in a business combination. Depreciation is provided using the straight-line method over the estimated useful lives of the assets and includes amortization expense for assets capitalized under finance leases. The estimated useful lives by asset class are as follows: software -
Impairment of long-lived assets. Long-lived assets, such as property and equipment and assets held for sale, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, then an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset.
Income taxes. Income taxes are accounted for under the asset-and-liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. We periodically evaluate the realizability of our net deferred tax assets. Our tax accruals are analyzed periodically and adjustments are made as events occur to warrant such adjustment. Valuation allowances on certain U.S. deferred tax assets and non-U.S. deferred tax assets are established, because realization of these tax benefits through future taxable income does not meet the more-likely-than-not threshold.
We operate in various countries and tax jurisdictions globally. For interim reporting purposes, we record income taxes based on the expected effective income tax rate, taking into consideration year to date and global forecasted tax results. For the six months ended June 30, 2023, the tax rate differed from the U.S. federal statutory rate of
Included in Other long-term liabilities is an accrual of $
Revenue recognition. We recognize revenue when a customer obtains control of promised goods or services in accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“Topic 606”). The amount of revenue that is recorded reflects the consideration that we expect to receive in exchange for those goods or services. We apply the following five-step model in order to determine this amount: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation.
We apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, we review the contract to determine which performance obligations we must deliver and which of these performance obligations are distinct. We recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when the performance obligation is satisfied or as it is satisfied. For a complete discussion of accounting for Revenues from services, Revenues from products and Revenue from transfer of intellectual property and other, refer to Note 13.
Concentration of credit risk and allowance for credit losses. Financial instruments that potentially subject us to concentrations of credit risk consist primarily of accounts receivable. Substantially all of our accounts receivable are with either companies in the healthcare industry or patients. However, credit risk is limited due to the number of our clients as well as their dispersion across many different geographic regions.
While we have receivables due from federal and state governmental agencies, such receivables are not a credit risk because federal and state governments fund the related healthcare programs. Payment is primarily dependent upon submitting appropriate documentation. On June 30, 2023 and December 31, 2022, receivable balances (net of explicit and implicit price concessions) from Medicare and Medicaid were
The portion of our accounts receivable due from individual patients comprises the largest portion of credit risk. At June 30, 2023 and December 31, 2022, receivables due from patients represented approximately
We assess the collectability of accounts receivable balances by considering factors such as historical collection experience, customer credit worthiness, the age of accounts receivable balances, regulatory changes and current economic conditions and trends that may affect a customer’s ability to pay. Actual results could differ from those estimates. The allowance for credit losses was $
Equity-based compensation. We measure the cost of services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized in the Condensed Consolidated Statement of Operations over the period during which an employee is required to provide service in exchange for the award. We record excess tax benefits realized from the exercise of stock options as cash flows from operations. For the three and six months ended June 30, 2023, we recorded $
Research and development expenses. Research and development expenses include external and internal expenses. External expenses include clinical and non-clinical activities performed by contract research organizations, lab services, purchases of drug and diagnostic product materials and manufacturing development costs. Research and development employee-related expenses include salaries, benefits and equity-based compensation expense. Other internal research and development expenses are incurred to support overall research and development activities and include expenses related to general overhead and facilities. We expense these costs in the period in which they are incurred. We estimate our liabilities for research and development expenses in order to match the recognition of expenses to the period in which the actual services are received. As such, accrued liabilities related to third party research and development activities are recognized based upon our estimate of services received and degree of completion of the services in accordance with the specific third party contract.
Research and development expense includes costs for in-process research and development projects acquired in asset acquisitions which have not reached technological feasibility, and which have no alternative future use. For in-process research and development projects acquired in business combinations, the in-process research and development project is capitalized and evaluated for impairment until the development process has been completed. Once the development process has been completed the asset will be amortized over its remaining estimated useful life.
Segment reporting. Our chief operating decision-maker is Phillip Frost, M.D., our Chairman and Chief Executive Officer. Dr. Frost reviews our operating results and operating plans and makes resource allocation decisions on a Company-wide or aggregate basis. We manage our operations in reportable segments, pharmaceutical and diagnostics. The pharmaceutical segment consists of our pharmaceutical operations in Chile, Mexico, Ireland, Israel and Spain, Rayaldee product sales and our pharmaceutical research and development. The diagnostics segment primarily consists of clinical laboratory operations through BioReference. There are no significant inter-segment sales. We evaluate the performance of each segment based on operating profit or loss. There is no inter-segment allocation of interest expense or income taxes. Refer to Note 15.
Shipping and handling costs. We do not charge customers for shipping and handling costs. Shipping and handling costs are classified as Cost of revenues in the Condensed Consolidated Statement of Operations.
Foreign currency translation. The financial statements of certain of our foreign operations use the local currency as the functional currency. The local currency assets and liabilities are generally translated at the rate of exchange to the U.S. dollar on the balance sheet date. The local currency revenues and expenses are translated at average rates of exchange to the U.S. dollar during the reporting periods. Foreign currency transaction gains (losses) have been reflected as a component of Other income (expense), net within the Condensed Consolidated Statement of Operations and foreign currency translation gains (losses) have been included as a component of the Condensed Consolidated Statement of Comprehensive Income (Loss). During the three and six months ended June 30, 2023, we recorded $
Variable interest entities. The consolidation of a variable interest entity (“VIE”) is required when an enterprise has a controlling financial interest. A controlling financial interest in a VIE will have both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE. Refer to Note 6.
Investments. We have made strategic investments in development stage and emerging companies. We record these investments as equity method investments or as equity securities based on our percentage of ownership and whether we have significant influence over the operations of the investees. For investments classified under the equity method of accounting, we record our proportionate share of their losses in Losses from investments in investees in our Condensed Consolidated Statement of Operations. Refer to Note 6. For investments classified as equity securities, we record changes in their fair value as Other income (expense) in our Condensed Consolidated Statement of Operations based on their closing price per share at the end of each reporting period, unless the equity security does not have a readily determinable fair value. Refer to Note 6.
Recently adopted accounting pronouncements.
In August 2020, the FASB issued ASU No. 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40).” ASU 2020-06 simplifies the accounting for convertible instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred stock. The ASU is effective for public entities for fiscal years beginning after December 15, 2021, with early adoption permitted. As required, we adopted ASU 2020-06 on January 1, 2022 and used the modified retrospective approach for all convertible debt instruments at the beginning of the period of adoptions. Results for reporting periods beginning January 1, 2022 are presented under ASU 2020-06, while prior period amounts were not adjusted and continue to be reported in accordance with historic accounting guidance.
Under the modified approach, entities will apply the guidance to all financial instruments that are outstanding as of the beginning of the year of adoption with the cumulative effect recognized as an adjustment to the opening balance of retained earnings. ASU 2020-06 eliminates the cash conversion and beneficial conversion feature models in ASC 470-20 that require an issuer of certain convertible debt and preferred stock to separately account for embedded conversion features as a component of equity. The adoption of ASU 2020-06 at January 1, 2022 resulted in an increase of the Convertible notes of $
NOTE 4 EARNINGS (LOSS) PER SHARE
Basic income (loss) per share is computed by dividing our net income (loss) by the weighted average number of shares of our Common Stock outstanding during the period. Shares of Common Stock outstanding under the share lending arrangement entered into in conjunction with the 2025 Notes (as defined in Note 7) are excluded from the calculation of basic and diluted earnings per share because the borrower of the shares is required under the share lending arrangement to refund any dividends paid on the shares lent. Refer to Note 7. For diluted earnings per share, the dilutive impact of stock options and warrants is determined by applying the “treasury stock” method. The dilutive impact of the 2033 Senior Notes, the 2023 Convertible Notes and the 2025 Notes (each, as defined and discussed in Note 7) has been considered using the “if converted” method. For periods in which their effect would be antidilutive, no effect is given to Common Stock issuable under outstanding options or warrants or the potentially dilutive shares issuable pursuant to the 2033 Senior Notes, the 2023 Convertible Notes and the 2025 Notes in the dilutive computation.
A total of
During the three months ended June 30, 2023,
During the six months ended June 30, 2023,
During the three months ended June 30, 2022, an aggregate of
During the six months ended June 30, 2022, an aggregate of
NOTE 5 COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
| June 30, |
December 31, |
|||||||
| (In thousands) |
2023 |
2022 |
||||||
| Accounts receivable, net: |
||||||||
| Accounts receivable |
$ | $ | ||||||
| Less: allowance for credit losses |
( |
) | ( |
) | ||||
| $ | $ | |||||||
| Inventories, net: |
||||||||
| Consumable supplies |
$ | $ | ||||||
| Finished products |
||||||||
| Work in-process |
||||||||
| Raw materials |
||||||||
| Less: inventory reserve |
( |
) | ( |
) | ||||
| $ | $ | |||||||
| Other current assets and prepaid expenses: |
||||||||
| Taxes recoverable |
$ | $ | ||||||
| Prepaid expenses |
||||||||
| Prepaid insurance |
||||||||
| Other receivables |
||||||||
| Other |
||||||||
| $ | $ | |||||||
| Intangible assets, net: |
||||||||
| Customer relationships |
$ | $ | ||||||
| Technologies |
||||||||
| Trade names |
||||||||
| Covenants not to compete |
||||||||
| Licenses |
||||||||
| Product registrations |
||||||||
| Other |
||||||||
| Less: accumulated amortization |
( |
) | ( |
) | ||||
| $ | $ | |||||||
| Accrued expenses: |
||||||||
| Inventory received but not invoiced |
$ | $ | ||||||
| Commitments and contingencies |
||||||||
| Employee benefits |
||||||||
| Clinical trials |
||||||||
| Contingent consideration |
||||||||
| Finance leases short-term |
||||||||
| Professional fees |
||||||||
| Other |
||||||||
| $ | $ | |||||||
| Other long-term liabilities: |
||||||||
| Contingent consideration |
$ | $ | ||||||
| Mortgages and other debts payable |
||||||||
| Finance leases long-term |
||||||||
| Contract liabilities |
||||||||
| Other |
||||||||
| $ | $ | |||||||
Our intangible assets and goodwill relate principally to our completed acquisitions of OPKO Renal, OPKO Biologics, EirGen, BioReference and ModeX. We amortize intangible assets with definite lives on a straight-line basis over their estimated useful lives. The estimated useful lives by asset class are as follows: technologies -
In the first quarter of 2022, we reclassified $
The following table summarizes the changes in Goodwill by reporting unit during the six months ended June 30, 2023.
| 2023 |
||||||||||||||||||||
| (In thousands) |
Gross goodwill at January 1 |
Cumulative impairment at January 1 |
Acquisitions, dispositions and other |
Foreign exchange and other |
Balance at June 30 |
|||||||||||||||
| Pharmaceuticals |
||||||||||||||||||||
| CURNA |
$ | $ | ( |
) | $ | $ | $ | |||||||||||||
| Rayaldee |
||||||||||||||||||||
| FineTech |
( |
) | ||||||||||||||||||
| ModeX |
( |
) | ||||||||||||||||||
| OPKO Biologics |
||||||||||||||||||||
| OPKO Chile |
||||||||||||||||||||
| OPKO Health Europe |
||||||||||||||||||||
| OPKO Mexico |
( |
) | ||||||||||||||||||
| Transition Therapeutics |
( |
) | ||||||||||||||||||
| Diagnostics |
||||||||||||||||||||
| BioReference |
||||||||||||||||||||
| OPKO Diagnostics |
( |
) | ||||||||||||||||||
| $ | $ | ( |
) | $ | ( |
) | $ | $ | ||||||||||||
NOTE 6 ACQUISITIONS AND INVESTMENTS
ModeX Acquisition
On May 9, 2022, the Company entered into the ModeX Merger Agreement, pursuant to which ModeX became a wholly owned subsidiary of the Company. The Company paid the entirety of the $
The following table summarizes the final purchase price allocation and the fair value of the net assets acquired and liabilities assumed at the date of acquisition of ModeX at the date of acquisition:
| (in thousands) |
ModeX |
|||
| Cash and cash equivalents |
$ | |||
| Other assets |
||||
| Property, plant and equipment |
||||
| IPR&D assets |
||||
| Goodwill |
||||
| Accounts payable |
( |
) | ||
| Deferred tax liability |
( |
) | ||
| Total purchase price |
$ | |||
Goodwill from the acquisition of ModeX principally relates to intangible assets that do not qualify for separate recognition (for instance, ModeX's assembled workforce) and the deferred tax liability generated as a result of the transaction. Goodwill is not tax deductible for income tax purposes and was assigned to the pharmaceutical reporting segment.
Our IPR&D assets will not be amortized until the underlying development programs are completed and we obtain regulatory approval. The IPR&D asset is then accounted for as a finite-lived intangible asset and amortized depending on pattern of future use. Intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, although IPR&D is required to be tested at least annually until the project is completed or abandoned.
Since the date of acquisition, ModeX has recorded revenue of $
Investments
The following table reflects the accounting method, carrying value and underlying equity in net assets of our unconsolidated investments as of June 30, 2023 and December 31, 2022:
| (in thousands) |
As of June 30, 2023 |
As of December 31, 2022 |
||||||||||||||
| Investment type |
Investment Carrying Value |
Underlying Equity in Net Assets |
Investment Carrying Value |
Underlying Equity in Net Assets |
||||||||||||
| Equity method investments |
$ | $ | $ | $ | ||||||||||||
| Variable interest entity, equity method |
||||||||||||||||
| Equity method investments - FV option |
||||||||||||||||
| Equity securities |
||||||||||||||||
| Equity securities with no readily determinable fair value |
||||||||||||||||
| Warrants and options |
||||||||||||||||
| Total carrying value of investments |
$ | $ | ||||||||||||||
Equity method investments
Our equity method investments, other than GeneDx Holdings, as described below, consist of investments in Pharmsynthez (ownership
Equity method investments - Fair value option
On April 29, 2022, the Company sold GeneDx to GeneDx Holdings in accordance with the terms of the GeneDx Merger Agreement, pursuant to which GeneDx Holdings paid to the Company aggregate consideration of $
Pursuant to the GeneDx Merger Agreement, the Company designated, and GeneDx Holdings nominated for election an individual to serve on the board of directors of GeneDx Holdings, and such nominee was elected by GeneDx Holdings stockholders to serve as a director until GeneDx Holdings 2024 annual meeting of stockholders. As a result, we have determined that the Company or our related parties can exercise significant influence over the investee through our board representation or voting power. However, our influence is restricted by the GeneDx Holdings Shareholder Agreement, pursuant to which we have agreed to vote our shares of GeneDx Holdings Common Stock in accordance with the recommendation of GeneDx Holdings’s board of directors for so long as we continue to hold at least
Investments in Equity Securities
Our equity securities consist of investments in VBI Vaccines Inc. (
| For the six months ended June 30, |
||||||||
| (in thousands) |
2023 |
2022 |
||||||
| Equity Securities: |
||||||||
| Net gains and losses recognized during the period on equity securities |
$ | ( |
) | $ | ( |
) | ||
| Unrealized net losses recognized during the period on equity securities still held at the reporting date |
$ | ( |
) | $ | ( |
) | ||
Sales of investments
Gains (losses) included in earnings from sales of our investments are recorded in Other income (expense), net in our Condensed Consolidated Statement of Operations. The cost of securities sold is based on the specific identification method.
Warrants and options
In addition to our equity method investments and equity securities, we hold options to purchase
Investments in variable interest entities
We have determined that we hold variable interests in LeaderMed and Zebra Biologics, Inc. (“Zebra”). We made this determination as a result of our assessment that they do not have sufficient resources to carry out their principal activities without additional financial support.
In September 2021, we and LeaderMed, a pharmaceutical development company with operations based in Asia, formed a joint venture to develop, manufacture and commercialize two of OPKO’s clinical stage, long-acting drug products in Greater China and eight other Asian territories. Under the terms of the agreements, we granted the joint venture exclusive rights to develop, manufacture and commercialize (a) OPK88003, an oxyntomodulin analog being developed for the treatment of obesity and diabetes, and (b) Factor VIIa-CTP, a novel long acting coagulation factor being developed to treat hemophilia, in exchange for
In order to determine the primary beneficiary of the joint venture, we evaluated our investment and our related parties’ investment, as well as our investment combined with the related parties’ investment to identify if we had the power to direct the activities that most significantly impact the economic performance of the joint venture. Based on the capital structure, governing documents and overall business operations of the joint venture, we determined that, while a VIE, we do not have the power to direct the activities that most significantly impact the joint venture’s economic performance and do not have an obligation to fund expected losses. We did determine that we can significantly influence control of the joint venture through our board representation and voting power. Therefore, we have the ability to exercise significant influence over the joint venture’s operations and account for our investment in the joint venture under the equity method.
We own
In order to determine the primary beneficiary of Zebra, we evaluated our investment and our related parties’ investment, as well as our investment combined with the related parties’ investment to identify if we had the power to direct the activities that most significantly impact the economic performance of Zebra. Based on the capital structure, governing documents and overall business operations of Zebra, we determined that, while a VIE, we do not have the power to direct the activities that most significantly impact Zebra’s economic performance and have no obligation to fund expected losses. We determined, however, that we can significantly influence control of Zebra through our board representation and voting power. Therefore, we have the ability to exercise significant influence over Zebra’s operations and account for our investment in Zebra under the equity method.
NOTE 7 DEBT
As of June 30, 2023 and December 31, 2022, our debt consisted of the following:
| June 30, |
December 31, |
|||||||
| (In thousands) |
2023 |
2022 |
||||||
| 2025 Notes |
$ | $ | ||||||
| 2023 Convertible Notes |
||||||||
| 2033 Senior Notes |
||||||||
| JP Morgan Chase |
||||||||
| Chilean and Spanish lines of credit |
||||||||
| Current portion of notes payable |
||||||||
| Long term portion of notes payable |
||||||||
| Total |
$ | $ | ||||||
| Balance sheet captions |
||||||||
| Current portion of convertible notes |
$ | $ | ||||||
| Long term portion of convertible notes |
||||||||
| Current portion of lines of credit and notes payable |
||||||||
| Long Term notes payable included in long-term liabilities |
||||||||
| Total |
$ | $ | ||||||
In February 2019, we issued $
Holders may convert their 2025 Notes into shares of Common Stock at their option at any time prior to the close of business on the business day immediately preceding November 15, 2024 only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ended March 31, 2019 (and only during such calendar quarter), if the last reported sale price of our Common Stock for at least
The initial and current conversion rate for the 2025 Notes is
We may redeem for cash any or all of the 2025 Notes, at our option, if the last reported sale price of our Common Stock has been at least
If we undergo a fundamental change, as defined in the indenture governing the 2025 Notes, prior to the maturity date of the 2025 Notes, holders may require us to repurchase for cash all or any portion of their notes at a repurchase price equal to
In May 2021, we entered into exchange agreements with certain holders of the 2025 Notes, pursuant to which the holders exchanged $
In conjunction with the issuance of the 2025 Notes, we agreed to loan up to
The following table sets forth information related to the 2025 Notes which is included in our Condensed Consolidated Balance Sheet as of June 30, 2023:
| (In thousands) |
2025 Senior Notes |
Debt Issuance Cost |
Total |
|||||||||
| Balance at December 31, 2022 |
$ | $ | ( |
) | $ | |||||||
| Amortization of debt discount and debt issuance costs |
— | |||||||||||
| Balance at June 30, 2023 |
$ | $ | ( |
) | $ | |||||||
In August 2020, the FASB issued ASU No. 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40).” ASU 2020-06 simplifies the accounting for convertible instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred stock. The ASU is effective for public entities for fiscal years beginning after December 15, 2021, with early adoption permitted. As required, we adopted ASU 2020-06 on January 1, 2022 and used the modified retrospective approach for all convertible debt instruments at the beginning of the period of adoptions. Results for reporting periods beginning January 1, 2022 are presented under ASU 2020-06, while prior period amounts were not adjusted and continue to be reported in accordance with historic accounting guidance.
Under the modified approach, entities will apply the guidance to all financial instruments that are outstanding as of the beginning of the year of adoption with the cumulative effect recognized as an adjustment to the opening balance of retained earnings. ASU 2020-06 eliminates the cash conversion and beneficial conversion feature models in ASC 470-20 that require an issuer of certain convertible debt and preferred stock to separately account for embedded conversion features as a component of equity. The adoption of ASU 2020-06 at January 1, 2022 resulted in an increase of the Convertible notes of $
In February 2018, we issued a series of
We may redeem all or any part of the then issued and outstanding 2023 Convertible Notes, together with accrued and unpaid interest thereon, pro rata among the holders, upon no fewer than
Purchasers of the 2023 Convertible Notes included an affiliate of Dr. Phillip Frost, M.D., our Chairman and Chief Executive Officer, and Dr. Jane H. Hsiao, Ph.D., MBA, our Vice-Chairman and Chief Technical Officer.
In January 2013, we issued an aggregate of $
From 2013 to 2016, holders of the 2033 Senior Notes converted $
During the first quarter of 2023, we paid approximately $
In November 2015, BioReference and certain of its subsidiaries entered into a credit agreement with JPMorgan Chase Bank, N.A. (“CB”), as lender and administrative agent, as amended (the “Credit Agreement”). As amended, the Credit Agreement provides for a $
On June 29, 2023, the company entered into a Waiver and Amendment No. 2 to the Credit Agreement (the "Credit Agreement Amendment"). The Credit Agreement Amendment, among other things, (i) waived specific defaults under the Credit Agreement resulting from the failure to pledge certain intellectual property, (ii) replaced the London interbank offered rate (LIBOR) with the forward-looking term rate based on the secured overnight financing rate (the "SOFR Rate") as the interest rate benchmark, (iii) reduced the aggregate revolving commitment from $
The Credit Agreement is guaranteed by all of BioReference’s domestic subsidiaries and is also secured by substantially all assets of BioReference and its domestic subsidiaries, as well as a non-recourse pledge by us of our equity interest in BioReference. Availability under the Credit Agreement is based on a borrowing base composed of eligible accounts receivables of BioReference and certain of its subsidiaries, as specified therein. As of June 30, 2023, $
At BioReference’s option, borrowings under the Credit Agreement (other than swingline loans) bear interest at (i) the CB floating rate (defined as the higher of (x) the prime rate and (y) the SOFR Rate for an interest period of one month plus
As of June 30, 2023 and December 31, 2022, $
The Credit Agreement contains customary covenants and restrictions, including, without limitation, covenants that require BioReference and its subsidiaries to maintain a minimum fixed charge coverage ratio if availability under the new credit facility falls below a specified amount and to comply with laws and restrictions on the ability of BioReference and its subsidiaries to incur additional indebtedness or to pay dividends and make certain other distributions to the Company, subject to certain exceptions as specified therein. Failure to comply with these covenants would constitute an event of default under the Credit Agreement, notwithstanding the ability of BioReference to meet its debt service obligations. The Credit Agreement also includes various customary remedies for the lenders following an event of default, including the acceleration of repayment of outstanding amounts under the Credit Agreement and execution upon the collateral securing obligations under the Credit Agreement. Substantially all the assets of BioReference and its subsidiaries are restricted from sale, transfer, lease, disposal or distributions to the Company, subject to certain exceptions. As of June 30, 2023, BioReference and its subsidiaries had net assets of approximately $
In addition to the Credit Agreement, we had line of credit agreements with thirteen other financial institutions as of June 30, 2023, and December 31, 2022, in the U.S., Chile and Spain. These lines of credit are used primarily as sources of working capital for inventory purchases.
The following table summarizes the amounts outstanding under the BioReference, Chilean and Spanish lines of credit:
| (Dollars in thousands) |
Balance Outstanding |
|||||||||||||||
| Interest rate on borrowings at |
Credit line |
June 30, |
December 31, |
|||||||||||||
| Lender |
June 30, 2023 |
capacity |
2023 |
2022 |
||||||||||||
| JPMorgan Chase |
% | $ | $ | $ | ||||||||||||
| Itau Bank |
% | |||||||||||||||
| Bank of Chile |
% | |||||||||||||||
| BICE Bank |
% | |||||||||||||||
| Scotiabank |
% | |||||||||||||||
| Santander Bank |
% | |||||||||||||||
| Security Bank |
% | |||||||||||||||
| Estado Bank |
% | |||||||||||||||
| BCI Bank |
% | |||||||||||||||
| Internacional Bank |
% | |||||||||||||||
| Consoorcio Bank |
% | |||||||||||||||
| Banco De Sabadell |
% | |||||||||||||||
| Santander Bank |
% | |||||||||||||||
| Total |
$ | $ | $ | |||||||||||||
At June 30, 2023 and December 31, 2022, the weighted average interest rate on our lines of credit was approximately
At June 30, 2023 and December 31, 2022, we had notes payable and other debt (excluding the 2033 Senior Notes, the 2023 Convertible Notes, the 2025 Notes, the Credit Agreement and amounts outstanding under lines of credit described above) as follows:
| June 30, |
December 31, |
|||||||
| (In thousands) |
2023 |
2022 |
||||||
| Current portion of notes payable |
$ | $ | ||||||
| Other long-term liabilities |
||||||||
| Total |
$ | $ | ||||||
The notes and other debt mature at various dates ranging from 2023 through 2032, bearing variable interest rates from
NOTE 8 ACCUMULATED OTHER COMPREHENSIVE LOSS
For the six months ended June 30, 2023, changes in Accumulated other comprehensive loss, net of tax, were as follows:
| Foreign |
||||
| currency |
||||
| (In thousands) |
translation |
|||
| Balance at December 31, 2022 |
$ | ( |
) | |
| Other comprehensive income |
||||
| Balance at June 30, 2023 |
$ | ( |
) | |
NOTE 9 FAIR VALUE MEASUREMENTS
We record fair values at an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement determined based on assumptions that market participants would use in pricing an asset or liability. We utilize a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers are: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
As of June 30, 2023, we had equity securities and an equity method fair value option (refer to Note 6), forward foreign currency exchange contracts for inventory purchases (refer to Note 10) and contingent consideration related to the acquisitions of CURNA, OPKO Diagnostics and OPKO Renal that are required to be measured at fair value on a recurring basis. In addition, in connection with our investment and our consulting agreement with BioCardia, we record the related BioCardia options at fair value as well as the warrants from COCP.
Our financial assets and liabilities measured at fair value on a recurring basis are as follows:
| Fair value measurements as of June 30, 2023 |
||||||||||||||||
| Quoted |
||||||||||||||||
| prices in |
||||||||||||||||
| active |
Significant |
|||||||||||||||
| markets for |
other |
Significant |
||||||||||||||
| identical |
observable |
unobservable |
||||||||||||||
| assets |
inputs |
inputs |
||||||||||||||
| (In thousands) |
(Level 1) |
(Level 2) |
(Level 3) |
Total |
||||||||||||
| Assets: |
||||||||||||||||
| Money market funds |
$ | $ | $ | $ | ||||||||||||
| Equity securities |
||||||||||||||||
| Equity Method - FV option |
||||||||||||||||
| Common stock options/warrants |
||||||||||||||||
| Total assets |
$ | $ | $ | $ | ||||||||||||
| Liabilities: |
||||||||||||||||
| Forward contracts |
||||||||||||||||
| Contingent consideration |
||||||||||||||||
| Total liabilities |
$ | $ | $ | $ | ||||||||||||
| Fair value measurements as of December 31, 2022 |
||||||||||||||||
| Quoted |
||||||||||||||||
| prices in |
||||||||||||||||
| active |
Significant |
|||||||||||||||
| markets for |
other |
Significant |
||||||||||||||
| identical |
observable |
unobservable |
||||||||||||||
| assets |
inputs |
inputs |
||||||||||||||
| (In thousands) |
(Level 1) |
(Level 2) |
(Level 3) |
Total |
||||||||||||
| Assets: |
||||||||||||||||
| Money market funds |
$ | $ | $ | $ | ||||||||||||
| Equity securities |
$ | |||||||||||||||
| Equity Method - fair value option |
||||||||||||||||
| Common stock options/warrants |
||||||||||||||||
| Total assets |
$ | $ | $ | $ | ||||||||||||
| Liabilities: |
||||||||||||||||
| Forward contracts |
||||||||||||||||
| Contingent consideration |
||||||||||||||||
| Total liabilities |
$ | $ | $ | $ | ||||||||||||
The carrying amount and estimated fair value of our 2025 Notes, as well as the applicable fair value hierarchy tiers, are contained in the table below. The fair value of the 2025 Notes is determined using inputs other than quoted prices in active markets that are directly observable.
| June 30, 2023 |
||||||||||||||||||||
| Carrying |
Total |
|||||||||||||||||||
| (In thousands) |
Value |
Fair Value |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||||
| 2025 Notes |
$ | $ | $ | $ | $ | |||||||||||||||
There have been no transfers between Level 1 and Level 2 and no transfers to or from Level 3 of the fair value hierarchy.
As of June 30, 2023 and December 31, 2022, the carrying value of our other financial instrument assets approximates their fair value due to their short-term nature or variable rate of interest.
The following table reconciles the beginning and ending balances of our Level 3 assets and liabilities as of June 30, 2023:
| June 30, 2023 |
||||
| Contingent |
||||
| (In thousands) |
consideration |
|||
| Balance at December 31, 2022 |
$ | |||
| Change in fair value: |
||||
| Included in results of operations |
||||
| Foreign currency impact |
||||
| Balance at June 30, 2023 |
$ | |||
The estimated fair values of our financial instruments have been determined by using available market information and what we believe to be appropriate valuation methodologies. We use the following methods and assumptions in estimating fair value:
Contingent consideration – We estimate the fair value of the contingent consideration utilizing a discounted cash flow model for the expected payments based on estimated timing and expected revenues. We use several discount rates depending on each type of contingent consideration related to, CURNA and OPKO Renal transactions. As of June 30, 2023, of the $
NOTE 10 DERIVATIVE CONTRACTS
The following table summarizes the fair values and the presentation of our derivative financial instruments in the Condensed Consolidated Balance Sheets:
| Balance Sheet |
June 30, |
December 31, |
|||||||
| (In thousands) |
Component |
2023 |
2022 |
||||||
| Derivative financial instruments: |
|||||||||
| Common Stock options/warrants |
Investments, net |
$ | $ | ||||||
| Forward contracts |
Unrealized losses on forward contracts are recorded in Accrued expenses. |
$ | ( |
) | $ | ( |
) | ||
We enter into foreign currency forward exchange contracts with respect to the risk of exposure to exchange rate differences arising from inventory purchases on letters of credit. Under these forward contracts, for any rate above or below the fixed rate, we receive or pay the difference between the spot rate and the fixed rate for the given amount at the settlement date.
To qualify the derivative instrument as a hedge, we are required to meet strict hedge effectiveness and contemporaneous documentation requirements at the initiation of the hedge and assess the hedge effectiveness on an ongoing basis over the life of the hedge. At June 30, 2023 and December 31, 2022, our derivative financial instruments did not meet the documentation requirements to be designated as hedges. Accordingly, we recognize the changes in Fair value of derivative instruments, net in our Condensed Consolidated Statement of Operations. The following table summarizes the losses and gains recorded for the three and six months ended June 30, 2023 and 2022:
| Three months ended June 30, |
Six months ended June 30, |
|||||||||||||||
| (In thousands) |
2023 |
2022 |
2023 |
2022 |
||||||||||||
| Derivative loss: |
||||||||||||||||
| Common Stock options/warrants |
$ | $ | ( |
) | $ | $ | ( |
) | ||||||||
| Forward contracts |
( |
) | ||||||||||||||
| Total |
$ | $ | $ | ( |
) | $ | ||||||||||
NOTE 11 RELATED PARTY TRANSACTIONS
On May 4, 2023, the Company entered into an Assignment and Assumption Agreement (the "Assignment Agreement") with Ruen-Hui Biopharmaceuticals, Inc., a Taiwanese entity ("Ruen-Hui") in which Dr. Hsiao owns more than a
On April 29, 2022, upon consummation of the GeneDx Transaction, the Company entered into a Transition Services Agreement (the “Transition Services Agreement”) with GeneDx (now a wholly owned subsidiary of GeneDx Holdings), pursuant to which the Company agreed to provide, at cost, certain customary support services in respect of GeneDx’s business through August 31, 2023, including human resources, information technology support, and finance and accounting. As of June 30, 2023, the Company had incurred aggregate expenses of million for services rendered under the Transition Services Agreement. For the six months ended June 30, 2023, the company incurred expenses of $
The Company owns approximately
We hold investments in Zebra (ownership
We lease office space from Frost Real Estate Holdings, LLC (“Frost Holdings”) in Miami, Florida, where our principal executive offices are located. Effective August 1, 2019, we entered into an amendment to our lease agreement with Frost Holdings. The lease, as amended, is for approximately
Dr. Elias Zerhouni, our Vice Chairman and President, sits on the board of directors of Danaher Corporation (“Danaher”). Our subsidiary, BioReference, routinely procures products and services from several subsidiaries of Danaher, including Beckman Coulter, Integrated DNA Technologies Inc., and Leica Microsystems Inc., to which BioReference has paid $
BioReference purchases and uses certain products acquired from InCellDx, a company in which we hold a
We reimburse Dr. Frost for Company-related use by Dr. Frost and our other executives of an airplane owned by a company that is beneficially owned by Dr. Frost. We reimburse Dr. Frost for out-of-pocket operating costs for the use of the airplane by Dr. Frost or Company executives for Company-related business. We do not reimburse Dr. Frost for personal use of the airplane by Dr. Frost or any other executive. For the three and six months ended June 30, 2023, we reimbursed approximately $
NOTE 12 COMMITMENTS AND CONTINGENCIES
In February 2023, the Office of the Attorney General for the State of Texas (“TX OAG”) informed BioReference that it believes that, from 2005 to the present, BioReference may have violated the Texas Medicaid Fraud Prevention Act with respect to claims it presented to Texas Medicaid for reimbursement. BioReference has not determined whether there is any merit to the TX OAG claims nor can it determine the extent of any potential liability. While management cannot predict the outcome of these matters at this time, the ultimate outcome could materially and adversely affect our business, financial condition, results of operations, and cash flows.
On December 29, 2022, the Israel Tax Authority (the “ITA”) issued an assessment against our subsidiary, OPKO Biologics in the amount of approximately $
In connection with our acquisitions of CURNA, OPKO Diagnostics and OPKO Renal, we agreed to pay future consideration to the sellers upon the achievement of certain events. Therefore, as of June 30, 2023, we recorded $
GeneDx, Inc., the Company’s former subsidiary, received a letter dated May 26, 2022 from the Texas Medicaid Office of the Inspector General stating that certain testing provided by GeneDx was not eligible for reimbursement by the Texas Medicaid program, because the testing was considered non-covered by the Texas Medicaid program at the time the tests were performed and/or GeneDx did not hold the requisite CLIA subspecialty classifications for the testing. The Company is working with GeneDx Holdings to investigate these issues. Following recent communication, it appears the CLIA subspecialty classification issue has been addressed to the satisfaction of the Texas Medicaid Office of the Inspector General. The potential non-covered testing issue, however, remains under investigation. The Texas Medicaid Office has expressed in writing a potential repayment liability of approximately $
On March 1, 2019, the Company received a Civil Investigative Demand (“CID”) from the U.S. Department of Justice (“DOJ”), Washington, DC. The CID sets forth document requests and interrogatories in connection with allegations that the Company and certain of its affiliates violated the False Claims Act and/or the Anti-Kickback Statute. On January 13, 2022, the Federal Government notified the U.S.D.C., Middle District Florida, Jacksonville Division, that it is declining to intervene in the matter but retains the right, via the Attorney General, to consent to any proposed dismissal of the action by the Court. On February 9, 2022, the States of Florida, Georgia, and Commonwealth of Massachusetts notified the U.S.D.C., Middle District Florida, Jacksonville Division, that they are declining to intervene in the matter. Notwithstanding the above declinations, on February 17, 2022, the Company was served with the Relator’s Summons and Complaint (“Complaint”), which had been previously sealed. The Complaint alleges violations of the False Claims Act, the California Fraud Preventions Act, the Florida False Claims Act, the Massachusetts False Claims Act, the Georgia False Medicaid Claims Act, and illegal kickbacks. A motion to dismiss the Complaint was filed on April 25, 2022 and the case was dismissed in March 2023. However, the Relator filed an amended complaint in April 2023. While management cannot predict the outcome of these matters at this time, the ultimate outcome could be material to our business, financial condition, results of operations, and cash flows.
From time to time, we may receive inquiries, document requests, CIDs or subpoenas from the Department of Justice, OCR, CMS, various payors and fiscal intermediaries, and other state and federal regulators regarding investigations, audits and reviews. In addition to the matters discussed in this note, we are currently responding to CIDs, subpoenas, payor audits, and document requests for various matters relating to our laboratory operations. Some pending or threatened proceedings against us may involve potentially substantial amounts as well as the possibility of civil, criminal, or administrative fines, penalties, or other sanctions, which could be material. Settlements of suits involving the types of issues that we routinely confront may require monetary payments as well as corporate integrity agreements. Additionally, qui tam or “whistleblower” actions initiated under the civil False Claims Act may be pending but placed under seal by the court to comply with the False Claims Act’s requirements for filing such suits. Also, from time to time, we may detect issues of non-compliance with federal healthcare laws pertaining to claims submission and reimbursement practices and/or financial relationships with physicians, among other things. We may avail ourselves of various mechanisms to address these issues, including participation in voluntary disclosure protocols. Participating in voluntary disclosure protocols can have the potential for significant settlement obligations or even enforcement action. The Company generally has cooperated, and intends to continue to cooperate, with appropriate regulatory authorities as and when investigations, audits and inquiries arise.
We are a party to other litigation in the ordinary course of business. While we cannot predict the ultimate outcome of legal matters, we accrue a liability for legal contingencies when we believe that it is both probable that a liability has been incurred and that we can reasonably estimate the amount of the loss. It’s reasonably possible the ultimate liability could exceed amounts currently estimated and we review established accruals and adjust them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel and other relevant information. To the extent new information is obtained and our views on the probable outcomes of claims, suits, assessments, investigations or legal proceedings change, changes in our accrued liabilities would be recorded in the period in which such determination is made. Because of the high degree of judgment involved in establishing loss estimates, the ultimate outcome of such matters will differ from our estimates and such differences may be material to our business, financial condition, results of operations, and cash flows.
At June 30, 2023, we were committed to make future purchases for inventory and other items in 2023 that occur in the ordinary course of business under various purchase arrangements with fixed purchase provisions aggregating approximately $
NOTE 13 REVENUE RECOGNITION
We generate revenues from services, products and intellectual property as follows:
Revenue from services
Revenue for laboratory services is recognized at the time test results are reported, which approximates when services are provided and the performance obligations are satisfied. Services are provided to patients covered by various third-party payor programs including various managed care organizations, as well as the Medicare and Medicaid programs. Billings for services are included in revenue net of allowances for contractual discounts, allowances for differences between the amounts billed and estimated program payment amounts, and implicit price concessions provided to uninsured patients which are all elements of variable consideration.
The following are descriptions of our payors for laboratory services:
Healthcare Insurers. Reimbursements from healthcare insurers are based on negotiated fee-for-service schedules. Revenues consist of amounts billed, net of contractual allowances for differences between amounts billed and the estimated consideration we expect to receive from such payors, which considers historical denial and collection experience and the terms of our contractual arrangements. Adjustments to the allowances, based on actual receipts from the third-party payors, are recorded upon settlement.
Government Payors. Reimbursements from government payors are based on fee-for-service schedules set by governmental authorities, including traditional Medicare and Medicaid. Revenues consist of amounts billed, net of contractual allowances for differences between amounts billed and the estimated consideration we expect to receive from such payors, which considers historical denial and collection experience and the terms of our contractual arrangements. Adjustments to the allowances, based on actual receipts from the government payors, are recorded upon settlement.
Client Payors. Client payors include physicians, hospitals, employers, and other institutions for which services are performed on a wholesale basis, and are billed and recognized as revenue based on negotiated fee schedules. Client payors also include cities, states and companies for which BioReference provides COVID-19 testing services.
Patients. Uninsured patients are billed based on established patient fee schedules or fees negotiated with physicians on behalf of their patients. Insured patients (including amounts for coinsurance and deductible responsibilities) are billed based on fees negotiated with healthcare insurers. Collection of billings from patients is subject to credit risk and ability of the patients to pay. Revenues consist of amounts billed net of discounts provided to uninsured patients in accordance with our policies and implicit price concessions. Implicit price concessions represent differences between amounts billed and the estimated consideration that we expect to receive from patients, which considers historical collection experience and other factors including current market conditions. Adjustments to the estimated allowances, based on actual receipts from the patients, are recorded upon settlement.
The complexities and ambiguities of billing, reimbursement regulations and claims processing, as well as considerations unique to Medicare and Medicaid programs, require us to estimate the potential for retroactive adjustments as an element of variable consideration in the recognition of revenue in the period the related services are rendered. Actual amounts are adjusted in the period those adjustments become known. Negative revenue adjustments due to changes in estimates of implicit price concessions for performance obligations satisfied in prior periods were recognized of $
Third-party payors, including government programs, may decide to deny payment or recoup payments for testing they contend were improperly billed or not medically necessary, against their coverage determinations, or for which they believe they have otherwise overpaid (including as a result of their own error), and we may be required to refund payments already received. Our revenues may be subject to retroactive adjustment as a result of these factors among others, including without limitation, differing interpretations of billing and coding guidance and changes by government agencies and payors in interpretations, requirements, and “conditions of participation” in various programs. We have processed requests for recoupment from third-party payors in the ordinary course of our business, and it is likely that we will continue to do so in the future. If a third-party payor denies payment for testing or recoups money from us in a later period, reimbursement for our testing could decline.
As an integral part of our billing compliance program, we periodically assess our billing and coding practices, respond to payor audits on a routine basis, and investigate reported failures or suspected failures to comply with federal and state healthcare reimbursement requirements, as well as overpayment claims which may arise from time to time without fault on the part of the Company. We may have an obligation to reimburse Medicare, Medicaid, and third-party payors for overpayments regardless of fault. We have periodically identified and reported overpayments, reimbursed payors for overpayments and taken appropriate corrective action.
Settlements with third-party payors for retroactive adjustments due to audits, reviews or investigations are also considered variable consideration and are included in the determination of the estimated transaction price for providing services. These settlements are estimated based on the terms of the payment agreement with the payor, correspondence from the payor and our historical settlement activity, including an assessment of the probability a significant reversal of cumulative revenue recognized will occur when the uncertainty is subsequently resolved. Estimated settlements are adjusted in future periods as adjustments become known (that is, new information becomes available), or as years are settled or are no longer subject to such audits, reviews, and investigations. As of June 30, 2023 and December 31, 2022, we had liabilities of approximately $
The composition of revenue from services by payor for the three and six months ended June 30, 2023 and 2022 was as follows:
| Three months ended June 30, |
Six months ended June 30, |
|||||||||||||||
| (In thousands) |
2023 |
2022 |
2023 |
2022 |
||||||||||||
| Healthcare insurers |
$ | $ | $ | $ | ||||||||||||
| Government payers |
||||||||||||||||
| Client payers |
||||||||||||||||
| Patients |
||||||||||||||||
| Total |
$ | $ | $ | $ | ||||||||||||
Revenue from products
We recognize revenue from product sales when a customer obtains control of promised goods or services. The amount of revenue recorded reflects the consideration that we expect to receive in exchange for those goods or services. Our estimates for sales returns and allowances are based upon the historical patterns of product returns and allowances taken, matched against the sales from which they originated, and our evaluation of specific factors that may increase or decrease the risk of product returns. Product revenues are recorded net of estimated rebates, chargebacks, discounts, co-pay assistance and other deductions (collectively, “Sales Deductions”) as well as estimated product returns which are all elements of variable consideration. Allowances are recorded as a reduction of revenue at the time product revenues are recognized. The actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we will adjust these estimates, which would affect revenue from products in the period such variances become known.
Rayaldee is distributed in the U.S. principally through the retail pharmacy channel, which initiates with the largest wholesalers in the U.S. (collectively, “Rayaldee Customers”). In addition to distribution agreements with Rayaldee Customers, we have entered into arrangements with many healthcare providers and payors that provide for government-mandated or privately-negotiated rebates, chargebacks and discounts with respect to the purchase of Rayaldee.
We recognize revenue for shipments of Rayaldee at the time of delivery to customers after estimating Sales Deductions and product returns as elements of variable consideration utilizing historical information and market research projections. For the three and six months ended June 30, 2023, we recognized $
The following table presents an analysis of Rayaldee product sales allowances and accruals for the three and six months ended June 30, 2023 and 2022:
| (In thousands) |
Chargebacks, discounts, rebates and fees |
Governmental |
Returns |
Total |
||||||||||||
| Balance at March 31, 2023 |
$ | $ | $ | $ | ||||||||||||
| Provision related to current period sales |
||||||||||||||||
| Credits or payments made |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Balance at June 30, 2023 |
$ | $ | $ | $ | ||||||||||||
| Total gross Rayaldee sales |
$ | |||||||||||||||
| Provision for Rayaldee sales allowances and accruals as a percentage of gross Rayaldee sales |
% | |||||||||||||||
| (In thousands) |
Chargebacks, discounts, rebates and fees |
Governmental |
Returns |
Total |
||||||||||||
| Balance at December 31, 2022 |
$ | $ | $ | $ | ||||||||||||
| Provision related to current period sales |
||||||||||||||||
| Credits or payments made |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Balance at June 30, 2023 |
$ | $ | $ | $ | ||||||||||||
| Total gross Rayaldee sales |
$ | |||||||||||||||
| Provision for Rayaldee sales allowances and accruals as a percentage of gross Rayaldee sales |
% | |||||||||||||||
| (In thousands) |
Chargebacks, discounts, rebates and fees |
Governmental |
Returns |
Total |
||||||||||||
| Balance at March 31, 2022 |
$ | $ | $ | $ | ||||||||||||
| Provision related to current period sales |
||||||||||||||||
| Credits or payments made |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Balance at June 30, 2022 |
$ | $ | $ | $ | ||||||||||||
| Total gross Rayaldee sales |
$ | |||||||||||||||
| Provision for Rayaldee sales allowances and accruals as a percentage of gross Rayaldee sales |
% | |||||||||||||||
| (In thousands) |
Chargebacks, discounts, rebates and fees |
Governmental |
Returns |
Total |
||||||||||||
| Balance at December 31, 2021 |
$ | $ | $ | $ | ||||||||||||
| Provision related to current period sales |
||||||||||||||||
| Credits or payments made |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Balance at June 30, 2022 |
$ | $ | $ | $ | ||||||||||||
| Total gross Rayaldee sales |
$ | |||||||||||||||
| Provision for Rayaldee sales allowances and accruals as a percentage of gross Rayaldee sales |
% | |||||||||||||||
Taxes collected from customers related to revenues from services and revenues from products are excluded from revenues.
Revenue from intellectual property and other
We recognize revenues from the transfer of intellectual property generated through license, development, collaboration and/or commercialization agreements. The terms of these agreements typically include payment to us for one or more of the following: non-refundable, up-front license fees; development and commercialization milestone payments; funding of research and/or development activities; and royalties on sales of licensed products. Revenue is recognized upon satisfaction of a performance obligation by transferring control of a good or service to the customer.
For research, development and/or commercialization agreements that result in revenues, we identify all material performance obligations, which may include a license to intellectual property and know-how, and research and development activities. In order to determine the transaction price, in addition to any upfront payment, we estimate the amount of variable consideration at the outset of the contract either utilizing the expected value or most likely amount method, depending on the facts and circumstances relative to the contract. We constrain (reduce) our estimates of variable consideration such that it is probable that a significant reversal of previously recognized revenue will not occur throughout the life of the contract. When determining if variable consideration should be constrained, we consider whether there are factors outside of our control that could result in a significant reversal of revenue. In making these assessments, we consider the likelihood and magnitude of a potential reversal of revenue. These estimates are re-assessed each reporting period as required.
Upfront License Fees: If a license to our intellectual property is determined to be functional intellectual property distinct from the other performance obligations identified in the arrangement, we recognize revenue from nonrefundable, upfront license fees based on the relative value prescribed to the license compared to the total value of the arrangement. The revenue is recognized when the license is transferred to the customer and the customer is able to use and benefit from the license. For licenses that are not distinct from other obligations identified in the arrangement, we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time. If the combined performance obligation is satisfied over time, we apply an appropriate method of measuring progress for purposes of recognizing revenue from nonrefundable, upfront license fees. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.
Development and Regulatory Milestone Payments: Depending on facts and circumstances, we may conclude that it is appropriate to include the milestone in the estimated transaction price or that it is appropriate to fully constrain the milestone. A milestone payment is included in the transaction price in the reporting period that we conclude that it is probable that recording revenue in the period will not result in a significant reversal in amounts recognized in future periods. We may record revenues from certain milestones in a reporting period before the milestone is achieved if we conclude that achievement of the milestone is probable and that recognition of revenue related to the milestone will not result in a significant reversal in amounts recognized in future periods. We record a corresponding contract asset when this conclusion is reached. Milestone payments that have been fully constrained are not included in the transaction price to date. These milestones remain fully constrained until we conclude that achievement of the milestone is probable and that recognition of revenue related to the milestone will not result in a significant reversal in amounts recognized in future periods. We re-evaluate the probability of achievement of such development milestones and any related constraint each reporting period. We adjust our estimate of the overall transaction price, including the amount of revenue recorded, if necessary.
Research and Development Activities: If we are entitled to reimbursement from our customers for specified research and development expenses, we account for them as separate performance obligations if distinct. We also determine whether the research and development funding would result in revenues or an offset to research and development expenses in accordance with provisions of gross or net revenue presentation. The corresponding revenues or offset to research and development expenses are recognized as the related performance obligations are satisfied.
Sales-based Milestone and Royalty Payments: Our customers may be required to pay us sales-based milestone payments or royalties on future sales of commercial products. We recognize revenues related to sales-based milestone and royalty payments upon the later to occur of (i) achievement of the customer’s underlying sales or (ii) satisfaction of any performance obligation(s) related to these sales, in each case assuming the license to our intellectual property is deemed to be the predominant item to which the sales-based milestones and/or royalties relate.
Other Potential Products and Services: Arrangements may include an option for license rights, future supply of drug substance or drug product for either clinical development or commercial supply at the licensee’s election. We assess if these options provide a material right to the licensee and if so, they are accounted for as separate performance obligations at the inception of the contract and revenue is recognized only if the option is exercised and products or services are subsequently delivered or when the rights expire. If the promise is based on market terms and not considered a material right, the option is accounted for if and when exercised. If we are entitled to additional payments when the licensee exercises these options, any additional payments are generally recorded in license or other revenues when the licensee obtains control of the goods, which is upon delivery.
For the three and six months ended June 30, 2023, we recorded $
Contract liabilities relate to cash consideration that OPKO receives in advance of satisfying the related performance obligations. Changes in the contractual liabilities balance during the six months ended June 30, 2023 were as follows:
| (In thousands) |
||||
| Balance at December 31, 2022 |
$ | |||
| Balance at June 30, 2023 |
||||
| Revenue recognized in the period from: |
||||
| Amounts included in contracts liability at the beginning of the period |
( |
) |
NOTE 14 STRATEGIC ALLIANCES
Merck
On March 8, 2023, ModeX, the Company (with respect to certain sections), and Merck Sharp & Dohme LLC (“Merck”) entered into a License and Research Collaboration Agreement (the “Merck Agreement”) pursuant to which ModeX granted to Merck a license to certain patent rights and know-how in connection with the development of ModeX’s preclinical nanoparticle vaccine candidate targeting the Epstein-Barr Virus.
Under the terms of the Merck Agreement, ModeX granted to Merck an exclusive, sublicensable, royalty-bearing license to certain intellectual property to develop, manufacture, use and commercialize (i) a multivalent or monovalent vaccine assembled using our platform for Epstein-Barr Virus (“Vaccine”), and (ii) any pharmaceutical or biological preparation in final form containing a Vaccine for sale or for administration to human patients in a clinical trial for all uses (“Product”). We received an initial payment of $
As part of their strategic collaboration, ModeX and Merck have put in place a research plan to manage research and other development activities related to the development of a Vaccine or Product including a joint steering committee to facilitate the research program. As part of the research plan, they will use a third-party contract development and manufacturing organization (“CDMO”) to carry out such activities unless otherwise agreed. Development costs incurred by ModeX in furtherance of these development activities will be reimbursed by Merck. To date, we have spent $
The Merck Agreement will remain in effect until one or more Products receive marketing authorization, and, thereafter, until the expiration of all royalty obligations unless earlier terminated as permitted under the Merck Agreement. In addition to termination rights for material breach and bankruptcy, Merck is permitted to terminate the Agreement in its entirety without cause after a specified notice period. If Merck terminates the Merck Agreement for convenience or by us for Merck’s uncured material breach, we may elect to receive a reversion license such that we can continue its work with Vaccines and Products which have not been terminated due to a material safety issue.
LeaderMed
On September 14, 2021, we and LeaderMed announced the formation of a joint venture to develop, manufacture and commercialize two of OPKO’s clinical stage, long-acting drug products in Greater China and eight other Asian territories.
Under the terms of the agreements, we have granted the joint venture exclusive rights to develop, manufacture and commercialize (a) OPK88003, an oxyntomodulin analog being developed for the treatment of obesity and diabetes, and (b) Factor VIIa-CTP, a novel long-acting coagulation factor being developed to treat hemophilia, in exchange for a
LeaderMed is responsible for funding the joint venture’s operations, development and commercialization efforts and, together with its syndicate partners, initially invested $
CAMP4 Therapeutics
On July 6, 2021, we entered into an exclusive license agreement (the “CAMP4 Agreement”) with CAMP4, pursuant to which we granted to CAMP4 an exclusive license to develop, manufacture, commercialize or improve therapeutics utilizing the AntagoNAT technology, an oligonucleotide platform developed under OPKO CURNA, which includes the molecule for the treatment of Dravet syndrome, together with any derivative or modification thereof (the “Licensed Compound”) and any pharmaceutical product that comprises or contains the Licensed Compound, alone or in combination with one or more other active ingredients (“Licensed Product”), worldwide. The CAMP4 Agreement grant covers human pharmaceutical, prophylactic, and therapeutic and certain diagnostic uses.
We received an initial upfront payment of $
Unless earlier terminated, the CAMP4 Agreement will remain in effect on a Licensed Product-by-Licensed Product and country by-country basis until such time as the royalty term expires for a Licensed Product in a country, and expires in its entirety upon the expiration of the royalty term for the last Licensed Product in the last country. CAMP4’s royalty obligations expire on the later of (i) the expiration, invalidation or abandonment date of the last patent right in connection with the royalty bearing product, or (ii) ten (
NICOYA Macau Limited
On June 18, 2021, EirGen, our wholly owned subsidiary, and NICOYA Macau Limited (“Nicoya”), a Macau corporation and an affiliate of NICOYA Therapeutics, entered into a Development and License Agreement (the “Nicoya Agreement”) granting Nicoya the exclusive rights for the development and commercialization of extended release calcifediol (the “Nicoya Product”) in Greater China, which includes mainland China, Hong Kong, Macau, and Taiwan (collectively, the “Nicoya Territory”). Extended release calcifediol is marketed in the U.S. by OPKO under the tradename Rayaldee. The license grant to Nicoya covers the therapeutic and preventative use of the Nicoya Product for SHPT in non-dialysis and hemodialysis chronic kidney disease patients (the “Nicoya Field”).
EirGen received an initial upfront payment of $
Nicoya will, at its sole cost and expense, be responsible for performing all development activities necessary to obtain all regulatory approvals for the Nicoya Product in the Nicoya Territory and for all commercial activities pertaining to the Nicoya Product in the Nicoya Territory.
Unless earlier terminated, the Nicoya Agreement will remain in effect until such time as all royalty payment terms and extended payment terms have expired, and Nicoya shall have no further payment obligations to EirGen under the terms of the Nicoya Agreement. Nicoya’s royalty obligations expire on the later of (i) expiration of the last to expire valid patent claim covering the Nicoya Product sold in the Nicoya Territory, (ii) expiration of all regulatory and data exclusivity applicable to the Nicoya Product in the Nicoya Territory, and (iii) on a product-by-product basis, ten (
CSL Vifor
In May 2016, EirGen and Vifor Fresenius Medical Care Renal Pharma Ltd. (“Vifor”) entered into a Development and License Agreement (the “Vifor Agreement”) for the development and commercialization of Rayaldee worldwide, except for (i) the United States and Canada, (ii) any country in Central America or South America (including Mexico), (iii) Russia, (iv) China, (v) South Korea, (vi) Ukraine, (vii) Belorussia, (viii) Azerbaijan, (ix) Kazakhstan, (x) Taiwan (xi) the Middle East, and (xii) all countries of Africa (the “Vifor Territory”), as amended. The license to Vifor potentially covers all therapeutic and prophylactic uses of the Product in human patients (the “Vifor Field”), provided that initially the license is for the use of the Product for the treatment or prevention of SHPT related to patients with CKD and vitamin D insufficiency/deficiency (the “Vifor Initial Indication”).
In January 2023, the price approval for Rayaldee was granted by the German Association of Statutory Health Insurance funds (GKV-SV), which triggered a milestone payment of $
Effective May 23, 2021, we entered into an amendment to the Vifor Agreement pursuant to which the parties thereto agreed to include Japan as part of the Vifor Territory.
Effective May 5, 2020, we entered into an amendment to the Vifor Agreement pursuant to which the parties agreed to exclude Mexico, South Korea, the Middle East and all of the countries of Africa from the Vifor Territory. In addition, the parties agreed to certain amendments to the milestone structure and to reduce minimum royalties payable. As revised, the Company has received a $
We plan to share responsibility with Vifor for the conduct of trials specified within an agreed-upon development plan, with each company leading certain activities within the plan. EirGen will lead the manufacturing activities within and outside the Vifor Territory and the commercialization activities outside the Vifor Territory and outside the Vifor Field in the Vifor Territory and Vifor will lead the commercialization activities in the Vifor Territory and the Vifor Field. For the initial development plan, the companies have agreed to certain cost sharing arrangements. Vifor will be responsible for all other development costs that Vifor considers necessary to develop the Product for the use of the Product for the Vifor Initial Indication in the Vifor Territory in the Vifor Field except as otherwise provided in the Vifor Agreement. The first of the clinical studies provided for in the development activities commenced in September 2018.
In connection with the Vifor Agreement, the parties entered into a letter agreement pursuant to which EirGen granted to Vifor an exclusive option (the “Option”) to acquire an exclusive license under certain EirGen patents and technology to use, import, offer for sale, sell, distribute and commercialize the Product in the U.S. solely for the treatment of SHPT in dialysis patients with CKD and vitamin D insufficiency (the “Dialysis Indication”). Upon exercise of the Option, Vifor has agreed to reimburse EirGen for all of the development costs incurred by EirGen with respect to the Product for the Dialysis Indication in the U.S. Vifor would also pay EirGen up to an additional aggregate amount of $
Payments received for regulatory milestones and sales milestones are non-refundable. The regulatory milestones are payable if and when Vifor obtains approval from certain regulatory authorities and will be recognized as revenue in the period in which the associated milestone is achieved, assuming all other revenue recognition criteria are met. We account for the sales milestones as royalties and sales milestones payments will be recognized as revenue in the period in which the associated milestone is achieved or sales occur, assuming all other revenue recognition criteria are met.
Pfizer Inc.
In December 2014, we entered into an exclusive worldwide agreement (the “Pfizer Agreement”) with Pfizer for the development and commercialization of our long-acting Somatrogon (hGH-CTP) for the treatment of growth hormone deficiency (“GHD”) in adults and children, as well as for the treatment of growth failure in children born small for gestational age (the “Pfizer Transaction”).
In June 2023, The FDA approved NGENLA (Somatrogon) a once-weekly injection to treat pediatric growth hormone deficiency in the United States. In early 2022, the European Commission and Ministry of Health, Labour and Welfare in Japan approved NGENLA (Somatrogon) in those territories. We have also received pricing approvals in Germany and Japan. NGENLA (Somatrogon) is approved for the treatment of pediatric GHD in more than 40 markets, including Canada, Australia, Japan, and EU Member States. With the achievement of these milestones, during the second quarter of 2023, we recorded revenue of $
In May 2020, we entered into an Amended and Restated Development and Commercialization License Agreement (the “Restated Pfizer Agreement”) with Pfizer, effective January 1, 2020, pursuant to which the parties agreed, among other things, to share all costs for Manufacturing Activities, as defined in the Restated Pfizer Agreement, for developing a licensed product for the three indications included in the Restated Pfizer Agreement.
On October 21, 2019, we and Pfizer announced that the global phase 3 trial evaluating Somatrogon dosed once-weekly in prepubertal children with GHD met its primary endpoint of non-inferiority to daily Genotropin® (somatropin) for injection, as measured by annual height velocity at 12 months.
Under the terms of the Pfizer Transaction, as restated, we received non-refundable and non-creditable upfront payments of $
The agreement with Pfizer will remain in effect until the last sale of the licensed product, unless earlier terminated as permitted under the Pfizer Agreement. In addition to termination rights for material breach and bankruptcy, Pfizer is permitted to terminate the Pfizer Agreement in its entirety, or with respect to one or more world regions, without cause after a specified notice period. If the Pfizer Agreement is terminated by us for Pfizer’s uncured material breach, or by Pfizer without cause, provision has been made for transition of product and product responsibilities to us for the terminated regions, as well as continued supply of product by Pfizer or transfer of supply to us in order to support the terminated regions.
We recognized the non-refundable $
The Pfizer Transaction includes milestone payments of $
Other
We have completed strategic deals with numerous institutions and commercial partners. In connection with these agreements, upon the achievement of certain milestones we are obligated to make certain payments and have royalty obligations upon sales of products developed under the license agreements. At this time, we are unable to estimate the timing and amounts of payments as the obligations are based on future development of the licensed products.
NOTE 15 SEGMENTS
We manage our operations in
Information regarding our operations and assets for our operating segments and the unallocated corporate operations as well as geographic information are as follows:
| For the three months ended June 30, |
For the six months ended June 30, |
|||||||||||||||
| (In thousands) |
2023 |
2022 |
2023 |
2022 |
||||||||||||
| Revenue from services: |
||||||||||||||||
| Pharmaceutical |
$ | $ | $ | $ | ||||||||||||
| Diagnostics |
||||||||||||||||
| Corporate |
||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Revenue from products: |
||||||||||||||||
| Pharmaceutical |
$ | $ | $ | $ | ||||||||||||
| Diagnostics |
||||||||||||||||
| Corporate |
||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Revenue from transfer of intellectual property and other: |
||||||||||||||||
| Pharmaceutical |
$ | $ | $ | $ | ||||||||||||
| Diagnostics |
||||||||||||||||
| Corporate |
||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Operating income (loss): |
||||||||||||||||
| Pharmaceutical |
$ | $ | $ | $ | ||||||||||||
| Diagnostics |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Corporate |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||||||
| Depreciation and amortization: |
||||||||||||||||
| Pharmaceutical |
$ | $ | $ | $ | ||||||||||||
| Diagnostics |
||||||||||||||||
| Corporate |
||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Loss from investment in investees: |
||||||||||||||||
| Pharmaceutical |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Diagnostics |
||||||||||||||||
| Corporate |
||||||||||||||||
| $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||||
| Revenues: |
||||||||||||||||
| United States |
$ | $ | $ | $ | ||||||||||||
| Ireland |
||||||||||||||||
| Chile |
||||||||||||||||
| Spain |
||||||||||||||||
| Israel |
||||||||||||||||
| Mexico |
||||||||||||||||
| Other |
||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| June 30, |
December 31, |
|||||||
| (In thousands) |
2023 |
2022 |
||||||
| Assets: |
||||||||
| Pharmaceutical |
$ | $ | ||||||
| Diagnostics |
||||||||
| Corporate |
||||||||
| $ | $ | |||||||
| Goodwill: |
||||||||
| Pharmaceutical |
$ | $ | ||||||
| Diagnostics |
||||||||
| $ | $ | |||||||
NOTE 16 LEASES
We have operating leases for office space, laboratory operations, research and development facilities, manufacturing locations, warehouses and certain equipment. We determine if a contract contains a lease at inception or modification of a contract. Our leases generally do not provide an implicit interest rate, and we therefore use our incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of the lease within a particular currency environment. We used the incremental borrowing rates as of January 1, 2019 for operating leases that commenced prior to that date. Many of our leases contain rental escalation, renewal options and/or termination options that are factored into our determination of lease payments as appropriate. Variable lease payment amounts that cannot be determined at the commencement of the lease are not included in the right-to-use assets or liabilities.
We elected the use of permitted practical expedients of not recording leases on our Condensed Consolidated Balance Sheet when the leases have terms of 12 months or less, and we elected not to separate nonlease components from lease components and instead account for each separate lease component and the nonlease components associated with that lease component as a single lease component.
The following table presents the lease balances within the Condensed Consolidated Balance Sheet as of June 30, 2023 and December 31, 2022:
| (in thousands) |
Classification on the Balance Sheet |
June 30, 2023 |
December 31, 2022 |
||||||
| Assets |
|||||||||
| Operating lease assets |
Operating lease right-of-use assets |
$ | $ | ||||||
| Finance lease assets |
Property, plant and equipment, net |
||||||||
| Liabilities |
|||||||||
| Current |
|||||||||
| Operating lease liabilities |
Current maturities of operating leases |
||||||||
| Accrued expenses |
Current maturities of finance leases |
||||||||
| Long-term |
|||||||||
| Operating lease liabilities |
Operating lease liabilities |
||||||||
| Other long-term liabilities |
Finance lease liabilities |
$ | $ | ||||||
| Weighted average remaining lease term |
|||||||||
| Operating leases (in years) |
|||||||||
| Finance leases (in years) |
|||||||||
| Weighted average discount rate |
|||||||||
| Operating leases |
% | % | |||||||
| Finance leases |
% | % | |||||||
The following table reconciles the undiscounted future minimum lease payments (displayed by year and in the aggregate) under noncancelable operating leases with terms of more than one year to the total operating lease liabilities recognized on our Condensed Consolidated Balance Sheet as of June 30, 2023:
| (in thousands) |
Operating |
Finance |
||||||
| July 1, 2023 through December 31, 2023 |
$ | $ | ||||||
| 2024 |
||||||||
| 2025 |
||||||||
| 2026 |
||||||||
| 2027 |
||||||||
| Thereafter |
||||||||
| Total undiscounted future minimum lease payments |
||||||||
| Less: Difference between lease payments and discounted lease liabilities |
||||||||
| Total lease liabilities |
$ | $ | ||||||
Expense under operating leases and finance leases was $
Supplemental cash flow information is as follows:
| For the six months ended June 30, |
||||||||
| (in thousands) |
2023 |
2022 |
||||||
| Operating cash out flows from operating leases |
$ | $ | ||||||
| Operating cash out flows from finance leases |
||||||||
| Financing cash out flows from finance leases |
||||||||
| Total |
$ | $ | ||||||
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
You should read this discussion together with the unaudited Condensed Consolidated Financial Statements, related notes, and other financial information included elsewhere in this Quarterly Report on Form 10-Q together with our audited consolidated financial statements, related notes, and other information contained in our Annual Report on Form 10-K for the year ended December 31, 2022 (the “Form 10-K”). The following discussion contains assumptions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed under “Risk Factors,” in Part I, Item 1A of the Form 10-K and as described from time to time in our other filings with the Securities and Exchange Commission. These risks could cause our actual results to differ materially from those anticipated in these forward-looking statements.
We are a diversified healthcare company that seeks to establish industry-leading positions in large and rapidly growing medical markets. Our diagnostics business includes BioReference Health, LLC (“BioReference”), one of the nation’s largest full service laboratories with a 180-person sales and marketing team to drive growth and leverage new products, and we offer our 4Kscore prostate cancer test through BioReference. Our pharmaceutical business features Rayaldee, a U.S. Food and Drug Administration (“FDA”) approved treatment for secondary hyperparathyroidism (“SHPT”) in adults with stage 3 or 4 chronic kidney disease (“CKD”) and vitamin D insufficiency, and Somatrogon (hGH-CTP), a once-weekly human growth hormone injection for which we completed a successful phase 3 study in August 2019 and partnered with Pfizer Inc. (“Pfizer”) with respect to Somatrogon (hGH-CTP)’s further development. Regulatory applications for Somatrogon (hGH-CTP) have been submitted to the applicable regulatory bodies for review in several countries around the world. In June 2023, The FDA approved NGENLA (Somatrogon) to treat children and adolescents from as young as three years of age with growth disturbance due to insufficient secretion of growth hormone. In February 2022, the European Commission granted marketing authorization in the European Union for Somatrogon (hGH-CTP) under the brand name NGENLA®. NGENLA® has been approved in more than 40 markets including the United States, EU Member States, Japan, Canada, and Australia. In May 2022, we acquired ModeX Therapeutics, Inc. (“ModeX”), a biotechnology company focused on developing innovative multi-specific immune therapies for cancer and infectious diseases candidates. ModeX has a robust early-stage pipeline with assets in key areas of immuno-oncology and infectious diseases, and we intend to further expand our pharmaceutical product pipeline through ModeX’s portfolio of development candidates.
Through BioReference, we provide laboratory testing services, primarily to customers in the larger metropolitan areas in New York, New Jersey, Florida, Texas, Maryland, California, Pennsylvania, Delaware, Washington, DC, Illinois and Massachusetts, as well as to customers in a number of other states. We offer a comprehensive test menu of clinical diagnostics for blood, urine and tissue analysis. This includes hematology, clinical chemistry, immunoassay, infectious disease, serology, hormones, and toxicology assays, as well as Pap smear, anatomic pathology (biopsies) and other types of tissue analysis, as well as testing for COVID-19. We market our laboratory testing services directly to physicians, geneticists, hospitals, clinics, correctional and other health facilities.
We operate established pharmaceutical platforms in Ireland, Chile, Spain, Mexico, and the U.S., which are generating revenue and from which we expect to generate positive cash flow and facilitate future market entry for our products currently in development. In addition, we have a development and commercial supply pharmaceutical company and a global supply chain operation and holding company in Ireland. We own an APIs manufacturer in Israel, which we expect will facilitate the development of our pipeline of molecules and compounds for our proprietary molecular diagnostic and therapeutic products.
RESULTS OF OPERATIONS
Foreign Currency Exchange Rates
Approximately 34.4% of revenue for the six months ended June 30, 2023, and approximately 23.6% of revenue for the six months ended June 30, 2022, were denominated in currencies other than the U.S. Dollar (USD). Our financial statements are reported in USD and, accordingly, fluctuations in exchange rates affect the translation of revenues and expenses denominated in foreign currencies into USD for purposes of reporting our consolidated financial results. In the first quarter of 2023 and the year ended December 31, 2022, the most significant currency exchange rate exposures were to the Euro and Chilean Peso. Gross accumulated currency translation adjustments recorded as a separate component of shareholders’ equity were $33.5 million and $39.9 million at June 30, 2023, and December 2022, respectively.
We are subject to foreign currency transaction risk for fluctuations in exchange rates during the period of time between the consummation and cash settlement of transactions. We seek to limit foreign currency transaction risk through hedge transactions with foreign currency forward contracts. Under these forward contracts, for any rate above or below the fixed rate, we receive or pay the difference between the spot rate and the fixed rate for the given amount at the settlement date. At June 30, 2023, we had 67 open foreign exchange forward contracts relating to inventory purchases on letters of credit with various amounts maturing monthly through July 2023 with a notional value totaling approximately $3.5 million. At December 31, 2022, we had 194 open foreign exchange forward contracts relating to inventory purchases on letters of credit with various amounts maturing monthly through January 2023 with a notional value totaling approximately $11.9 million.
FOR THE THREE MONTHS ENDED June 30, 2023 and 2022
Our consolidated income (loss) from operations for the three months ended June 30, 2023 and 2022 was as follows:
| For the three months ended June 30, |
||||||||||||||||
| (In thousands) |
2023 |
2022 |
Change |
% Change |
||||||||||||
| Revenues: |
||||||||||||||||
| Revenue from services |
$ | 127,052 | $ | 186,804 | $ | (59,752 | ) | (32 | )% | |||||||
| Revenue from products |
43,500 | 35,892 | 7,608 | 21 | % | |||||||||||
| Revenue from transfer of intellectual property and other |
94,866 | 87,197 | 7,669 | 9 | % | |||||||||||
| Total revenues |
265,418 | 309,893 | (44,475 | ) | (14 | )% | ||||||||||
| Costs and expenses: |
||||||||||||||||
| Cost of revenue |
138,939 | 194,311 | (55,372 | ) | (28 | )% | ||||||||||
| Selling, general and administrative |
79,794 | 101,464 | (21,670 | ) | (21 | )% | ||||||||||
| Research and development |
18,159 | 17,254 | 905 | 5 | % | |||||||||||
| Contingent Consideration |
(34 | ) | 175 | (209 | ) | (119 | )% | |||||||||
| Amortization of intangible assets |
21,535 | 22,793 | (1,258 | ) | (6 | )% | ||||||||||
| Gain on sale |
— | (15,365 | ) | 15,365 | 100 | % | ||||||||||
| Total costs and expenses |
258,393 | 320,632 | (62,239 | ) | (19 | )% | ||||||||||
| Income (loss) from operations |
7,025 | (10,739 | ) | 17,764 | 165 | % | ||||||||||
Diagnostics
| For the three months ended June 30, |
||||||||||||||||
| (In thousands) |
2023 |
2022 |
Change |
% Change |
||||||||||||
| Revenues |
||||||||||||||||
| Revenue from services |
$ | 127,052 | $ | 186,804 | $ | (59,752 | ) | (32 | )% | |||||||
| Total revenues |
127,052 | 186,804 | (59,752 | ) | (32 | )% | ||||||||||
| Costs and expenses: |
||||||||||||||||
| Cost of revenue |
113,027 | 171,841 | (58,814 | ) | (34 | )% | ||||||||||
| Selling, general and administrative |
52,617 | 78,980 | (26,363 | ) | (33 | )% | ||||||||||
| Research and development |
617 | 2,780 | (2,163 | ) | (78 | )% | ||||||||||
| Amortization of intangible assets |
5,049 | 6,111 | (1,062 | ) | (17 | )% | ||||||||||
| Gain of sale of assets |
— | (15,365 | ) | 15,365 | 100 | % | ||||||||||
| Total costs and expenses |
171,310 | 244,347 | (73,037 | ) | (30 | )% | ||||||||||
| Loss from operations |
(44,258 | ) | (57,543 | ) | 13,285 | 23 | % | |||||||||
Revenue. Revenue from services for the three months ended June 30, 2023, decreased by approximately $59.8 million compared to the three months ended June 30, 2022. The decrease in revenue for the three months ended June 30, 2023, reflects lower demand for COVID-19 testing and lower COVID-19 reimbursement of $48.7 million and $0.8 million, respectively. BioReference performed 33 thousand molecular tests for COVID-19 during the three months ended June 30, 2023, representing 1.45% of total testing volume for that period. In comparison, the three months ended June 30, 2022, included 874 thousand molecular tests for COVID-19 and 81 thousand serology antibody tests, representing 30.7% of total testing volume for the 2022 period. The reduction in reimbursement reflected an increase in utilization of antigen point of care diagnostic tests and a change in the mix of customers, which have varying contract prices depending on the level of services we provide.
Furthermore, clinical test reimbursement decreased by $5.8 million due to the mix of testing ordered offset by an increase in clinical test volume of $7.7 million. Moreover, revenues decreased by $12.1 million as a result of our sale in April 2022 of GeneDx in the GeneDx Transaction (as defined below).
Estimated collection amounts are subject to the complexities and ambiguities of billing, reimbursement regulations and claims processing, as well as considerations unique to Medicare and Medicaid programs, and require us to consider the potential for retroactive adjustments when estimating variable consideration in the recognition of revenue in the period the related services are rendered. Negative revenue adjustments due to changes in estimates of implicit price concessions for performance obligations satisfied in prior periods were recognized of $13.9 million and $23.2 million, respectively, for the three months ended June 30, 2023 and 2022. Revenue adjustments for the three months ended June 30, 2023 were mainly due to the composition of patient pay mix and, in 2022, mainly to lower reimbursement estimates for COVID-19 testing.
The composition of revenue from services by payor for the three months ended June 30, 2023 and 2022 was as follows:
| Three months ended June 30, |
||||||||
| (In thousands) |
2023 |
2022 |
||||||
| Healthcare insurers |
$ | 76,954 | $ | 76,442 | ||||
| Government payers |
20,923 | 25,659 | ||||||
| Client payers |
24,899 | 80,931 | ||||||
| Patients |
4,276 | 3,772 | ||||||
| Total |
$ | 127,052 | $ | 186,804 | ||||
Client payors include cities, states and companies for which BioReference provides COVID-19 testing services.
Cost of revenue. Cost of revenue for the three months ended June 30, 2023 decreased $58.8 million compared to the three months ended June 30, 2022. Cost of revenue decreased primarily due to a decline in the volume of COVID-19 tests performed during the three months ended June 30, 2023, compared to 2022. Cost of revenue for the three months ended June 30, 2023, also decreased due to changes in the mix of testing ordered during the period, continued cost-reduction initiatives implemented at Bio Reference and $8.2 million as a result of the disposition of GeneDx in April 2022.
Selling, general and administrative expenses. Selling, general and administrative expenses for the three months ended June 30, 2023 and 2022 were $52.6 million and $79.0 million, respectively. Selling, general and administrative expenses in our diagnostics segment decreased primarily due to the continued cost-reduction initiatives implemented at Bio Reference as we strive to return to profitability following the buildup and then decline of COVID related testing.
Research and development expenses. The following table summarizes the components of our research and development expenses:
| Research and Development Expenses |
Three months ended June 30, |
|||||||
| 2023 |
2022 |
|||||||
| Research and development employee-related expenses |
$ | 464 | $ | 2,233 | ||||
| Other internal research and development expenses |
153 | 547 | ||||||
| Total research and development expenses |
$ | 617 | $ | 2,780 | ||||
The decrease in research and development expenses for the three months ended June 30, 2023, was primarily related to the development of more efficient clinical testing services at BioReference and partly as a result of the GeneDx disposition.
Amortization of intangible assets. Amortization expense reflects the amortization of acquired intangible assets with defined useful lives. Amortization of intangible assets was $5.0 million and $6.1 million, respectively, for the three months ended June 30, 2023 and 2022. Amortization expense declined for the three months ending June 30, 2023 due to the disposition of GeneDx.
Gain on sale of assets. Gain on sale of assets for the three months ended June 30, 2022, was $15.4 million due to the disposition of GeneDx in April 2022.
Pharmaceuticals
| For the three months ended June 30, |
||||||||||||||||
| (In thousands) |
2023 |
2022 |
Change |
% Change |
||||||||||||
| Revenues: |
||||||||||||||||
| Revenue from products |
$ | 43,500 | $ | 35,892 | $ | 7,608 | 21 | % | ||||||||
| Revenue from transfer of intellectual property and other |
94,866 | 87,197 | 7,669 | 9 | % | |||||||||||
| Total revenues |
138,366 | 123,089 | 15,277 | 12 | % | |||||||||||
| Costs and expenses: |
||||||||||||||||
| Cost of revenue |
25,912 | 22,470 | 3,442 | 15 | % | |||||||||||
| Selling, general and administrative |
14,831 | 13,518 | 1,313 | 10 | % | |||||||||||
| Research and development |
17,540 | 14,809 | 2,731 | 18 | % | |||||||||||
| Contingent Consideration |
(34 | ) | 175 | (209 | ) | (119 | )% | |||||||||
| Amortization of intangible assets |
16,486 | 16,682 | (196 | ) | (1 | )% | ||||||||||
| Total costs and expenses |
74,735 | 67,654 | 7,081 | 10 | % | |||||||||||
| Income from operations |
63,631 | 55,435 | 8,196 | 15 | % | |||||||||||
Revenue. Revenue from products for the three months ended June 30, 2023 and 2022 was $43.5 million and $35.9 million, respectively. The increase in revenue from products for the three months ended June 30, 2023 compared to the three months ended June 30, 2022 was attributable to an increase in sales from OPKO Chile and OPKO Mexico which were positively impacted by foreign exchange fluctuations of approximately $1.9 million , as well as increased sales of Rayaldee. Revenue from sales of Rayaldee for the three months ended June 30, 2023 and 2022 was $7.7 million and $6.2 million, respectively. For the three months ended June 30, 2023, revenue from transfer of intellectual property and other principally reflects revenue of $90.0 million triggered by the FDA approval of NGENLA (Somatrogon), the 2022 period includes an $85.0 million regulatory milestone payments from Pfizer due from the commencement of sales from NGENLA (Somatrogon) in Europe and Japan (as defined in Note 14 to our condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q). For the three months ended June 30, 2023 and 2022, revenue from transfer of intellectual property and other also includes $0.5 million and $2.3 million, respectively, related to the Pfizer Transaction (as defined in Note 14 to our condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q).
Cost of revenue. Cost of revenue for the three months ended June 30, 2023 increased $3.4 million compared to the three months ended June 30, 2022, which was attributable to an increase in sales as well as changes in product mix during the period at our international operating companies as well as higher inventory costs partially impacted by unfavorable foreign exchange fluctuations of approximately $1.3 million.
Selling, general and administrative expenses. Selling, general and administrative expenses for the three months ended June 30, 2023 and 2022 were $14.8 million and $13.5 million, respectively. The increase in selling, general and administrative expenses was due to an increase in employee-related expenses from from our international operations and Rayaldee.
Research and development expenses. Research and development expenses for the three months ended June 30, 2023 and 2022 were $17.5 million and $14.8 million, respectively. Research and development expenses include external and internal expenses, partially offset by third-party grants and funding arising from collaboration agreements. External expenses include clinical and non-clinical activities performed by contract research organizations, lab services, purchases of drug and diagnostic product materials and manufacturing development costs. We track external research and development expenses by the individual program for phase 3 clinical trials for drug approval and premarket approval for diagnostics tests, if any. Internal expenses include employee-related expenses such as salaries, benefits and equity-based compensation expenses. Other internal research and development expenses are incurred to support overall research and development activities and include expenses related to general overhead and facilities.
The following table summarizes the components of our research and development expenses:
| Research and Development Expenses |
Three months ended June 30, |
|||||||
| 2023 |
2022 |
|||||||
| External expenses: |
||||||||
| Manufacturing expense for biological products |
$ | 3,006 | $ | 2,070 | ||||
| Phase 3 studies |
1,186 | 2,200 | ||||||
| Post-marketing studies |
29 | — | ||||||
| Earlier-stage programs |
11,925 | 3,113 | ||||||
| Research and development employee-related expenses |
8,955 | 6,774 | ||||||
| Other internal research and development expenses |
1,052 | 652 | ||||||
| Third-party grants and funding from collaboration agreements |
(8,613 | ) | — | |||||
| Total research and development expenses |
$ | 17,540 | $ | 14,809 | ||||
The increase in research and development expenses for the three months ended June 30, 2023, was primarily due to research expenses at ModeX, partially offset by lower expenses related to Somatrogon (hGH-CTP) due to the closure of the open-label extension studies in countries in which Somatrogon (hGH-CTP) received marketing authorization. Research and development expenses for the pharmaceutical segment for the three months ended June 30, 2023 and 2022 included equity-based compensation expenses of $914.6 thousand and $637.9 thousand, respectively.
Contingent consideration. Contingent consideration for the three months ended June 30, 2023 and 2022 was a $34 thousand reversal of expense and $175 thousand of expense, respectively. Contingent consideration for the three months ended June 30, 2023 and 2022 was primarily attributable to changes in assumptions regarding the timing of achievement of future milestones for OPKO Renal, and potential amounts payable to former stockholders of OPKO Renal in connection therewith, pursuant to our acquisition agreement in March 2013.
Amortization of intangible assets. Amortization of intangible assets was $16.5 million and $16.7 million for the three months ended June 30, 2023 and 2022. Amortization expense reflects the amortization of acquired intangible assets with defined useful lives. Our indefinite lived IPR&D assets will not be amortized until the underlying development programs are completed. Upon obtaining regulatory approval by the FDA, the IPR&D assets will be accounted for as a finite-lived intangible asset and amortized on a straight-line basis over its estimated useful life.
Corporate
| For the three months ended June 30, |
||||||||||||||||
| (In thousands) |
2023 |
2022 |
Change |
% Change |
||||||||||||
| Costs and expenses: |
||||||||||||||||
| Selling, general and administrative |
$ | 12,346 | $ | 8,966 | $ | 3,380 | 38 | % | ||||||||
| Research and development |
2 | (335 | ) | 337 | 101 | % | ||||||||||
| Total costs and expenses |
12,348 | 8,631 | 3,717 | 43 | % | |||||||||||
| Loss from operations |
(12,348 | ) | (8,631 | ) | (3,717 | ) | (43 | )% | ||||||||
Operating loss for our unallocated corporate operations for the three months ended June 30, 2023 and 2022 was $12.3 million and $8.6 million, respectively, and principally reflects general and administrative expenses incurred in connection with our corporate operations. The increase in operating loss for our unallocated corporate operations for the three months ended June 30, 2023, was primarily due to increases in employee expenses and professional fees, partially offset by a decrease in legal fees.
Other
Interest income. Interest income for the three months ended June 30, 2023 and 2022 was $1.1 million and $0.2 million, respectively. The increase is driven by having higher average cash and investment balances as a result of the cash received related to the GeneDx disposition, as well as increased interest rates between the two periods.
Interest expense. Interest expense for the three months ended June 30, 2023 and 2022 was $3.3 million and $3.1 million, respectively. Interest expense was principally related to interest incurred on the 2025 Notes, the 2023 Convertible Notes, and BioReference’s outstanding debt under the Credit Agreement (each as defined in Note 7 to our condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q ) with JPMorgan Chase Bank, N.A. (“CB”).
Fair value changes of derivative instruments, net. Fair value changes of derivative instruments, net for the three months ended June 30, 2023 and 2022, was $0.1 million and a $0.3 million reversal of expense, respectively. Derivative expense for the three months ended June 30, 2023 and 2022 was principally related to the change in fair value on foreign currency forward exchange contracts at OPKO Chile.
Other income (expense), net. Other income (expense), net for the three months ended June 30, 2023 and 2022 was $21.4 million and $73.0 million of expense, respectively. Other income (expense), net for the three months ended June 30, 2023, and 2022, included $19.9 million and $71.2 million of expense as a result of a decrease in the fair value of our investment in GeneDx Holdings (as defined below). Foreign currency gains of $0.9 million and $0.8 million of losses were the majority of other expenses for the three months ended June 30, 2023, and 2022, respectively.
Income tax provision. Our income tax provision for the three months ended June 30, 2023 and 2022 was $3.1 million and $15.1 million, respectively, and reflects quarterly results using our expected effective tax rate. For the three months ended June 30, 2023, the tax rate differed from the U.S. federal statutory rate of 21% primarily due to the relative mix in earnings and losses in the U.S. versus foreign tax jurisdictions, and operating results in tax jurisdictions which do not result in a tax benefit.
Loss from investments in investees. We have invested in certain early stage companies that we perceive to have valuable proprietary technology and significant potential to create value for us as a shareholder or member. We account for these investments under the equity method of accounting, recording of our proportionate share of their losses until our share of their loss exceeds our investment. Until the investees’ technologies are commercialized, if ever, we anticipate they will report net losses. Loss from investments in investees was $42 thousand and $268 thousand for the three months ended June 30, 2023 and 2022, respectively.
FOR THE six months ended June 30, 2023 and 2022
Our consolidated income (loss) from operations for the six months ended June 30, 2023 and 2022 was as follows:
| For the six months ended June 30, |
||||||||||||||||
| (In thousands) |
2023 |
2022 |
Change |
% Change |
||||||||||||
| Revenues: |
||||||||||||||||
| Revenue from services |
$ | 259,420 | $ | 473,402 | $ | (213,982 | ) | (45 | )% | |||||||
| Revenue from products |
83,883 | 72,550 | 11,333 | 16 | % | |||||||||||
| Revenue from transfer of intellectual property and other |
159,692 | 93,159 | 66,533 | 71 | % | |||||||||||
| Total revenues |
502,995 | 639,111 | (136,116 | ) | (21 | )% | ||||||||||
| Costs and expenses: |
||||||||||||||||
| Cost of revenue |
277,253 | 438,187 | (160,934 | ) | (37 | )% | ||||||||||
| Selling, general and administrative |
155,436 | 219,000 | (63,564 | ) | (29 | )% | ||||||||||
| Research and development |
50,764 | 35,566 | 15,198 | 43 | % | |||||||||||
| Contingent Consideration |
102 | 69 | 33 | 48 | % | |||||||||||
| Amortization of intangible assets |
43,009 | 44,818 | (1,809 | ) | (4 | )% | ||||||||||
| Gain of sale of assets |
— | (15,365 | ) | 15,365 | 100 | % | ||||||||||
| Total costs and expenses |
526,564 | 722,275 | (195,711 | ) | (27 | )% | ||||||||||
| Loss from operations |
(23,569 | ) | (83,164 | ) | 59,595 | 72 | % | |||||||||
Diagnostics
| For the six months ended June 30, |
||||||||||||||||
| (In thousands) |
2023 |
2022 |
Change |
% Change |
||||||||||||
| Revenues |
||||||||||||||||
| Revenue from services |
$ | 259,420 | $ | 473,402 | $ | (213,982 | ) | (45 | )% | |||||||
| Total revenues |
259,420 | 473,402 | (213,982 | ) | (45 | )% | ||||||||||
| Costs and expenses: |
||||||||||||||||
| Cost of revenue |
227,088 | 393,048 | (165,960 | ) | (42 | )% | ||||||||||
| Selling, general and administrative |
105,193 | 173,936 | (68,743 | ) | (40 | )% | ||||||||||
| Research and development |
1,306 | 9,002 | (7,696 | ) | (85 | )% | ||||||||||
| Amortization of intangible assets |
10,097 | 13,873 | (3,776 | ) | (27 | )% | ||||||||||
| Gain of sale of assets |
— | (15,365 | ) | 15,365 | 100 | % | ||||||||||
| Total costs and expenses |
343,684 | 574,494 | (230,810 | ) | (40 | )% | ||||||||||
| loss from operations |
(84,264 | ) | (101,092 | ) | 16,828 | 17 | % | |||||||||
Revenue. Revenue from services for the six months ended June 30, 2023 decreased by approximately $214.0 million compared to the six months ended June 30, 2022. The decrease in revenue for the six months ended June 30, 2023 reflects lower demand for COVID-19 testing and lower COVID-19 reimbursement of $175.5 million and $2.2 million, respectively. BioReference performed 102 thousand molecular tests for COVID-19 and 73 thousand serology antibody tests during the six months ended June 30, 2023, which represented 3.8% of total testing volume for that period. In comparison, the six months ended June 30, 2022 included 2.9 million molecular tests for COVID-19 and 0.2 million serology antibody tests, which represented 41.7% of total testing volume for the period. The reduction in reimbursement reflects an increase in utilization of antigen point of care diagnostic tests as well as a change in the mix of customers, which have varying contract prices depending on the level of services we provide.
For the six months ended June 30, 2023, clinical test volume increased $24.7 million, while clinical test reimbursement decreased $12.7 million, respectively, as a result of the mix of testing ordered. Furthermore, as a result of our April 2022 sale of GeneDx in the GeneDx Transaction (as defined below), genomic test revenues decreased by $48.3 million.
Estimated collection amounts are subject to the complexities and ambiguities of billing, reimbursement regulations and claims processing, as well as considerations unique to Medicare and Medicaid programs, and require us to consider the potential for retroactive adjustments when estimating variable consideration in the recognition of revenue in the period the related services are rendered. For the six months ended June 30, 2023, negative revenue adjustments due to changes in estimates of implicit price concessions for performance obligations satisfied in prior periods of $18.7 million were recognized. Revenue adjustments for the six months ended June 30, 2023 were primarily due to lower COVID-19 test reimbursement estimates. For the six months ended June 30, 2022, negative revenue adjustments due to changes in estimates of implicit price concessions for performance obligations satisfied in prior periods of $21.2 million were recognized. Revenue adjustments for the six months ended June 30, 2022 were primarily due to lower COVID-19 test reimbursement estimates.
The composition of revenue from services by payor for the six months ended June 30, 2023 and 2022 was as follows:
| Six months ended June 30, |
||||||||
| (In thousands) |
2023 |
2022 |
||||||
| Healthcare insurers |
$ | 157,365 | $ | 172,269 | ||||
| Government payers |
41,267 | 53,263 | ||||||
| Client payers |
52,443 | 240,021 | ||||||
| Patients |
8,345 | 7,849 | ||||||
| Total |
$ | 259,420 | $ | 473,402 | ||||
Client payors include cities, states and companies for which BioReference provides COVID-19 testing services.
Cost of revenue. Cost of revenue for the six months ended June 30, 2023 decreased $166.0 million compared to the six months ended June 30, 2022. Cost of revenue decreased primarily due to a decline in the volume of COVID-19 tests performed during the six months ended June 30, 2023 compared to 2022. Cost of revenue for the six months ended June 30, 2023 also decreased due to changes in the mix of testing ordered during the period. Cost of revenue also decreased by $34.9 million as a result of the GeneDx Transaction in April 2022.
Selling, general and administrative expenses. Selling, general and administrative expenses for the six months ended June 30, 2023 and 2022 were $105.2 million and $173.9 million, respectively. Selling, general and administrative expenses in our diagnostics segment decreased primarily due to the continued cost-reduction initiatives implemented at Bio Reference as we strive to return to profitability following the buildup and then decline of COVID related testing, as well as decreased expenses due to the GeneDx Transaction.
Research and development expenses. The following table summarizes the components of our research and development expenses:
| Research and Development Expenses |
Six months ended June 30, |
|||||||
| 2023 |
2022 |
|||||||
| Research and development employee-related expenses |
$ | 826 | $ | 7,159 | ||||
| Other internal research and development expenses |
480 | 1,843 | ||||||
| Total research and development expenses |
$ | 1,306 | $ | 9,002 | ||||
The decrease in research and development expenses for the six months ended June 30, 2023 was primarily related to the development of more efficient clinical testing services at BioReference and partly as a result of the disposition of GeneDx during the second quarter of 2022.
Amortization of intangible assets. Amortization of intangible assets was $10.1 million and $13.9 million, respectively, for the six months ended June 30, 2023 and 2022. Amortization expense reflects the amortization of acquired intangible assets with defined useful lives. Amortization expense declined during the six months ended June 30, 2023 due to the disposition of GeneDx in April 2022 and to acquired intangible assets becoming fully amortized.
Gain on sale of assets. Gain on sale of assets for the six months ended June 30, 2022, was $15.4 million due to the disposition of GeneDx in April 2022.
Pharmaceuticals
| For the six months ended June 30, |
||||||||||||||||
| (In thousands) |
2023 |
2022 |
Change |
% Change |
||||||||||||
| Revenues: |
||||||||||||||||
| Revenue from products |
$ | 83,883 | $ | 72,550 | $ | 11,333 | 16 | % | ||||||||
| Revenue from transfer of intellectual property and other |
159,692 | 93,159 | 66,533 | 71 | % | |||||||||||
| Total revenues |
243,575 | 165,709 | 77,866 | 47 | % | |||||||||||
| Costs and expenses: |
||||||||||||||||
| Cost of revenue |
50,165 | 45,139 | 5,026 | 11 | % | |||||||||||
| Selling, general and administrative |
28,392 | 25,129 | 3,263 | 13 | % | |||||||||||
| Research and development |
49,419 | 27,100 | 22,319 | 82 | % | |||||||||||
| Contingent Consideration |
102 | 69 | 33 | 48 | % | |||||||||||
| Amortization of intangible assets |
32,912 | 30,945 | 1,967 | 6 | % | |||||||||||
| Total costs and expenses |
160,990 | 128,382 | 32,608 | 25 | % | |||||||||||
| Income from operations |
82,585 | 37,327 | 45,258 | 121 | % | |||||||||||
Revenue. The increase in revenue from products for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 was driven by an increase in sales from OPKO Chile and OPKO Mexico, which were positively impacted by foreign exchange fluctuations of approximately $2.1 million, as well as increased sales of Rayaldee. Revenue from sales of Rayaldee for the six months ended June 30, 2023 and 2022 was $14.4 million and $11.3 million, respectively. Revenue from transfer of intellectual property and other for the six months ended June 30, 2023 reflects revenue of $90.0 million triggered by the FDA approval of NGENLA (Somatrogon) and a $50.0 million payment from Merck in consideration for the rights granted to Merck under the Merck Agreement (as defined in Note 14 to our condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q), a $7.0 million payment from Vifor (as defined in Note 14 to our condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q) triggered by the German price approval for Rayaldee and a $2.5 million payment from Nicoya due to Nicoya’s submission of the investigational new drug application to China's Center for Drug Evaluation. For the six months ended June 30, 2022, revenue from transfer of intellectual property and other reflects a $85.0 million regulatory milestone payments from Pfizer due from the commencement of sales from NGENLA (Somatrogon) in Europe and Japan and $3.0 million related to a sales milestone from Vifor.
Cost of revenue. Cost of revenue for the six months ended June 30, 2023 increased $5.0 million compared to the six months ended June 30, 2022 driven by an increase in sales as well as changes in product mix during the period at our international operating companies, as well as by higher inventory costs compared to the prior period and partially impacted by unfavorable foreign exchange fluctuations of $1.3 million.
Selling, general and administrative expenses. Selling, general and administrative expenses for the six months ended June 30, 2023 and 2022 were $28.4 million and $25.1 million, respectively. The increase in selling, general and administrative expenses was due to an increase in employee-related expenses from our international operations and Rayaldee.
Research and development expenses. Research and development expenses for the six months ended June 30, 2023 and 2022 were $49.4 million and $27.1 million, respectively. Research and development expenses include external and internal expenses, partially offset by third-party grants and funding arising from collaboration agreements. External expenses include clinical and non-clinical activities performed by contract research organizations, lab services, purchases of drug and diagnostic product materials and manufacturing development costs. We track external research and development expenses by individual program for phase 3 clinical trials for drug approval and premarket approval for diagnostics tests, if any. Internal expenses include employee-related expenses such as salaries, benefits and equity-based compensation expense. Other internal research and development expenses are incurred to support overall research and development activities and include expenses related to general overhead and facilities.
The following table summarizes the components of our research and development expenses:
| Research and Development Expenses |
Six months ended June 30, |
|||||||
| 2023 |
2022 |
|||||||
| External expenses: |
||||||||
| Manufacturing expense for biological products |
$ | 5,979 | $ | 3,319 | ||||
| Phase III studies |
3,127 | 4,832 | ||||||
| Post-marketing studies |
159 | 12 | ||||||
| Earlier-stage programs |
30,075 | 5,714 | ||||||
| Research and development employee-related expenses |
16,762 | 11,953 | ||||||
| Other internal research and development expenses |
2,003 | 1,270 | ||||||
| Third-party grants and funding from collaboration agreements |
(8,686 | ) | — | |||||
| Total research and development expenses |
$ | 49,419 | $ | 27,100 | ||||
The increase in research and development expenses for the six months ended June 30, 2023 was primarily due to research expenses at ModeX, including a $12.5 million payment to Sanofi under the Sanofi In-License Agreement (each as defined in Note 14 to our condensed consolidated financial statements contained in this Quarterly Report on Form 10- Q), partially offset by lower expenses related to Somatrogon (hGH-CTP) due to the closure of the open-label extension studies in countries in which Somatrogon (hGH-CTP) received marketing authorization. Research and development expenses for the pharmaceutical segment for the six months ended June 30, 2023 and 2022 included equity-based compensation expense of $1.8 million and $0.8 million, respectively.
Contingent consideration. Contingent consideration for the six months ended June 30, 2023 and 2022 was $0.1 million and $0.1 million of expense, respectively. Contingent consideration for the six months ended June 30, 2023 and 2022 was primarily attributable to changes in assumptions regarding the timing of achievement of future milestones for OPKO Renal, and potential amounts payable to former stockholders of OPKO Renal in connection therewith, pursuant to our acquisition agreement in March 2013.
Amortization of intangible assets. Amortization of intangible assets was $32.9 million and $30.9 million, respectively, for the six months ended June 30, 2023 and 2022. Amortization expense reflects the amortization of acquired intangible assets with defined useful lives. Our indefinite lived IPR&D assets will not be amortized until the underlying development programs are completed. Upon obtaining regulatory approval by the FDA, the IPR&D assets will be accounted for as a finite-lived intangible asset and amortized on a straight-line basis over its estimated useful life. In the first half of 2022, we reclassified $590.2 million of IPR&D related to Somatrogon (hGH-CTP) from IPR&D in our Condensed Consolidated Balance Sheet upon the approval of NGENLA (Somatrogon) in Europe and Japan. The assets will be amortized on a straight-line basis over their estimated useful life of approximately 12 years.
Corporate
| For the six months ended June 30, |
||||||||||||||||
| (In thousands) |
2023 |
2022 |
Change |
% Change |
||||||||||||
| Costs and expenses: |
||||||||||||||||
| Selling, general and administrative |
$ | 21,851 | $ | 19,935 | $ | 1,916 | 10 | % | ||||||||
| Research and development |
39 | (536 | ) | 575 | 107 | % | ||||||||||
| Total costs and expenses |
21,890 | 19,399 | 2,491 | 13 | % | |||||||||||
| Loss from operations |
(21,890 | ) | (19,399 | ) | (2,491 | ) | (13 | )% | ||||||||
Operating loss for our unallocated corporate operations for the six months ended June 30, 2023 and 2022 was $21.9 million and $19.4 million, respectively, and principally reflect general and administrative expenses incurred in connection with our corporate operations. The increase in operating loss for our unallocated corporate operations for the six months ended June 30, 2023 was primarily due to increase in employee expenses and professional fees, partially offset by a decrease in legal fees.
Other
Interest income. Interest income for the six months ended June 30, 2023 and 2022 was $2.1 million and $0.2 million, respectively. The increase is driven by having higher average cash and investment balances as a result of the cash received related to the disposition of GeneDx, as well as increased interest rates between the two periods.
Interest expense. Interest expense for the six months ended June 30, 2023 and 2022 was $6.6 million and $5.7 million, respectively. Interest expense was principally related to interest incurred on the 2025 Notes, the 2023 Convertible Notes, the 2033 Senior Notes, and BioReference’s outstanding debt under the Credit Agreement.
Fair value changes of derivative instruments, net. Fair value changes of derivative instruments, net for the six months ended June 30, 2023 and 2022, were $0.9 million of expense and $0.2 million reversal of expense, respectively. Derivative expense for the six months ended June 30, 2023 and 2022, was principally related to the change in fair value on foreign currency forward exchange contracts at OPKO Chile.
Other income (expense), net. Other income (expense), net for the six months ended June 30, 2023 and 2022, was $4.4 million and $74.4 million of expense, respectively. Other income (expense), net for the six months ended June 30, 2023, and 2022, includes $8.3 million and $71.2 million, respectively, of expense as a result of a decrease in the fair value of our investment in GeneDx Holdings (as defined below). Foreign currency gains of $2.0 million and $1.8 million of losses were the majority of other expenses for the six months ended June 30, 2023, and 2022, respectively.
Income tax benefit (provision). Our income tax benefit (provision) for the six months ended June 30, 2023 and 2022 was $(4.4) million and $6.2 million, respectively, and reflects quarterly results using our expected effective tax rate. For the six months ended June 30, 2023, the tax rate differed from the U.S. federal statutory rate of 21% primarily due to a $22.0 million discrete benefit resulting from reduced tax rates that will be applicable to existing foreign deferred tax liabilities, as well as the relative mix in earnings and losses in the U.S. versus foreign tax jurisdictions, and operating results in tax jurisdictions which do not result in a tax benefit.
Loss from investments in investees. We have made investments in certain early stage companies that we perceive to have valuable proprietary technology and significant potential to create value for us as a shareholder or member. We account for these investments under the equity method of accounting, resulting in the recording of our proportionate share of their losses until our share of their loss exceeds our investment. Until the investees’ technologies are commercialized, if ever, we anticipate they will report net losses. Loss from investments in investees was $0.1 million and $0.3 million for the six months ended June 30, 2023 and 2022, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2023, we had cash and cash equivalents of approximately $108.1 million, which does not include the $90 million milestone payment from Pfizer that is expected to be received in August 2023. Cash used in operations of $23.0 million for the six months ended June 30, 2023 principally reflects milestone payments of $90.0 million, $7.0 million and $2.5 million from Pfizer, Vifor and Nicoya, respectively, and general and administrative expenses related to our corporate operations and research and development activities. Cash used in investing activities for the six months ended June 30, 2023 primarily reflects an investment of $5.0 million in GeneDx Holdings Class A common stock and capital expenditures of $7.6 million. Cash used in financing activities of $9.7 million primarily reflects net borrowings on our lines of credit and $3.0 million redemption of the 2033 Senior Notes. We have historically not generated sustained positive cash flow sufficient to offset our operating and other expenses, and our primary sources of cash have been from the public and private placement of equity, the issuance of the 2023 Convertible Notes, 2025 Notes and credit facilities available to us.
In June 2023, the Company and Pfizer announced that the FDA approved NGENLA (Somatrogon), a once-weekly injection to treat pediatric growth hormone deficiency in the United States. With the achievement of the FDA approval milestone, during the second quarter of 2023 we recorded $90.0 million of revenue under the Restated Pfizer Agreement.
On March 8, 2023, ModeX, the Company (with respect to certain sections), and Merck entered into a License and Research Collaboration Agreement (the “Merck Agreement under”) pursuant to which Merck obtained a license to certain patent rights and know-how in connection with the development of ModeX’s preclinical nanoparticle vaccine candidate targeting the Epstein -Barr Virus. In consideration for the rights granted to Merck under the Merck Agreement, we received an initial one-time, non-refundable upfront payment of $50.0 million in April 2023. Certain of the rights subject to the license provided by us under the Merck Agreement were obtained by us from Sanofi pursuant to the Sanofi In-License Agreement stipulates, and because a portion of the upfront payment, milestones and royalties received by us under the Merck Agreement may be payable to Sanofi under the terms of the Sanofi In-License Agreement, of which $12.5 million was paid to Sanofi during the second quarter of 2023.
As part of their strategic collaboration, ModeX and Merck have put in place a research plan to manage research and other development activities related to the development of a Vaccine or Product including a joint steering committee to facilitate the research program. As part of the research plan, they will use a third-party contract development and manufacturing organization (“CDMO”) to carry out such activities unless otherwise agreed. Development costs incurred by ModeX in furtherance of these development activities will be reimbursed by Merck. To date, we have spent $8.2 million of development costs related to the Epstein -Barr Virus, for which Merck will provide reimbursement.
On May 9, 2022, the Company entered into an Agreement and Plan of Merger (the “ModeX Merger Agreement”), pursuant to which we acquired ModeX. The Company paid the entirety of the $300.0 million purchase price in shares of Common Stock (the “Consideration Shares”) to the former stockholders of ModeX. The Consideration Shares were valued at $219.4 million, based on the closing price per share of our Common Stock of $2.44 as reported by NASDAQ on the closing date, which reflected the deduction from the purchase price of the value of certain equity awards issued by the Company to ModeX employees in an aggregate amount equal to $12.4 million on the closing date. Included in the total fair value of consideration transferred of $221.7 million were $2.3 million of fully vested equity awards. The Company deposited 10% of the Consideration Shares in a twelve-month escrow for purposes of satisfying the potential indemnity obligations of the sellers under the ModeX Merger Agreement.
On April 29, 2022, the Company completed the disposition (the “GeneDx Transaction.”) of its former subsidiary, GeneDx LLC (f/k/a GeneDx, Inc. “GeneDx”), to GeneDx Holdings Corp. (f/k/a “Sema4 Holdings Corp.”), a Delaware corporation (“GeneDx Holdings”). GeneDx Holdings paid to the Company aggregate consideration of $150 million in cash (before deduction of transaction expenses and other customary purchase price adjustments), together with the Closing Shares (as defined in Note 1 to our condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q). Based on the closing stock price of GeneDx Holdings as of April 29, 2022, the total upfront consideration represented approximately $322 million. Additionally, subject to GeneDx achieving certain revenue targets for the fiscal years ending December 31, 2022 and 2023, we are eligible to receive an earnout payment in cash or stock (at GeneDx Holdings’ discretion) equal to a maximum of 30.9 million shares of GeneDx Holdings’ Class A common stock if paid in stock (the “Milestone Consideration”). We received 23.1 million shares of Class A Common Stock with respect to Milestone Consideration for the year ended December 31, 2022. As of June 30, 2023, the aggregate value of our GeneDx Holdings investment based on the quoted market price of their respective shares of common stock and the number of shares held by us was $21.2 million.
In April 2022, Pfizer notified OPKO that NGENLA received pricing approval in Germany and Japan. NGENLA was granted marketing authorization by the Ministry of Health, Labour and Welfare in Japan and by the European Commission in January and February of 2022, respectively. With the achievement of these milestones, we received $85.0 million in milestone payments in 2022 under the Restated Pfizer Agreement.
In February 2019, we issued $200.0 million aggregate principal amount of the 2025 Notes in an underwritten public offering. The 2025 Notes bear interest at a rate of 4.50% per year, payable semiannually in arrears on February 15 and August 15 of each year. The 2025 Notes mature on February 15, 2025, unless earlier repurchased, redeemed or converted.
Holders may convert their 2025 Notes into shares of Common Stock at their option at any time prior to the close of business on the business day immediately preceding November 15, 2024, subject to the satisfaction of certain conditions. Upon conversion, we will pay or deliver, as the case may be, cash, shares of our Common Stock, or a combination of cash and shares of our Common Stock, at our election.
The current conversion rate for the 2025 Notes is 236.7424 shares of Common Stock per $1,000 principal amount of 2025 Notes (equivalent to a conversion price of approximately $4.22 per share of Common Stock). The conversion rate for the 2025 Notes is subject to adjustment in certain events but will not be adjusted for any accrued and unpaid interest.
In May 2021, we entered into exchange agreements with certain holders of the 2025 Notes pursuant to which the holders exchanged $55.4 million in aggregate principal amount of the outstanding 2025 Notes for 19,051,270 shares of our Common Stock (the “Exchange”).
In February 2018, we issued the 2023 Convertible Notes in the aggregate principal amount of $55.0 million, with an original maturity date in February 2023. Each holder of a 2023 Convertible Note has the option, from time to time, to convert all or any portion of the outstanding principal balance of such 2023 Convertible Note, together with accrued and unpaid interest thereon, into shares of our Common Stock at a conversion price of $5.00 per share. We may redeem all or any part of the then issued and outstanding 2023 Convertible Notes, together with accrued and unpaid interest thereon upon no fewer than 30 days, and no more than 60 days, notice to the holders. The 2023 Convertible Notes contain customary events of default and representations and warranties of OPKO. On February 10, 2023, the Company amended the 2023 Convertible Notes to extend the maturity to January 31, 2025, and to reset the conversion price to the 10 day volume weighted average price immediately preceding the date of the amended note, plus a 25% conversion premium, or $1.66 per share. Interest under the 2023 Convertible Notes accrues from the most recent date to which interest has been paid or, if no interest has been paid, from the date of issuance, until the principal and accrued and unpaid interest are paid in full.
As of June 30, 2023, the total commitments under our Credit Agreement with CB and our lines of credit with financial institutions in Chile and Spain were $43.4 million, of which $26.1 million was drawn as of June 30, 2023. At June 30, 2023, the weighted average interest rate on these lines of credit was approximately 8.8%. These lines of credit are short-term and are used primarily as a source of working capital. The highest aggregate principal balance at any time outstanding during the six months ended June 30, 2023 was $26.4 million. We intend to continue to draw under these lines of credit as needed. There is no assurance that these lines of credit or other funding sources will be available to us on acceptable terms, or at all, in the future.
The Credit Agreement provides for a $50.0 million secured revolving credit facility and includes a $20.0 million sub-facility for swingline loans and a $20.0 million sub-facility for the issuance of letters of credit. The Credit Agreement matures on August 30, 2025 and is guaranteed by all of BioReference’s domestic subsidiaries, subject to certain exceptions. The Credit Agreement is also secured by substantially all assets of BioReference and its domestic subsidiaries, subject to certain exceptions, as well as a non-recourse pledge by us of our equity interest in BioReference. Availability under the Credit Agreement is based on a borrowing base composed of eligible accounts receivables of BioReference and certain of its subsidiaries, as specified therein. As of June 30, 2023, $13.3 million remained available for borrowing under the Credit Agreement.
In connection with our agreements with Merck, Pfizer, Vifor, Nicoya and CAMP4, we are eligible to receive various milestone payments and royalty considerations. Under the terms of the Merck Agreement, we received an initial payment of $50 million and are also eligible to receive up to an additional $872.5 million upon the achievement of certain commercial and development milestones under several indications. We are also eligible to receive tiered royalty payments ranging from high single digits to low double digits upon achievement of certain sales targets of the Product (as defined in the Merck Agreement). Under the terms of the Restated Pfizer Agreement, we have received or are eligible to receive up to an additional $275.0 million upon the achievement of certain regulatory milestones, including $90 million triggered by the FDA approval in the US and $85 million due to the commencement of sales from NGENLA (Somatrogon) in Europe and Japan, which we received in 2022. In addition, we are eligible to receive regional, tiered gross profit sharing for both Somatrogon (hGH-CTP) and Pfizer’s Genotropin®. Under the terms of the Vifor Agreement, we are entitled to receive up to an additional $10 million in regulatory milestones and $207 million in milestone payments tied to the launch, pricing and sales of Rayaldee, including a $7 million regulatory milestone payment we recorded in the first quarter of 2023 triggered by the German price approval for Rayaldee and $3 million regulatory milestone payment we recognized in 2022 following the first sale of Rayaldee in Europe. In addition, we are eligible to receive tiered, double-digit royalty payments. Under the terms of the Nicoya Agreement, we received an initial upfront payment of $5 million and are eligible to receive an aggregate of $5 million tied to the first anniversary of the effective date of the Nicoya Agreement, of which we have received $2.5 million. Furthermore, we received the additional $2.5 million upon Nicoya’s submission of the investigational new drug application to the Center for Drug Evaluation of China in March 2023. We are also eligible to receive up to an additional aggregate amount of $115 million upon the achievement of certain development, regulatory and sales-based milestones by Nicoya for the Nicoya Product in the Nicoya Territory. We are also eligible to receive tiered, double digit royalty payments at rates in the low double digits on net product sales within the Nicoya Territory and in the Nicoya Field. Under the terms of the CAMP4 Agreement, we received an initial upfront payment of $1.5 million and we are eligible to receive up to $3.5 million in development milestone payments for Dravet syndrome products and $4.0 million for non-Dravet syndrome products, as well as sales milestones of up to $90 million for Dravet syndrome products and up to $90 million for non-Dravet syndrome products.
In connection with our acquisitions of CURNA and OPKO Renal, we agreed to pay future consideration to the sellers upon the achievement of certain events up to an additional $125.0 million in either shares of our Common Stock or cash, at our option subject to the achievement of certain milestones, to the former shareholders of OPKO Renal. As a result of our execution of the CAMP4 Agreement, we will have to pay a percentage of any payments received under the CAMP4 Agreement to the former CURNA stockholders.
We believe that the cash and cash equivalents on hand at June 30, 2023 and the amounts available to be borrowed under our lines of credit are sufficient to meet our anticipated cash requirements for operations and debt service beyond the next 12 months. We based this estimate on assumptions that may prove to be wrong or are subject to change, and we may be required to use our available cash resources sooner than we currently expect. If we acquire additional assets or companies, accelerate our product development programs or initiate additional clinical trials, we will need additional funds. Our future cash requirements, and the timing of those requirements, will depend on a number of factors, including the approval and success of our products and products in development, particularly our long acting Somatrogon (hGH-CTP) for which we have received approval in over 40 markets, including the United States, Europe, Japan, Australia and Canada, the commercial success of Rayaldee, BioReference’s financial performance, possible acquisitions and dispositions, the continued progress of research and development of our product candidates, the timing and outcome of clinical trials and regulatory approvals, the costs involved in preparing, filing, prosecuting, maintaining, defending, and enforcing patent claims and other intellectual property rights, the status of competitive products, the availability of financing, our success in developing markets for our product candidates and results of government investigations, payor claims, and legal proceedings that may arise, including, without limitation class action and derivative litigation to which we are subject, and our ability to obtain insurance coverage for such claims. We have historically not generated sustained positive cash flow and if we are not able to secure additional funding when needed, we may have to delay, reduce the scope of, or eliminate one or more of our clinical trials or research and development programs or possible acquisitions or reduce our marketing or sales efforts or cease operations.
The following table provides information as of June 30, 2023, with respect to the amounts and timing of our known contractual obligation payments due by period.
| Contractual obligations |
Remaining six months ending |
|||||||||||||||||||||||||||
| (In thousands) |
December 31, 2023 |
2024 |
2025 |
2026 |
2027 |
Thereafter |
Total |
|||||||||||||||||||||
| Open purchase orders |
$ | 46,137 | $ | 236 | $ | 5 | $ | — | $ | — | $ | — | $ | 46,378 | ||||||||||||||
| Operating leases |
6,309 | 8,367 | 5,072 | 3,596 | 3,266 | 9,542 | 36,152 | |||||||||||||||||||||
| Finance leases |
1,547 | 2,592 | 2,003 | 1,390 | 588 | 1,959 | 10,079 | |||||||||||||||||||||
| 2025 and 2023 Convertible Notes |
— | — | 212,299 | — | — | — | 212,299 | |||||||||||||||||||||
| Mortgages and other debts payable |
2,061 | 1,914 | 1,568 | 1,347 | 1,090 | 4,728 | 12,708 | |||||||||||||||||||||
| Lines of credit |
26,072 | — | — | — | — | — | 26,072 | |||||||||||||||||||||
| Interest commitments |
3,535 | 6,789 | 5,181 | 207 | 205 | 615 | 16,532 | |||||||||||||||||||||
| Total |
$ | 85,661 | $ | 19,898 | $ | 226,128 | $ | 6,540 | $ | 5,149 | $ | 16,844 | $ | 360,220 | ||||||||||||||
The preceding table does not include information where the amounts of the obligations are not currently determinable, including the following:
| • |
Contractual obligations in connection with clinical trials, which span over two years, and that depend on patient enrollment. The total amount of expenditures is dependent on the actual number of patients enrolled and as such, the contracts do not specify the maximum amount we may owe. |
| • |
Product license agreements effective during the lesser of 15 years or patent expiration whereby payments and amounts are determined by applying a royalty rate on uncapped future sales. |
| • |
Contingent consideration that includes payments upon achievement of certain milestones including meeting development milestones such as the completion of successful clinical trials, NDA approvals by the FDA and revenue milestones upon the achievement of certain revenue targets all of which are anticipated to be paid within the next seven years and are payable in either shares of our Common Stock or cash, at our option, and that may aggregate up to $125.0 million. |
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There were no material changes to our critical accounting policies and estimates described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 that have had a material impact on our Condensed Consolidated Financial Statements and related notes.
RECENT ACCOUNTING PRONOUNCEMENTS
Recently adopted accounting pronouncements.
In August 2020, the FASB issued ASU No. 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40).” ASU 2020-06 simplifies the accounting for convertible instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred stock. The ASU is effective for public entities for fiscal years beginning after December 15, 2021, with early adoption permitted. As required, we adopted ASU 2020-06 on January 1, 2022 and used the modified retrospective approach for all convertible debt instruments at the beginning of the period of adoptions. Results for reporting periods beginning January 1, 2022 are presented under ASU 2020-06, while prior period amounts were not adjusted and continue to be reported in accordance historic accounting guidance.
Under the modified approach, entities will apply the guidance to all financial instruments that are outstanding as of the beginning of the year of adoption with the cumulative effect recognized as an adjustment to the opening balance of retained earnings. ASU 2020-06 eliminates the cash conversion and beneficial conversion feature models in ASC 470-20 that require an issuer of certain convertible debt and preferred stock to separately account for embedded conversion features as a component of equity. The adoption of ASU 2020-06 at January 1, 2022 resulted in an increase of the Convertible notes of $25.6 million, a reduction of the Accumulated deficit of $17.5 million and a reduction of Additional paid-in capital of $39.1 million.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of doing business, we are exposed to the risks associated with foreign currency exchange rates and changes in interest rates.
Foreign Currency Exchange Rate Risk – We operate globally and, as such, we are subject to foreign exchange risk in our commercial operations as portions of our revenues are exposed to changes in foreign currency exchange rates, primarily the Chilean Peso, the Mexican Peso, and the Euro.
Although we do not speculate in the foreign exchange market, we may from time to time manage exposures that arise in the normal course of business related to fluctuations in foreign currency exchange rates by entering into offsetting positions through the use of foreign exchange forward contracts. Certain firmly committed transactions may be hedged with foreign exchange forward contracts. As exchange rates change, gains and losses on the exposed transactions are partially offset by gains and losses related to the hedging contracts. Both the exposed transactions and the hedging contracts are translated and fair valued, respectively, at current spot rates, with gains and losses included in earnings.
Our derivative activities, which consist of foreign exchange forward contracts, are initiated to economically hedge forecasted cash flows that are exposed to foreign currency risk. The foreign exchange forward contracts generally require us to exchange local currencies for foreign currencies based on pre-established exchange rates at the contracts’ maturity dates. As exchange rates change, gains and losses on these contracts are generated based on the change in the exchange rates that are recognized in the Condensed Consolidated Statements of Operations and offset the impact of the change in exchange rates on the foreign currency cash flows that are hedged. If the counterparties to the exchange contracts do not fulfill their obligations to deliver the contracted currencies, we could be at risk for currency related fluctuations. Our foreign exchange forward contracts primarily hedge exchange rates on the Chilean Peso to the U.S. dollar. If Chilean Pesos were to strengthen or weaken in relation to the U.S. dollar, our loss or gain on hedged foreign currency cash-flows would be offset by the derivative contracts, with a net effect of zero.
Approximately 34.4% of revenue for the six months ended June 30, 2023, and approximately 23.6% of revenue for the six months ended June 30, 2022, were denominated in currencies other than the U.S. Dollar (USD). Our financial statements are reported in USD and, accordingly, fluctuations in exchange rates will affect the translation of revenues and expenses denominated in foreign currencies into USD for purposes of reporting the consolidated financial results. In the first six months of 2023 and during the year ended December 31, 2022, the most significant currency exchange rate exposures were the Euro and Chilean Peso. Gross accumulated currency translation adjustments recorded as a separate component of shareholders’ equity were $33.5 million and $39.9 million at June 30, 2023 and December 2022, respectively. For information on such open foreign exchange forward contracts for the three and six months ended June 30, 2023 and 2022 see “Management’s Discussion and Analysis—Results of Operations— Foreign Currency Exchange Rates.”
We do not engage in trading market risk sensitive instruments or purchasing hedging instruments or “other than trading” instruments that are likely to expose us to significant market risk, whether interest rate, foreign currency exchange, commodity price, or equity price risk.
Interest Rate Risk – Our exposure to interest rate risk relates to our cash and investments and to our borrowings. We generally maintain an investment portfolio of money market funds and marketable securities. The securities in our investment portfolio are not leveraged, and are, due to their very short-term nature, subject to minimal interest rate risk. We currently do not hedge interest rate exposure. Because of the short-term maturities of our investments, we do not believe that a change in market interest rates would have a significant negative impact on the value of our investment portfolio except for reduced income in a low interest rate environment.
At June 30, 2023, we had cash and cash equivalents of $108.1 million. The weighted average interest rate related to our cash and cash equivalents for the three months ended June 30, 2023 was less than 1%. As of June 30, 2023, the principal outstanding balances under BioReference’s Credit Agreement with CB and our Chilean and Spanish lines of credit was $26.1 million in the aggregate at a weighted average interest rate of approximately 8.8%.
Our $55.0 million aggregate principal amount of our 2023 Convertible Notes has a fixed interest rate of 5%, and our $200.0 million aggregate principal amount of the 2025 Notes has a fixed interest rate of 4.50%, and therefore are not subject to fluctuations in market interest rates.
The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we may invest our excess cash in debt instruments of the U.S. Government and its agencies, bank obligations, repurchase agreements and high-quality corporate issuers, and money market funds that invest in such debt instruments, and, by policy, restrict our exposure to any single corporate issuer by imposing concentration limits. To minimize the exposure due to adverse shifts in interest rates, we maintain investments at an average maturity of generally less than three months.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, management concluded that our disclosure controls and procedures were effective as of June 30, 2023.
Changes to the Company’s Internal Control Over Financial Reporting
There have been no changes to the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
We are, from time to time, party to various legal proceedings arising out of our business. During the reporting period covered by this Quarterly Report on Form 10-Q, there have been no material changes to the description of legal proceedings set forth in our Annual Report on Form 10-K for the year ended December 31, 2022.
There have been no material changes to our risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
During the quarter ended June 30, 2023, none of our officers or directors adopted or terminated any contract, instruction or written plan for the purchase or sale of securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) under the Exchange Act or any "non-Rule 10b5-1 trading arrangement", as defined in It5em 408 of Regulation S-K.
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| Exhibit 101.INS |
Inline XBRL Instance Document |
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| Exhibit 101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
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| Exhibit 101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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| Exhibit 101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
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| Exhibit 101.LAB |
inline XBRL Taxonomy Extension Label Linkbase Document |
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| Exhibit 101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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| Exhibit 104 |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
+ Filed herewith.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: August 3, 2023 |
OPKO Health, Inc. |
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| /s/ Adam Logal |
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| Adam Logal |
||||||||
| Senior Vice President and Chief Financial |
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| Officer |