e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(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 March 31, 2011.
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 001-33528
OPKO Health, Inc.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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75-2402409 |
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(State or Other Jurisdiction of
Incorporation or Organization)
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(I.R.S. Employer Identification No.) |
4400 Biscayne Blvd.
Miami, FL 33137
(Address of Principal Executive Offices) (Zip Code)
(305) 575-4100
(Registrants Telephone Number, Including Area Code)
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.
þ YES o NO
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
YES o NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company (in Rule 12b-2 of the Exchange Act)
(Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act): YES o NO þ
As of May 1, 2011, the registrant had 285,060,055 shares of common stock outstanding.
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, or PSLRA, Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. 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. 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, 2010, and described from time to time in our reports filed with the Securities and
Exchange Commission. Except as required by law, we do not undertake any obligation to update
forward-looking statements. 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 a history of operating losses and we do not expect to become profitable in
the near future. |
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Our technologies are in an early stage of development and are unproven. |
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Our drug research and development activities may not result in commercially viable
products. |
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The results of previous clinical trials may not be predictive of future results, and
our current and planned clinical trials may not satisfy the requirements of the FDA or
other non-U.S. regulatory authorities. |
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We will require substantial additional funding, which may not be available to us on
acceptable terms, or at all. |
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Our business is substantially dependant on our ability to develop, launch and
generate revenue from our molecular diagnostic program. |
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We expect to finance future cash needs primarily through public or private offerings,
debt financings or strategic collaborations, which may dilute your stockholdings in the
Company. |
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If our competitors develop and market products that are more effective, safer or less
expensive than our future product candidates, our commercial opportunities will be
negatively impacted. |
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The regulatory approval process is expensive, time consuming and uncertain and may
prevent us or our collaboration partners from obtaining approvals for the
commercialization of some or all of our product candidates. |
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Failure to recruit and enroll patients for clinical trials may cause the development
of our product candidates to be delayed. |
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Even if we obtain regulatory approvals for our product candidates, the terms of
approvals and ongoing regulation of our products may limit how we manufacture and market
our product candidates, which could materially impair our ability to generate
anticipated revenues. |
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We may not meet regulatory quality standards applicable to our manufacturing and
quality processes. |
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Even if we receive regulatory approval to market our product candidates, the market
may not be receptive to our products. |
3
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If we fail to attract and retain key management and scientific personnel, we may be
unable to successfully develop or commercialize our product candidates. |
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In the event that we successfully evolve from a company primarily involved in
development to a company also involved in commercialization, we may encounter
difficulties in managing our growth and expanding our operations successfully. |
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If we fail to acquire and develop other products or product candidates, at all or on
commercially reasonable terms, we may be unable to diversify or grow our business. |
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We have no experience manufacturing our pharmaceutical product candidates other than
our Mexican facility and we therefore rely on third parties to manufacture and supply
our pharmaceutical product candidates, and would need to meet various standards
necessary to satisfy FDA regulations if and when we commence manufacturing. |
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We currently have no pharmaceutical or diagnostic marketing, sales or distribution
capabilities other than in Chile and Mexico for sales in those countries. If we are
unable to develop our sales and marketing and distribution capability on our own or
through collaborations with marketing partners, we will not be successful in
commercializing our pharmaceutical product candidates. |
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Independent clinical investigators and contract research organizations that we engage
to conduct our clinical trials may not be diligent, careful or timely. |
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The success of our business is dependent on the actions of our collaborative
partners. |
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Our license agreement with TESARO, Inc. is important to our business. If TESARO does
not successfully develop and commercialize rolapitant, our business could be adversely
affected. |
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If we are unable to obtain and enforce patent protection for our products, our
business could be materially harmed. |
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We do not have an exclusive arrangement in place with Dr. Tom Kodadek with respect to
technology or intellectual property that may be material to our business. |
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If we are unable to protect the confidentiality of our proprietary information and
know-how, the value of our technology and products could be adversely affected. |
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We rely heavily on licenses from third parties. |
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We license patent rights to certain of our technology from third-party owners. If
such owners do not properly maintain or enforce the patents underlying such licenses,
our competitive position and business prospects will be harmed. |
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Our commercial success depends significantly on our ability to operate without
infringing the patents and other proprietary rights of third parties. |
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Adverse results in material litigation matters or governmental inquiries could have a
material adverse effect upon our business and financial condition. |
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Medicare prescription drug coverage legislation and future legislative or regulatory
reform of the health care system may affect our ability to sell our products profitably. |
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Failure to obtain regulatory approval outside the United States will prevent us from
marketing our product candidates abroad. |
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We may not have the funding available to pursue acquisitions. |
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Acquisitions may disrupt our business, distract our management and may not proceed as
planned; and we may encounter difficulties in integrating acquired businesses. |
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Non-U.S. governments often impose strict price controls, which may adversely affect
our future profitability. |
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Our business may become subject to legal, economic, political, regulatory and other
risks associated with international operations. |
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The market price of our common stock may fluctuate significantly. |
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Directors, executive officers, principal stockholders and affiliated entities own a
significant percentage of our capital stock, and they may make decisions that you do not
consider to be in your best interests or in the best interests of our stockholders. |
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Compliance with changing regulations concerning corporate governance and public
disclosure may result in additional expenses. |
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If we are unable to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act
of 2002, as they apply to us, or our internal controls over financial reporting are not
effective, the reliability of our financial statements may be questioned and our common
stock price may suffer. |
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We may be unable to maintain our listing on the NYSE Amex, which could cause our
stock price to fall and decrease the liquidity of our common stock. |
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Future issuances of common stock and hedging activities may depress the trading price
of our common stock. |
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Provisions in our charter documents and Delaware law could discourage an acquisition
of us by a third party, even if the acquisition would be favorable to you. |
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We do not intend to pay cash dividends on our common stock in the foreseeable future. |
5
PART I. FINANCIAL INFORMATION
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 wholly-owned subsidiaries.
Item 1. Financial Statements
OPKO Health, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited) (in thousands except share data)
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March 31, 2011 |
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December 31, 2010 |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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$ |
47,879 |
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$ |
18,016 |
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Marketable securities |
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59,983 |
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Accounts receivable, net |
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14,001 |
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13,317 |
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Inventory, net |
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18,137 |
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19,957 |
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Prepaid expenses and other current assets |
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2,785 |
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2,782 |
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Total current assets |
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142,785 |
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54,072 |
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Property and equipment, net |
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2,771 |
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2,729 |
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Intangible assets, net |
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19,355 |
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9,964 |
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Goodwill |
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6,672 |
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5,856 |
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Investments |
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4,691 |
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5,114 |
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Other assets |
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33 |
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111 |
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Total assets |
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$ |
176,307 |
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$ |
77,846 |
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LIABILITIES, SERIES D PREFERRED STOCK, AND
SHAREHOLDERS EQUITY |
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Current liabilities |
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Accounts payable |
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$ |
4,574 |
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$ |
7,170 |
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Accrued expenses |
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5,557 |
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5,739 |
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Current portion of lines of credit |
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14,552 |
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14,690 |
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Total current liabilities |
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24,683 |
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27,599 |
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Long-term liabilities |
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1,883 |
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1,067 |
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Total liabilities |
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26,566 |
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28,666 |
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Commitments and contingencies |
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Series D preferred stock $0.01 par value, 2,000,000 shares authorized; 1,209,677
and 1,209,677 shares issued and outstanding (liquidation value of $33,613
and $33,013) at March 31, 2011 and December 31, 2010, respectively |
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26,128 |
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26,128 |
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Shareholders equity |
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Series A Preferred stock $0.01 par value, 4,000,000 shares authorized;
722,700 and 897,439 shares issued and outstanding (liquidation value of
$2,076 and $2,468) at March 31, 2011 and December 31, 2010,
respectively |
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7 |
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9 |
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Series C Preferred Stock $0.01 par value, 500,000 shares authorized;
No shares issued or outstanding |
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Common Stock $0.01 par value, 500,000,000 shares authorized;
285,042,867 and 255,412,706 shares issued and outstanding at
March 31, 2011 and December 31, 2010, respectively |
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2,850 |
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2,554 |
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Treasury stock - 45,154 shares at March 31, 2011 and December 31, 2010 |
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(61 |
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(61 |
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Additional paid-in capital |
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482,521 |
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376,008 |
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Accumulated other comprehensive income |
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2,424 |
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2,921 |
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Accumulated deficit |
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(364,128 |
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(358,379 |
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Total shareholders equity |
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123,613 |
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23,052 |
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Total liabilities, Series D Preferred Stock, and shareholders equity |
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$ |
176,307 |
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$ |
77,846 |
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The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of
these statements.
6
OPKO Health, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except share data)
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For the three months ended March 31, |
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2011 |
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2010 |
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Revenue |
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Product sales |
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$ |
8,635 |
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$ |
7,922 |
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Other revenue |
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13 |
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Total revenue |
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8,648 |
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7,922 |
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Cost of goods sold, excluding amortization of intangible assets |
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5,623 |
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5,528 |
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Gross margin, excluding amortization of intangible assets |
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3,025 |
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2,394 |
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Operating expenses |
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Selling, general and administrative |
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5,586 |
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4,243 |
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Research and development |
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1,645 |
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1,328 |
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Other operating expenses, principally amortization of
intangible assets |
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880 |
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889 |
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Total operating expenses |
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8,111 |
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6,460 |
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Operating loss |
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(5,086 |
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(4,066 |
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Other income (expense), net |
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38 |
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(340 |
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Loss before income taxes and investment losses |
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(5,048 |
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(4,406 |
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Income tax provision |
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233 |
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47 |
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Loss before investment losses |
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(5,281 |
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(4,453 |
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Loss from investments in investees |
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(423 |
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(231 |
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Net loss |
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(5,704 |
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(4,684 |
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Preferred stock dividend |
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(645 |
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(662 |
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Net loss attributable to common shareholders |
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$ |
(6,349 |
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$ |
(5,346 |
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Loss per share, basic and diluted |
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$ |
(0.02 |
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$ |
(0.02 |
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Weighted average number of common shares outstanding, basic
and diluted |
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261,042,274 |
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254,452,451 |
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The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these
statements.
7
OPKO Health, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
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For the three months ended March 31, |
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2011 |
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2010 |
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Cash flows from operating activities |
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Net loss |
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$ |
(5,704 |
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$ |
(4,684 |
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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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997 |
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971 |
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Accretion of debt discount related to notes payable |
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2 |
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60 |
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Equity-based compensation employees and non-employees |
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1,754 |
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1,205 |
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Loss from investments in investees |
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423 |
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231 |
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Provision for (recovery of) bad debt |
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28 |
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(10 |
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Provision for (reversal of) inventory reserves |
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62 |
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(63 |
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Changes in: |
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Accounts receivable |
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(598 |
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(1,668 |
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Inventory |
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1,391 |
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885 |
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Prepaid expenses and other current assets |
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(379 |
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(272 |
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Other assets |
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80 |
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103 |
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Accounts payable |
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(2,487 |
) |
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513 |
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Accrued expenses |
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(254 |
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50 |
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Net cash used in operating activities |
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(4,685 |
) |
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(2,679 |
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Cash flows from investing activity |
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Acquisition of businesses, net of cash |
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(10,538 |
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(1,447 |
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Purchase of marketable securities |
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(59,983 |
) |
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(4,999 |
) |
Capital expenditures |
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(108 |
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(203 |
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Net cash used in investing activity |
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(70,629 |
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(6,649 |
) |
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Cash flows from financing activities: |
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Issuance of common stock, including related parties, net |
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104,828 |
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Borrowing under lines of credit |
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3,027 |
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1,165 |
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Repayments under lines of credit |
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(2,827 |
) |
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(821 |
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Proceeds from the exercise of stock options and warrants |
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135 |
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2 |
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Repayments of notes payable and capital lease obligations |
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(2 |
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Net cash provided by financing activities |
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105,163 |
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344 |
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Effect of exchange rate changes on cash and cash equivalents |
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14 |
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Net increase (decrease) in cash and cash equivalents |
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29,863 |
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(8,984 |
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Cash and cash equivalents at beginning of period |
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18,016 |
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42,658 |
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Cash and cash equivalents at end of period |
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$ |
47,879 |
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$ |
33,674 |
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SUPPLEMENTAL INFORMATION |
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Interest paid |
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$ |
65 |
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$ |
46 |
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Issuance of capital stock to acquire Exakta-OPKO |
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$ |
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$ |
1,999 |
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The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these
statements.
8
OPKO Health, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1 BUSINESS AND ORGANZATION
We are a multi-national pharmaceutical and diagnostics company that seeks to establish
industry-leading positions in large and rapidly growing medical markets by leveraging our
discovery, development and commercialization expertise and our novel and proprietary technologies.
Our current focus is on conditions with major unmet medical needs including neurological disorders,
infectious diseases, oncology and ophthalmologic diseases. We are developing a range of solutions
to diagnose, treat and prevent these conditions, including molecular diagnostics tests, proprietary
pharmaceuticals and vaccines. We plan to commercialize these solutions on a global basis in large
and high growth markets, including emerging markets. We have already established emerging markets
pharmaceutical platforms in Chile and Mexico, which are delivering revenue and which we expect to
deliver cash flow and facilitate future market entry for our products currently in development. We
also actively explore opportunities to acquire complementary pharmaceuticals, compounds,
technologies, and businesses. We are a Delaware corporation, headquartered in Miami, Florida.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation. The accompanying unaudited interim condensed consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the
United States 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 accounting principles
generally accepted in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of only normal recurring adjustments) considered necessary
to present fairly the Companys results of operations, financial position and cash flows have been
made. The results of operations and cash flows for the three months ended March 31, 2011, are not
necessarily indicative of the results of operations and cash flows that may be reported for the
remainder of 2011 or for future periods. The unaudited condensed consolidated financial statements
should be read in conjunction with the 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, 2010.
Principles of consolidation. The accompanying unaudited condensed consolidated financial
statements include the accounts of OPKO Health, Inc. and our wholly-owned subsidiaries. All
significant intercompany accounts and transactions are eliminated in consolidation.
Use of Estimates. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 from those
estimates.
Cash and Cash Equivalents. Cash and cash equivalents consist of 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, and U.S. treasury
securities.
Marketable securities. Investments with original maturities of greater than 90 days and
remaining maturities of less than one year are classified as marketable securities. Marketable
securities include U.S. treasury securities. Unrealized gains and temporary losses on investments
are included in accumulated other comprehensive income (loss) as a separate component of
stockholders equity. Realized gains and losses, dividends, interest income, and declines in value
judged to be other-than-temporary credit losses are included in other income (expense).
Amortization of any premium or discount arising at purchase is included in interest income.
Comprehensive loss. Our comprehensive loss for the three months ended March 31, 2011 was $6.2
million and includes our net loss and the cumulative translation adjustment, net, for the
translation of our subsidiaries in Chile and Mexico. Comprehensive loss for the three months ended
March 31, 2010 was $5.0 million and includes our net loss for the three months and the cumulative
translation adjustment, net, for the translation of the results of our subsidiaries in Chile and
Mexico.
9
Revenue recognition. Generally, we recognize revenue from product sales when goods are
shipped and title and risk of loss transfer to our customers. Certain of our instrumentation
products are sold directly to end-users and require that we deliver, install and train the staff at
the end-users facility. As a result, we do not recognize revenue until the product is delivered,
installed and training has occurred for instrumentation products sold to end-users.
Other revenues include revenue related to upfront license payments, license fees and milestone
payments received through our license, collaboration and commercialization agreements. We analyze
our multiple-element arrangements to determine whether the elements can be separated and accounted
for individually as separate units of accounting.
Non-refundable license fees for the out-license of our technology are recognized depending on
the provisions of each agreement. We recognize non-refundable upfront license payments as revenue
upon receipt if the license has standalone value and the fair value of our undelivered obligations,
if any, can be determined. If the license is considered to have standalone value but the fair value
of any of the undelivered items cannot be determined, the license payments are recognized as
revenue over the period of our performance for such undelivered items or services. License fees
with ongoing involvement or performance obligations are recorded as deferred revenue once received
and generally are recognized ratably over the period of such performance obligation only after both
the license period has commenced and we have delivered the technology. Our assessment of our
obligations and related performance periods requires significant management judgment. If an
agreement contains research and development obligations, the relevant time period for the research
and development phase is based on management estimates and could vary depending on the outcome of
clinical trials and the regulatory approval process. Such changes could materially impact the
revenue recognized, and as a result, management reviews the estimates related to the relevant time
period of research and development on a quarterly basis.
Revenue from milestone payments related to arrangements under which we have continuing
performance obligations are recognized as revenue upon achievement of the milestone only if all of
the following conditions are met: the milestone payments are non-refundable; there was substantive
uncertainty at the date of entering into the arrangement that the milestone would be achieved; the
milestone is commensurate with either the vendors performance to achieve the milestone or the
enhancement of the value of the delivered item by the vendor; the milestone relates solely to past
performance; and the amount of the milestone is reasonable in relation to the effort expended or
the risk associated with the achievement of the milestone. If any of these conditions are not met,
the milestone payments are not considered to be substantive and are, therefore, deferred and
recognized as revenue over the term of the arrangement as we complete our performance obligations.
Total deferred revenue related to other revenues was $0.2 million and $0.2 million at March
31, 2011 and December 31, 2010, respectively.
Derivative financial instruments. We record derivative financial instruments on our balance
sheet at their fair value and the changes in the fair value are recognized in income when they
occur, the only exception being derivatives that qualify as hedges. 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 March 31, 2011 and December 31, 2010, our forward
contracts for inventory purchases did not meet the documentation requirements to be designated as
hedges. Accordingly, we recognize all changes in fair values in income. Refer to Note 7.
Product warranties. Product warranty expense is recorded concurrently with the recording of
revenue for product sales. The costs of warranties are accounted for as a component of cost of
sales. We estimate warranty costs based on our estimated historical experience and adjust for any
known product reliability issues.
Allowance for doubtful accounts. We analyze accounts receivable and historical bad debt
levels, customer credit worthiness and current economic trends when evaluating the adequacy of the
allowance for doubtful accounts using the specific identification method. Our reported net loss is
directly affected by our estimate of the collectability of accounts receivable. Estimated
allowances for sales returns are based upon our history of product returns. The amount of
allowance for doubtful accounts was $1.2 million at March 31, 2011 and December 31, 2010.
Segment reporting. Our chief operating decision-maker (CODM) is comprised of our executive
management with the oversight of our board of directors. Our CODM review our operating results and
operating plans and make resource allocation decisions on a company-wide or aggregate basis.
Accordingly, we have aggregated our three operating segments, instrumentation, pharmaceutical
operating business and pharmaceutical research and
10
development activities into two reporting segments, instrumentation and pharmaceutical as we
expect the businesses to have similar long-term economic characteristics.
Equity-based compensation. We measure the cost of employee 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 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 a financing cash inflow rather than as a reduction of taxes paid in
cash flow from operations. Equity-based compensation arrangements to non-employees are recorded at
their fair value on the measurement date. The measurement of equity-based compensation is subject
to periodic adjustment as the underlying equity instruments vest. During the three months ended
March 31, 2011 and 2010, we recorded $1.8 million and $1.2 million, respectively, of equity-based
compensation expense.
Recent accounting pronouncements. In December 2010, the FASB issued an amendment to the
disclosure of supplementary pro forma information for business combinations. The amendment
specifies that if a public entity presents comparative financial statements, the entity should
disclose revenue and earnings of the combined entity as though the business combination(s) that
occurred during the current year had occurred as of the beginning of the comparable prior annual
reporting period only. The amendment also expands the supplemental pro forma disclosures under
current accounting guidance to include a description of the nature and amount of material,
nonrecurring pro forma adjustments directly attributable to the business combination included in
the reported pro forma revenue and earnings. The amendment is effective prospectively for business
combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2010. The adoption of this amendment did not
have a material impact on our financial statement disclosures.
In December 2010, the FASB issued an amendment to the accounting for goodwill impairment
tests. The amendment modifies Step 1 of the impairment test for reporting units with zero or
negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of
the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In
determining whether it is more likely than not that a goodwill impairment exists, an entity should
consider whether there are any adverse qualitative factors indicating that an impairment may exist.
The qualitative factors are consistent with the existing guidance. The amendment is effective for
fiscal years, and interim periods within those years, beginning after December 15, 2010. The
adoption of this amendment did not have a material impact on our results of operations or financial
condition.
In December 2010, the FASB issued an amendment to the accounting for annual excise taxes paid
to the federal government by pharmaceutical manufacturers under health care reform. The liability
for the fee should be estimated and recorded in full upon the first qualifying branded prescription
drug sale with a corresponding deferred cost that is amortized to expense using a straight-line
method of allocation unless another method better allocates the fee over the calendar year that it
is payable. The amendment is effective for calendar years beginning after December 31, 2010, when
the fee initially becomes effective. As we currently do not manufacture pharmaceutical products in
the United States, we do not expect the adoption of this amendment to have a material impact on our
results of operations or financial condition.
In March 2010, the FASB reached a consensus to issue an amendment to the accounting for
revenue arrangements under which a vendor satisfies its performance obligations to a customer over
a period of time, when the deliverable or unit of accounting is not within the scope of other
authoritative literature, and when the arrangement consideration is contingent upon the achievement
of a milestone. The amendment defines a milestone and clarifies whether an entity may recognize
consideration earned from the achievement of a milestone in the period in which the milestone is
achieved. This amendment is effective for fiscal years beginning on or after June 15, 2010, with
early adoption permitted. We adopted this amendment prospectively for milestones achieved after
January 1, 2011. This amendment did not have a material impact on our results of operation or
financial condition.
In October 2009, the FASB issued an amendment to the accounting for multiple-deliverable
revenue arrangements. This amendment provides guidance on whether multiple deliverables exist, how
the arrangements should be separated, and how the consideration paid should be allocated. As a
result of this amendment, entities may be able to separate multiple-deliverable arrangements in
more circumstances than under existing accounting guidance. This guidance amends the requirement
to establish the fair value of undelivered products and services based on objective evidence and
instead provides for separate revenue recognition based upon managements best estimate of the
selling price for an undelivered item when there is no other means to determine the fair value of
that undelivered item. The existing guidance previously required that the fair value of the
undelivered item reflect the price of the item either sold in a separate transaction between
unrelated third parties or the price charged for each
11
item when the item is sold separately by the
vendor. If the fair value of all of the elements in the arrangement was
not determinable, then revenue was deferred until all of the items were delivered or fair
value was determined. We adopted this amendment prospectively for revenue arrangements entered
into or materially modified after January 1, 2011. This amendment did not have a material impact
on our results of operation or financial condition.
NOTE 3 LOSS PER SHARE
Basic loss per share is computed by dividing our net loss by the weighted average number of
shares outstanding during the period. Diluted earnings per share is computed by dividing our net
loss by the weighted average number of shares outstanding and the impact of all dilutive potential
common shares, primarily stock options. The dilutive impact of stock options and warrants are
determined by applying the treasury stock method.
A total of 28,506,408 and 19,071,146 potential common shares have been excluded from the
calculation of net loss per share for the three months ended March 31, 2011 and 2010, respectively,
because their inclusion would be anti-dilutive. As of March 31, 2011, the holders of our Series A
Preferred Stock and Series D Preferred Stock could convert their Preferred Shares into
approximately 830,511 and 13,553,759 shares of our Common Stock, respectively.
NOTE 4 COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
(in thousands) |
|
2011 |
|
|
2010 |
|
Accounts receivable, net: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
15,184 |
|
|
$ |
14,482 |
|
Less allowance for doubtful accounts |
|
|
(1,183 |
) |
|
|
(1,165 |
) |
|
|
|
|
|
|
|
|
|
$ |
14,001 |
|
|
$ |
13,317 |
|
|
|
|
|
|
|
|
Inventories, net: |
|
|
|
|
|
|
|
|
Raw materials (components) |
|
$ |
4,784 |
|
|
$ |
4,868 |
|
Work-in process |
|
|
1,222 |
|
|
|
889 |
|
Finished products |
|
|
12,634 |
|
|
|
14,632 |
|
Less inventory reserve |
|
|
(503 |
) |
|
|
(432 |
) |
|
|
|
|
|
|
|
|
|
$ |
18,137 |
|
|
$ |
19,957 |
|
|
|
|
|
|
|
|
Intangible assets, net: |
|
|
|
|
|
|
|
|
Customer relationships |
|
$ |
7,506 |
|
|
$ |
7,719 |
|
Technology |
|
|
14,597 |
|
|
|
4,597 |
|
Product registrations |
|
|
4,232 |
|
|
|
4,227 |
|
Tradename |
|
|
662 |
|
|
|
666 |
|
Covenants not to compete |
|
|
387 |
|
|
|
349 |
|
Other |
|
|
297 |
|
|
|
7 |
|
Less accumulated amortization |
|
|
(8,326 |
) |
|
|
(7,601 |
) |
|
|
|
|
|
|
|
|
|
$ |
19,355 |
|
|
$ |
9,964 |
|
|
|
|
|
|
|
|
The change in value of the intangible assets include the foreign currency fluctuation between the
Chilean and Mexican pesos against the US dollar at March 31, 2011 and December 31, 2010. The increase
in technology and other reflects the acquisition of CURNA, Inc. Refer to Note 5.
NOTE 5 ACQUISITIONS, INVESTMENTS, AND LICENSES
CURNA acquisition
In January 2011, we acquired all of the outstanding stock of CURNA, Inc., (CURNA) in
exchange for $10.0 million in cash, plus $0.6 million in liabilities, of which, $0.5
million was paid at closing. In addition to the cash consideration, we have agreed to pay to the
CURNA sellers a portion of any consideration we receive in connection with certain license,
partnership or collaboration agreements we may enter into with third parties in the future relating
to the CURNA technology, including, license fees, upfront payments, royalties and milestone
payments. As a result, we recorded $0.6 million, as contingent consideration for the future
consideration.
12
We will evaluate the contingent consideration on an ongoing basis and the changes in fair value will
be recognized in earnings until the contingencies are resolved. CURNA was a privately held
company based in Jupiter, Florida, engaged in the discovery of new drugs for the treatment of a
wide variety of illnesses, including cancer, heart disease, metabolic disorders and a range of
genetic anomalies.
The following table reflects the estimated fair value of the net assets acquired at the date
of acquisition:
|
|
|
|
|
(in thousands) |
|
|
|
|
Current assets (including cash of $5) |
|
$ |
38 |
|
Fixed assets |
|
|
21 |
|
Intangible assets |
|
|
|
|
Technology |
|
|
10,000 |
|
Patents |
|
|
290 |
|
|
|
|
|
Total intangible assets |
|
|
10,290 |
|
Goodwill |
|
|
828 |
|
Accounts payable and accrued expenses |
|
|
(54 |
) |
Contingent consideration |
|
|
(580 |
) |
|
|
|
|
Total purchase price |
|
$ |
10,543 |
|
|
|
|
|
We believe the estimated fair values assigned to the CURNA assets acquired and liabilities
assumed are based on reasonable assumptions. However, the fair value estimates for the purchase
price allocation may change during the allowable allocation period, which is up to one year from
the acquisition date, if additional information becomes available that would require changes to our
estimates.
Exakta-OPKO acquisition
In February 2010, we acquired Exakta-OPKO (previously known as Pharmacos Exakta S.A. de C.V.),
a privately-owned Mexican company engaged in the manufacture, marketing and distribution of
ophthalmic and other pharmaceutical products for government and private markets since 1957.
Pursuant to a purchase agreement we acquired all of the outstanding stock of Exakta-OPKO and real
property owned by an affiliate of Exakta-OPKO for a total aggregate purchase price of $3.5 million,
of which an aggregate of $1.5 million was paid in cash and $2.0 million was paid in shares of our
Common Stock, par value $.01. In September 2010, we reduced the consideration paid by $0.1 million
in working capital adjustments per the purchase agreement. The number of shares to be issued was
determined by the average closing price of our Common Stock as reported on the NYSE Amex for the
ten trading days ending on February 12, 2010. A total of 1,371,428 shares of our Common Stock were
issued in the transaction which were valued at $2.0 million due to trading restrictions. A portion
of the proceeds will remain in escrow for a period of time to satisfy indemnification claims.
Investments
In November 2010, we made an investment in Fabrus, LLC (Fabrus), a privately held early
stage biotechnology company with next generation therapeutic antibody drug discovery and
development capabilities. Fabrus is using its proprietary antibody screening and engineering
approach to discover promising lead compounds against several important oncology targets. As of
March 31, 2011, we hold approximately 13% of Fabrus outstanding membership interests on a fully
diluted basis. Our investment was part of a $2.1 million financing for Fabrus and included other
related parties. Refer to Note 8.
Effective September 21, 2009, we entered into an agreement pursuant to which we invested $2.5
million in cash in Cocrystal Discovery, Inc., a privately held biopharmaceutical company
(Cocrystal). Cocrystal is focused on the discovery and development of novel antiviral drugs
using a combination of protein structure-based approaches. As of March 31, 2011 we hold
approximately 16% of Cocrystal on a fully diluted basis. Refer to Note 8.
On June 10, 2009, we entered into a stock purchase agreement with Sorrento Therapeutics, Inc.
(Sorrento), a publicly held company with a technology for generating fully human monoclonal
antibodies, pursuant to which we invested $2.3 million in Sorrento. OPKO owns approximately
59,015,257 shares of Sorrento Common Stock, or approximately 23% of Sorrentos total outstanding
common stock at March 31, 2011. The closing stock price for Sorrentos common stock, a thinly
traded stock, as quoted on the over-the-counter markets was $0.30 per share on March 31, 2011.
Refer to Note 8.
13
Rolapitant license
In December 2010, we entered into a license agreement (the TESARO License) with TESARO, Inc.
(TESARO) granting TESARO exclusive rights to the development, manufacture, commercialization and
distribution of rolapitant and a related compound. Under the terms of the TESARO License, we are
eligible for payments of up to $121.0 million, including an up-front payment of $6.0 million, which
was received in December 2010, and additional payments based upon achievement of specified
regulatory and commercialization milestones. In addition, TESARO will pay us double digit tiered
royalties on sales of licensed product. We will share future profits from the commercialization of
licensed products in Japan with TESARO and we will have an option to market the products in Latin
America. In connection with the TESARO License, we also acquired an equity position in TESARO. We
recorded the equity position at $0.7 million, the estimated fair value based on a discounted cash
flow model.
In accounting for the license of rolapitant to TESARO, we determined that we did not have any
continuing involvement in the development of rolapitant or any other future performance obligations
and, as a result, recognized the $6.0 million up-front payment and the $0.7 million equity position
as license revenue during the year ended December 31, 2010.
Pursuant to an asset purchase agreement with Schering-Plough Corporation (Schering), we
acquired rolapitant and other assets relating to Scherings neurokinin-1 (NK-1) receptor
antagonist program on October 12, 2009 (the Schering Agreement). Under the terms of the
Schering Agreement, we paid Schering $2.0 million in cash upon closing and agreed to pay up to an
additional $27.0 million upon certain development milestones. Rolapitant, the lead product in the
NK-1 program, successfully completed Phase II clinical testing for prevention of nausea and
vomiting related to cancer chemotherapy and surgery, and other indications. Development of
rolapitant and the other assets had been stopped at the time of our acquisition and there were no
ongoing clinical trials. We recorded $2.0 million as in-process research and development expense
upon our acquisition.
Variable interest entities
We have determined that we hold variable interests (VIE) in three entities, TESARO, Fabrus
and CoCrystal. 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 subordinated
financial support.
In order to determine the primary beneficiary of Cocrystal and Fabrus, we evaluated our
investment as well as our investment combined with a related party group to identify who had the
most power to control each entity and who received the largest benefits (or absorbed the most
losses) from each entity. The related party group when considering our investment in Cocrystal
includes OPKO and the Frost Group, LLC (the Frost Group). The Frost Group members include Frost
Gamma Investments Trust, of which Phillip Frost, MD, our Chairman of our Board of Directors and
Chief Executive Officer, is the sole trustee (the Gamma Trust), Dr. Jane H. Hsiao, who is the
Vice Chairman of the board of directors and Chief Technical Officer, Steven D. Rubin who is
Executive Vice President Administration and a director of the Company and Rao Uppaluri who is
the Chief Financial Officer of the Company. As of March 31, 2011 we own approximately 16% of
Cocrystal and members of the Frost Group own approximately 42% of Cocrystals voting stock on an as
converted basis, including 39% held by the Gamma Trust. Dr. Frost, Mr. Rubin, and Dr. Hsiao
currently serve on the Board of Directors of Cocrystal and represent 50% of its board. The Gamma
Trust can significantly influence Cocrystal through its board representation and voting power. As
such, we have determined that the Gamma Trust is the primary beneficiary within the related party
group.
The related party group when considering our investment in Fabrus includes OPKO and the Gamma
Trust, Hsu Gamma Investment, L.P., of which Jane Hsiao is the general partner (Hsu Gamma), and
the Richard Lerner Family Trust. Dr.s Frost, Hsiao and Lerner are all members of our Board of
Directors. As of March 31, 2011, we own approximately 13% of Fabrus and Drs. Frost, Hsiao and
Lerner own 24% of Fabrus voting stock on an as converted basis, including 16% held by the Gamma
Trust. Drs. Frost and Hsiao currently serve on the Board of Managers of Fabrus and represent 40%
of its board. The Gamma Trust can significantly influence the success of Fabrus through its board
representation and voting power. As such, we have determined that the Gamma Trust is the primary
beneficiary within the related party group. Because we have the ability to exercise significant
influence over Cocrystals and Fabrus operations through our related party affiliates, we account
for our investments in Cocrystal and Fabrus, under the equity method.
In order to determine the primary beneficiary of TESARO, we evaluated the power and benefits
held by its equity holders. On an as converted basis, we hold an equity interest of approximately
6% of TESARO as of
14
March 31, 2011. The decrease in our ownership percentage on an as converted basis from 9% at
December 31, 2010 is a result of TESARO issuing additional equity securities during the three
months ended March 31, 2011. As of March 31, 2011, we determined that despite the issuance of
additional equity securities, TESARO does not have sufficient resources to carry out its principal
activities without additional subordinated financial support. In addition, we do not hold any seats
on the Board of Directors and we do not have any management positions. The largest equity holder
owns approximately 68% of TESARO on an as converted basis and is represented by two members of
TESAROs board of directors. As a result of that equity holder having the power to influence
TESARO and being entitled to the largest share of the benefits of TESARO, we determined such holder
is the primary beneficiary of TESARO. Because we do not have the ability to exercise significant
influence over TESAROs operations, we account for TESARO under the cost method of accounting.
We have not provided financial or other support to the variable interest entities other than
those associated with our original investments in Cocrystal and Fabrus or those associated with our
TESARO License and we are not obligated to provide ongoing financial support to them.
The following table reflects our maximum exposure to each of our investments:
|
|
|
|
|
|
|
|
|
Investee name |
|
(in thousands) |
|
|
Accounting method |
|
|
Sorrento |
|
$ |
2,300 |
|
|
Equity method |
Cocrystal |
|
|
2,500 |
|
|
VIE, equity method |
Fabrus |
|
|
650 |
|
|
VIE, equity method |
TESARO |
|
|
731 |
|
|
VIE, cost method |
Less accumulated losses in investees |
|
|
(1,490 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 6 FAIR VALUE MEASUREMENTS
We record fair value 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 that should be 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 include: 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 March 31, 2011, we held money market funds and treasury securities that qualify as cash
equivalents, marketable securities that consist of treasury securities, forward contracts for
inventory purchases (Refer to Note 7) and contingent consideration related to the acquisition of
CURNA (Refer to Note 5) that are required to be measured at fair value on a recurring basis. As of
March 31, 2011, we held money market funds and treasury securities totaling $46.9 million,
including treasury securities maturing June 9, 2011 and June 23, 2011, that qualify as cash
equivalents as well as marketable securities which were comprised entirely of treasury securities
totaling $60.0 million, maturing June 30, 2011, July 14, 2011, and July 21, 2011, that are required
to be measured at fair value on a recurring basis. The $85.0 million of treasury securities are
recorded at amortized cost, which reflects their approximate fair value. Our other assets and
liabilities carrying value approximate their fair value due to their short-term nature.
Any future fluctuation in fair value related to these instruments that is judged to be
temporary, including any recoveries of previous write-downs, would be recorded in accumulated other
comprehensive income or loss. If we determine that any future valuation adjustment was
other-than-temporary, we would record a charge to the consolidated statement of operations as
appropriate.
15
Our financial assets and liabilities measured at fair value on a recurring basis are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements as of March 31, 2011 |
|
|
|
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 |
|
$ |
21,944 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
21,944 |
|
Treasury securities |
|
|
84,979 |
|
|
|
|
|
|
|
|
|
|
|
84,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
106,923 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
106,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts |
|
$ |
|
|
|
$ |
340 |
|
|
$ |
|
|
|
$ |
340 |
|
CURNA contingent
considerations |
|
|
|
|
|
|
|
|
|
|
580 |
|
|
|
580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
|
|
|
$ |
340 |
|
|
$ |
580 |
|
|
$ |
920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 7 DERIVATIVE CONTRACTS
We enter into foreign currency forward exchange contracts to cover 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.
We record derivative financial instruments on our balance sheet at their fair value as an
accrued expense and the changes in the fair value are recognized in income in other expense net
when they occur, the only exception being derivatives that qualify as hedges. 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 March 31, 2011, the forward
contracts did not meet the documentation requirements to be designated as hedges. Accordingly, we
recognize all changes in fair values in income.
The outstanding contracts at March 31, 2011, have been recorded at fair value, and their
maturity details are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Fair value at |
|
|
Effect on gain |
|
Days until maturity |
|
Contract value |
|
|
March 31, 2011 |
|
|
(loss) |
|
0 to 30 |
|
$ |
1,722 |
|
|
$ |
1,912 |
|
|
$ |
(190 |
) |
31 to 60 |
|
|
1,177 |
|
|
|
1,233 |
|
|
|
(56 |
) |
61 to 90 |
|
|
784 |
|
|
|
866 |
|
|
|
(82 |
) |
91 to 120 |
|
|
|
|
|
|
|
|
|
|
|
|
121 to 180 |
|
|
186 |
|
|
|
191 |
|
|
|
(5 |
) |
More than 180 |
|
|
193 |
|
|
|
200 |
|
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,062 |
|
|
$ |
4,402 |
|
|
$ |
(340 |
) |
|
|
|
|
|
|
|
|
|
|
NOTE 8 RELATED PARTY TRANSACTIONS
On March 14, 2011, we issued 27,000,000 shares of our Common Stock. Refer to Note 11. The
27,000,000 shares of our Common Stock issued include an aggregate of 3,733,000 shares of our Common
Stock purchased by the Gamma Trust and Hsu Gamma at the public offering price. The Gamma Trust
purchased an aggregate of 3,200,000 shares for approximately $12 million, and Hsu Gamma purchased
an aggregate of 533,000 shares for approximately $1.9 million. Jefferies & Company, Inc. and J.P.
Morgan Securities LLC acted as joint book-running
managers for the offering. UBS Investment Bank and Lazard Capital Markets LLC acted as
co-lead managers for
16
the offering and Ladenburg Thalmann & Co. Inc., a subsidiary of Ladenburg
Thalmann Financial Services Inc., acted as co-manager for the offering. Dr. Frost is the Chairman
of the Board of Directors and principal shareholder of Ladenburg Thalmann Financial Services Inc.
On January 28, 2011, we entered into a definitive agreement with CURNA and each of CURNAs
stockholders and optionholders, pursuant to which we agreed to acquire all of the outstanding stock
of CURNA in exchange for $10.0 million in cash, plus $0.6 million in liabilities, of which
$0.5 million was paid at closing. At the time of the transaction, The Scripps Research Institute
(TSRI) owned approximately 4% of CURNA. Dr. Frost serves as Trustee for TSRI and Richard Lerner
is its President.
We have a $12.0 million line of credit with the Frost Group. On June 2, 2010 we repaid all
amounts outstanding on the line of credit including $12 million in principal and $4.1 million in
interest. The line of credit, which previously expired on January 11, 2011, was renewed on
February 22, 2011 until March 31, 2012 on substantially the same terms as those in effect at the
time of expiration. We have the ability to draw funds under the line of credit until its
expiration in March 2012. We are obligated to pay interest upon maturity, capitalized quarterly,
on outstanding borrowings under the line of credit at an 11% annual rate. The line of credit is
collateralized by all of our U.S. personal property except our intellectual property.
In November 2010, we made an investment in Fabrus, a privately held early stage biotechnology
company with next generation therapeutic antibody drug discovery and development capabilities. In
exchange for the investment, we acquired approximately 13% of Fabrus outstanding membership
interests on a fully diluted basis. Our investment was part of a $2.1 million financing for
Fabrus. Other investors participating in the financing include the Gamma Trust and Hsu Gamma. In
connection with the financing, Drs. Frost and Hsiao joined the Fabrus Board of Managers. Dr.
Richard Lerner, a director of the Company, owns approximately 5% of Fabrus. Vaughn Smider, Founder
and CEO of Fabrus, is an Assistant Professor at TSRI. Dr. Frost serves as a Trustee for TSRI, and
Richard Lerner serves as its President.
On July 20, 2010, we entered into a use agreement with TRSI for approximately 1,100 square
feet of space in Jupiter, Florida to house our molecular diagnostics operations. Dr. Frost serves
as a trustee for TSRI and Richard Lerner serves as its president. Pursuant to the terms of the use
agreement, which is effective as of November 1, 2009, gross rent is approximately $40 thousand per
year for a two-year term which may be extended upon mutual agreement for one additional year.
On June 1, 2010, the Company entered into a cooperative research and development agreement
with Academia Sinica in Taipei, Taiwan (Academia Sinica), for pre-clinical work for a compound
against various forms of cancer. Dr. Alice Yu, a member of our board of directors, is a
Distinguished Research Fellow and Associate Director at the Genomics Research Center, Academia
Sinica (Genomics Research Center). In connection with the agreement, we are required to pay
Academia Sinica approximately $0.2 million over the term of the agreement.
Effective March 5, 2010, the Frost Group assigned two license agreements with Academia Sinica
to the Company. The license agreements pertain to alpha-galactosyl ceramide analogs and their use
as immunotherapies and peptide ligands in the diagnosis and treatment of cancer. In connection
with the assignment of the two licenses, the Company agreed to reimburse the Frost Group for the
licensing fees previously paid by the Frost Group to Academia Sinica in the amounts of $50 thousand
and $75 thousand, respectively, as well as reimbursement of certain expenses of $50 thousand.
Effective September 21, 2009, we entered into an agreement pursuant to which we invested $2.5
million in Cocrystal in exchange for 1,701,723 shares of Cocrystals Convertible Series A Preferred
Stock. A group of investors, led by the Frost Group (the CoCrystal Investors), previously
invested $5 million in Cocrystal, and agreed to invest an additional $5 million payable in two
equal installments in September 2009 and March 2010. As a result of an amendment to the CoCrystal
Investors agreements dated June 9, 2009, OPKO, rather than the CoCrystal Investors, made the first
installment investment ($2.5 million) on September 21, 2009. Refer to Note 5.
On July 20, 2009, we entered into a worldwide exclusive license agreement with Academia Sinica
in Taipei, Taiwan, for a new technology to develop protein vaccines against influenza and other
viral infections. Dr. Alice Yu, a member of our board of directors, is a Distinguished Research
Fellow and Associate Director at the Genomics Research Center. In connection with the license, the
Company paid to Academia Sinica an upfront licensing fee and agreed to pay royalties and other
payments on the occurrence of certain development milestones.
17
On June 16, 2009, we entered into an agreement to lease approximately 10,000 square feet of
space in Hialeah, Florida to house manufacturing and service operations for our ophthalmic
instrumentation business (the Hialeah Facility) from an entity controlled by Dr. Frost and Dr.
Jane Hsiao. Pursuant to the terms of a lease agreement, which is effective as of February 1, 2009,
gross rent is $0.1 million per year for a one-year lease and was extended through February 1, 2011.
On June 10, 2009, we entered into a stock purchase agreement with Sorrento, pursuant to which
we invested $2.3 million in Sorrento. Refer to Note 5. In exchange for the investment, we
acquired approximately one-third of the outstanding common shares of Sorrento and received a
fully-paid, exclusive license to the Sorrento antibody library for the discovery and development of
therapeutic antibodies in the field of ophthalmology. On September 21, 2009, Sorrento entered into
a merger transaction with Quikbyte Software, Inc. Prior to the merger transaction, certain
investors, including Dr. Frost and other members of OPKO management, made an investment in
Quikbyte. Dr. Richard Lerner, a member of our Board of Directors, serves as a consultant and
scientific advisory board member to Sorrento and owns less than one percent of its shares.
In November 2007, we entered into an office lease with Frost Real Estate Holdings, LLC, an
entity affiliated with Dr. Frost. The lease is for approximately 8,300 square feet of space in an
office building in Miami, Florida, where the Companys principal executive offices are located.
The lease provides for payments of approximately $18 thousand per month in the first year
increasing annually to $24 thousand per month in the fifth year, plus applicable sales tax. The
rent is inclusive of operating expenses, property taxes and parking. The rent for the first year
was reduced to reflect a $30 thousand credit for the costs of tenant improvements.
On September 19, 2007, we entered into an exclusive technology license agreement with Winston
Laboratories, Inc. (Winston). On February 23, 2010, we provided Winston notice of termination of
the license agreement, and the agreement terminated on May 24, 2010. Previously, members of the
Frost Group beneficially owned approximately 30% of Winston Pharmaceuticals, Inc., and Dr.
Uppaluri, our Chief Financial Officer, served as a member of Winstons board. Effective May 19,
2010, the members of the Frost Group sold 100% of Winstons capital stock beneficially owned by
them (consisting of an aggregate of 18,399,271 outstanding shares of common stock and warrants to
purchase an aggregate of 8,958,975 shares of common stock) to an entity whose members include Dr.
Joel E. Bernstein, the President and Chief Executive Officer of Winston. As consideration for the
sale, the Frost Group members received an aggregate of $789,500 in cash and non-recourse promissory
notes in the aggregate principal amount of $10,263,500. Dr. Uppaluri resigned from the Winston
board effective May 19, 2010. In connection with the license agreement, we reimbursed Winston $29
thousand, and $3 thousand in the years ended December 31, 2009 and 2008, respectively, for services
provided by Winston personnel to assist us with the clinical program for the product we licensed.
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 in an
amount equal to the cost of a first class airline ticket between the travel cities for each
executive, including Dr. Frost, traveling on the airplane for Company-related business. We do not
reimburse Dr. Frost for personal use of the airplane by Dr. Frost or any other executive; nor do we
pay for any other fixed or variable operating costs of the airplane. For the three months ended
March 31, 2011 and 2010, we reimbursed Dr. Frost approximately $57 thousand and $18 thousand,
respectively, for Company-related travel by Dr. Frost and other OPKO executives.
NOTE 9 COMMITMENTS AND CONTINGENCIES
In connection with our acquisition of CURNA, we agreed to pay a portion of future
consideration to the CURNA sellers if we license or partner the CURNA technology with a third party
including, license fees, upfront payments, royalties and milestone payments. As a result, we
recorded $0.6 million, as contingent consideration for the future consideration. Refer to Note 5.
On January 7, 2010, we received a letter from counsel to Nidek Co., Ltd. (Nidek) alleging
that Ophthalmic Technologies, Inc. (OTI) or OPKO breached its service obligations to Nidek under
the Service Agreement between OTI, Nidek and Newport Corporation, dated December 29, 2006, and the
Service Agreement by and between Nidek and OTI, dated the same date. We entered into a settlement
agreement in April 2011 which resolved all disputes between the Company and Nidek and released us
from any future service obligation to Nidek. The settlement did not have a material impact on our
results of operations or financial condition.
On May 6, 2008, we completed the acquisition of Vidus Ocular, Inc. (Vidus). Pursuant to a
Securities Purchase Agreement with Vidus, each of its stockholders, and the holders of convertible
promissory notes issued by
18
Vidus, we acquired all of the outstanding stock and convertible debt of Vidus in exchange for
(i) the issuance and delivery at closing of 658,080 shares of our Common Stock (the Closing
Shares); (ii) the issuance of 488,420 shares of our Common Stock to be held in escrow pending the
occurrence of certain development milestones (the Milestone Shares); and (iii) the issuance of
options to acquire 200,000 shares of our Common Stock. Additionally, in the event that the stock
price for our Common Stock at the time of receipt of approval or clearance by the U.S. Food & Drug
Administration of a pre-market notification 510(k) relating to the Aquashunt is not at or above a
specified price, we will be obligated to issue an additional 413,850 shares of our Common Stock.
We are a party to other litigation in the ordinary course of business. We do not believe that
any such litigation will have a material adverse effect on our business, financial condition, or
results of operations.
NOTE 10 SEGMENTS
We currently manage our operations in two reportable segments, pharmaceutical and
instrumentation segments. The pharmaceutical segment consists of two operating segments, our (i)
pharmaceutical research and development segment which is focused on the research and development of
pharmaceutical products, diagnostic tests and vaccines, and (ii) the pharmaceutical operations we
acquired in Chile and Mexico through the acquisition of OPKO Chile and Exakta-OPKO. The
instrumentation segment consists of ophthalmic instrumentation products and the activities related
to the research, development, manufacture and commercialization of those products. There are no
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 and income taxes.
Information regarding our operations and assets for the two segments and the unallocated
corporate operations as well as geographic information are as follows:
19
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
|
March 31, |
|
(in thousands) |
|
2011 |
|
|
2010 |
|
Product sales |
|
|
|
|
|
|
|
|
Pharmaceutical |
|
$ |
6,937 |
|
|
$ |
5,312 |
|
Instrumentation |
|
|
1,698 |
|
|
|
2,610 |
|
|
|
|
|
|
|
|
|
|
$ |
8,635 |
|
|
$ |
7,922 |
|
|
|
|
|
|
|
|
Operating loss |
|
|
|
|
|
|
|
|
Pharmaceutical |
|
$ |
(1,019 |
) |
|
$ |
(644 |
) |
Instrumentation |
|
|
(955 |
) |
|
|
(936 |
) |
Corporate |
|
|
(3,112 |
) |
|
|
(2,486 |
) |
|
|
|
|
|
|
|
|
|
$ |
(5,086 |
) |
|
$ |
(4,066 |
) |
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
Pharmaceutical |
|
$ |
824 |
|
|
$ |
514 |
|
Instrumentation |
|
|
130 |
|
|
|
444 |
|
Corporate |
|
|
43 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
$ |
997 |
|
|
$ |
971 |
|
|
|
|
|
|
|
|
Product sales |
|
|
|
|
|
|
|
|
United States |
|
$ |
264 |
|
|
$ |
197 |
|
Chile |
|
|
5,756 |
|
|
|
4,937 |
|
Mexico |
|
|
1,199 |
|
|
|
401 |
|
All others |
|
|
1,416 |
|
|
|
2,387 |
|
|
|
|
|
|
|
|
|
|
$ |
8,635 |
|
|
$ |
7,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
March 31, |
|
|
December |
|
|
|
2011 |
|
|
31, 2010 |
|
Assets |
|
|
|
|
|
|
|
|
Pharmaceutical |
|
$ |
59,503 |
|
|
$ |
51,599 |
|
Instrumentation |
|
|
9,126 |
|
|
|
8,637 |
|
Corporate |
|
|
107,678 |
|
|
|
17,610 |
|
|
|
|
|
|
|
|
|
|
$ |
176,307 |
|
|
$ |
77,846 |
|
|
|
|
|
|
|
|
During the three months ended March 31, 2011, our largest customer represented 12% of our
total revenue. During the three months ended March 31, 2010, our two largest customers
represented 17%, and 10%, respectively, of our revenue. As of March 31, 2011, one customer
represented 30% of our accounts receivable balance. As of December 31, 2010, two customers
represented 32% and 11%, respectively, of our accounts receivable balance.
NOTE 11 ISSUANCE OF COMMON STOCK
On March 14, 2011, we issued 27,000,000 shares of our Common Stock in a public offering at a
price of $3.75 per share. We also granted the underwriters a 30-day option to purchase up to an
additional 4,050,000 shares of our Common Stock to cover overallotments, if any. On March 15,
2011, representatives for the underwriters provided us notice that the underwriters exercised a
portion of their 4,050,000 share over-allotment option for 2,397,029 additional shares of our
Common Stock.
The following table reflects the proceeds received from the issuance of shares:
|
|
|
|
|
|
|
|
|
(in thousands, except share amounts) |
|
Shares |
|
|
Dollars |
|
Original issuance |
|
|
27,000,000 |
|
|
$ |
101,250 |
|
Over-allotment |
|
|
2,397,029 |
|
|
|
8,989 |
|
|
|
|
|
|
|
|
Total |
|
|
29,397,029 |
|
|
|
110,239 |
|
|
|
|
|
|
|
|
|
Underwriters discount and commissions(1) |
|
5.5% on 24,064,029 shares |
|
|
(4,963 |
) |
Offering expenses |
|
|
|
|
|
|
(448 |
) |
|
|
|
|
|
|
|
|
Net proceeds |
|
|
|
|
|
$ |
104,828 |
|
|
|
|
|
|
|
|
|
20
|
|
|
(1) |
|
The underwriters will not receive any underwriting discount or commissions on
the sale of 5,333,000 shares of common stock to entities associated with certain stockholders,
including two of our directors and executive officers. Refer to Note 8. |
NOTE 12 SUBSEQUENT EVENTS
On or about May 3, 2011, we initiated the redemption of our Series A Preferred Stock. Holders
of our Series A Preferred Stock have until May 30, 2011 to elect to convert their Series A
Preferred Shares into shares of our Common Stock, which convert on a 1:1 basis. The closing price
of our Common Stock on May 2, 2011 was $3.91. On June 3, 2011, we will redeem all of our
outstanding Series A Preferred Stock for their redemption amount of $2.50, plus unpaid accrued
dividends of $0.35 per share. As of March 31, 2011 there were 722,700 shares of our Series A
Preferred Stock outstanding, resulting in a potential cash payment of approximately $2.1 million if
all of the Series A Preferred Stock remain outstanding as of June 3, 2011.
We have reviewed all subsequent events and transactions that occurred after the date of our
March 31, 2011 consolidated balance sheet date, through the time of filing this Quarterly Report on
Form 10-Q.
21
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
OVERVIEW
You should read this discussion together with the condensed consolidated financial statements,
related Notes, and other financial information included elsewhere in this report and in our Annual
Report on Form 10-K for the year ended December 31, 2010 (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 II, Item
1A of our Form 10-K for the year ended December 31, 2010. These risks could cause our actual
results to differ materially from those anticipated in these forward-looking statements.
We are a multi-national pharmaceutical and diagnostics company that seeks to establish
industry-leading positions in large and rapidly growing medical markets by leveraging our
discovery, development and commercialization expertise and our novel and proprietary technologies.
Our current focus is on conditions with major unmet medical needs including neurological disorders,
infectious diseases, oncology and ophthalmologic diseases. We are developing a range of solutions
to diagnose, treat and prevent these conditions, including molecular diagnostics tests, proprietary
pharmaceuticals and vaccines. We plan to commercialize these solutions on a global basis in large
and high growth markets, including emerging markets. We have already established emerging markets
pharmaceutical platforms in Chile and Mexico, which are delivering revenue and which we expect to
deliver cash flow and facilitate future market entry for our products currently in development. We
also actively explore opportunities to acquire complementary pharmaceuticals, compounds,
technologies, and businesses.
We expect to incur substantial losses as we continue the development of our product
candidates, continue our other research and development activities, and establish a sales and
marketing infrastructure in anticipation of the commercialization of our diagnostic and
pharmaceutical product candidates. We currently have limited commercialization capabilities, and
it is possible that we may never successfully commercialize any of our diagnostic and
pharmaceutical product candidates. We do not currently generate revenue from any of our diagnostic
and pharmaceutical product candidates. Our research and development activities are budgeted to
expand over a period of time and will require further resources if we are to be successful. As a
result, we believe that our operating losses are likely to be substantial over the next several
years. We may need to obtain additional funds to further develop our research and development
programs, and there can be no assurance that additional capital will be available to us when needed
on acceptable terms, or at all.
RECENT DEVELOPMENTS
On March 14, 2011, we issued 27,000,000 shares of our Common Stock in a public offering at a
price of $3.75 per share. We also granted the underwriters a 30-day option to purchase up to an
additional 4,050,000 shares of our Common Stock to cover overallotments, if any. On March 15,
2011, representatives for the underwriters provided us notice that the underwriters exercised a
portion of their 4,050,000 share over-allotment option for 2,397,029 additional shares of our
Common Stock. We received approximately $104.8 million in net proceeds from the issuance of
29,397,029 shares of our Common Stock after deducting the underwriters discounts and commissions
and other estimated offering expenses.
On January 31, 2011, we acquired all of the outstanding stock of CURNA, Inc. (CURNA), a
privately held therapeutics company, in exchange for $10.0 million in cash, plus $0.6 million in liabilities, of which, $0.5 million was paid at closing. In addition to the cash
consideration, we have agreed to pay to the CURNA sellers a portion of any consideration we receive
in connection with certain license, partnership or collaboration agreements we may enter into with
third parties in the future relating to the CURNA technology, including, license fees, upfront
payments, royalties and milestone payments. CURNA is engaged in the discovery of new drugs for the
treatment of a wide variety of illnesses, including cancer, heart disease, metabolic disorders and
a range of genetic anomalies.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010
Revenue. Revenue for the three months ended March 31, 2011, was $8.6 million, compared to
$7.9 million for the comparable 2010 period. The increase in revenue during the first three months
of 2011 is primarily due to revenue from our OPKO Chile and Exakta-OPKO pharmaceutical businesses.
We acquired Exakta-OPKO in February 2010, and as a result, the 2010 period reflects revenue only
after the acquisition occurred. Revenue from
22
our instrumentation business decreased from the 2010
period, primarily as a result of decreased demand from our international customers for our OCT/SLO
product.
Gross margin. Gross margin for the three months ended March 31, 2011, was $3.0 million
compared to $2.4 million for the comparable period of 2010. Gross margin for the three months
ended March 31, 2011, increased from the 2010 period primarily as a result of the increased gross
margin generated by our pharmaceutical businesses in Chile and Mexico, partially offset by
decreased revenue and resulting decreased gross margin generated by our instrumentation business.
Selling, general and administrative expense. Selling, general and administrative expense for
the three months ended March 31, 2011, was $5.6 million compared to $4.2 million of expense for the
comparable period of 2010. The increase in selling, general and administrative expenses is
primarily the result of increased warehousing and distribution costs for our Chilean operations,
increased equity based compensation expense and a full period of selling, general and
administrative expenses for our operations in Mexico. Selling, general and administrative expenses
during the first three months of 2011 and 2010 primarily include personnel expenses, including
equity-based compensation expense of $1.4 million and $1.0 million, respectively, and professional
fees.
Research and development expense. Research and development expense during the three months
ended March 31, 2011 and 2010, was $1.6 million and $1.3 million, respectively. The increase in
research and development expense primarily is the result of increased personnel expenses including
equity based compensation expense. The three months ended March 31, 2011 and 2010, include
equity-based compensation expense of $0.4 million and $0.2 million, respectively. During the three
months ended March 31, 2011, research and development expense primarily consisted of activities
related to our molecular diagnostics development program, research and development expense for our
instrumentation business including the development of next generation devices, and development of
the technology acquired from CURNA. Research and development expense for the three month period
ended March 31, 2010 primarily included activities related to our rolapitant development program,
which we out licensed in December 2010, our molecular diagnostics development program and research
and development activities for our instrumentation business.
Other operating expenses. Other operating expenses was $0.9 million for the three months
ended March 31, 2011 and March 31, 2010. Other operating expenses primarily include the
amortization of intangible assets. Amortization expense during the three months ended March 31,
2011 includes the amortization expense of the CURNA intangible assets acquired in January 2011,
offset by a portion of the OTI intangible assets that fully amortized in November 2010.
Other income and expenses. Other income, net was $38 thousand for the first three months of
2011 compared to other expense, net of $0.3 million for the comparable 2010 period. Other income
primarily consists of interest earned on our cash and cash equivalents and other expense primarily
reflects the interest incurred on our line of credit with The Frost Group LLC (the Frost Group).
On June 2, 2010, we repaid all amounts outstanding on the Frost Group line of credit including $12.0
million in principal and $4.1 million in interest. The Frost Group members include a trust
controlled by Dr. Frost, who is the Companys Chief Executive Officer and Chairman of the board of
directors, Dr. Jane H. Hsiao, who is the Vice Chairman of the board of directors and Chief
Technical Officer, Steven D. Rubin who is Executive Vice President Administration and a director
of the Company and Rao Uppaluri who is the Chief Financial Officer of the Company.
Income taxes. Our income tax provision reflects the income tax payable in Chile and Mexico.
We have recorded a full valuation allowance against our deferred tax assets in the U.S.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2011, we had cash, cash equivalents and marketable securities of approximately
$107.9 million. Cash used in operations during 2011 primarily reflects expenses related to
research and development activities, selling, general and administrative activities related to our
corporate and instrumentation operations, as well as our operations in Chile and Mexico. Since our
inception, we have not generated sufficient gross margins to offset our operating and other
expenses and our primary source of cash has been from the sale of our stock and credit facilities
available to us.
On March 14, 2011, we issued 27,000,000 shares of our Common Stock in a public offering at a
price of $3.75 per share. We also granted the underwriters a 30-day option to purchase up to an
additional 4,050,000 shares of our Common Stock to cover overallotments, if any. On March 15,
2011, representatives for the underwriters provided
23
us notice that the underwriters exercised a
portion of their 4,050,000 share over-allotment option for 2,397,029 additional shares of our
Common Stock. We received approximately $104.8 million, net, from the issuance of 29,397,029
shares of our Common Stock.
On January 31, 2011, we acquired all of the outstanding stock of CURNA in exchange for $10.0
million in cash, plus $0.6 million in liabilities, of which, $0.5 million was paid at
closing. In addition to the cash consideration, we have agreed to pay to the CURNA sellers a
portion of any consideration we receive in connection with certain license, partnership or
collaboration agreements we may enter into with third parties in the future relating to the CURNA
technology, including, license fees, upfront payments, royalties and milestone payments. As a
result, we recorded $0.6 million, as contingent consideration for the future consideration. CURNA
is engaged in the discovery of new drugs for the treatment of a wide variety of illnesses,
including cancer, heart disease, metabolic disorders and a range of genetic anomalies.
We have outstanding lines of credit in the aggregate amount of $18.9 million with seven
financial institutions in Chile, of which, $4.3 million is unused. These lines of credit are used
primarily as a source of working capital and for inventory purchases. The average interest rate
on these lines of credit is approximately 3%. These lines of credit are short term and are
generally due within three months. The highest balance at any time during the three months ended
March 31, 2011, was $14.8 million. We intend to continue to enter into these lines of credit as
needed. There is no assurance that this or other funding sources will be available to us on
acceptable terms, or at all.
We currently have an unutilized $12.0 million line of credit with the Frost Group. The line
of credit, which previously expired on January 11, 2011, was renewed on February 22, 2011 on
substantially the same terms as those in effect at the time of expiration. We are obligated to pay
interest upon maturity, capitalized quarterly, on outstanding borrowings under the line of credit
at an 11% annual rate, which is due March 31, 2012. The line of credit is collateralized by all of
our U.S. based personal property except our intellectual property.
We expect to incur losses from operations for the foreseeable future. We expect to incur
substantial research and development expenses, including expenses related to the hiring of
personnel and additional clinical trials. We expect that selling, general and administrative
expenses will also increase as we expand our sales, marketing and administrative staff and add
infrastructure.
We believe the cash, cash equivalents, and marketable securities on hand at March 31, 2011 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 will depend on a
number of factors, including possible acquisitions, 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,
and our success in developing markets for our product candidates. 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.
We intend to finance additional research and development projects, clinical trials and our
future operations with a combination of available cash on hand, payments from potential strategic
research and development, licensing and/or marketing arrangements, public offerings, private
placements, debt financing and revenues from future product sales, if any. There can be no
assurance, however, that additional capital will be available to us on acceptable terms, or at all.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Accounting Estimates. The preparation of financial statements in conformity with generally
accepted accounting principles 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 sales and expenses during the
reporting period. Actual results could differ from those estimates.
Equity-based compensation. We recognize equity based compensation as an expense in our
financial statements and that cost is measured at the fair value of the award and expensed over
their vesting period. Equity-based compensation arrangements to non-employees are recorded at
their fair value on the measurement date. We
24
estimate the grant-date fair value of our stock
option grants using a valuation model known as the Black-Scholes-Merton formula or the
Black-Scholes Model and allocate the resulting compensation expense over the corresponding
requisite service period associated with each grant. The Black-Scholes Model requires the use of
several variables to estimate the grant-date fair value of stock options including expected term,
expected volatility, expected dividends and risk-free interest rate. We perform significant
analyses to calculate and select the appropriate variable assumptions used in the Black-Scholes
Model. We also perform significant analyses to estimate forfeitures of equity-based awards. We
are required to adjust our forfeiture estimates on at least an annual basis based on the number of
share-based awards that ultimately vest. The selection of assumptions and estimated forfeiture
rates is subject to significant judgment and future changes to our assumptions and estimates may
have a material impact on our Consolidated Financial Statements.
Goodwill and intangible assets. The allocation of the purchase price for acquisitions
requires extensive use of accounting estimates and judgments to allocate the purchase price to the
identifiable tangible and intangible assets acquired, including in-process research and
development, and liabilities assumed based on their respective fair values. Additionally, we must
determine whether an acquired entity is considered to be a business or a set of net assets, because
a portion of the purchase price can only be allocated to goodwill in a business combination.
Appraisals inherently require significant estimates and assumptions, including but not limited
to, determining the timing and estimated costs to complete the in-process research and development
projects, projecting regulatory approvals, estimating future cash flows, and developing appropriate
discount rates. We believe the estimated fair values assigned to the CURNA assets acquired and
liabilities assumed are based on reasonable assumptions. However, the fair value estimates for the
purchase price allocation may change during the allowable allocation period, which is up to one
year from the acquisition date, if additional information becomes available that would require
changes to our estimates.
Allowance for doubtful accounts and revenue recognition. Generally, we recognize revenue from
product sales when goods are shipped and title and risk of loss transfer to our customers. Certain
of our products are sold directly to end-users and require that we deliver, install and train the
staff at the end-users facility. As a result, we do not recognize revenue until the product is
delivered, installed and training has occurred. Return policies in certain international markets
for our medical device products provide for stringent guidelines in accordance with the terms of
contractual agreements with customers. Our estimates for sales returns are based upon the
historical patterns of products returned matched against the sales from which they originated, and
managements evaluation of specific factors that may increase the risk of product returns. We
analyze accounts receivable and historical bad debt levels, customer credit worthiness and current
economic trends when evaluating the adequacy of the allowance for doubtful accounts using
the specific identification method. Our reported net loss is directly affected by
managements estimate of the collectability of accounts receivable. The allowance for doubtful
accounts recognized in our consolidated balance sheets at March 31, 2011 and December 31, 2010 was
$1.2 million and $1.2 million, respectively.
Recent accounting pronouncements. In December 2010, the FASB issued an amendment to the
disclosure of supplementary pro forma information for business combinations. The amendment
specifies that if a public entity presents comparative financial statements, the entity should
disclose revenue and earnings of the combined entity as though the business combination(s) that
occurred during the current year had occurred as of the beginning of the comparable prior annual
reporting period only. The amendment also expands the supplemental pro forma disclosures under
current accounting guidance to include a description of the nature and amount of material,
nonrecurring pro forma adjustments directly attributable to the business combination included in
the reported pro forma revenue and earnings. The amendment is effective prospectively for business
combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2010. The adoption of this amendment did not
have a material impact on our financial statement disclosures.
In December 2010, the FASB issued an amendment to the accounting for goodwill impairment
tests. The amendment modifies Step 1 of the impairment test for reporting units with zero or
negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of
the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In
determining whether it is more likely than not that a goodwill impairment exists, an entity should
consider whether there are any adverse qualitative factors indicating that an impairment may exist.
The qualitative factors are consistent with the existing guidance. The amendment is effective for
fiscal years, and interim periods within those years, beginning after December 15, 2010. The
adoption of this amendment did not have a material impact on our results of operations or financial
condition.
25
In December 2010, the FASB issued an amendment to the accounting for annual excise taxes paid
to the federal government by pharmaceutical manufacturers under health care reform. The liability
for the fee should be estimated and recorded in full upon the first qualifying branded prescription
drug sale with a corresponding deferred cost that is amortized to expense using a straight-line
method of allocation unless another method better allocates the fee over the calendar year that it
is payable. The amendment is effective for calendar years beginning after December 31, 2010, when
the fee initially becomes effective. As we currently do not manufacture pharmaceutical products in
the United States, we do not expect the adoption of this amendment to have a material impact on our
results of operations or financial condition.
In March 2010, the FASB reached a consensus to issue an amendment to the accounting for
revenue arrangements under which a vendor satisfies its performance obligations to a customer over
a period of time, when the deliverable or unit of accounting is not within the scope of other
authoritative literature, and when the arrangement consideration is contingent upon the achievement
of a milestone. The amendment defines a milestone and clarifies whether an entity may recognize
consideration earned from the achievement of a milestone in the period in which the milestone is
achieved. This amendment is effective for fiscal years beginning on or after June 15, 2010, with
early adoption permitted. We adopted this amendment prospectively for milestones achieved after
January 1, 2011. This amendment did not have a material impact on our results of operation or
financial condition.
In October 2009, the FASB issued an amendment to the accounting for multiple-deliverable
revenue arrangements. This amendment provides guidance on whether multiple deliverables exist, how
the arrangements should be separated, and how the consideration paid should be allocated. As a
result of this amendment, entities may be able to separate multiple-deliverable arrangements in
more circumstances than under existing accounting guidance. This guidance amends the requirement
to establish the fair value of undelivered products and services based on objective evidence and
instead provides for separate revenue recognition based upon managements best estimate of the
selling price for an undelivered item when there is no other means to determine the fair value of
that undelivered item. The existing guidance previously required that the fair value of the
undelivered item reflect the price of the item either sold in a separate transaction between
unrelated third parties or the price charged for each item when the item is sold separately by the
vendor. If the fair value of all of the elements in the arrangement was not determinable,
then revenue was deferred until all of the items were delivered or fair value was determined.
We adopted this amendment prospectively for revenue arrangements entered into or materially
modified after January 1, 2011. This amendment did not have a material impact on our results of
operation or financial condition.
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 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 are
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 at current spot rates, with
gains and losses included in earnings.
Our derivative activities, which consist of foreign exchange forward contracts, are initiated
to 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 consolidated statement of operations at maturity, 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. We enter into these contracts with
counterparties that we believe to be creditworthy and do not enter into any leveraged derivative
transactions. We had $4.1 million in foreign exchange forward contracts outstanding at March 31,
2011, primarily to hedge Chilean-based operating cash flows against US dollars. If Chilean Pesos
were to strengthen in relation to the US dollar, our hedged foreign currency cash-flows expense
would be offset by a loss on the derivative contracts, with a net effect of zero.
26
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 market risk relates to our cash and investments and to
our borrowings. We maintain an investment portfolio of money market funds and treasury 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 March 31, 2011, we had
cash, cash equivalents and marketable securities of $107.9 million. The weighted average interest
rate related to our cash and cash equivalents for the three months ended March 31, 2011 was 0%. As
of March 31, 2011, the principal value of our credit lines was $14.6 million, and have a weighted
average interest rate of approximately 3%.
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 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 one month.
Item 4. Controls and Procedures
The Companys management, under the supervision and with the participation of the Companys
Chief Executive Officer (CEO) and Chief Financial Officer (CFO), has evaluated the
effectiveness of the Companys disclosure controls and procedures as defined in Securities and
Exchange Commission (SEC) Rule 13a-15(e) as of March 31, 2011. Based on that evaluation, CEO and
CFO have concluded that the Companys disclosure controls and procedures are effective to ensure
that information the Company is required to disclose in reports that it files or submits under the
Securities Exchange Act is accumulated and communicated to management, including the CEO and CFO,
as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed,
summarized, and reported within the time periods specified in the SECs rules and forms.
There have been no changes to the Companys internal control over financial reporting that
occurred during the Companys first quarter of 2011 that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are a party to litigation in the ordinary course of business. We do not believe that any
such litigation will have a material adverse effect on our business, financial condition or results
of operations.
Item 1A. Risk Factors
There have been no material changes from the risk factors as previously disclosed in the Item
1A of the Company Annual Report on Form 10-K.
27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. (Removed and Reserved)
Item 5. Other Information
None.
Item 6. Exhibits.
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Exhibit 1.1(7)
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|
Underwriting Agreement dated March 9, 2011, by and
among OPKO Health, Inc., Jefferies & Company, Inc. and
J.P. Morgan Securities LLC, as representatives for the
underwriters named therein. |
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Exhibit 2.1(1)
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Merger Agreement and Plan of Reorganization,
dated as of March 27, 2007, by and among Acuity
Pharmaceuticals, Inc., Froptix Corporation, eXegenics,
Inc., e-Acquisition Company I-A, LLC, and
e-Acquisition Company II-B, LLC. |
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Exhibit 2.2(4)+
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Securities Purchase Agreement dated May 6, 2008,
among Vidus Ocular, Inc., OPKO Instrumentation, LLC,
OPKO Health, Inc., and the individual sellers and
noteholders named therein. |
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Exhibit 2.3(8)
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Purchase Agreement, dated February 17, 2010, among
Ignacio Levy García and José de Jesús Levy García,
Inmobiliaria Chapalita, S.A. de C.V., Pharmacos
Exakta, S.A. de C.V., OPKO Health, Inc., OPKO Health
Mexicana S. de R.L. de C.V., and OPKO Manufacturing
Facilities S. de R.L. de C.V. |
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Exhibit 2.4+
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Agreement and Plan of Merger, dated January 28, 2011,
among CURNA Inc., KUR, LLC, OPKO Pharmaceuticals, LLC,
OPKO CURNA, LLC, and certain individuals named
therein. |
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Exhibit 3.1(2)
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Amended and Restated Certificate of Incorporation. |
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Exhibit 3.2(3)
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Amended and Restated By-Laws. |
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Exhibit 4.1(1)
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Form of Common Stock Warrant. |
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Exhibit 10.1
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Amendment No. 2 to the Credit Agreement dated March
27, 2007, as amended, with the Frost Group, LLC. |
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Exhibit 10.2
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Third Amended and Restated Subordinated Note and
Security Agreement, dated February 22, 2011, with the
Frost Group, LLC. |
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Exhibit 31.1
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Certification by Phillip Frost, Chief Executive
Officer, pursuant to Rule 13a-14(a) and 15d-14(a) of
the Securities and Exchange Act of 1934 as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 for the quarterly period ended March 31, 2011. |
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Exhibit 31.2
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Certification by Rao Uppaluri, Chief Financial
Officer, pursuant to Rule 13a-14(a) and 15d-14(a) of
the Securities and Exchange Act of 1934 as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 for the quarterly period ended March 31, 2011. |
28
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Exhibit 32.1
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Certification by Phillip Frost, Chief Executive
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 for the quarterly period ended March 31, 2011. |
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Exhibit 32.2
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Certification by Rao Uppaluri, Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 for the quarterly period ended March 31, 2011. |
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+ |
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Certain confidential material contained in the
document has been omitted and filed separately with
the Securities and Exchange Commission. |
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(1) |
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Filed with the Companys Current Report on Form 8-K
filed with the Securities and Exchange Commission on
April 2, 2007, and incorporated herein by reference. |
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(2) |
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Filed with the Companys Current Report on Form 8-A
filed with the Securities and Exchange Commission on
June 11, 2007, and incorporated herein by reference. |
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(3) |
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Filed with the Companys Annual Report on Form 10-K
filed with the Securities and Exchange Commission on
March 31, 2008 and incorporated herein by reference. |
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(4) |
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Filed with the Companys Quarterly Report on Form 10-Q
filed with the Securities and Exchange Commission on
August 8, 2008 for the Companys three-month period
ended June 30, 2008, and incorporated herein by
reference. |
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(6) |
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Filed with the Companys Quarterly Report on Form 10-Q
filed with the Securities and Exchange Commission on
November 12, 2008 for the Companys three-month period
ended September 30, 2008, and incorporated herein by
reference. |
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(7) |
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Filed with the Companys Current Report on Form 8-K
filed with the Securities and Exchange Commission on
March 10, 2011, and incorporated herein by reference. |
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(8) |
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Filed with the Companys Quarterly Report on Form
10-Q filed with the Securities and Exchange Commission
on May 10, 2010 for the Companys three-month period
ended March 31, 2010, and incorporated herein by
reference. |
29
SIGNATURES
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.
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Date: May 9, 2011 |
OPKO Health, Inc.
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/s/ Adam Logal
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Adam Logal |
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Executive Director of Finance, Chief
Accounting Officer and Treasurer |
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30
Exhibit Index
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Exhibit Number |
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Description |
Exhibit 2.4(+)
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Agreement and Plan of Merger, dated January 28,
2011, among CURNA Inc., KUR, LLC, OPKO
Pharmaceuticals, LLC, OPKO CURNA, LLC, and
certain individuals named therein. |
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Exhibit 10.1
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Amendment No. 2 to the Credit Agreement dated
March 27, 2007, as amended, with the Frost
Group, LLC. |
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Exhibit 10.2
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Third Amended and Restated Subordinated Note and
Security Agreement, dated February 22, 2011,
with the Frost Group, LLC. |
|
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Exhibit 31.1
|
|
Certification by Phillip Frost, Chief Executive
Officer, pursuant to Rule 13a-14(a) and
15d-14(a) of the Securities and Exchange Act of
1934 as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 for the quarterly
period ended March 31, 2011. |
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Exhibit 31.2
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Certification by Rao Uppaluri, Chief Financial
Officer, pursuant to Rule 13a-14(a) and
15d-14(a) of the Securities and Exchange Act of
1934 as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 for the quarterly
period ended March 31, 2011. |
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Exhibit 32.1
|
|
Certification by Phillip Frost, Chief Executive
Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 for the quarterly
period ended March 31, 2011. |
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Exhibit 32.2
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Certification by Rao Uppaluri, Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 for the quarterly period ended March 31, 2011. |
31