OPKO Health, Inc.
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This Quarterly Report on Form 10-Q contains “forward-looking statements,” as that term is defined under the Private Securities Litigation Reform Act of 1995 (“PSLRA”), Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended.amended (the “Exchange Act”). Forward-looking statements include statements about our expectations, beliefs or intentions regarding our product development efforts, business, financial condition, results of operations, strategies or prospects.prospects, operating results, cash flows and/or financial condition. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results as of the date they are made. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described below and in “Item 1A-Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2016,2022, and described from time to time in our other reports filedfilings with the Securities and Exchange Commission.Commission (the “SEC”). We do not undertake anany obligation to update forward-looking statements.statements, except to the extent required by applicable law. We intend that all forward-looking statements be subject to the safe-harbor provisions of the PSLRA. These forward-looking statements are only predictions and reflect our views as of the date they are made with respect to future events and financial performance.
Risks and uncertainties, the occurrence of which could adversely affect our business, include the following:
There have been no transfers between Level 1 and Level 2 and no transfers to or from Level 3 of the fair value hierarchy.
As of September 30, 2017March 31, 2023 and December 31, 2016,2022, the carrying value of our other financial instrument assets and liabilities approximates their fair value due to their short-term nature or variable rate of interest.
The following table reconciles the beginning and ending balances of our Level 3 assets and liabilities as of September 30, 2017:March 31, 2023:
|
| | | | | | | |
| September 30, 2017 |
(In thousands) | Contingent consideration | | Embedded conversion option |
Balance at December 31, 2016 | $ | 45,076 |
| | $ | 16,736 |
|
Total losses for the period: | | | |
Included in results of operations | (4,475 | ) | | (3,185 | ) |
Foreign currency impact | 3 |
| | — |
|
Payments | (303 | ) | | — |
|
Reclassification of embedded derivatives to equity | — |
| | (13,551 | ) |
Balance at September 30, 2017 | $ | 40,301 |
| | $ | — |
|
| | | | | | | | | |
| March 31, 2023 |
(In thousands) | Contingent consideration | | | | |
Balance at December 31, 2022 | $ | 1,036 | | | | | |
| | | | | |
Change in fair value: | | | | | |
Included in results of operations | 136 | | | | | |
Foreign currency impact | 7 | | | | | |
| | | | | |
| | | | | |
Balance at March 31, 2023 | $ | 1,179 | | | | | |
The estimated fair values of our financial instruments have been determined by using available market information and what we believe to be appropriate valuation methodologies. We use the following methods and assumptions in estimating fair value:
Contingent consideration – We estimate the fair value of the contingent consideration utilizing a discounted cash flow model for the expected payments based on estimated timing and expected revenues. We use several discount rates depending on each type of contingent consideration related to, OPKO Diagnostics, CURNA and OPKO Renal transactions. If estimated future sales were to decrease by 10%, the contingent consideration related to OPKO Renal, which represents the majority of our contingent consideration liability, would decrease by $2.4 million. As of September 30, 2017,March 31, 2023, of the $40.3$1.2 million of contingent consideration, $2.0$0.1 million is was recorded in Accrued expenses and $38.3$1.1 million is of contingent consideration was recorded in Other long-term liabilities. As of December 31, 2016, of the $45.12022, $1.0 million of contingent consideration $0.3 million iswas recorded in Accruedaccrued expenses and $44.8 million is recordedother long-term liabilities. As a result of our execution of the CAMP4 Agreement (as
defined in Other long-term liabilities.Note 14), we will have to pay a percentage of any payments received under the CAMP4 Agreement to the former CURNA stockholders.
NOTE 910 DERIVATIVE CONTRACTS
The following table summarizes the fair values and the presentation of our derivative financial instruments in the Condensed Consolidated Balance Sheets:
| | (In thousands) | Balance Sheet Component | | September 30, 2017 | | December 31, 2016 | (In thousands) | Balance Sheet Component | | March 31, 2023 | | December 31, 2022 |
Derivative financial instruments: | | | | | | Derivative financial instruments: | | | | | |
| Common Stock options/warrants | Investments, net | | $ | 2,020 |
| | $ | 4,017 |
| Common Stock options/warrants | Investments, net | | $ | 26 | | | $ | 28 | |
Embedded conversion option | 2033 Senior Notes, net of discount and estimated fair value of embedded derivatives | | $ | — |
| | $ | (16,736 | ) | |
| Forward contracts | Unrealized gains on forward contracts are recorded in Other current assets and prepaid expenses. Unrealized (losses) on forward contracts are recorded in Accrued expenses. | | $ | (264 | ) | | $ | 39 |
| Forward contracts | Unrealized losses on forward contracts are recorded in Accrued expenses. | | $ | (884) | | | $ | (1,123) | |
We enter into foreign currency forward exchange contracts with respect 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.
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 September 30, 2017March 31, 2023 and December 31, 2016,2022, our derivative financial instruments dodid not meet the documentation requirements to be designated as hedges. Accordingly, we recognize the changes in Fair value of derivative instruments, net in our Condensed Consolidated StatementsStatement of Operations. The following table summarizes the losses and gains recorded for the ninethree and three months ended September 30, 2017March 31, 2023 and 2016:2022:
| | | | | | | | | | | | | | | |
| | | Three months ended March 31, |
(In thousands) | | | | | 2023 | | 2022 |
Derivative loss: | | | | | | | |
| | | | | | | |
Common Stock options/warrants | | | | | $ | (2) | | | $ | (1) | |
| | | | | | | |
Forward contracts | | | | | (1,057) | | | (131) | |
Total | | | | | $ | (1,059) | | | $ | (132) | |
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
(In thousands) | 2017 | | 2016 | | 2017 | | 2016 |
Derivative gain (loss): | | | | | | | |
Common Stock options/warrants | $ | (342 | ) | | $ | (12 | ) | | $ | (854 | ) | | $ | (4,728 | ) |
2033 Senior Notes | (6,829 | ) | | (5,795 | ) | | 3,185 |
| | (1,061 | ) |
Forward contracts | (379 | ) | | 106 |
| | (362 | ) | | (100 | ) |
Total | $ | (7,550 | ) | | $ | (5,701 | ) | | $ | 1,969 |
| | $ | (5,889 | ) |
NOTE 1011 RELATED PARTY TRANSACTIONS
On April 29, 2022, upon consummation of the GeneDx Transaction, the Company entered into a Transition Services Agreement (the “Transition Services Agreement”), with GeneDx (now a wholly owned subsidiary of GeneDx Holdings), pursuant to which the Company agreed to provide, at cost, certain customary support services in respect of GeneDx’s business through December 31, 2022, including human resources, information technology support, and finance and accounting. As of March 31, 2023, the Company had incurred aggregate expenses of $2.0 million for services rendered under the Transition Services Agreement. For the three months ended March 31, 2023, the company incurred expenses of $0.7 million for services rendered under the Transaction Services Agreement. As of March 31, 2023, the company has a receivable of $0.6 million payable to the Company by GeneDx in accordance with the terms of the Transition Services Agreement.
The Company owns approximately 9% of Pharmsynthez and Pharmsynthez is Xenetic’s largest and controlling stockholder. Dr. Richard Lerner, a director of the Company until his death on December 2, 2021, was a co-inventor of Xenetic’s technology and received 31,240 shares of Xenetic upon the closing of the Xenetic transactions described above. Adam Logal, our Senior Vice President and Chief Financial Officer, is a director of Xenetic.
We hold investments in Zebra (ownership 29%), Sevion (31%), Neovasc (4%(0.5%), ChromaDex Corporation (1%), MabVax (4%(0.1%), COCP (9%) ARNO (5%(3%), NIMS (1%), Eloxx (1.5%), BioCardia (5%(1%) and Eloxx (3%LeaderMed Health Group Limited (47%). These investments were considered related party transactions as a result of our executive management’s ownership interests and/or board representation in these entities. We also hold an investment in GeneDx Holdings (Nasdaq: WGS) representing an 11.8% ownership interest as a result of our sale of GeneDx, Inc. and subsequent participation in an underwritten offering by GeneDx Holdings. Rick Pfenniger who sits on our Board also sits on the GeneDx Board as a result of the acquisition. See further discussion of our investments in Note 5.
In June 2017, we invested $1.5 million in Eloxx for 99,915 Preferred C Shares and in July 2017, we invested an additional $1.5 million in Sevion for 10,000,000 shares of Sevion common stock. An entity controlled by Dr. Frost also made in investment in Eloxx and committed to investing additional funds in Sevion by December 31, 2017. Sevion and Eloxx entered into an acquisition agreement on May 31, 2017 under which Eloxx will become a wholly owned subsidiary of Sevion. Upon completion of the transaction, Sevion will change its name to Eloxx Pharmaceuticals, Inc. Previously, in November 2016, we made a $0.2 million loan to Sevion, and in February 2017, we entered into an agreement with Sevion pursuant to which we delivered $0.3 million cash to Sevion in exchange for a promissory note. The loan and promissory note were converted into 4.1 million shares of Sevion common stock in August 2017. In September 2017, we converted 66,667 shares of Series C Preferred Stock of Sevion into 1,250,006 shares of common stock. The agreements with Sevion were considered related party transactions as a result of our executive management’s ownership interests and board representation in Sevion.
In July 2017, we invested an additional $0.1 million in MabVax for 152,143 shares of common stock and in May 2017, we invested an additional $0.5 million in MabVax for 285,714 shares of Series G Preferred Stock and 322,820 shares of Series I Preferred Stock. We had also invested an additional $1.0 million in MabVax in August 2016 for 207,900 shares of its common stock and warrants to purchase 415,800 shares of its common stock.
In April 2017, we invested an additional $1.0 million in COCP for 4,166,667 shares of its common stock, and in August 2016, we had invested an additional $2.0 million in COCP for 4,878,050 shares of its common stock.
In January 2016, we invested an additional $0.3 million in ARNO for 714,285 shares of its common stock, and in August 2016, we had invested an additional $0.3 million in ARNO for 714,285 shares of its common stock and warrants to purchase 357,142 shares of its common stock.
In October 2016, we entered into a consulting agreement to provide strategic advisory services to BioCardia. In connection with the consulting agreement, BioCardia granted us 5,027,726 common stock options. In December 2016, we purchased 19,230,769 shares of BioCardia from Dr. Frost for $2.5 million. We have also purchased shares of BioCardia in the open market. BioCardia is a related party as a result of our executive management’s ownership interest and board representation in BioCardia and its predecessor, Tiger X Medical, Inc. In October 2016, BioCardia completed its merger with Tiger X Medical, Inc., to which Tiger X Medical, Inc. was the surviving entity and the name of the issuer was changed to BioCardia.
In November 2016, we entered into a Pledge Agreement with the Museum of Science, Inc. and the Museum of Science Endowment Fund, Inc. pursuant to which we will contribute an aggregate of $1.0 million over a four-year period for constructing, equipping and the general operation of the Frost Science Museum. Dr. Frost and Mr. Pfenniger serve on the Board of Trustees of the Frost Science Museum and Mr. Pfenniger is the Vice Chairman of the Board of Trustees.6.
We lease office space from Frost Real Estate Holdings, LLC (“Frost Holdings”) in Miami, Florida, where our principal executive offices are located. Effective JanuaryAugust 1, 2017,2019, we entered into an amendment to our lease agreement with Frost
Holdings. The lease, as amended, is for approximately 29,500 square feet of space. The lease provides for payments of approximately $81$89 thousand per month in the first year increasing annually to $86$101 thousand per month in the thirdfifth year, plus applicable sales tax. The rent is inclusive of operating expenses, property taxes and parking.
Dr. Elias Zerhouni, our Vice Chairman and President, sits on the board of directors of Danaher Corporation (“Danaher”). Our wholly-owned subsidiary, BioReference, routinely procures products and services from several subsidiaries of Danaher, including Beckman Coulter, Integrated DNA Technologies Inc., and Leica Microsystems Inc., to which BioReference has paid $925.8 thousand, $15.4 thousand, and $94.3 thousand, respectively, during three months ended March 31, 2023 .
BioReference purchases and uses certain products acquired from InCellDx, Inc., a company in which we hold a 28%29% minority interest.
We reimburse Dr. Frost for Company-related use by Dr. Frost and our other executives of an airplane owned by a company that is beneficially owned by Dr. Frost. We reimburse Dr. Frost for out-of-pocket operating costs for the use of the airplane by Dr. Frost or Company executives for Company-related business. We do not reimburse Dr. Frost for personal use of the airplane by Dr. Frost or any other executive. For the three and nine months ended September 30, 2017,March 31, 2023 and 2022, we recognizedreimbursed approximately $168$29.3 thousand and $309 thousand, respectively, for Company-related travel by Dr. Frost and other OPKO executives. For the three and nine months ended September 30, 2016, we recognized approximately $154 thousand and $274$31.0 thousand, respectively, for Company-related travel by Dr. Frost and other OPKO executives.
NOTE 1112 COMMITMENTS AND CONTINGENCIES
In February 2023, the Office of the Attorney General for the State of Texas (“TX OAG”) informed BioReference that it believes that, from 2005 to the present, BioReference may have violated the Texas Medicaid Fraud Prevention Act with respect to claims it presented to Texas Medicaid for reimbursement. BioReference has not determined whether there is any merit to the TX OAG claims nor can it determine the extent of any potential liability. While management cannot predict the outcome of these matters at this time, the ultimate outcome could materially and adversely affect our business, financial condition, results of operations, and cash flows.
On December 29, 2022, the Israel Tax Authority (the “ITA”) issued an assessment against our subsidiary, OPKO Biologics in the amount of approximately $246 million (including interest) related to uncertain tax positions involving income recognition in connection with an examination of foreign tax returns for the 2014 through 2020 tax years. We recognize that local tax law is inherently complex and the local taxing authorities may not agree with certain tax positions taken.We are appealing this assessment, as we believe, other than for uncertain tax positions for which we have reserved, the issues are without technical merit. We intend to exhaust all judicial remedies necessary to resolve the matter, as necessary, which could be a lengthy process. There can be no assurance that this matter will be resolved in our favor, and an adverse outcome, or any future tax examinations involving similar assertions, could have a material adverse effect on our financial condition, results of operations and cash flows.
In connection with our acquisitions of CURNA, OPKO Diagnostics and OPKO Renal, we agreed to pay future consideration to the sellers upon the achievement of certain events. As a result, as of September 30, 2017,March 31, 2023, we recorded $40.3$1.2 million as contingent consideration, with $2.0$0.1 million recorded withinin Accrued expenses and $38.3$1.1 million recorded within Other long-term liabilities in the accompanying Condensed Consolidated Balance Sheets. Refer to Note 4.5.
In August 2017, we entered intoGeneDx, Inc., the Company’s former subsidiary, received a Commitment Letter (the “Commitment Letter”letter dated May 26, 2022 from the Texas Medicaid Office of the Inspector General stating that certain testing provided by GeneDx was not eligible for reimbursement by the Texas Medicaid program, because the testing was considered non-covered by the Texas Medicaid program at the time the tests were performed and/or GeneDx did not hold the requisite CLIA subspecialty classifications for the testing. The Company is working with GeneDx Holdings to investigate these issues. Following recent communication, it appears the CLIA subspecialty classification issue has been addressed to the satisfaction of the Texas Medicaid Office of the Inspector General. The potential non-covered testing issue, however, remains under investigation. The Texas Medicaid Office has expressed in writing a potential repayment liability of approximately $784 thousand. At this time, the Company can express no opinion as to the likelihood of an unfavorable outcome or the range of potential loss in this matter.
On March 1, 2019, the Company received a Civil Investigative Demand (“CID”) with Veterans Accountable Care Group, LLCfrom the U.S. Department of Justice (“VACG”DOJ”), Washington, DC. The CID sets forth document requests and interrogatories in connection with submissionallegations that the Company and certain of a bid by its affiliate,affiliates violated the Veterans Accountable Care Organization, LLC (“VACO”) in response to a request for proposal (“RFP”) fromFalse Claims Act and/or the Veterans Health Administration (“VA”) regarding its Community Care Network. If VACO is successful in its bid, we will acquire a fifteen percent (15%) membership interest in VACO. In addition, BioReference, our wholly-owned subsidiary, will provide laboratory services forAnti-Kickback Statute. On January 13, 2022, the Community Care Network, a region which currently includes approximately 2,133,000 veterans inFederal Government notified the states of Massachusetts, Maine, New Hampshire, Vermont, New York, Pennsylvania, New Jersey, Rhode Island, Connecticut, Maryland, Virginia, West Virginia, and North Carolina.
Pursuant to the Commitment Letter, we committed to provide, or to arrange from a third party lender, a line of credit for VACG in the amount of $50.0 million (the “Facility”). Funds drawn under the Facility would be contributed by VACG to VACO in order to satisfy the financial stability requirement of VACO in connection with its submission of the RFP. VACG would not be permitted to draw down on the Facility unless and until the VHA awards a contract to VACO. The Facility would have a maturity of five (5) years. Interest on the Facility would be payable at a rate equal to six and one-half percent (6.5%) per annum, payable quarterly in arrears.
We currently anticipate that a decision by the VHA with respect to the RFP will occur during the fourth quarter of 2017, although there can be no assurance that a decision will be made by such time or that, if made, such decision will not be challenged by participants in the RFP process or otherwise.
The Facility is subject to the negotiation of definitive documentation conditions customary for transactions of such type and otherwise acceptable to VACG and the lender under the Facility.
We accrue a liability for legal contingencies when we believeU.S.D.C., Middle District Florida, Jacksonville Division, that it is both probable that a liability has been incurred and that we can reasonably estimatedeclining to intervene in the amountmatter but retains the right, via the Attorney General, to consent to any proposed dismissal of the loss. We review these accrualsaction by the Court. On February 9, 2022, the States of Florida, Georgia, and adjust themCommonwealth of Massachusetts notified the U.S.D.C., Middle District Florida, Jacksonville Division, that they are declining to reflect ongoing negotiations, settlements, rulings, advice of legal counsel and other relevant information. To the extent new information is obtained and our views on the probable outcomes of claims, suits, assessments, investigations or legal proceedings change, changes in our accrued liabilities would be recordedintervene in the period in which such determination is made. Formatter. Notwithstanding the matters referenced inabove declinations, on February 17, 2022, the paragraph below, the amount of liability is not probable or the amount cannot be reasonably estimated; and, therefore, accruals have not been made. In addition, in accordanceCompany was served with the relevant authoritative guidance, for mattersRelator’s Summons and Complaint (“Complaint”), which the likelihood of material loss is at least reasonably possible, we provide disclosurehad been previously sealed. The Complaint alleges violations of the possible loss or rangeFalse Claims Act, the California Fraud Preventions Act, the Florida False Claims Act, the Massachusetts False Claims Act, the Georgia False Medicaid Claims Act, and illegal kickbacks. A motion to dismiss the Complaint was filed on April 25, 2022 and the case was dismissed in March 2023. However, the Relator filed an amended complaint in April 2023. While management cannot predict the outcome of loss; however, if a reasonable estimate cannotthese matters at this time, the ultimate outcome could be made, we will provide disclosurematerial to that effect.our business, financial condition, results of operations, and cash flows.
From time to time, we may receive inquiries, document requests, CIDs or subpoenas from the Department of Justice, the Office of Inspector General and Office for Civil Rights (“OCR”) of the Department of Health and Human Services, the Centers for Medicare and Medicaid Services,OCR, CMS, various payors and fiscal intermediaries, and other state and federal regulators regarding investigations, audits and reviews. In addition to the matters discussed in this note, we are currently responding to CIDs, subpoenas, orpayor audits, and document requests for various matters relating to our laboratory operations. Some pending or threatened proceedings against us may involve potentially substantial amounts as well as the possibility of civil, criminal, or administrative fines, penalties, or other sanctions, which could be material. Settlements of suits involving the types of issues that we routinely confront may require monetary payments as well as corporate integrity agreements. Additionally, qui tam or “whistleblower” actions initiated under the civil False Claims Act may be pending but placed under seal by the court to comply with the False Claims Act’s requirements for filing such suits. Also, from time to time, we may detect issues of non-compliance with federal healthcare laws pertaining to claims submission and reimbursement practices and/or financial relationships with physicians, among other things. We may avail ourselves of various mechanisms to address these issues, including participation in voluntary disclosure protocols. Participating in voluntary disclosure protocols can have the potential for significant settlement obligations or even enforcement action. The Company generally has cooperated, and intends to continue to cooperate, with appropriate regulatory authorities as and when investigations, audits and inquiries arise.
We are a party to other litigation in the ordinary course of business. We do not believe that any such litigation will have a material adverse effect on our business, financial condition, results of operations or cash flows.
In April 2017, the Civil Division of the United States Attorney’s Office for the Southern District of New York (the “SDNY”) informed BioReference Laboratories (“BioReference”) that it believes that, from 2006 to the present, BioReference
had, in violation of the False Claims Act, improperly billed Medicare and Tricare (both are federal government healthcare programs) for clinical laboratory services provided to hospital inpatient beneficiaries at certain hospitals. BioReference is reviewing and assessing the allegations made by the SDNY, and, at this point, BioReference has not determined whether there is any merit to the SDNY’s claims nor can it determine the extent of any potential liability. While managementwe cannot predict the ultimate outcome of theselegal matters, at this time,we accrue a liability for legal contingencies when we believe that it is both probable that a liability has been incurred and that we can reasonably estimate the amount of the loss. It’s reasonably possible the ultimate liability could exceed amounts currently estimated and we review established accruals and adjust them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel and other relevant information. To the extent new information is obtained and our views on the probable outcomes of claims, suits, assessments, investigations or legal proceedings change, changes in our accrued liabilities would be recorded in the period in which such determination is made. Because of the high degree of judgment involved in establishing loss estimates, the ultimate outcome couldof such matters will differ from our estimates and such differences may be material to our business, financial condition, results of operations, and cash flows.
We expect to continue 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, particularly as it relates to the launch of Rayaldee. We do not anticipate that we will generate substantial revenue from the sale of proprietary pharmaceutical products or certain of our diagnostic products for some time and we have generated only limited revenue from our pharmaceutical operations in Chile, Mexico, Israel, Spain, and Ireland, and from sale of the 4Kscore test. If we acquire additional assets or companies, accelerate our product development programs or initiate additional clinical trials, we will need additional funds. If we are not able to secure additional funding when needed, we may have to delay, reduce the scope of, or eliminate one or more of our clinical trials or research and development programs or possible acquisitions.
We have employment agreements with certain executives of BioReference which provide for compensation and certain other benefits and for severance payments under certain circumstances. During the nine months ended September 30, 2017 and 2016, we recognized $3.7 million and $17.9 million, respectively, of severance costs pursuant to these employment agreements as a component of Selling, general and administrative expense.
At September 30, 2017,March 31, 2023, we were committed to make future purchases for inventory and other items in 20172023 that occur in the ordinary course of business under various purchase arrangements with fixed purchase provisions aggregating $106.6approximately $52.8 million.
NOTE 13 REVENUE RECOGNITION
We generate revenues from services, products and intellectual property as follows:
Revenue from services
Revenue for laboratory services is recognized at the time test results are reported, which approximates when services are provided and the performance obligations are satisfied. Services are provided to patients covered by various third-party payor programs including various managed care organizations, as well as the Medicare and Medicaid programs. Billings for services are included in revenue net of allowances for contractual discounts, allowances for differences between the amounts billed and estimated program payment amounts, and implicit price concessions provided to uninsured patients which are all elements of variable consideration.
The following are descriptions of our payors for laboratory services:
Healthcare Insurers. Reimbursements from healthcare insurers are based on negotiated fee-for-service schedules. Revenues consist of amounts billed, net of contractual allowances for differences between amounts billed and the estimated consideration we expect to receive from such payors, which considers historical denial and collection experience and the terms
of our contractual arrangements. Adjustments to the allowances, based on actual receipts from the third-party payors, are recorded upon settlement.
Government Payors. Reimbursements from government payors are based on fee-for-service schedules set by governmental authorities, including traditional Medicare and Medicaid. Revenues consist of amounts billed, net of contractual allowances for differences between amounts billed and the estimated consideration we expect to receive from such payors, which considers historical denial and collection experience and the terms of our contractual arrangements. Adjustments to the allowances, based on actual receipts from the government payors, are recorded upon settlement.
Client Payors. Client payors include physicians, hospitals, employers, and other institutions for which services are performed on a wholesale basis, and are billed and recognized as revenue based on negotiated fee schedules. Client payors also include cities, states and companies for which BioReference provides COVID-19 testing services.
Patients. Uninsured patients are billed based on established patient fee schedules or fees negotiated with physicians on behalf of their patients. Insured patients (including amounts for coinsurance and deductible responsibilities) are billed based on fees negotiated with healthcare insurers. Collection of billings from patients is subject to credit risk and ability of the patients to pay. Revenues consist of amounts billed net of discounts provided to uninsured patients in accordance with our policies and implicit price concessions. Implicit price concessions represent differences between amounts billed and the estimated consideration that we expect to receive from patients, which considers historical collection experience and other factors including current market conditions. Adjustments to the estimated allowances, based on actual receipts from the patients, are recorded upon settlement.
The complexities and ambiguities of billing, reimbursement regulations and claims processing, as well as considerations unique to Medicare and Medicaid programs, require us to estimate the potential for retroactive adjustments as an element of variable consideration in the recognition of revenue in the period the related services are rendered. Actual amounts are adjusted in the period those adjustments become known. Negative revenue adjustments due to changes in estimates of implicit price concessions for performance obligations satisfied in prior periods were recognized of $4.8 million and $3.2 million, respectively, for the three months ended March 31, 2023, and 2022. Revenue adjustments for the three months ended March 31, 2023were mainly due to the composition of patient pay mix and, in 2022, mainly to lower reimbursement estimates for COVID-19 testing.
Third-party payors, including government programs, may decide to deny payment or recoup payments for testing they contend were improperly billed or not medically necessary, against their coverage determinations, or for which they believe they have otherwise overpaid (including as a result of their own error), and we may be required to refund payments already received. Our revenues may be subject to retroactive adjustment as a result of these factors among others, including without limitation, differing interpretations of billing and coding guidance and changes by government agencies and payors in interpretations, requirements, and “conditions of participation” in various programs. We have processed requests for recoupment from third-party payors in the ordinary course of our business, and it is likely that we will continue to do so in the future. If a third-party payor denies payment for testing or recoups money from us in a later period, reimbursement for our testing could decline.
As an integral part of our billing compliance program, we periodically assess our billing and coding practices, respond to payor audits on a routine basis, and investigate reported failures or suspected failures to comply with federal and state healthcare reimbursement requirements, as well as overpayment claims which may arise from time to time without fault on the part of the Company. We may have an obligation to reimburse Medicare, Medicaid, and third-party payors for overpayments regardless of fault. We have periodically identified and reported overpayments, reimbursed payors for overpayments and taken appropriate corrective action.
Settlements with third-party payors for retroactive adjustments due to audits, reviews or investigations are also considered variable consideration and are included in the determination of the estimated transaction price for providing services. These settlements are estimated based on the terms of the payment agreement with the payor, correspondence from the payor and our historical settlement activity, including an assessment of the probability a significant reversal of cumulative revenue recognized will occur when the uncertainty is subsequently resolved. Estimated settlements are adjusted in future periods as adjustments become known (that is, new information becomes available), or as years are settled or are no longer subject to such audits, reviews, and investigations. As of March 31, 2023 and December 31, 2022, we had liabilities of approximately $2.2 million and $1.8 million, respectively, within Accrued expenses and Other long-term liabilities related to reimbursements for payor overpayments.
The composition of revenue from services by payor for the three months ended March 31, 2023 and 2022 was as follows:
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
(In thousands) | 2023 | | 2022 | | | | |
Healthcare insurers | $ | 80,602 | | | $ | 95,779 | | | | | |
Government payers | 20,417 | | | 27,588 | | | | | |
Client payers | 27,168 | | | 159,040 | | | | | |
Patients | 4,181 | | | 4,192 | | | | | |
Total | $ | 132,368 | | | $ | 286,599 | | | | | |
Revenue from products
We recognize revenue from product sales when a customer obtains control of promised goods or services. The amount of revenue that is recorded reflects the consideration that we expect to receive in exchange for those goods or services. Our estimates for sales returns and allowances are based upon the historical patterns of product returns and allowances taken, matched against the sales from which they originated, and our evaluation of specific factors that may increase or decrease the risk of product returns. Product revenues are recorded net of estimated rebates, chargebacks, discounts, co-pay assistance and other deductions (collectively, “Sales Deductions”) as well as estimated product returns which are all elements of variable consideration. Allowances are recorded as a reduction of revenue at the time product revenues are recognized. The actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we will adjust these estimates, which would affect Revenue from products in the period such variances become known.
Rayaldee is distributed in the U.S. principally through the retail pharmacy channel, which initiates with the largest wholesalers in the U.S. (collectively, “Rayaldee Customers”). In addition to distribution agreements with Rayaldee Customers, we have entered into arrangements with many healthcare providers and payors that provide for government-mandated and/or privately-negotiated rebates, chargebacks and discounts with respect to the purchase of Rayaldee.
We recognize revenue for shipments of Rayaldee at the time of delivery to customers after estimating Sales Deductions and product returns as elements of variable consideration utilizing historical information and market research projections. For the three months ended March 31, 2023 and 2022, we recognized $6.6 million and $5.1 million, respectively, in net product revenue from sales of Rayaldee.
The following table presents an analysis of product sales allowances and accruals for the three months ended March 31, 2023 and 2022:
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(In thousands) | | Chargebacks, discounts, rebates and fees | | Governmental | | Returns | | Total |
Balance at December 31, 2022 | | $ | 1,532 | | | $ | 5,063 | | | $ | 1,683 | | | $ | 8,278 | |
Provision related to current period sales | | 3,306 | | | 4,045 | | | 286 | | | 7,637 | |
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Credits or payments made | | (3,264) | | | (3,968) | | | (293) | | | (7,525) | |
Balance at March 31, 2023 | | $ | 1,574 | | | $ | 5,140 | | | $ | 1,676 | | | $ | 8,390 | |
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Total gross Rayaldee sales | | | | | | | | $ | 14,281 | |
Provision for Rayaldee sales allowances and accruals as a percentage of gross Rayaldee sales | | | | | | | | 53% |
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(In thousands) | | Chargebacks, discounts, rebates and fees | | Governmental | | Returns | | Total |
Balance at December 31, 2021 | | $ | 2,014 | | | $ | 5,499 | | | $ | 2,639 | | | $ | 10,152 | |
Provision related to current period sales | | 3,215 | | | 4,869 | | | 269 | | | 8,353 | |
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Credits or payments made | | (3,641) | | | (5,086) | | | (575) | | | (9,302) | |
Balance at March 31, 2022 | | $ | 1,588 | | | $ | 5,282 | | | $ | 2,333 | | | $ | 9,203 | |
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Total gross Rayaldee sales | | | | | | | | $ | 13,479 | |
Provision for Rayaldee sales allowances and accruals as a percentage of gross Rayaldee sales | | | | | | | | 62% |
Taxes collected from customers related to revenues from services and revenues from products are excluded from revenues.
Revenue from intellectual property and other
We recognize revenues from the transfer of intellectual property generated through license, development, collaboration and/or commercialization agreements. The terms of these agreements typically include payment to us for one or more of the following: non-refundable, up-front license fees; development and commercialization milestone payments; funding of research and/or development activities; and royalties on sales of licensed products. Revenue is recognized upon satisfaction of a performance obligation by transferring control of a good or service to the customer.
For research, development and/or commercialization agreements that result in revenues, we identify all material performance obligations, which may include a license to intellectual property and know-how, and research and development activities. In order to determine the transaction price, in addition to any upfront payment, we estimate the amount of variable consideration at the outset of the contract either utilizing the expected value or most likely amount method, depending on the facts and circumstances relative to the contract. We constrain (reduce) our estimates of variable consideration such that it is probable that a significant reversal of previously recognized revenue will not occur throughout the life of the contract. When determining if variable consideration should be constrained, we consider whether there are factors outside of our control that could result in a significant reversal of revenue. In making these assessments, we consider the likelihood and magnitude of a potential reversal of revenue. These estimates are re-assessed each reporting period as required.
Upfront License Fees: If a license to our intellectual property is determined to be functional intellectual property distinct from the other performance obligations identified in the arrangement, we recognize revenue from nonrefundable, upfront license fees based on the relative value prescribed to the license compared to the total value of the arrangement. The revenue is recognized when the license is transferred to the customer and the customer is able to use and benefit from the license. For licenses that are not distinct from other obligations identified in the arrangement, we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time. If the combined performance obligation is satisfied over time, we apply an appropriate method of measuring progress for purposes of recognizing revenue from nonrefundable, upfront license fees. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.
Development and Regulatory Milestone Payments: Depending on facts and circumstances, we may conclude that it is appropriate to include the milestone in the estimated transaction price or that it is appropriate to fully constrain the milestone. A milestone payment is included in the transaction price in the reporting period that we conclude that it is probable that recording revenue in the period will not result in a significant reversal in amounts recognized in future periods. We may record revenues from certain milestones in a reporting period before the milestone is achieved if we conclude that achievement of the milestone is probable and that recognition of revenue related to the milestone will not result in a significant reversal in amounts recognized in future periods. We record a corresponding contract asset when this conclusion is reached. Milestone payments that have been fully constrained are not included in the transaction price to date. These milestones remain fully constrained until we conclude that achievement of the milestone is probable and that recognition of revenue related to the milestone will not result in a significant reversal in amounts recognized in future periods. We re-evaluate the probability of achievement of such development milestones and any related constraint each reporting period. We adjust our estimate of the overall transaction price, including the amount of revenue recorded, if necessary.
Research and Development Activities: If we are entitled to reimbursement from our customers for specified research and development expenses, we account for them as separate performance obligations if distinct. We also determine whether the
research and development funding would result in revenues or an offset to research and development expenses in accordance with provisions of gross or net revenue presentation. The corresponding revenues or offset to research and development expenses are recognized as the related performance obligations are satisfied.
Sales-based Milestone and Royalty Payments: Our customers may be required to pay us sales-based milestone payments or royalties on future sales of commercial products. We recognize revenues related to sales-based milestone and royalty payments upon the later to occur of (i) achievement of the customer’s underlying sales or (ii) satisfaction of any performance obligation(s) related to these sales, in each case assuming the license to our intellectual property is deemed to be the predominant item to which the sales-based milestones and/or royalties relate.
Other Potential Products and Services: Arrangements may include an option for license rights, future supply of drug substance or drug product for either clinical development or commercial supply at the licensee’s election. We assess if these options provide a material right to the licensee and if so, they are accounted for as separate performance obligations at the inception of the contract and revenue is recognized only if the option is exercised and products or services are subsequently delivered or when the rights expire. If the promise is based on market terms and not considered a material right, the option is accounted for if and when exercised. If we are entitled to additional payments when the licensee exercises these options, any additional payments are generally recorded in license or other revenues when the licensee obtains control of the goods, which is upon delivery.
For the three months ended March 31, 2023 and 2022, we recorded $64.8 million and $6.0 million of revenue from the transfer of intellectual property and other, respectively. For the three months ended March 31, 2023, revenue from transfer of intellectual property and other principally reflects an upfront payment of $50.0 million from Merck and a $7.0 million payment from Vifor (as defined below) triggered by the German price approval for Rayaldee. Furthermore, we recorded a $2.5 million payment from Nicoya due to Nicoya’s submission of the investigational new drug application to China's Center for Drug Evaluation (“CDE”). For the three months ended March 31, 2023 and 2022, revenue from transfer of intellectual property and other reflects $1.8 million and $2.2 million, respectively, of revenue related to the Pfizer Transaction (as defined below). For the three months ended March 31, 2022, revenue from transfer of intellectual property and other included $3.0 million related to a sales milestone from Vifor.
Contract liabilities relate to cash consideration that OPKO receives in advance of satisfying the related performance obligations. Changes in the contractual liabilities balance during the three months ended March 31, 2023 were as follows:
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(In thousands) | | | |
Balance at December 31, 2022 | $ | 138 | | | |
Balance at March 31, 2023 | 140 | | | |
Revenue recognized in the period from: | | | |
Amounts included in contracts liability at the beginning of the period | (2) | | | |
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NOTE 1214 STRATEGIC ALLIANCES
Vifor Fresenius Medical Care Renal Pharma LtdMerck
We planOn March 8, 2023, ModeX, the Company (with respect to certain sections), and Merck Sharp & Dohme LLC (“Merck”) entered into a License and Research Collaboration Agreement (the “Merck Agreement”) pursuant to which ModeX granted to Merck a license to certain patent rights and know-how in connection with the development of ModeX’s preclinical nanoparticle vaccine candidate targeting the Epstein Barr Virus.
Under the terms of the Merck Agreement, ModeX granted to Merck an exclusive, sublicensable, royalty-bearing license to certain intellectual property to conduct research under a research program to be established by the parties and to develop, manufacture, use and commercialize (i) a portfoliomultivalent or monovalent vaccine assembled using the our platform for Epstein-Barr Virus (“Vaccine”), and (ii) any pharmaceutical or biological preparation in final form containing a Vaccine for sale or for administration to human patients in a clinical trial for all uses (“Product”). We received an initial payment of product candidates through$50.0 million and are eligible to receive up to an additional $872.5 million upon the achievement of certain commercial and development milestones under several indications. We are also eligible to receive tiered royalty payments ranging from high single digits to low double digits upon achievement of certain sales targets of the Product. Certain of the rights subject to the license provided by us under the Merck Agreement were obtained by us from Sanofi pursuant to that certain License Agreement entered into as of July 1, 2021 (“Sanofi In-License Agreement”) between us and Sanofi, a combinationFrench corporation (“Sanofi”), and a portion of internalthe upfront payment, milestones and royalties received by us under the Merck Agreement may be payable to Sanofi under the terms
of the Sanofi In-License Agreement. As a result of such obligations under the Sanofi In-License Agreement, we recorded $12.5 million in Accrued expenses in the accompanying Condensed Consolidated Balance Sheets.
As part of the strategic collaboration, ModeX and Merck have agreed to establish a program for research and other development activities related to the development of a Vaccine or Product undertaken by the parties pursuant to a research plan. The parties will also establish a joint steering committee to facilitate the research program.
The Merck Agreement will remain in effect until one or more Products receive marketing authorization, and, thereafter, until the expiration of all royalty obligations unless earlier terminated as permitted under the Merck Agreement. In addition to termination rights for material breach and bankruptcy, Merck is permitted to terminate the Agreement in its entirety without cause after a specified notice period. If Merck terminates the Merck Agreement for convenience or by us for Merck’s uncured material breach, we may elect to receive a reversion license such that we can continue its work with Vaccines and Products which have not been terminated due to a material safety issue.
LeaderMed
On September 14, 2021, we and LeaderMed announced the formation of a joint venture to develop, manufacture and commercialize two of OPKO’s clinical stage, long-acting drug products in Greater China and eight other Asian territories.
Under the terms of the agreements, we have granted the joint venture exclusive rights to develop, manufacture and commercialize (a) OPK88003, an oxyntomodulin analog being developed for the treatment of obesity and diabetes, and (b) Factor VIIa-CTP, a novel long-acting coagulation factor being developed to treat hemophilia, in exchange for a 47% ownership interest in the joint venture. In addition, during 2021 we received an upfront payment of $1 million and will be reimbursed for clinical trial material and technical support we provide the joint venture.
LeaderMed has agreed to be responsible for funding the joint venture’s operations, development and external partnerships.commercialization efforts and, together with its syndicate partners, initially invested $11 million in exchange for a 53% ownership interest. We retain full rights to oxyntomodulin and Factor VIIa-CTP in all other geographies.
CAMP4 Therapeutics
On July 6, 2021, we entered into an exclusive license agreement (the “CAMP4 Agreement”) with CAMP4, pursuant to which we granted to CAMP4 an exclusive license to develop, manufacture, commercialize or improve therapeutics utilizing the AntagoNAT technology, an oligonucleotide platform developed under OPKO CURNA, which includes the molecule for the treatment of Dravet syndrome, together with any derivative or modification thereof (the “Licensed Compound”) and any pharmaceutical product that comprises or contains the Licensed Compound, alone or in combination with one or more other active ingredients (“Licensed Product”), worldwide. The CAMP4 Agreement grant covers human pharmaceutical, prophylactic, and therapeutic and certain diagnostic uses.
We received an initial upfront payment of $1.5 million and 3,373,008 shares of CAMP4’s Series A Prime Preferred Stock (“Preferred Stock”), which equates to approximately 9% of the outstanding shares of CAMP4, and we are eligible to receive up to $3.5 million in development milestone payments for Dravet syndrome products, and $4 million for non-Dravet syndrome products, as well as sales milestones of up to $90 million for Dravet syndrome products and up to $90 million for non-Dravet syndrome products. We may also receive double digit royalty payments on the net sales of royalty bearing products, subject to adjustment. In May 2016,addition, upon achievement of certain development milestones, we will be eligible to receive equity consideration of up to 5,782,299 shares of Preferred Stock in connection with Dravet syndrome products and up to 1,082,248 shares of Preferred Stock in connection with non-Dravet syndrome products. In connection with our acquisition of CURNA, we agreed to pay future consideration to the sellers upon the achievement of certain events. As a result of our execution of the CAMP4 Agreement, we will have to pay a percentage of any payments received under the CAMP4 Agreement to the former CURNA stockholders.
Unless earlier terminated, the CAMP4 Agreement will remain in effect on a Licensed Product-by-Licensed Product and country by-country basis until such time as the royalty term expires for a Licensed Product in a country, and expires in its entirety upon the expiration of the royalty term for the last Licensed Product in the last country. CAMP4’s royalty obligations expire on the later of (i) the expiration, invalidation or abandonment date of the last patent right in connection with the royalty bearing product, or (ii) ten (10) years after a royalty bearing product’s first commercial sale in a country. In addition to termination rights for material breach and bankruptcy, CAMP4 is permitted to terminate the CAMP4 Agreement after a specified notice period.
NICOYA Macau Limited
On June 18, 2021, EirGen, our wholly-ownedwholly owned subsidiary, and Vifor Fresenius Medical Care Renal Pharma LtdNICOYA Macau Limited (“VFMCRP”Nicoya”), a Macau corporation and an affiliate of NICOYA Therapeutics, entered into a Development and License Agreement (the “VFMCRP“Nicoya Agreement”) granting Nicoya the exclusive rights for the development and commercialization of extended release calcifediol (the “Nicoya Product”) in Greater China, which includes mainland China, Hong Kong, Macau, and Taiwan (collectively, the “Nicoya Territory”). Extended release calcifediol is marketed in the U.S. by OPKO under the tradename Rayaldee. The license grant to Nicoya covers the therapeutic and preventative use of the Nicoya Product for SHPT in non-dialysis and hemodialysis chronic kidney disease patients (the “Nicoya Field”).
EirGen received an initial upfront payment of $5 million and was eligible to receive an additional $5 million tied to the first anniversary of the effective date of the Nicoya Agreement, as amended, of which EirGen has received $2.5 million plus accrued interest for the delayed payment. Furthermore, EirGen received the additional $2.5 million upon Nicoya’s submission of an investigational new drug (IND) application to the Center for Drug Evaluation (CDE) of China in March 2023. EirGen is also eligible to receive up to an additional aggregate amount of $115 million upon the achievement of certain development, regulatory and sales-based milestones by Nicoya for the Nicoya Product in the Nicoya Territory. EirGen is eligible to receive tiered, double digit royalty payments at rates in the low double digits on net product sales within the Nicoya Territory and in the Nicoya Field.
Nicoya will, at its sole cost and expense, be responsible for performing all development activities necessary to obtain all regulatory approvals for the Nicoya Product in the Nicoya Territory and for all commercial activities pertaining to the Nicoya Product in the Nicoya Territory.
Unless earlier terminated, the Nicoya Agreement will remain in effect until such time as all royalty payment terms and extended payment terms have expired, and Nicoya shall have no further payment obligations to EirGen under the terms of the Nicoya Agreement. Nicoya’s royalty obligations expire on the later of (i) expiration of the last to expire valid patent claim covering the Nicoya Product sold in the Nicoya Territory, (ii) expiration of all regulatory and data exclusivity applicable to the Nicoya Product in the Nicoya Territory, and (iii) on a product-by-product basis, ten (10) years after such Nicoya Product’s first commercial sale in the Nicoya Territory. In addition to termination rights for material breach and bankruptcy, Nicoya is permitted to terminate the Nicoya Agreement after a specified notice period.
CSL Vifor
In May 2016, EirGen and Vifor Fresenius Medical Care Renal Pharma Ltd. (“Vifor”) entered into a Development and License Agreement (the “Vifor Agreement”) for the development and commercialization of Rayaldee (the “Product”) worldwide, except for (i) the United States and Canada, (ii) any country in Central America or South America (excluding(including Mexico), (iii) Russia, (iv) China, (v) Japan,South Korea, (vi) Ukraine, (vii) Belorussia, (viii) Azerbaijan, (ix) Kazakhstan, and (x) Taiwan (xi) the Middle East, and (xii) all countries of Africa (the “VFMCRP“Vifor Territory”)., as amended. The license to VFMCRPVifor potentially covers all therapeutic and prophylactic uses of the Product in human patients (the “VFMCRP“Vifor Field”), provided that initially the license is for the use of the Product for the treatment or prevention of SHPT related to patients with stage 3 or 4 chronic kidney diseaseCKD and vitamin D insufficiency/deficiency (the “VFMCRP“Vifor Initial Indication”).
Under
In January 2023, the termsprice approval for Rayaldee was granted by the German Association of Statutory Health Insurance funds (GKV-SV), which triggered a milestone payment of $7.0 million for the three months ended March 31, 2023. For the three months ended March 31, 2022, we recognized a milestone payment of $3.0 million in revenue from transfer of intellectual property and other for the first sale of Rayaldee in Europe.
Effective May 23, 2021, we entered into an amendment to the Vifor Agreement pursuant to which the parties thereto agreed to include Japan as part of the VFMCRPVifor Territory.
Effective May 5, 2020, we entered into an amendment to the Vifor Agreement EirGen grantedpursuant to VFMCRP an exclusive license inwhich the VFMCRP Territory inparties agreed to exclude Mexico, South Korea, the VFMCRP FieldMiddle East and all of the countries of Africa from the Vifor Territory. In addition, the parties agreed to use certain EirGen patents and technologyamendments to make, have made, use, sell, offer for sale, and import Productsthe milestone structure and to develop, commercialize, have commercialized, and otherwise exploitreduce minimum royalties payable. As revised, the Product. EirGenCompany has received a non-refundable$3 million payment triggered by the first marketing approval of Rayaldee in Europe, $7.0 million payment triggered by the Germany price approval by the local sick fund association, and non-creditable initial payment of $50 million. EirGen is also eligible to receive up to an additional $37$10 million in regulatory milestones (“Regulatory Milestones”) and $195$207 million in milestone payments tied to launch, pricing and sales-based milestones (“Sales Milestones”)sales of Rayaldee, and will receive tiered, royalties on sales of the product at percentage rates that range from the mid-teensdouble-digit royalties.
We plan to the mid-twenties or a minimum royalty, whichever is greater, upon the commencement of sales of the Product within the VFMCRP Territory and in the VFMCRP Field.
As part of the arrangement, the companies will share responsibility with Vifor for the conduct of trials specified within an agreed-upon development plan, with each company leading certain activities within the plan. EirGen will lead the manufacturing activities within and outside the VFMCRPVifor Territory and the commercialization activities outside the VFMCRPVifor Territory and outside the VFMCRPVifor Field in the VFMCRPVifor Territory and VFMCRPVifor will lead the commercialization activities in the VFMCRPVifor Territory and the VFMCRPVifor Field. For the initial development plan, the companies have agreed to certain cost sharing arrangements. VFMCRPVifor will be responsible for all other
development costs that VFMCRPVifor considers necessary to develop the Product for the use of the Product for the VFMCRPVifor Initial Indication in the VFMCRPVifor Territory in the VFMCRPVifor Field except as otherwise provided in the VFMCRPVifor Agreement.
The VFMCRP Agreement will remain in effect with respect to the Product in each countryfirst of the VFMCRP Territory, on a country by country basis, until the date on which VFMCRP shall have no further payment obligations to EirGen under the terms of the VFMCRP Agreement, unless earlier terminated pursuant to the VFMCRP Agreement. VFMCRP’s royalty
obligations expire on a country-by-country and product-by-product basis on the later of (i) expiration of the last to expire valid claim covering the Product sold in such country, (ii) expiration of all regulatory and data exclusivity applicable to the Productclinical studies provided for in the country of sale, and (iii) ten (10) years after the Product first commercial saledevelopment activities commenced in such country. In addition to termination rights for material breach and bankruptcy, VFMCRP is permitted to terminate the VFMCRP Agreement in its entirety, or with respect to one or more countries in the VFMCRP Territory, after a specified notice period, provided that VFMCRP shall not have the right to terminate the VFMCRP Agreement with respect to certain major countries without terminating the entire VFMCRP Agreement. If the VFMCRP Agreement is terminated by EirGen or VFMCRP, provision has been made for transition of product and product responsibilities to EirGen.September 2018.
In connection with the VFMCRPVifor Agreement, the parties entered into a letter agreement (the “Letter Agreement”) pursuant to which EirGen granted to VFMCRPVifor an exclusive option (the “Option”) to acquire an exclusive license under certain EirGen patents and technology to use, import, offer for sale, sell, distribute and commercialize the Product in the United StatesU.S. solely for the treatment of secondary hyperparathyroidismSHPT in dialysis patients with chronic kidney diseaseCKD and vitamin D insufficiency (the “Dialysis Indication”). Upon exercise of the Option, VFMCRP willVifor has agreed to reimburse EirGen for all of the development costs incurred by EirGen with respect to the Product for the Dialysis Indication in the United States. VFMCRPU.S. Vifor would also pay EirGen up to an additional aggregate amount of $555 million of sales-based milestones upon the achievement of certain milestones and would be obligated to pay royalties at percentage rates that range from the mid-teens to the mid-twenties on sales of the Product in the United StatesU.S. for the Dialysis Indication.
The Option is exercisable until the earlier of (i) the To date, that EirGen submits a new drug application or supplemental new drug application or their then equivalents to the U.S. Food and Drug Administration for the Product for the Dialysis Indication in the United States, (ii) the parties mutually agree to discontinue development of Product for the Dialysis Indication, or (iii) VFMCRP provides notice to OPKO that itVifor has elected not to exerciseexercised the Option.
OPKO has guaranteed the performance of certain of EirGen’s obligations under the VFMCRP Agreement and the Letter Agreement.
For revenue recognition purposes, we evaluated the various agreements with VFMCRP to determine whether there were multiple deliverables in the arrangement. The VFMCRP Agreement provides for the following: (1) an exclusive license in the VFMCRP Territory in the VFMCRP Field to use certain patents and technology to make, have made, use, sell, offer for sale, and import Products and to develop, commercialize, have commercialized, and otherwise exploit the Product; (2) EirGen will supply Products to support the development, sale and commercialization of the Products to VFMCRP in the VFMCRP Territory (the “Manufacturing Services”); and (3) the Option to acquire an exclusive license under certain EirGen patents and technology to use, import, offer for sale, sell, distribute and commercialize the Product in the United States solely for the Dialysis Indication. Based on our evaluation, the exclusive license is the only deliverable at the outset of the arrangement. We concluded the Manufacturing Services were a contingent deliverable dependent on the future regulatory and commercial action by VFMCRP and the Option was substantive and not considered a deliverable under the license arrangement.
We recognized the $50.0 million upfront license payment in Revenue from transfer of intellectual property in our Condensed Consolidated Statements of Operations in the second quarter of 2016. Revenues related to the Manufacturing Services will be recognized as Product is sold to VFMCRP. No revenue related to the Option will be recognized unless and until VFMCRP exercises its Option under the Letter Agreement.
We determined that the cost sharing arrangement for development of the Dialysis Indication is not a deliverable in the VFMCRP Agreement. Payments for the Dialysis Indication will be recorded as Research and development expense as incurred.
EirGen is also eligible to receive up to an additional $37 million in Regulatory Milestones and $195 million in Sales Milestones. Payments received for Regulatory Milestonesregulatory milestones and Sales Milestonessales milestones are non-refundable. The Regulatory Milestonesregulatory milestones are payable if and when VFMCRPVifor obtains approval from certain regulatory authorities and will be recognized as revenue in the period in which the associated milestone is achieved, assuming all other revenue recognition criteria are met. We account for the Sales Milestonessales milestones as royalties and Sales Milestonessales milestones payments will be recognized as revenue in full in the period in which the associated milestone is achieved or sales occur, assuming all other revenue recognition criteria are met. To date, no revenue has been recognized related to the achievement of the milestones.
Pfizer Inc.
In December 2014, we entered into an exclusive worldwide agreement (the “Pfizer Agreement”) with Pfizer Inc. (“Pfizer”) for the development and commercialization of our long-acting hGH-CTPSomatrogon (hGH-CTP) for the treatment of growth hormone deficiency (“GHD”) in adults and children, as well as for the treatment of growth failure in children born small for gestational age (“SGA”) (the “Pfizer Transaction”).
In early 2022, the European Commission and Ministry of Health, Labour and Welfare in Japan approved the next-generation long-acting recombinant human growth hormone NGENLA (Somatrogon), a once-weekly injection to treat pediatric growth hormone deficiency, and we received pricing approvals in Germany and Japan. With the achievement of these milestones, we received $85.0 million in milestone payments in 2022. Further, Canada and Australia approved NGENLA in 2021.
TheIn January 2022, the FDA issued a Complete Response Letter for the BLA for Somatrogon (hGH-CTP). Pfizer Transaction closedand OPKO are evaluating the FDA’s comments and will work with the agency to determine the best path forward for Somatrogon (hGH-CTP) in the United States.
In May 2020, we entered into an Amended and Restated Development and Commercialization License Agreement (the “Restated Pfizer Agreement”) with Pfizer, effective January 2015 following1, 2020, pursuant to which the terminationparties agreed, among other things, to share all costs for Manufacturing Activities, as defined in the Restated Pfizer Agreement, for developing a licensed product for the three indications included in the Restated Pfizer Agreement.
On October 21, 2019, we and Pfizer announced that the global phase 3 trial evaluating Somatrogon dosed once-weekly in prepubertal children with GHD met its primary endpoint of the waiting period under the Hart-Scott-Rodino Act. non-inferiority to daily Genotropin® (somatropin) for injection, as measured by annual height velocity at 12 months.
Under the terms of the Pfizer Transaction, as restated, we received non-refundable and non-creditable upfront payments of $295.0 million and are eligible to receive up to an additional $275.0 million upon the achievement of certain regulatory milestones.milestones, $85 million of which we received during the second quarter of 2022. Pfizer received the exclusive license to commercialize hGH-CTPSomatrogon worldwide. In addition, we are eligible to receive initial tiered royalty payments associated with the commercialization of hGH-CTPSomatrogon for Adultadult GHD with percentage rates ranging from the high teens to mid-twenties. Upon the launch of hGH-CTPSomatrogon for Pediatricpediatric GHD in certain major markets, the royalties will transition to regional, tiered gross profit sharing for both hGH-CTPSomatrogon and Pfizer’s Genotropin® (somatropin).
The agreement with Pfizer will remain in effect until the last sale of the licensed product, unless earlier terminated as permitted under the agreement.Pfizer Agreement. In addition to termination rights for material breach and bankruptcy, Pfizer is permitted to terminate the Pfizer Agreement in its entirety, or with respect to one or more world regions, without cause after a specified notice period. If the Pfizer Agreement is terminated by us for Pfizer’s uncured material breach, or by Pfizer without cause, provision has been made for transition of product and product responsibilities to us for the terminated regions, as well as continued supply of product by Pfizer or transfer of supply to us in order to support the terminated regions.
We will lead the clinical activities and will be responsible for funding the development programs for the key indications, which includes Adult and Pediatric GHD and Pediatric SGA. Pfizer will be responsible for all development costs for additional indications as well as all post-marketing studies. In addition, Pfizer will fund the commercialization activities for all indications and lead the manufacturing activities covered by the global development plan.
For revenue recognition purposes, we viewed the Pfizer Transaction as a multiple-element arrangement. Multiple-element arrangements are analyzed to determine whether the various performance obligations, or elements, can be separated or whether they must be accounted for as a single unit of accounting. We evaluated whether a delivered element under an arrangement has standalone value and qualifies for treatment as a separate unit of accounting. Deliverables that do not meet these criteria are not evaluated separately for the purpose of revenue recognition. For a single unit of accounting, payments received are recognized in a manner consistent with the final deliverable. We determined that the deliverables under the Pfizer Transaction, including the licenses granted to Pfizer, as well as our obligations to provide various research and development services, will be accounted for as a single unit of account. This determination was made because the ongoing research and development services to be provided by us are essential to the overall arrangement as we have significant knowledge and technical know-how that is important to realizing the value of the licenses granted. The performance period over which the revenue will be recognized is expected to continue from the first quarter of 2015 through 2020, when we anticipate completing the various research and development services that are specified in the Pfizer Transaction and our performance obligations are completed. We will continue to review the timing of when our research and development services will be completed in order to assess that the estimated performance period over which the revenue is to be recognized is appropriate. Any significant changes in the timing of the performance period will result in a change in the revenue recognition period. We increased the expected performance period over which the revenue will be recognized in the third quarter of 2017 by approximately one year.
We are recognizing the non-refundable $295.0 million upfront payments on a straight-line basis overas revenue as the performance period. We recognized $46.5 millionresearch and development services
were completed. As of March 31, 2023 and December 31, 2022, we had no contract liabilities related to the Pfizer Transaction in Revenue from transfer of intellectual property in our Condensed Consolidated Statements of Operations during the nine months ended September 30, 2017, and had deferred revenue related to the Pfizer Transaction of $112.3 million at September 30, 2017. As of September 30, 2017, $44.9 million of deferred revenue related to the Pfizer Transaction was classified in Accrued expenses and $67.4 million was classified in Other long-term liabilities in our Condensed Consolidated Balance Sheets.Transaction.
The Pfizer Transaction includes milestone payments totalingof $275.0 million upon the achievement of certain milestones. The milestones range from $20.0 million to $90.0 million each and are based on achievement of regulatory approval in the U.S. and regulatory approval and price approval in other major markets. We evaluated each of these milestone payments and believe that all of the milestones are substantive as (i) there is substantive uncertainty at the close of the Pfizer Transaction that the milestones would be achieved as approval from a regulatory authority must be received to achieve the milestones which would be commensurate with the enhancement of value of the underlying intellectual property, (ii) the milestones relate solely to past performance and (iii) the amount of the milestone is reasonable in relation to the effort expended and the risk associated with the achievement of the milestone. The milestone payments will be recognized as revenue in full in the period in which the associated milestone is achieved, assuming all other revenue recognition criteria are met. To date, no$85.0 million of revenue has been recognized related to the achievement of the milestones.
TESARO
In November 2009, we entered into an asset purchase agreement (the “NK-1 Agreement”) under which we acquired VARUBI™ (rolapitant) and other neurokinin-1 (“NK-1”) assets from Merck. In December 2010, we entered into an exclusive license agreement with TESARO, in which we out-licensed the development, manufacture, commercialization and distribution
of our lead NK-1 candidate, VARUBI™ (the “TESARO License”). Under the terms of the license, we received a $6.0 million upfront payment from TESARO and we received $30 million of milestone payments from TESARO upon achievement of certain regulatory and commercial sale milestones and we are eligible to receive additional commercial milestone payments of up to $85 million if specified levels of annual net sales are achieved. During the nine months ended September 30, 2017, $10.0 million of revenue was recognized related to the achievement of the milestones under the TESARO License. During the nine months ended September 30, 2016, no revenue was recognized related to the achievement of the milestones under the TESARO License. TESARO is also obligated to pay us tiered royalties on annual net sales achieved in the United States and Europe at percentage rates that range from the low double digits to the low twenties, and outside of the United States and Europe at low double-digit percentage rates. TESARO assumed responsibility for clinical development and commercialization of licensed products at its expense. Under the NK-1 Agreement, we will continue to receive royalties on a country-by-country and product-by-product basis until the later of the date that all of the patent rights licensed from us and covering VARUBI™ expire, are invalidated or are not enforceable and 12 years from the first commercial sale of the product.
If TESARO elects to develop and commercialize VARUBI™ in Japan through a third-party licensee, TESARO will share equally with us all amounts it receives in connection with such activities, subject to certain exceptions and deductions.
The term of the license will remain in force until the expiration of the royalty term in each country, unless we terminate the license earlier for TESARO’s material breach of the license or bankruptcy. TESARO has a right to terminate the license at any time during the term for any reason on three months’ written notice.
Pharmsynthez
In April 2013, we entered into a series of concurrent transactions with Pharmsynthez, a Russian pharmaceutical company traded on the Moscow Stock Exchange pursuant to which we acquired an equity method investment in Pharmsynthez (ownership 9%). We also granted rights to certain technologies in the Russian Federation, Ukraine, Belarus, Azerbaijan and Kazakhstan (the “Pharmsynthez Territories”) to Pharmsynthez and agreed to perform certain development activities. We will receive from Pharmsynthez royalties on net sales of products incorporating the technologies in the Pharmsynthez Territories, as well as a percentage of any sublicense income from third parties for the technologies in the Pharmsynthez Territories.
In July 2015, we entered into a Note Purchase Agreement with Pharmsynthez pursuant to which we delivered $3.0 million to Pharmsynthez in exchange for a $3.0 million note (the “Pharmsynthez Note Receivable”). The Pharmsynthez Note Receivable will be settled in 2017 and Pharmsynthez may satisfy the note either in cash or shares of its capital stock. We recorded the Pharmsynthez Note Receivable within Other current assets and prepaid expenses in our Condensed Consolidated Balance Sheets.
RXi Pharmaceuticals Corporation
In March 2013, we completed the sale to RXi of substantially all of our assets in the field of RNA interference (the “RNAi Assets”) (collectively, the “Asset Purchase Agreement”). Pursuant to the Asset Purchase Agreement, RXi will be required to pay us up to $50.0 million in milestone payments upon the successful development and commercialization of each drug developed by RXi, certain of its affiliates or any of its or their licensees or sublicensees utilizing patents included within the RNAi Assets (each, a “Qualified Drug”). In addition, RXi will also be required to pay us royalties equal to: (a) a mid single-digit percentage of “Net Sales” (as defined in the Asset Purchase Agreement) with respect to each Qualified Drug sold for an ophthalmologic use during the applicable “Royalty Period” (as defined in the Asset Purchase Agreement); and (b) a low single-digit percentage of net sales with respect to each Qualified Drug sold for a non-ophthalmologic use during the applicable Royalty Period.
Other
We have completed strategic deals with numerous institutions and commercial partners. In connection with these agreements, upon the achievement of certain milestones we are obligated to make certain payments and have royalty obligations upon sales of products developed under the license agreements. At this time, we are unable to estimate the timing and amounts of payments as the obligations are based on future development of the licensed products.
NOTE 1315 SEGMENTS
We manage our operations in two reportable segments, pharmaceutical and diagnostics. The pharmaceutical segment consists of our pharmaceutical operations we acquired in Chile, Mexico, Ireland, Israel and Spain,Rayaldee product sales and our pharmaceutical research and development. The diagnostics segment primarily consists of our clinical and genomics laboratory operations we acquired through the acquisitions of BioReference and OPKO Lab and our point-of-care operations. There are no significant inter-
segmentinter-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 our operating segments and the unallocated corporate operations as well as geographic information are as follows:
| | | For the three months ended September 30, | | For the nine months ended September 30, | | | For the three months ended March 31, |
(In thousands) | 2017 | | 2016 | | 2017 | | 2016 | (In thousands) | | 2023 | | 2022 |
Revenue from services: | | | | | | | | Revenue from services: | | | | |
Pharmaceutical | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| Pharmaceutical | | $ | — | | | $ | — | |
Diagnostics | 229,035 |
| | 259,025 |
| | 740,992 |
| | 777,559 |
| Diagnostics | | 132,368 | | | 286,599 | |
Corporate | — |
| | — |
| | — |
| | — |
| Corporate | | — | | | — | |
| $ | 229,035 |
| | $ | 259,025 |
| | $ | 740,992 |
| | $ | 777,559 |
| | | $ | 132,368 | | | $ | 286,599 | |
Revenue from products: | | | | | | | | Revenue from products: | | | | |
Pharmaceutical | $ | 22,795 |
| | $ | 20,569 |
| | $ | 73,992 |
| | $ | 63,275 |
| Pharmaceutical | | $ | 40,383 | | | $ | 36,658 | |
Diagnostics | — |
| | — |
| | — |
| | — |
| Diagnostics | | — | | | — | |
Corporate | — |
| | — |
| | — |
| | — |
| Corporate | | — | | | — | |
| $ | 22,795 |
| | $ | 20,569 |
| | $ | 73,992 |
| | $ | 63,275 |
| | | $ | 40,383 | | | $ | 36,658 | |
Revenue from transfer of intellectual property: | | | | | | | | |
Revenue from transfer of intellectual property and other: | | Revenue from transfer of intellectual property and other: | | | | |
Pharmaceutical | $ | 11,665 |
| | $ | 18,441 |
| | $ | 58,819 |
| | $ | 105,338 |
| Pharmaceutical | | $ | 64,826 | | | $ | 5,962 | |
Diagnostics | — |
| | — |
| | — |
| | — |
| Diagnostics | | — | | | — | |
Corporate | — |
| | — |
| | — |
| | — |
| Corporate | | — | | | — | |
| $ | 11,665 |
| | $ | 18,441 |
| | $ | 58,819 |
| | $ | 105,338 |
| | | $ | 64,826 | | | $ | 5,962 | |
Operating loss: | | | | | | | | |
Operating income (loss): | | Operating income (loss): | | | | |
Pharmaceutical | $ | (18,452 | ) | | $ | (18,593 | ) | | $ | (49,709 | ) | | $ | 15,422 |
| Pharmaceutical | | $ | 18,955 | | | $ | (18,108) | |
Diagnostics | (27,619 | ) | | 3,098 |
| | (35,664 | ) | | 11,117 |
| Diagnostics | | (40,007) | | | (43,548) | |
Corporate | (12,219 | ) | | (8,128 | ) | | (41,067 | ) | | (49,414 | ) | Corporate | | (9,542) | | | (10,768) | |
| | $ | (58,290 | ) | | $ | (23,623 | ) | | $ | (126,440 | ) | | $ | (22,875 | ) | | | $ | (30,594) | | | $ | (72,424) | |
Depreciation and amortization: | | | | | | | | Depreciation and amortization: | | | | |
Pharmaceutical | $ | 6,935 |
| | $ | 6,994 |
| | $ | 20,404 |
| | $ | 12,841 |
| Pharmaceutical | | $ | 17,760 | | | $ | 15,402 | |
Diagnostics | 18,430 |
| | 18,818 |
| | 56,183 |
| | 59,711 |
| Diagnostics | | 8,686 | | | 12,412 | |
Corporate | 29 |
| | 20 |
| | 90 |
| | 60 |
| Corporate | | — | | | — | |
| $ | 25,394 |
| | $ | 25,832 |
| | $ | 76,677 |
| | $ | 72,612 |
| | | $ | 26,446 | | | $ | 27,814 | |
Income (loss) from investment in investees: | | | | | | | | |
Loss from investment in investees: | | Loss from investment in investees: | | | | |
Pharmaceutical | $ | (3,661 | ) | | $ | 399 |
| | $ | (10,784 | ) | | $ | (5,643 | ) | Pharmaceutical | | $ | (37) | | | $ | (49) | |
Diagnostics | (352 | ) | | (1,213 | ) | | (987 | ) | | 496 |
| Diagnostics | | — | | | — | |
Corporate | — |
| | — |
| | — |
| | — |
| Corporate | | — | | | — | |
| $ | (4,013 | ) | | $ | (814 | ) | | $ | (11,771 | ) | | $ | (5,147 | ) | | | $ | (37) | | | $ | (49) | |
Revenues: | | | | | | | | Revenues: | | | | |
United States | $ | 229,218 |
| | $ | 259,221 |
| | $ | 751,732 |
| | $ | 777,703 |
| United States | | $ | 189,085 | | | $ | 291,808 | |
Ireland | 15,182 |
| | 20,594 |
| | 57,812 |
| | 114,526 |
| Ireland | | 15,846 | | | 8,462 | |
Chile | 11,514 |
| | 9,936 |
| | 33,534 |
| | 26,516 |
| Chile | | 15,541 | | | 16,339 | |
Spain | 4,123 |
| | 3,910 |
| | 13,746 |
| | 12,257 |
| Spain | | 6,110 | | | 7,109 | |
Israel | 1,935 |
| | 3,699 |
| | 13,807 |
| | 12,862 |
| Israel | | 4,594 | | | 1,558 | |
Mexico | 1,483 |
| | 675 |
| | 3,072 |
| | 2,308 |
| Mexico | | 5,826 | | | 3,750 | |
Other | 40 |
| | — |
| | 100 |
|
| — |
| Other | | 575 | | | 193 | |
| $ | 263,495 |
| | $ | 298,035 |
| | $ | 873,803 |
| | $ | 946,172 |
| | | $ | 237,577 | | | $ | 329,219 | |
| | (In thousands) | September 30, 2017 | | December 31, 2016 | (In thousands) | March 31, 2023 | | December 31, 2022 |
Assets: | | | | Assets: | | | |
Pharmaceutical | $ | 1,309,650 |
| | $ | 1,294,916 |
| Pharmaceutical | $ | 1,373,982 | | | $ | 1,322,531 | |
Diagnostics | 1,339,401 |
| | 1,408,522 |
| Diagnostics | 671,875 | | | 690,504 | |
Corporate | 72,939 |
| | 63,181 |
| Corporate | 123,813 | | | 154,224 | |
| $ | 2,721,990 |
| | $ | 2,766,619 |
| | $ | 2,169,670 | | | $ | 2,167,259 | |
Goodwill: |
| |
| Goodwill: | | | |
Pharmaceutical | $ | 262,786 |
| | $ | 251,817 |
| Pharmaceutical | $ | 314,355 | | | $ | 312,826 | |
Diagnostics | 452,787 |
| | 452,786 |
| Diagnostics | 283,025 | | | 283,025 | |
Corporate | — |
| | — |
| |
| $ | 715,573 |
| | $ | 704,603 |
| |
| | | $ | 597,380 | | | $ | 595,851 | |
Two customersNo customer represented more than 10% of our total consolidated revenue during the three and nine months ended September 30, 2017.March 31, 2023 and 2022. As of September 30, 2017, one customer represented more than 10% of our accounts receivable balance. As ofMarch 31, 2023 and December 31, 2016, one2022, no customer represented more than 10% of our accounts receivable balance.
NOTE 14 SUBSEQUENT EVENTS
On October 12, 2017, EirGen, our wholly-owned subsidiary, and Japan Tobacco Inc. (“JT”) entered into a Development and License Agreement granting JT the exclusive rights for the development and commercialization of Rayaldee in Japan (the “JT Territory”). The license grant to JT covers the therapeutic and preventative use of the Product for (i) SHPT in non-dialysis and dialysis patients with CKD, (ii) rickets, and (iii) osteomalacia (the “JT Initial Indications”), as well as such additional indications as may be added to the scope of the license subject to the terms of the Agreement (the “JT Additional Indications”, and together with the JT Initial Indications, the “JT Field”).
OPKO will receive an initial upfront payment of $6 million. OPKO will receive another $6 million upon the initiation of OPKO’s planned phase 2 study for Rayaldee in dialysis patients in the U.S. OPKO is also eligible to receive up to an additional aggregate amount of $31 million upon the achievement of certain regulatory and development milestones by JT for the Product in the JT Territory, and $75 million upon the achievement of certain sales based milestones by JT in the JT Territory. OPKO will also receive tiered, double digit royalty payments at rates ranging from low double digits to mid-teens on net Product sales within the JT Territory and in the JT Field. JT will, at its sole cost and expense, be responsible for performing all development activities necessary to obtain all regulatory approvals for Rayaldee in Japan and for all commercial activities pertaining to Rayaldee in Japan, except for certain preclinical expenses which OPKO has agreed to reimburse JT up to a capped amount.16 LEASES
We have reviewed all subsequent eventsoperating leases for office space, laboratory operations, research and transactionsdevelopment facilities, manufacturing locations, warehouses and certain equipment. We determine if a contract contains a lease at inception or modification of a contract. Our leases generally do not provide an implicit interest rate, and we therefore use our incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of the lease within a particular currency environment. We used the incremental borrowing rates as of January 1, 2019 for operating leases that occurred after the datecommenced prior to that date. Many of our September 30, 2017leases contain rental escalation, renewal options and/or termination options that are factored into our determination of lease payments as appropriate. Variable lease payment amounts that cannot be determined at the commencement of the lease are not included in the right-to-use assets or liabilities.
We elected the use of permitted practical expedients of not recording leases on our Condensed Consolidated Balance Sheet date, throughwhen the timeleases have terms of filing this Quarterly Report12 months or less, and we elected not to separate nonlease components from lease components and instead account for each separate lease component and the nonlease components associated with that lease component as a single lease component.
The following table presents the lease balances within the Condensed Consolidated Balance Sheet as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Classification on the Balance Sheet | | March 31, 2023 | | December 31, 2022 |
Assets | | | | | | |
Operating lease assets | | Operating lease right-of-use assets | | $ | 36,832 | | | $ | 38,725 | |
Finance lease assets | | Property, plant and equipment, net | | 10,858 | | | 9,898 | |
| | | | | | |
Liabilities | | | | | | |
Current | | | | | | |
Operating lease liabilities | | Current maturities of operating leases | | 11,490 | | | 11,628 | |
Accrued expenses | | Current maturities of finance leases | | 2,968 | | | 2,809 | |
Long-term | | | | | | |
Operating lease liabilities | | Operating lease liabilities | | 26,462 | | | 27,963 | |
Other long-term liabilities | | Finance lease liabilities | | $ | 7,890 | | | $ | 7,089 | |
| | | | | | |
Weighted average remaining lease term | | | | | | |
Operating leases | | | | 6.1 years | | 6.0 years |
Finance leases | | | | 6.6 years | | 6.5 years |
Weighted average discount rate | | | | | | |
Operating leases | | | | 4.5 | % | | 4.4 | % |
Finance leases | | | | 4.3 | % | | 3.8 | % |
The following table reconciles the undiscounted future minimum lease payments (displayed by year and in the aggregate) under noncancelable operating leases with terms of more than one year to the total operating lease liabilities recognized on Form 10-Q.our Condensed Consolidated Balance Sheet as of March 31, 2023:
| | | | | | | | | | | |
(in thousands) | Operating | | Finance |
April 1, 2023 through December 31, 2023 | $ | 9,286 | | | $ | 2,482 | |
2024 | 8,464 | | | 2,724 | |
2025 | 5,295 | | | 2,062 | |
2026 | 4,030 | | | 1,402 | |
2027 | 3,858 | | | 587 | |
Thereafter | 11,910 | | | 1,990 | |
Total undiscounted future minimum lease payments | 42,843 | | | 11,247 | |
Less: Difference between lease payments and discounted lease liabilities | 4,891 | | | 389 | |
Total lease liabilities | $ | 37,952 | | | $ | 10,858 | |
Expense under operating leases and finance leases was $4.1 million and $0.7 million, respectively, for the three months ended March 31, 2023, which includes $0.6 million of variable lease costs. Expense under operating leases and finance leases was $4.6 million and $0.7 million, respectively, for the three months ended March 31, 2022, which includes $0.4 million of variable lease costs. Operating lease costs and finance lease costs are included within Operating loss in the Condensed Consolidated Statement of Operations. Short-term lease costs were not material.
Supplemental cash flow information is as follows:
| | | | | | | | | | | |
(in thousands) | For the three months ended March 31, |
| 2023 | | 2022 |
Operating cash out flows from operating leases | $ | 3,872 | | | $ | 4,288 | |
Operating cash out flows from finance leases | 108 | | | 33 | |
Financing cash out flows from finance leases | 656 | | | 498 | |
Total | $ | 4,636 | | | $ | 4,819 | |
| | | |
| | | |
| | | |
| | | |
| | | |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
You should read this discussion together with the unaudited Condensed Consolidated Financial Statements, related Notes,notes, and other financial information included elsewhere in this reportQuarterly Report on Form 10-Q together with our audited consolidated financial statements, related notes, and other information contained in our Annual Report on Form 10-K for the year ended December 31, 20162022 (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,I, Item 1A of ourthe Form 10-K for the year ended December 31, 2016, and as described from time to time in our other reports filedfilings with the Securities and Exchange Commission. These risks could cause our actual results to differ materially from those anticipated in these forward-looking statements.
We are a diversified healthcare company that seeks to establish industry-leading positions in large and rapidly growing medical markets. Our diagnostics business includes BioReference LaboratoriesHealth, LLC (“BioReference”), one of the nation’s third-largest clinical laboratorylargest full service laboratories with a core genetic testing business and a 400-person180-person sales and marketing team to drive growth and leverage new products, including the and we offer our4Kscore prostate cancer test and the Claros 1 in-office immunoassay platform (in development).through BioReference. Our pharmaceutical business features Rayaldee, an FDA-approveda U.S. Food and Drug Administration (“FDA”) approved treatment for secondary hyperparathyroidism (“SHPT”) in adults with stage 3 or 4 chronic kidney disease (“CKD”) and vitamin D insufficiency, (launched in November 2016), and VARUBI™ for chemotherapy-induced nausea and vomiting (oral formulation launched by partner TESARO in November 2015 and IV formulation approved October 2017)Somatrogon (hGH-CTP), OPK88003, a once or twice weekly oxyntomodulin for type 2 diabetes and obesity which is a clinically advanced drug candidate among the new class of GLP-1 glucagon receptor dual agonists (Phase 2b), and OPK88004, a selective androgen receptor modulator being developed for benign prostatic hyperplasia and other urologic and metabolic conditions. Our pharmaceutical business also features hGH-CTP, a once-weekly human growth hormone injection (in Phasefor which we completed a successful phase 3 study in August 2019 and is partnered with Pfizer)Pfizer Inc. (“Pfizer”). Regulatory applications for Somatrogon (hGH-CTP) have been submitted to the applicable regulatory bodies for review in several countries around the world. In February 2022, the European Commission granted marketing authorization in the European Union for Somatrogon (hGH-CTP) under the brand name NGENLA® to treat children and adolescents from as young as 3 years of age with growth disturbance due to insufficient secretion of growth hormone and has been granted pricing approval in Germany. NGENLA® has also been approved in Japan, Canada, and Australia. We also submitted the initial Biologics License Application (“BLA”) with the FDA for approval of Somatrogon (hGH-CTP) in the United States and Pfizer received a complete response letter in January 2022. Pfizer and OPKO have evaluated the FDA’s comments and are working with the agency to address their inquiries. In May 2022, we acquired ModeX Therapeutics, Inc. (“ModeX”), a biotechnology company focused on developing innovative multi-specific immune therapies for cancer and infectious diseases candidates. ModeX has a once-daily Factor VIIa drugrobust early-stage pipeline with assets in key areas of immuno-oncology and infectious diseases, and we intend to further expand our pharmaceutical product pipeline through ModeX’s portfolio of development candidates.
Through BioReference, we provide laboratory testing services, primarily to customers in the larger metropolitan areas in New York, New Jersey, Florida, Texas, Maryland, California, Pennsylvania, Delaware, Washington, DC, Illinois and Massachusetts, as well as to customers in a number of other states. We offer a comprehensive test menu of clinical diagnostics for hemophilia (Phase 2a).blood, urine and tissue analysis. This includes hematology, clinical chemistry, immunoassay, infectious disease, serology, hormones, and toxicology assays, as well as Pap smear, anatomic pathology (biopsies) and other types of tissue analysis, as well as testing for COVID-19. We market our laboratory testing services directly to physicians, geneticists, hospitals, clinics, correctional and other health facilities.
We operate established pharmaceutical platforms in Spain, Ireland, Chile, Spain, Mexico, and Mexico, the U.S.,which are generating revenue and from which we expect to generate positive cash flow and facilitate future market entry for our products currently in development. EirGen, our specialty pharmaceutical manufacturing and development site in Ireland, is focused on theIn addition, we have a development and commercial supply of high potency, high barrier to entry pharmaceutical products. In addition, we operatecompany and a specialty active pharmaceutical ingredients (“APIs”)global supply chain operation and holding company in Ireland. We own an APIs manufacturer in Israel, which we expect will facilitate the development of our pipeline of molecules and compounds for our proprietary molecular diagnostic and therapeutic products.
RECENT DEVELOPMENTS
On October 12, 2017, EirGen, our wholly-owned subsidiary, and Japan Tobacco Inc. (“JT”) entered into46
RESULTS OF OPERATIONS
Impact of COVID-19
We continue to be a Development and License Agreement granting JT the exclusive rights for the development and commercialization of Rayaldee in Japan (the “JT Territory”). The license grant to JT covers the therapeutic and preventative usepart of the Product for (i) SHPT in non-dialysiscoordinated public and dialysis patients with CKD, (ii) rickets,private sector response to the COVID-19 pandemic. There continues to be a high level of uncertainty relating to the pandemic’s continuing evolution, including how governments and (iii) osteomalacia (the “JT Initial Indications”),consumers will react to new developments, and whether the pandemic will have a longer-term effect on the healthcare industry and patient habits. BioReference has been providing COVID-19 solutions, including diagnostic molecular testing and serology antibody testing, to meet the testing needs of its customers, including physicians, health systems, long-term care facilities, governments, schools, employers, professional sports teams and entertainment venues, as well as such additional indicationsthe general public through relationships with retail pharmacy chains.
Throughout the pandemic, we have managed our company-wide lab operations specimen acquisition, logistics, procurement, customer service, and initiatives to manage our cost structure to match the ever changing COVID-19 testing volumes and to identify and capitalize on efficiencies in our core clinical lines of business. While BioReference benefited from significant COVID-19 testing volumes in 2020 and 2021, demand declined in 2022 and continued to decline during the first quarter of 2023.
Revenue from services for the three months ended March 31, 2023, decreased by $154.2 million as may be addedcompared to the scopesame period in 2022 due to lower COVID-19 testing volumes. Excluding COVID-19 test volumes, for the three months ended March 31, 2023, routine clinical test volumes increased 6.8% as compared to volumes for the three months ended March 31, 2022.
Foreign Currency Exchange Rates
Approximately 18.5% of revenue for the licensethree months ended March 31, 2023, and approximately 10.9% of revenue for the three months ended March 31, 2022, were denominated in currencies other than the U.S. Dollar (USD). Our financial statements are reported in USD and, accordingly, fluctuations in exchange rates will affect the translation of revenues and expenses denominated in foreign currencies into USD for purposes of reporting the consolidated financial results. In the first quarter of 2023 and the year ended December 31, 2022, the most significant currency exchange rate exposures were to the Euro and Chilean Peso. Gross accumulated currency translation adjustments recorded as a separate component of shareholders’ equity were $34.2 million and $39.9 million at March 31, 2023, and December 2022, respectively.
We are subject to foreign currency transaction risk for fluctuations in exchange rates during the termsperiod of time between the Agreement (the “JT Additional Indications”,consummation and togethercash settlement of transactions. We limit foreign currency transaction risk through hedge transactions with foreign currency forward contracts. Under these forward contracts, for any rate above or below the JT Initial Indications,fixed rate, we receive or pay the “JT Field”).
OPKO will receive an initial upfront payment of $6 million. OPKO will receive another $6 million upondifference between the initiation of OPKO’s planned phase 2 study for Rayaldee in dialysis patients inspot rate and the U.S. OPKO is also eligible to receive up to an additional aggregate amount of $31 million upon the achievement of certain regulatory and development milestones by JTfixed rate for the Product ingiven amount at the JT Territory, and $75 million upon the achievementsettlement date. At March 31, 2023, we had 177 open foreign exchange forward contracts relating to inventory purchases on letters of certain sales based milestones by JT in the JT Territory. OPKO will also receive tiered, double digit royalty payments at rates ranging from low double digitscredit with various amounts maturing monthly through April 2023 with a notional value totaling approximately $10.4 million. At December 31, 2022, we had 194 open foreign exchange forward contracts relating to mid-teensinventory purchases on net Product sales within the JT Territory and in the JT Field. JT will, at its sole cost and expense, be responsible for performing all development activities necessary to obtain all regulatory approvals for Rayaldee in Japan and for all commercial activities pertaining to Rayaldee in Japan, except for certain preclinical expenses which OPKO has agreed to reimburse JT up toletters of credit with various amounts maturing monthly through January 2023 with a capped amount.notional value totaling approximately $11.9 million.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2017MARCH 31, 2023 AND 20162022
|
| | | | | | | | | | | |
Revenues | For the three months ended September 30, | | |
(In thousands) | 2017 | | 2016 | | Change |
Revenue from services | $ | 229,035 |
| | $ | 259,025 |
| | $ | (29,990 | ) |
Revenue from products | 22,795 |
| | 20,569 |
| | 2,226 |
|
Revenue from transfer of intellectual property and other | 11,665 |
| | 18,441 |
| | (6,776 | ) |
Total revenues | $ | 263,495 |
| | $ | 298,035 |
| | $ | (34,540 | ) |
The decrease in RevenueOur consolidated income (loss) from services is attributable to decreased pricing at BioReference’s GeneDx division. The increase in Revenue from products principally reflects an increase in revenue from OPKO Chile and EirGen. Revenue from transfer of intellectual propertyoperations for the three months ended September 30, 2017March 31, 2023 and 2016 principally2022 was as follows:
| | | | | | | | | | | | | | | | | | | | |
| For the three months ended March 31, | | | | |
(In thousands) | 2023 | 2022 | | Change | | % Change |
Revenues: | | | | | | |
Revenue from services | $ | 132,368 | | $ | 286,599 | | | $ | (154,231) | | | (54) | % |
Revenue from products | 40,383 | | 36,658 | | | 3,725 | | | 10 | % |
Revenue from transfer of intellectual property and other | 64,826 | | 5,962 | | | 58,864 | | | 987 | % |
Total revenues | 237,577 | | 329,219 | | | (91,642) | | | (28) | % |
Costs and expenses: | | | | | | |
Cost of revenue | 138,314 | | 243,875 | | | (105,561) | | | (43) | % |
Selling, general and administrative | 75,642 | | 117,537 | | | (41,895) | | | (36) | % |
Research and development | 32,605 | | 18,312 | | | 14,293 | | | 78 | % |
Contingent Consideration | 136 | | (106) | | | 242 | | | 228 | % |
Amortization of intangible assets | 21,474 | | 22,025 | | | (551) | | | (3) | % |
| | | | | | |
Total costs and expenses | 268,171 | | 401,643 | | | (133,472) | | | (33) | % |
Loss from operations | (30,594) | | (72,424) | | | 41,830 | | | 58 | % |
Diagnostics
| | | | | | | | | | | | | | | | | | | | |
| For the three months ended March 31, | | | | |
(In thousands) | 2023 | 2022 | | Change | | % Change |
Revenues | | | | | | |
Revenue from services | $ | 132,368 | | $ | 286,599 | | | $ | (154,231) | | | (54) | % |
| | | | | | |
Total revenues | 132,368 | | 286,599 | | | (154,231) | | | (54) | % |
Costs and expenses: | | | | | | |
Cost of revenue | 114,061 | | 221,206 | | | (107,145) | | | (48) | % |
Selling, general and administrative | 52,576 | | 94,957 | | | (42,381) | | | (45) | % |
Research and development | 689 | | 6,222 | | | (5,533) | | | (89) | % |
| | | | | | |
Amortization of intangible assets | 5,049 | | 7,762 | | | (2,713) | | | (35) | % |
| | | | | | |
Total costs and expenses | 172,375 | | 330,147 | | | (157,772) | | | (48) | % |
Loss from operations | (40,007) | | (43,548) | | | 3,541 | | | 8 | % |
Revenue. Revenue from services for the three months ended March 31, 2023, decreased by approximately $154.2 million compared to the three months ended March 31, 2022. The decrease in revenue for the three months ended March 31, 2023, reflects $11.2lower demand for COVID-19 testing and lower COVID-19 reimbursement of $126.8 million and $17.7$1.4 million, respectively. BioReference performed 68 thousand molecular tests for COVID-19 during the three months ended March 31, 2023, representing 4.8% of total volume for that period. In comparison, the three months ended March 31, 2022, included 1,981 thousand molecular tests for COVID-19 and 126 thousand serology antibody tests, representing 46.9% of total volume for the 2022 period. The reduction in reimbursement reflected an increase in utilization of antigen point of care diagnostic tests and a change in the mix of customers, which have varying contract prices depending on the level of services we provide.
Furthermore, clinical test reimbursement decreased by $6.9 million due to the mix of testing ordered offset by an increase in clinical test volume of $17.0 million. Moreover, revenues decreased by $36.1 million as a result of the GeneDx Transaction that closed in April 2022.
Estimated collection amounts are subject to the complexities and ambiguities of billing, reimbursement regulations and claims processing, as well as considerations unique to Medicare and Medicaid programs, and require us to consider the potential for retroactive adjustments when estimating variable consideration in the recognition of revenue in the period the related services are rendered. Negative revenue adjustments due to changes in estimates of implicit price concessions for performance obligations satisfied in prior periods were recognized of $4.8 million and $3.2 million, respectively, for the three
months ended March 31, 2023, and 2022. Revenue adjustments for the three months ended March 31, 2023were mainly due to the composition of patient pay mix and, in 2022, mainly to lower reimbursement estimates for COVID-19 testing.
The composition of revenue related tofrom services by payor for the Pfizer Transaction.three months ended March 31, 2023 and 2022 was as follows:
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
(In thousands) | 2023 | | 2022 | | | | |
Healthcare insurers | $ | 80,602 | | | $ | 95,779 | | | | | |
Government payers | 20,417 | | | 27,588 | | | | | |
Client payers | 27,168 | | | 159,040 | | | | | |
Patients | 4,181 | | | 4,192 | | | | | |
Total | $ | 132,368 | | | $ | 286,599 | | | | | |
| | | | | | | |
| | | | | | | |
Client payors include cities, states and companies for which BioReference provides COVID-19 testing services.
Cost of revenue. Cost of revenue for the three months ended September 30, 2017 increased $0.1March 31, 2023 decreased $107.1 million compared to the prior year period. The decreasethree months ended March 31, 2022. Cost of revenue decreased primarily due to a decline in costthe volume of service revenue is attributableCOVID-19 tests performed during the three months ended March 31, 2023, compared to cost savings initiatives at BioReference. The increase in cost of product revenue is attributable to an increase in revenue at OPKO Chile and EirGen.2022. Cost of revenue for the three months ended September 30, 2017 and 2016 wereMarch 31, 2023, also decreased due to changes in the test mix during the period. In addition, cost of revenue decreased by $26.0 million as follows:a result of the GeneDx Transaction, which closed in April 2022.
|
| | | | | | | | | | |
Cost of Revenue | For the three months ended September 30, | | |
(In thousands) | 2017 | 2016 | | Change |
Cost of service revenue | $ | 135,203 |
| $ | 138,554 |
| | $ | (3,351 | ) |
Cost of product revenue | 16,107 |
| 12,626 |
| | 3,481 |
|
Total cost of revenue | $ | 151,310 |
| $ | 151,180 |
| | $ | 130 |
|
Selling, general and administrative expenses. Selling, general and administrative expenses for the three months ended September 30, 2017March 31, 2023, and 2016,2022 were $131.3$52.6 million and $124.8$95.0 million, respectively. Selling, general and administrative expenses in our diagnostics segment decreased primarily due to our sale of GeneDx. Furthermore, BioReference has implemented and continues to implement significant cost-reduction initiatives as it strives to return to profitability following the buildup and then decline of COVID related testing.
Research and development expenses. The following table summarizes the components of our research and development expenses:
| | | | | | | | | | | |
Research and Development Expenses | Three months ended March 31, |
| 2023 | | 2022 |
External expenses: | | | |
| | | |
Research and development employee-related expenses | 372 | | | 4,926 | |
Other internal research and development expenses | 317 | | | 1,296 | |
Total research and development expenses | $ | 689 | | | $ | 6,222 | |
| | | |
The decrease in research and development expenses for the three months ended March 31, 2023, was primarily related to the development of more efficient clinical testing services at BioReference and as a result of the GeneDx Transaction.
Amortization of intangible assets. Amortization expense reflects the amortization of acquired intangible assets with defined useful lives. Amortization of intangible assets was $5.0 million and $7.8 million, respectively, for the three months ended March 31, 2023 and 2022. Amortization expense declined during the three months ending March 31, 2023, due to the GeneDx Transaction in April 2022.
Pharmaceuticals
| | | | | | | | | | | | | | | | | | | | |
| For the three months ended March 31, | | | | |
(In thousands) | 2023 | 2022 | | Change | | % Change |
Revenues: | | | | | | |
| | | | | | |
Revenue from products | $ | 40,383 | | $ | 36,658 | | | $ | 3,725 | | | 10 | % |
Revenue from transfer of intellectual property and other | 64,826 | | 5,962 | | | 58,864 | | | 987 | % |
Total revenues | 105,209 | | 42,620 | | | 62,589 | | | 147 | % |
Costs and expenses: | | | | | | |
Cost of revenue | 24,253 | | 22,669 | | | 1,584 | | | 7 | % |
Selling, general and administrative | 13,562 | | 11,611 | | | 1,951 | | | 17 | % |
Research and development | 31,878 | | 12,291 | | | 19,587 | | | 159 | % |
Contingent Consideration | 136 | | (106) | | | 242 | | | 228 | % |
Amortization of intangible assets | 16,425 | | 14,263 | | | 2,162 | | | 15 | % |
| | | | | | |
Total costs and expenses | 86,254 | | 60,728 | | | 25,526 | | | 42 | % |
Income (loss) from operations | 18,955 | | (18,108) | | | 37,063 | | | 205 | % |
Revenue. Revenue from products for the three months ended March 31, 2023 and 2022 was $40.4 million and $36.7 million, respectively. The increase in revenue from products for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, was driven by an increase in sales in our international operating companies and an increase in sales of Rayaldee. Revenue from sales of Rayaldee for the three months ended March 31, 2023, and 2022 was $6.6 million and $5.1 million, respectively. Revenue from transfer of intellectual property and other for the three months ended March 31, 2023, primarily reflects an upfront payment of $50.0 million from Merck Sharp & Dohme LLC (“Merck”) related to the Epstein-Barr Virus agreement and a $7.0 million payment from Vifor under the Vifor Agreement (each as defined in Note 14 to our condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q) triggered by the German price approval related to Rayaldee. Furthermore, we recorded $2.5 million from Nicoya due to Nicoya’s submission of the investigational new drug application to China's Center for Drug Evaluation pursuant to the Nicoya Agreement (as defined in Note 14 to our condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q). For the three months ended March 31, 2023, and 2022, revenue from transfer of intellectual property and other reflects $1.8 million and $2.2 million, respectively, related to the Pfizer Transaction (as defined in Note 14 to our condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q). For the three months ended March 31, 2022, revenue from transfer of intellectual property and other included $3.0 million related to a sales milestone from Vifor under the Vifor Agreement.
Cost of revenue. Cost of revenue for the three months ended March 31, 2023 increased $1.6 million compared to the three months ended March 31, 2022, primarily due to changes in product mix during the period and unfavorable foreign exchange fluctuations at our international operating companies driven by higher inventory costs compared to the prior year.
Selling, general and administrative expenses. Selling, general and administrative expenses for the three months ended March 31, 2023 and 2022 were $13.6 million and $11.6 million, respectively. The increase in selling, general and administrative expenses was primarily due to costs related to the launch of an increase in employee-related expenses from Rayaldeeand increased selling, general and administrative expenses at BioReference. Selling, general and administrative expenses during the three months ended September 30, 2017 and 2016, include equity-based compensation expense of $4.6 million and $6.4 million, respectively.ourinternational operating companies.
Research and development expenses. Research and development expenses for the three months ended September 30, 2017March 31, 2023 and 2016,2022 were $32.3$31.9 million and $24.4$12.3 million, respectively. Research and development costsexpenses include external and internal expenses, partially offset by third-party grants and funding arising from collaboration agreements. External expenses include clinical and non-clinical activities performed by contract research organizations, lab services, purchases of drug and diagnostic product materials and manufacturing development costs. We track external research and development expenses by the individual program for phase 3 clinical trials for drug approval and pre-market approvals (“PMAs”)premarket approval for diagnostics tests, if any. Internal expenses include employee-related expenses includingsuch as salaries, benefits and equity-based compensation expense.expenses. Other internal research and development expenses are incurred to support overall research and development activities and include expenses related to general overhead and facilities.
The following table summarizes the components of our research and development expenses:
| | | | | | | | | | | |
Research and Development Expenses | Three months ended March 31, |
| 2023 | | 2022 |
External expenses: | | | |
Manufacturing expense for biological products | $ | 2,973 | | | $ | 1,250 | |
Phase 3 studies | 1,941 | | | 2,632 | |
Post-marketing studies | 129 | | | 17 | |
Earlier-stage programs | 18,150 | | | 2,601 | |
Research and development employee-related expenses | 7,808 | | | 5,173 | |
Other internal research and development expenses | 950 | | | 618 | |
Third-party grants and funding from collaboration agreements | (73) | | | — | |
Total research and development expenses | $ | 31,878 | | | $ | 12,291 | |
|
| | | | | | | |
Research and Development Expenses | For the three months ended September 30, |
| 2017 | | 2016 |
External expenses: | | | |
Phase 3 clinical trials | $ | 3,275 |
| | $ | 2,647 |
|
Manufacturing expense for biological products | 10,827 |
| | 6,951 |
|
PMA studies | 249 |
| | — |
|
Earlier-stage programs | 1,479 |
| | 1,910 |
|
Research and development employee-related expenses | 6,177 |
| | 6,718 |
|
Other internal research and development expenses | 10,500 |
| | 6,797 |
|
Third-party grants and funding from collaboration agreements | (178 | ) | | (599 | ) |
Total research and development expenses | $ | 32,329 |
| | $ | 24,424 |
|
The increase in research and development expenses is due to an increase in research and development expenses related to hGH-CTP, a long acting human growth hormone which was outlicensed to Pfizer in 2015, and to the acquisition of Transition Therapeutics in August 2016. In addition, duringfor the three months ended September 30, 2017March 31, 2023, was primarily due to a $12.5 million payment from us to Sanofi that accrued under the Sanofi In-License Agreement (each as defined in Note 14 to our condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q) and 2016, we recorded, as anresearch expenses at ModeX, partially offset to research and developmentby lower expenses $0.2 million and $0.6 million, respectively, related to research and development grantsSomatrogon (hGH-CTP) due to the closure of the open-label extension studies in countries in which Somatrogon (hGH-CTP) received from our collaboration and funding agreements.marketing authorization. Research and development expenses for the three months ended September 30, 2017 and 2016 include equity-based compensation expense of $1.3 million and $2.0 million, respectively. We expect our research and development expenses to increase as we continue to expand our research and development of potential future products.
Contingent consideration. Contingent consideration income (expense)pharmaceutical segment for the three months ended September 30, 2017March 31, 2023, and 2016, were $11.2 million2022 included equity-based compensation expenses of income$835.9 thousand and $3.1 million of expense,$258.5 thousand, respectively. The change in contingent
Contingent consideration income (expense) was attributable to contingent. Contingent consideration income for OPKO Renal during the three months ended September 30, 2017 dueMarch 31, 2023, and 2022 was $0.1 million expense and $0.1 million reversal of expense, respectively. Contingent consideration for the three months ended March 31, 2023 and 2022 was primarily attributable to changes in assumptions regarding the timing of successful achievement of future milestones of Rayaldee. The contingent consideration liabilities at September 30, 2017 relate tofor OPKO Renal, and potential amounts payable to former stockholders of CURNA, OPKO Diagnostics and OPKO Renal in connection therewith, pursuant to our acquisition agreementsagreement in January 2011, October 2011 and March 2013, respectively.2013.
Amortization of intangible assets. Amortization of intangible assets was $18.0$16.4 million and $18.1$14.3 million, respectively, for the three months ended September 30, 2017March 31, 2023 and 2016.2022. Amortization expense reflects the amortization of acquired intangible assets with defined useful lives. OurDuring the first quarter of 2022, we reclassified $590.2 million of IPR&D related to Somatrogon (hGH-CTP) from IPR&D in our Condensed Consolidated Balance Sheet upon the approval of NGENLA (Somatrogon) in Europe and Japan. The assets will not be amortized until the underlying development programs are completed. Upon obtaining regulatory approval by the U.S. FDA, IPR&D assets will then be accounted for as a finite-lived intangible asset and amortized on a straight-line basis over itstheir estimated useful life. of approximately 12 years.
Corporate
| | | | | | | | | | | | | | | | | | | | |
| For the three months ended March 31, | | | | |
(In thousands) | 2023 | 2022 | | Change | | % Change |
| | | | | | |
| | | | | | |
| | | | | | |
Costs and expenses: | | | | | | |
| | | | | | |
Selling, general and administrative | $ | 9,504 | | $ | 10,969 | | | (1,465) | | | (13) | % |
Research and development | 38 | | (201) | | | 239 | | | 119 | % |
Total costs and expenses | 9,542 | | 10,768 | | | (1,226) | | | (11) | % |
Loss from operations | (9,542) | | (10,768) | | | 1,226 | | | 11 | % |
Operating loss for our unallocated corporate operations for the three months ended March 31, 2023, and 2022 was $9.5 million and $10.8 million, respectively, and principally reflects general and administrative expenses incurred in connection with our corporate operations. The decrease in operating loss for our unallocated corporate operations for the three months ended March 31, 2023, was due to a decrease in legal expenses partially offset by an increase in professional fees incurred.
Other
Interest income. Interest income for the three months ended September 30, 2017March 31, 2023, and 20162022 was not significant$1.0 million and $0.0 million, respectively. The increase is driven by having higher average cash and investment balances as our cash investment strategy emphasizes the securitya result of the principal invested and fulfillment of liquidity needs.cash received related to the GeneDx Transaction, as well as increased interest rates between the two periods.
Interest expense.expense. Interest expense for the three months ended September 30, 2017March 31, 2023, and 20162022 was $1.8$3.4 million and $2.0$2.7 million, respectively. Interest expense iswas principally related to interest incurred on the 2033 Senior2025 Notes, including amortization of related deferred financing coststhe 2023 Convertible Notes, and to interest incurred on BioReference’s outstanding debt under its credit facility.the Credit Agreement (each as defined in Note 7 to our condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q ) with JPMorgan Chase Bank, N.A. (“CB”).
Fair value changes of derivative instruments, net. Fair value changes of derivative instruments, net for the three months ended September 30, 2017March 31, 2023 and 2016,2022, was $7.6$1.1 million and $5.7$0.1 million of expense, respectively. The change in derivative instruments principally related to non-cash expense related to the changes in the fair value of the embedded derivatives in the 2033 Senior Notes of $6.8 million and $5.8 million ofDerivative expense for the three months ended September 30, 2017March 31, 2023 and 2016, respectively.2022 was principally related to the change in fair value on foreign currency forward exchange contracts at OPKO Chile.
Other income (expense), net. Other income (expense), net for the three months ended September 30, 2017March 31, 2023, and 2016, were $0.62022 was $17.0 million of income and $3.0$(1.4) million of expense, respectively. Other income (expense), net for the three months ended March 31, 2023, included $8.3 million of income due to the increase in the fair value of our investment in GeneDx Holdings (as defined below). In addition, we recorded $8.5 million of income as a result of GeneDx Holdings achieving specific revenue targets for the fiscal year ending December 31, 2022. Other expense for the three months ended September 30, 2016March 31, 2022, primarily consistsconsisted of a $3.9 million other-than-temporary impairment charge to write our investments in Xenetic and RXi down to their respective fair values.foreign currency transaction gains recognized during the period.
Income tax benefit (provision). Our income tax benefit (provision) for the three months ended September 30, 2017March 31, 2023 and 20162022 was $24.4$(1.2) million and $20.0$21.3 million, respectively, and reflects quarterly results using our expected effective tax rate. For the three months ended March 31, 2023, the tax rate fordiffered from the full year. The change in income taxes isU.S. federal statutory rate of 21% primarily due to changesthe relative mix in earnings and losses in the geographic mixU.S. versus foreign tax jurisdictions, the impact of revenuesthe Merck Agreement and expenses.operating results in tax jurisdictions which do not result in a tax benefit.
Loss from investments in investees. We have made investmentsinvested in othercertain early stage companies that we perceive to have valuable proprietary technology and significant potential to create value for us as a shareholder or member. We account for these investments under the equity method of accounting, resulting in the recording of our proportionate share of their losses until our share of their loss exceeds our investment. Until the investees’ technologies are commercialized, if ever, we anticipate they will report a net loss.losses. Loss from investments in investees was $4.0 million$37 thousand and $0.8 million$49 thousand for the three months ended September 30, 2017March 31, 2023, and 2016,2022, respectively. The increase in Loss from investments in investees is attributable to losses recognized on our investment in Pharmsynthez.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
|
| | | | | | | | | | | |
Revenues | Nine months ended September 30, | | |
(In thousands) | 2017 | | 2016 | | Change |
Revenue from services | $ | 740,992 |
| | $ | 777,559 |
| | $ | (36,567 | ) |
Revenue from products | 73,992 |
| | 63,275 |
| | 10,717 |
|
Revenue from transfer of intellectual property and other | 58,819 |
| | 105,338 |
| | (46,519 | ) |
Total revenues | $ | 873,803 |
| | $ | 946,172 |
| | $ | (72,369 | ) |
The decrease in Revenue from services is attributable to decreased pricing at BioReference’s GeneDx division. The increase in Revenue from products principally reflects an increase in revenue from OPKO Chile and EirGen. Revenue from transferCost of revenue. Cost of revenue for the nine months ended September 30, 2017 increased $11.4 million compared to the prior year period. The increase in cost of service revenue is attributable to BioReference. The increase in cost of product revenue is attributable to an increase in revenue at OPKO Chile and EirGen. Included in cost of product revenue for the nine months ended September 30, 2017 is $5.0 million of inventory obsolescence expense related primarily to the launch of Rayaldee. Cost of revenue for the nine months ended September 30, 2017 and 2016 were as follows:
|
| | | | | | | | | | | |
Cost of Revenue | Nine months ended September 30, | | |
(In thousands) | 2017 | | 2016 | | Change |
Cost of service revenue | $ | 419,070 |
| | $ | 417,121 |
| | $ | 1,949 |
|
Cost of product revenue | 44,441 |
| | 35,033 |
| | 9,408 |
|
Total cost of revenue | $ | 463,511 |
| | $ | 452,154 |
| | $ | 11,357 |
|
Selling, general and administrative expenses. Selling, general and administrative expenses for the nine months ended September 30, 2017 and 2016, were $396.4 million and $370.4 million, respectively. The increase in selling, general and administrative expenses was primarily due to costs related to the launch of Rayaldee and increased selling, general and administrative expenses at BioReference, which was partially offset by a decrease in severance costs. Included in selling, general and administrative expenses for the nine months ended September 30, 2017 and 2016 are $3.7 million and $17.9 million, respectively, of net severance costs for certain BioReference executives. These severance costs include $2.8 million and $8.9 million of expense related to the acceleration of stock option vesting for certain BioReference executives in 2017 and 2016, respectively.
Selling, general and administrative expenses during the nine months ended September 30, 2017 and 2016, include equity-based compensation expense of $16.7 million and $27.7 million, respectively, including the expense related to the acceleration of stock option vesting for certain BioReference executives.
Research and development expenses. Research and development expenses for the nine months ended September 30, 2017 and 2016, were $90.9 million and $83.6 million, respectively. Research and development costs include external and internal expenses, partially offset by third-party grants and funding arising from collaboration agreements. External expenses include clinical and non-clinical activities performed by contract research organizations, lab services, purchases of drug and diagnostic product materials and manufacturing development costs. We track external research and development expenses by individual program for phase 3 clinical trials for drug approval and PMAs for diagnostics tests, if any. Internal expenses include employee-related expenses including salaries, benefits and equity-based compensation expense. Other internal research and development expenses are incurred to support overall research and development activities and include expenses related to general overhead and facilities.
The following table summarizes the components of our research and development expenses:
|
| | | | | | | |
Research and Development Expenses | Nine months ended September 30, |
| 2017 | | 2016 |
External expenses: | | | |
Phase 3 clinical trials | $ | 11,354 |
| | $ | 8,436 |
|
Manufacturing expense for biological products | 31,102 |
| | 30,484 |
|
PMA studies | 694 |
| | — |
|
Earlier-stage programs | 4,734 |
| | 4,949 |
|
Research and development employee-related expenses | 18,915 |
| | 21,266 |
|
Other internal research and development expenses | 25,394 |
| | 20,525 |
|
Third-party grants and funding from collaboration agreements | (1,249 | ) | | (2,066 | ) |
Total research and development expenses | $ | 90,944 |
| | $ | 83,594 |
|
The increase in research and development expenses is primarily due to a increase in research and development expenses related to hGH-CTP, a long acting human growth hormone which was outlicensed to Pfizer in 2015, and to the acquisition of Transition Therapeutics in August 2016.. In addition, during the nine months ended September 30, 2017 and 2016, we recorded, as an offset to research and development expenses, $1.2 million and $2.1 million, respectively, related to research and development grants received from our collaboration and funding agreements. Research and development expenses for the nine months ended September 30, 2017 and 2016 include equity-based compensation expense of $4.0 million and $6.0 million, respectively. We expect our research and development expense to increase as we continue to expand our research and development of potential future products.
Contingent consideration. Contingent consideration income (expense) for the nine months ended September 30, 2017 and 2016, were $4.5 million of income and $15.6 million of expense, respectively. The change in contingent consideration income (expense) was attributable to contingent consideration income for OPKO Renal during the nine months ended September 30, 2017 due to changes in assumptions regarding the timing of successful achievement of future milestones of Rayaldee. The contingent consideration liabilities at September 30, 2017 relate to potential amounts payable to former stockholders of CURNA, OPKO Diagnostics and OPKO Renal pursuant to our acquisition agreements in January 2011, October 2011 and March 2013, respectively.
Amortization of intangible assets. Amortization of intangible assets was $53.9 million and $47.3 million, respectively, for the nine months ended September 30, 2017 and 2016. Amortization expense reflects the amortization of acquired intangible assets with defined useful lives. Amortization of intangible assets for the nine months ended September 30, 2017 includes $12.0 million of amortization expense related to intangible assets for Rayaldee. Upon the FDA’s approval of Rayaldee in June 2016, we reclassified $187.6 million of IPR&D related to Rayaldee from In-process research and development to Intangible assets, net in our Condensed Consolidated Balance Sheets and began to amortize that asset. Our IPR&D assets will not be amortized until the underlying development programs are completed. Upon obtaining regulatory approval by the U.S. FDA, the IPR&D assets will then be accounted for as a finite-lived intangible asset and amortized on a straight-line basis over its estimated useful life.
Interest income. Interest income for the nine months ended September 30, 2017 and 2016, was not significant as our cash investment strategy emphasizes the security of the principal invested and fulfillment of liquidity needs.
Interest expense. Interest expense for the nine months ended September 30, 2017 and 2016, was $4.8 million and $6.0 million, respectively. Interest expense is principally related to interest incurred on the 2033 Senior Notes including amortization of related deferred financing costs and to interest incurred on BioReference’s outstanding debt under its credit
facility. The decrease in interest expense for the nine months ended September 30, 2017 is attributable to lower interest rates on borrowings in 2017 compared to 2016.
Fair value changes of derivative instruments, net. Fair value changes of derivative instruments, net for the nine months ended September 30, 2017 and 2016, was $2.0 million of income and $5.9 million of expense, respectively. Fair value changes of derivative instruments, net nine months ended September 30, 2017 principally related to non-cash income of $3.2 million related to the changes in the fair value of the embedded derivatives in the 2033 Senior Notes. For the nine months ended September 30, 2017, we observed a decrease in the market price of our Common Stock which resulted in the decrease in the estimated fair value of our embedded derivatives in the 2033 Senior Notes through the last valuation on February 1, 2017. Fair value changes of derivative instruments, net for the nine months ended September 30, 2016 principally reflects $4.0 million of expense related to the change in fair value of options to purchase additional shares of NeoVasc.
Other income (expense), net. Other income (expense), net for the nine months ended September 30, 2017 and 2016, were $3.1 million and $3.5 million of income, respectively. Other income for the nine months ended September 30, 2017 primarily consists of a $3.0 million gain on the sale of non-strategic assets at a wholly-owned BioReference subsidiary. Other income for the nine months ended September 30, 2016 primarily consisted of a $2.5 million gain recognized in connection with the merger of STI and VBI Vaccines Inc. and a $2.9 million gain recognized in connection with the settlement of a legal matter, which was partially offset by a $3.9 million other-than-temporary impairment charge to write our investments in Xenetic and RXi down to their respective fair values.
Income tax benefit. Our income tax benefit for the nine months ended September 30, 2017 and 2016 was $42.3 million and $24.6 million, respectively, and reflects quarterly results using our expected effective tax rate for the full year. The change in income taxes is primarily due to changes in the geographic mix of revenues and expenses.
Loss from investments in investees. We have made investments in other early stage companies that we perceive to have valuable proprietary technology and significant potential to create value for us as a shareholder or member. We account for these investments under the equity method of accounting, resulting in the recording of our proportionate share of their losses until our share of their loss exceeds our investment. Until the investees’ technologies are commercialized, if ever, we anticipate they will report a net loss. Loss from investments in investees was $11.8 million and $5.1 million for the nine months ended September 30, 2017 and 2016, respectively. The increase in Loss from investments in investees is attributable to losses recognized on our investment in Pharmsynthez.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2017,March 31, 2023, we had cash and cash equivalents of approximately $100.4$110.8 million. Cash used in operations during 2017of $22.6 million for the three months ended March 31, 2023 principally reflects milestone payments of $7.0 million and $2.5 million from Vifor and Nicoya, respectively, and general and administrative expenses related to general and administrative activities of our corporate operations and research and development activities. Cash provided by investing activities for the three months ended March 31, 2023 primarily reflects an investment of $5.0 million in GeneDx Holdings Class A common stock and our launch activities related to Rayaldee.capital expenditures of $3.0 million. Cash used in investingfinancing activities primarily reflects capital expenditures of $32.1 million. Cash provided by financing activities$13.1 million primarily reflects net borrowings on our lines of credit and $3.0 million redemption of $54.9 million.the 2033 Senior Notes. We have historically not generated sustained positive cash flow sufficient to offset our operating and other expenses, and our primary sourcesources of cash hashave been from the public and private placement of stock,equity, the issuance of the 2033 Senior2023 Convertible Notes, 2025 Notes and credit facilities available to us.
On October 12, 2017, EirGen, our wholly-owned subsidiary,March 8, 2023, ModeX, the Company (with respect to certain sections), and Japan Tobacco Inc. (“JT”)Merck entered into a DevelopmentLicense and LicenseResearch Collaboration Agreement granting JT(the “Merck Agreement under”) pursuant to which Merck obtained a license to certain patent rights and know-how in connection with the exclusive rightsdevelopment of ModeX’s preclinical nanoparticle vaccine candidate targeting the Epstein -Barr Virus. In consideration for the development and commercializationrights granted to Merck under the Merck Agreement, we received an initial one-time, non-refundable upfront payment of Rayaldee$50.0 million in Japan (the “JT Territory”). The license grant to JT covers the therapeutic and preventative useApril 2023. Certain of the Product for (i) SHPT in non-dialysisrights subject to the license provided by us under the Merck Agreement were obtained by us from Sanofi pursuant to the Sanofi In-License Agreement stipulates, and dialysis patients with CKD, (ii) rickets,because a portion of the upfront payment, milestones and (iii) osteomalacia (the “JT Initial Indications”), as well as such additional indications asroyalties received by us under the Merck Agreement may be addedpayable to the scope of the license subject toSanofi under the terms of the Sanofi In-License Agreement, (the “JT Additional Indications”, and together with the JT Initial Indications, the “JT Field”).
OPKO will receive an initial upfront payment of $6 million. OPKO will receive another $6we recorded $12.5 million upon the initiation of OPKO’s planned phase 2 study for Rayaldeein dialysis patientsAccrued expenses in the U.S. OPKO is also eligible to receive up to an additional aggregate amount of $31 million uponaccompanying Condensed Consolidated Balance Sheets.
On May 9, 2022, the achievement of certain regulatory and development milestones by JT for the Product in the JT Territory, and $75 million upon the achievement of certain sales based milestones by JT in the JT Territory. OPKO will also receive tiered, double digit royalty payments at rates ranging from low double digits to mid-teens on net Product sales within the JT Territory and in the JT Field. JT will, at its sole cost and expense, be responsible for performing all development activities necessary to obtain all regulatory approvals for Rayaldee in Japan and for all commercial activities pertaining to Rayaldee in Japan, except for certain preclinical expenses which OPKO has agreed to reimburse JT up to a capped amount.
In August 2017, weCompany entered into a Commitment Letteran Agreement and Plan of Merger (the “Commitment Letter”“ModeX Merger Agreement”) with Veterans Accountable Care Group, LLC (“VACG”), pursuant to which we acquired ModeX. The Company paid the entirety of the $300.0 million purchase price in connection with submissionshares of a bid by its affiliate, the Veterans Accountable Care Organization, LLC (“VACO”Common Stock (the “Consideration Shares”) in response to a request for proposal (“RFP”) from the Veterans Health Administration (“VA”) regarding its Community Care Network. If VACO is successful in its bid, we will acquire a fifteen percent (15%) membership interest in VACO. In addition, BioReference, our wholly-owned subsidiary, will provide laboratory services for the Community Care Network, a region which currently includes approximately 2,133,000 veterans in the states of Massachusetts, Maine, New Hampshire, Vermont, New York, Pennsylvania, New Jersey, Rhode Island, Connecticut, Maryland, Virginia, West Virginia, and North Carolina.
Pursuant to the Commitment Letter, we committed to provide, or to arrange from a third party lender, a lineformer stockholders of credit for VACG in the amount of $50.0 million (the “Facility”). Funds drawn under the Facility would be contributed by VACG to VACO in order to satisfy the financial stability requirement of VACO in connection with its submission of the RFP. VACG would not be permitted to draw down on the Facility unless and until the VHA awards a contract to VACO.ModeX. The Facility would have a maturity of five (5) years. Interest on the Facility would be payable at a rate equal to six and one-half percent (6.5%) per annum, payable quarterly in arrears.
We currently anticipate that a decision by the VHA with respect to the RFP will occur during the fourth quarter of 2017, although there can be no assurance that a decision will be made by such time or that, if made, such decision will not be challenged by participants in the RFP process or otherwise.
The Facility is subject to the negotiation of definitive documentation conditions customary for transactions of such type and otherwise acceptable to VACG and the lender under the Facility.
In November 2016, we launched commercial sales for Rayaldee in the U.S. market. The FDA approved Rayaldee extended release capsules in June 2016 for the treatment of SHPT in adults with stage 3 or 4 CKD and serum total 25-hydroxyvitamin D levels less than 30 ng/mL. We have a highly specialized sales and marketing team dedicated to the launch and commercialization of Rayaldee, and we have increased the sales and marketing team in the second half of 2017 as market access improves and prescription trends increase.
In August 2016, we completed the acquisition of Transition Therapeutics, a clinical stage biotechnology company. Holders of Transition Therapeutics common stock received 6,431,899 shares of OPKO Common Stock. The transaction wasConsideration Shares were valued at approximately $58.5$219.4 million, based on athe closing price per share of our Common Stock of $9.10$2.44 as reported by NASDAQ on the closing date, which reflected the deduction from the purchase price of the value of certain equity awards issued by the Company to ModeX employees in an aggregate amount equal to $12.4 million on the closing date. Included in the total fair value of consideration transferred of $221.7 million were $2.3 million of fully vested equity awards. The Company deposited 10% of the Consideration Shares in a twelve-month escrow for purposes of satisfying the potential indemnity obligations of the sellers under the ModeX Merger Agreement.
In May 2016, EirGen,On April 29, 2022, the Company completed the disposition (the “GeneDx Transaction.”) of its former subsidiary, GeneDx LLC (f/k/a GeneDx, Inc. “GeneDx”), to GeneDx Holdings Corp. (f/k/a “Sema Holdings Corp.”), a Delaware corporation (“GeneDx Holdings”). GeneDx Holdings paid to the Company aggregate consideration of $150 million in cash (before deduction of transaction expenses and other customary purchase price adjustments), together with the Closing Shares (as defined in Note 1 to our wholly-owned subsidiary, partnered with VFMCRP through a Development and License Agreementcondensed consolidated financial statements contained in this Quarterly Report on Form 10-Q). Based on the closing stock price of GeneDx Holdings as of April 29, 2022, the total upfront consideration represented approximately $322 million. Additionally, subject to GeneDx achieving certain revenue targets for the developmentfiscal years ending December 31, 2022 and commercialization2023, we are eligible to receive an earnout payment in cash or stock (at GeneDx Holdings’ discretion) equal to a maximum of Rayaldee30.9 million shares of GeneDx Holdings’ Class A common stock if paid in Europe, Canada, Mexico, Australia, South Korea and certain other international markets. The license to VFMCRP potentially covers all therapeutic and prophylactic uses of the product in human patients, provided that initially the license is for the use of the product for the treatment or prevention of SHPT related to patients with stage 3 or 4 chronic kidney disease and vitamin D insufficiency/deficiency (“VFMCRP Initial Indication”)stock (the “Milestone Consideration”. We received 23,1 million shares of Class A Common Stock as a non-refundableresult of GeneDx satisfactorily achieving targets as of December 31, 2022.
In April 2022, Pfizer notified OPKO that NGENLA (Somatrogon), a once-weekly injection to treat pediatric growth hormone deficiency, has received pricing approval in Germany and non-creditable upfrontJapan. NGENLA was granted marketing authorization by the Ministry of Health, Labour and Welfare in Japan and by the European Commission in January and February of 2022, respectively. With the achievement of these milestones, we received $85.0 million in milestone payments in 2022 under the Restated Pfizer Agreement.
In February 2019, we issued $200.0 million aggregate principal amount of the 2025 Notes in an underwritten public offering. The 2025 Notes bear interest at a rate of 4.50% per year, payable semiannually in arrears on February 15 and August 15 of each year. The 2025 Notes mature on February 15, 2025, unless earlier repurchased, redeemed or converted.
Holders may convert their 2025 Notes into shares of Common Stock at their option at any time prior to the close of business on the business day immediately preceding November 15, 2024, subject to the satisfaction of certain conditions. Upon conversion, we will pay or deliver, as the case may be, cash, shares of our Common Stock, or a combination of cash and shares of our Common Stock, at our election.
The current conversion rate for the 2025 Notes is 236.7424 shares of Common Stock per $1,000 principal amount of 2025 Notes (equivalent to a conversion price of approximately $4.22 per share of Common Stock). The conversion rate for the 2025 Notes is subject to adjustment in certain events but will not be adjusted for any accrued and unpaid interest.
In May 2021, we entered into exchange agreements with certain holders of the 2025 Notes pursuant to which the holders exchanged $55.4 million in aggregate principal amount of the outstanding 2025 Notes for 19,051,270 shares of our Common Stock (the “Exchange”).
In February 2018, in a transaction exempt from registration under the Securities Act, we issued the 2023 Convertible Notes in the aggregate principal amount of $55.0 million maturing, with an original maturity date in February 2023. Each holder of a 2023 Convertible Note hashad the option, from time to time, to convert all or any portion of the outstanding principal balance of such 2023 Convertible Note, together with accrued and unpaid interest thereon, into shares of our Common Stock, par value $0.01 per share, at a conversion price of $5.00 per share of Common Stock. We may redeem all or any part of the then issued and outstanding 2023 Convertible Notes, together with accrued and unpaid interest thereon upon no fewer than 30 days, and no more than 60 days, notice to the holders. The 2023 Convertible Notes contain customary events of default and representations and warranties of OPKO. On February 10, 2023, the Company amended the 2023 Convertible Notes to extend the maturity to January 31, 2025, and to reset the conversion price to the 10 day volume weighted average price immediately preceding the date of the amended note, plus a 25% conversion premium, or $1.66. In addition, under the terms of the 2023 Convertible Notes, interest will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the date of issuance, until the principal and accrued and unpaid interest, are paid in full. The remaining provisions of the 2023 Convertible Note were unchanged by such amendment.
As of March 31, 2023, the total commitments under our Credit Agreement with CB and our lines of credit with financial institutions in Chile and Spain were $53.5 million, of which $22.3 million was drawn as of March 31, 2023. At March 31, 2023, the weighted average interest rate on these lines of credit was approximately 5.4%. These lines of credit are short-term and are used primarily as a source of working capital. The highest aggregate principal balance at any time outstanding during the three months ended March 31, 2023 was $33.5 million. We intend to continue to draw under these lines of credit as needed. There is no assurance that these lines of credit or other funding sources will be available to us on acceptable terms, or at all, in the future.
The Credit Agreement provides for a $75.0 million secured revolving credit facility and includes a $20.0 million sub-facility for swingline loans and a $20.0 million sub-facility for the issuance of letters of credit. The Credit Agreement matures on August 30, 2024 and is guaranteed by all of BioReference’s domestic subsidiaries, subject to certain exceptions. The Credit Agreement is also secured by substantially all assets of BioReference and its domestic subsidiaries, subject to certain exceptions, as well as a non-recourse pledge by us of our equity interest in BioReference. Availability under the Credit Agreement is based on a borrowing base composed of eligible accounts receivables of BioReference and certain of its subsidiaries, as specified therein. As of March 31, 2023, $16.2 million remained available for borrowing under the Credit Agreement.
In connection with our agreements with Merck, Pfizer, Vifor, Nicoya and CAMP4, we are eligible to receive various milestone payments and royalty considerations. Under the terms of the Merck Agreement, we received an initial payment of $50$50.0 million and are also eligible to receive up to an additional $872.5 million upon the achievement of certain commercial and development milestones under several indications. We are also eligible to receive tiered royalty payments ranging from high single digits to low double digits upon achievement of certain sales targets of the Product (as defined in the Merck Agreement). Under the terms of the Restated Pfizer Agreement, we are eligible to receive up to an additional $232$275.0 million upon the achievement of certain regulatory and sales-based milestones. In addition, we are eligible to receive tiered royalties on sales of the product at percentage rates that range from the mid-teens to the mid-twenties or a minimum royalty, whichever is greater, upon commencement of sales of the product.
As part of the arrangement, the companies will share responsibility for the conduct of trials specified within an agreed-upon development plan, with each company leading certain activities within the plan. For the initial development plan, the companies have agreed to certain cost sharing arrangements. VFMCRP will be responsible for all other development costs that VFMCRP considers necessary to develop the product for the VFMCRP Initial Indication in the VFMCRP Territory except as otherwise provided in the VFMCRP Agreement. EirGen also granted to VFMCRP an option to acquire an exclusive license to use, import, offer for sale, sell, distribute and commercialize the product in the United States for treatment of SHPT in dialysis patients with stage 5 CKD and vitamin D insufficiency (the “Dialysis Indication”). Upon exercise of the Option, VFMCRP will reimburse EirGen for all of the development costs incurred by EirGen with respect to the product for the Dialysis Indication in the United States. VFMCRP would also pay EirGen up to an additional aggregate amount of $555milestones, including $85 million, upon the achievement of certain milestones and would be obligated to pay royalties on sales of the product at percentage rates that range from the mid-teens to the mid-twenties.
In January 2015, we partnered with Pfizer through a worldwide agreement for the development and commercialization of our long-acting hGH-CTP for the treatment of GHD in adults and children, as well as for the treatment of growth failure in children born SGA. Under the terms of the agreements with Pfizer,which we received non-refundable and non-creditable upfront payments of $295.0 million in 2015 and are eligible to receive up to an additional $275 million upon the achievement of certain regulatory milestones. Pfizer received the exclusive license to commercialize hGH-CTP worldwide.2022. In addition, we are eligible to receive initial tiered royalty payments associated with the commercialization of hGH-CTPSomatrogon (hGH-CTP) for Adultadult GHD with percentage rates ranging from the high teens to mid-twenties. Upon the launch of hGH-CTPSomatrogon (hGH-CTP) for Pediatricpediatric GHD in certain major markets, the royalties will transition to regional, tiered gross profit sharing for both hGH-CTPSomatrogon (hGH-CTP) and Pfizer’s Genotropin®.
We will lead Under the clinical activitiesterms of the Vifor Agreement, we are entitled to receive up to an additional $10 million in regulatory milestones and will be responsible$207 million in milestone payments tied to the launch, pricing and sales of Rayaldee, including a $7.0 million regulatory milestone payment we recorded in the first quarter of 2023 triggered by the German price approval for fundingRayaldee and $3.0 million regulatory milestone payment we recognized in 2022 following the development programs for the key indications, which includes Adult and Pediatric GHD and Pediatric SGA. Pfizer will be responsible for all development costs for additional indications as well as all post-marketing studies.first sale of Rayaldee in Europe. In addition, Pfizer will fundwe are eligible to receive tiered, double-digit royalty payments. Under the commercialization activities for all indications and lead the manufacturing activities covered by the global development plan. In December 2016, we announced preliminary topline data from our Phase 3, double blind, placebo controlled study of hGH-CTP in adults with GHD. Although there was no statistically significant difference between hGH-CTP and placebo on the primary endpoint of change in trunk fat mass from baseline to 26 weeks, after unblinding the study, we identified an exceptional value of trunk fat mass reduction in the placebo group that may have affected the primary outcome.
We have now completed post-hoc sensitivity analyses to evaluate the influence of outliers on the primary endpoint results using multiple statistical approaches. Analyses that excluded outliers showed a statistically significant difference between hGH-CTP and placebo on the change in trunk fat mass. Additional analyses that did not exclude outliers showed mixed results. Following completionterms of the analyses, OPKONicoya Agreement, we received an initial upfront payment of $5 million and Pfizerare eligible to receive an aggregate of $5 million tied to the first anniversary of the effective date of the Nicoya Agreement, of which we have agreed that OPKO may proceed with a pre-BLA meeting withreceived $2.5 million. Furthermore, we received the FDAadditional $2.5 million upon Nicoya’s submission of the investigational new drug application to discuss a submission plan. OPKO intendsthe Center for Drug Evaluation of China in March 2023. We are also eligible to carry outreceive up to an additional study in adults using a pen device.
We are constructing a research, development and manufacturing center in Waterford, Ireland, for which we expect to
incur between $40aggregate amount of $115 million and $45 million forupon the construction and validation of the facility. Construction of the facility began in the fourth quarter of 2016 with expected completion in 2019. Currently, we plan to fund the project from cash on hand or from third party funding sources that may be available to us.
Our licensee, TESARO, received approval by the U.S. FDA in September 2015 for oral VARUBI™, a neurokinin-1 receptor antagonist for the prevention of chemotherapy-induced nausea and vomiting. In November 2015, TESARO announced the commercial launch of VARUBI™ in the United States. We received $30.0 million of milestone payments from TESARO upon achievement of certain development, regulatory and commercial salesales-based milestones which includes a $10.0 million milestone paymentby Nicoya for the Nicoya Product in the Nicoya Territory. We are also eligible to receive tiered, double digit royalty payments at rates in the low double digits on net product sales within the Nicoya Territory and in the Nicoya Field. Under the terms of the CAMP4 Agreement, we received for the nine months ended September 30, 2017,an initial upfront payment of $1.5 million and we are eligible to receive additional commercialup to $3.5 million in development milestone payments for Dravet syndrome products and $4.0 million for non-Dravet syndrome products, as well as sales milestones of up to $85.0$90 million if specified levelsfor Dravet syndrome products and up to $90 million for non-Dravet syndrome products.
In January 2013, we issued $175.0 million of the 2033 Senior Notes. The 2033 Senior Notes were sold in a private placement in reliance on exemptions from registration under the Securities Act. At September 30, 2017, $31.9 million principal amount of 2033 Senior Notes was outstanding.
In connection with our acquisitions of CURNA, OPKO Diagnostics and OPKO Renal, we agreed to pay future consideration to the sellers upon the achievement of certain events, including up to an additional $19.1 million in shares of our Common Stock to the former stockholders of OPKO Diagnostics upon and subject to the achievement of certain milestones; and up to an additional $125.0 million in either shares of our Common Stock or cash, at our option subject to the achievement of certain milestones, to the former shareholders of OPKO Renal.
On November 5, 2015, BioReference and certain As a result of its subsidiaries entered intoour execution of the CAMP4 Agreement, we will have to pay a credit agreement with JPMorgan Chase Bank, N.A. (“CB”), as lender and administrative agent, as amended (the “Credit Agreement”). The Creditpercentage of any payments received under the CAMP4 Agreement provides for a $175.0 million secured revolving credit facility and includes a $20.0 million sub-facility for swingline loans and a $20.0 million sub-facility for the issuance of letters of credit. BioReference may increase the credit facility to up to $275.0 million on a secured basis, subject to the satisfaction of specified conditions. The Credit Agreement matures on November 5, 2020 and is guaranteed by all of BioReference’s domestic subsidiaries. The Credit Agreement is also secured by substantially all assets of BioReference and its domestic subsidiaries, as well as a non-recourse pledge by us of our equity interest in BioReference. Availability under the Credit Agreement is based on a borrowing base comprised of eligible accounts receivables of BioReference and certain of its subsidiaries, as specified therein.former CURNA stockholders.
On March 17, 2017, BioReference and certain of its subsidiaries entered into Amendment No. 3 to Credit Agreement, which amended the Credit Agreement to permit BioReference and its subsidiaries to dividend cash to the Company in the form of an intercompany loan, in an aggregate amount not to exceed $55,000,000. On August 7, 2017, BioReference and certain of its subsidiaries entered into Amendment No. 4 to Credit Agreement, which amended the Credit Agreement to permit BioReference and its subsidiaries to dividend cash to the Company in the form of an additional intercompany loan, in an aggregate amount not to exceed $35,000,000. The other terms of the Credit Agreement remain unchanged.
As of September 30, 2017, the total availability under our Credit Agreement with CB and our lines of credit with financial institutions in Chile and Spain was $130.6 million, of which $105.9 million was used and outstanding as of September 30, 2017. The weighted average interest rate on these lines of credit is approximately 4.5%. These lines of credit are short-term and are used primarily as a source of working capital. The highest balance at any time during the nine months ended September 30, 2017, was $105.9 million. We intend to continue to enter into these lines of credit as needed. There is no assurance that these lines of credit or other funding sources will be available to us on acceptable terms, or at all, in the future.
We expect to continue 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 that the cash and cash equivalents on hand at September 30, 2017,March 31, 2023 and the amounts available to be borrowed under our lines of credit are sufficient to meet our anticipated cash requirements for operations and debt service beyond the next 12 months. We based this estimate on assumptions that may prove to be wrong or are subject to change, and we may be required to use our available cash resources sooner than we currently expect. If we acquire additional assets or companies, accelerate our product development programs or initiate additional clinical trials, we will need additional funds. Our future cash requirements, and the timing of those requirements, will depend on a number of factors, including the evolving impact of the COVID-19 pandemic on our relationship with Pfizer,business, the approval and success of our products in development, particularly our long acting Somatrogon (hGH-CTP) for which we have received approval in Europe, Japan, Australia and Canada, submitted for approval in the U.S. and received a Complete Response Letter in January 2022, the approval and success of Somatrogon (hGH-CTP) outside the United States, including in Europe, Japan, Australia and Canada, the commercial launchsuccess of Rayaldee, BioReference’s financial performance, possible acquisitions and dispositions, the continued progress of research and development of our product candidates, the timing and outcome of clinical trials and regulatory approvals, the costs involved in preparing, filing, prosecuting, maintaining, defending, and enforcing patent claims and other intellectual property rights, the status of competitive products, the availability of financing, and our success in developing markets for our product candidates. Ifcandidates and results of government investigations, payor claims, and legal proceedings that may arise, including, without limitation class action and derivative litigation to which we are
subject, and our ability to obtain insurance coverage for such claims. We have historically not generated sustained positive cash flow and if we are not able to secure additional funding when needed, we may have to delay, reduce the scope of, or eliminate one or more of our clinical trials or research and development programs or possible acquisitions.acquisitions or reduce our marketing or sales efforts or cease operations.
Additionally, the rapid development and fluidity of the COVID-19 pandemic and new variants of the virus makes it very difficult to predict its ultimate impact on our business, results of operations and liquidity. The pandemic presents a significant uncertainty that could materially and adversely affect our results of operations, financial condition and cash flows. For example, testing needs for COVID-19 decreased significantly as a result of declining infection rates and the normalization of living with COVID-19 following the increase in accessibility to COVID-19 vaccines and antiviral treatments, which negatively impacted our COVID-19-related diagnostics testing services provided by BioReference and our results of operations, which had been positively affected by COVID-19 during 2020 and 2021. The combination of potential disruptions to our business resulting from COVID-19 together with and volatile credit and capital markets could adversely impact our future liquidity, which could have an adverse effect on our business and results of operations. We will continue to monitor and assess the impact COVID-19 and new variants of the virus may have on our business and financial results.
The following table provides information as of September 30, 2017,March 31, 2023, with respect to the amounts and timing of our known contractual obligation payments due by period.
| | Contractual obligations (In thousands) | | Remaining three months ending December 31, 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | Thereafter | | Total | Contractual obligations (In thousands) | | Remaining nine months ending December 31, 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter | | Total |
Open purchase orders | | $ | 97,863 |
| | $ | 8,446 |
| | $ | 274 |
| | $ | 34 |
| | $ | — |
| | $ | — |
| | $ | 106,617 |
| Open purchase orders | | $ | 52,568 | | | $ | 236 | | | $ | 5 | | | $ | — | | | $ | — | | | $ | — | | | $ | 52,809 | |
Operating leases | | 5,271 |
| | 18,231 |
| | 15,027 |
| | 9,388 |
| | 6,164 |
| | 6,853 |
| | 60,934 |
| Operating leases | | 9,041 | | | 7,924 | | | 4,798 | | | 3,494 | | | 3,234 | | | 9,461 | | | 37,952 | |
Capital leases | | 887 |
| | 3,404 |
| | 3,026 |
| | 2,367 |
| | 1,438 |
| | 800 |
| | 11,922 |
| |
2033 Senior Notes | | — |
| | — |
| | 31,850 |
| | — |
| | — |
| | — |
| | 31,850 |
| |
Deferred payments | | 5,000 |
| | 5,000 |
| | 5,000 |
| | — |
| | — |
| | — |
| | 15,000 |
| |
Finance leases | | Finance leases | | 2,266 | | | 2,602 | | | 2,013 | | | 1,398 | | | 587 | | | 1,992 | | | 10,858 | |
2025 and 2023 Convertible Notes | | 2025 and 2023 Convertible Notes | | — | | | — | | | 211,328 | | | — | | | — | | | — | | | 211,328 | |
| Mortgages and other debts payable | | 3,412 |
| | 416 |
| | 410 |
| | 409 |
| | 409 |
| | 755 |
| | 5,811 |
| Mortgages and other debts payable | | 2,007 | | | 1,913 | | | 1,565 | | | 1,347 | | | 1,090 | | | 4,727 | | | 12,649 | |
Lines of credit | | 12,623 |
| | — |
| | — |
| | 93,311 |
| | — |
| | — |
| | 105,934 |
| Lines of credit | | 22,259 | | | — | | | — | | | — | | | — | | | — | | | 22,259 | |
Severance payments | | 5,101 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,101 |
| |
| Interest commitments | | 257 |
| | 1,019 |
| | 291 |
| | 39 |
| | 37 |
| | 23 |
| | 1,666 |
| Interest commitments | | 5,281 | | | 6,789 | | | 5,867 | | | 207 | | | 205 | | | 615 | | | 18,964 | |
Total | | $ | 130,414 |
| | $ | 36,516 |
| | $ | 55,878 |
| | $ | 105,548 |
| | $ | 8,048 |
| | $ | 8,431 |
| | $ | 344,835 |
| Total | | $ | 93,422 | | | $ | 19,464 | | | $ | 225,576 | | | $ | 6,446 | | | $ | 5,116 | | | $ | 16,795 | | | $ | 366,819 | |
The preceding table does not include information where the amounts of the obligations are not currently determinable, including the following:
- •Contractual obligations in connection with clinical trials, which span over two years, and that depend on patient enrollment. The total amount of expenditures is dependent on the actual number of patients enrolled and as such, the contracts do not specify the maximum amount we may owe.
- •Product license agreements effective during the lesser of 15 years or patent expiration whereby payments and amounts are determined by applying a royalty rate on uncapped future sales.
- •Contingent consideration that includes payments upon achievement of certain milestones including meeting development milestones such as the completion of successful clinical trials, NDA approvals by the FDA and revenue milestones upon the achievement of certain revenue targets all of which are anticipated to be paid within the next seven years and are payable in either shares of our Common Stock or cash, at our option, and that may aggregate up to $159.1$141.8 million.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Accounting estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from these estimates.
Goodwill and intangible assets. Goodwill and other intangible assets, including IPR&D, acquired in business combinations, licensing and other transactions at both September 30, 2017 and December 31, 2016 was $2.1 billion, representing approximately 76% of total assets.
Assets acquired and liabilities assumed in business combinations, licensing and other transactions are generally recognized at the date of acquisition at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recognized as goodwill. We determined the fair value of intangible assets, including IPR&D, using the “income method.” This method starts with a forecast of net cash flows, risk adjusted for estimated probabilities of technical and regulatory success (for IPR&D) and adjusted to present value using an appropriate discount rate that reflects the risk associated with the cash flow streams. All assets are valued from a market participant view which might be different than our specific views. The valuation process is very complex and requires significant input and judgment using internal and external sources. Although a valuation is required to be finalized within a one-year period, it must consider all and only those facts and evidence which existed at the acquisition date. The most complex and judgmental matters applicable to the valuation process are summarized below:
Unit of account – Most intangible assets are valued as single global assets rather than multiple assets for each jurisdiction or indication after considering the development stage, expected levels of incremental costs to obtain additional approvals, risks associated with further development, amount and timing of benefits expected to be derived in the future, expected patent lives in various jurisdictions and the intention to promote the asset as a global brand.
Estimated useful life – The asset life expected to contribute meaningful cash flows is determined after considering all pertinent matters associated with the asset, including expected regulatory approval dates (if unapproved), exclusivity periods and other legal, regulatory or contractual provisions as well as the effects of any obsolescence, demand, competition, and other economic factors, including barriers to entry.
Probability of Technical and Regulatory Success (“PTRS”) Rate – PTRS rates are determined based upon industry averages considering the respective program’s development stage and disease indication and adjusted for specific information or data known at the acquisition date. Subsequent clinical results or other internal or external data obtained could alter the PTRS rate and materially impact the estimated fair value of the intangible asset in subsequent periods leading to impairment charges.
Projections – Future revenues are estimated after considering many factors such as initial market opportunity, pricing, sales trajectories to peak sales levels, competitive environment and product evolution. Future costs and expenses are estimated after considering historical market trends, market participant synergies and the timing and level of additional development costs to obtain the initial or additional regulatory approvals, maintain or further enhance the product. We generally assume initial positive cash flows to commence shortly after the receipt of expected regulatory approvals which typically may not occur for a number of years. Actual cash flows attributed to the project are likely to be different than those assumed since projections are subjected to multiple factors including trial results and regulatory matters which could materially change the ultimate commercial success of the asset as well as significantly alter the costs to develop the respective asset into commercially viable products.
Tax rates – The expected future income is tax effected using a market participant tax rate. In determining the tax rate, we consider the jurisdiction in which the intellectual property is held and location of research and manufacturing infrastructure. We also consider that any repatriation of earnings would likely have U.S. tax consequences.
Discount rate – Discount rates are selected after considering the risks inherent in the future cash flows; the assessment of the asset’s life cycle and the competitive trends impacting the asset, including consideration of any technical, legal, regulatory, or economic barriers to entry, as well as expected changes in standards of practice for indications addressed by the asset.
Goodwill was $715.6 million and $704.6 million, respectively, at September 30, 2017 and December 31, 2016. Goodwill is tested at least annually for impairment or when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, by assessing qualitative factors or performing a quantitative analysis in determining whether it is more likely than not that its fair value exceeds the carrying value. Examples of qualitative factors include our share price, our
financial performance compared to budgets, long-term financial plans, macroeconomic, industry and market conditions as well as the substantial excess of fair value over the carrying value of net assets from the annual impairment test previously performed.
The estimated fair value of a reporting unit is highly sensitive to changes in projections and assumptions; therefore, in some instances changes in these assumptions could potentially lead to impairment. We perform sensitivity analyses around our assumptions in order to assess the reasonableness of the assumptions and the results of our testing. Ultimately, future potential changes in these assumptions may impact the estimated fair value of a reporting unit and cause the fair value of the reporting unit to be below its carrying value. We believe that our estimates are consistent with assumptions that marketplace participants would use in their estimates of fair value. However, if actual results are not consistent with our estimates and assumptions, we may be exposed to an impairment charge that could be material.
Intangible assets, netThere were $1.4 billion, including IPR&D of $648.4 million and $644.7 million, respectively, at September 30, 2017 and December 31, 2016. Intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, although IPR&D is required to be tested at least annually until the project is completed or abandoned. Upon obtaining regulatory approval, the IPR&D asset is then accounted for as a finite-lived intangible asset and amortized on a straight-line basis over its estimated useful life. If the project is abandoned, the IPR&D asset is charged to expense.
Intangible assets are highly vulnerable to impairment charges, particularly newly acquired assets for recently launched products and IPR&D. These assets are initially measured at fair value and therefore any reduction in expectations used in the valuations could potentially lead to impairment. Some of the more common potential risks leading to impairment include competition, earlier than expected loss of exclusivity, pricing pressures, adverse regulatory changes or clinical trial results, delay or failure to obtain regulatory approval and additional development costs, inability to achieve expected synergies, higher operating costs, changes in tax laws and other macro-economic changes. The complexity in estimating the fair value of intangible assets in connection with an impairment test is similar to the initial valuation.
Considering the high risk nature of research and development and the industry’s success rate of bringing developmental compounds to market, IPR&D impairment charges are likely to occur in future periods. IPR&D is closely monitored and assessed each period for impairment.
We amortize intangible assets with definite lives on a straight-line basis over their estimated useful lives, ranging from 3 to 20 years. We use the straight-line method of amortization as there is no reliably determinable pattern in which the economic benefits of our intangible assets are consumed or otherwise used up. Amortization expense was $53.9 million and $47.3 million for the nine months ended September 30, 2017 and 2016, respectively.
Revenue recognition. Revenue for laboratory services is recognized at the time test results are reported, which approximates when services are provided. Services are provided to patients covered by various third-party payer programs including various managed care organizations, as well as the Medicare and Medicaid programs. Billings for services under third-party payer programs are included in revenue net of allowances for contractual discounts and allowances for differences between the amounts billed and estimated program payment amounts. Adjustments to the estimated payment amounts based on final settlement with the programs are recorded upon settlement as an adjustment to revenue. For the nine months ended September 30, 2017, approximately 31% of our revenues were derived directly from the Medicare and Medicaid programs.
We recognize revenue from product sales when persuasive evidence of an arrangement exists, delivery has occurred, collectability is reasonably assured, and the price to the buyer is fixed or determinable, which is generally when goods are shipped and title and risk of loss transfer to our customers. Our estimates for sales returns and allowances are based upon the historical patterns of product returns and allowances taken, matched against the sales from which they originated, and our evaluation of specific factors that may increase or decrease the risk of product returns. Product revenues are recorded net of estimated rebates, chargebacks, discounts, co-pay assistance and other deductions (collectively, “Sales Deductions”) as well as estimated product returns. Allowances are recorded as a reduction of revenue at the time product revenues are recognized.
We launched Rayaldee in the U.S. through our dedicated renal sales force in November 2016. Rayaldee is distributed in the U.S. principally through the retail pharmacy channel, which initiates with the largest wholesalers in the U.S. (collectively, “Rayaldee Customers”). In addition to distribution agreements with Rayaldee Customers, we have entered into arrangements with many healthcare providers and payers that provide for government-mandated and/or privately-negotiated rebates, chargebacks and discounts with respect to the purchase of Rayaldee.
We lack the experiential data which would allow us to estimate Sales Deductions and product returns. Therefore, as of September 30, 2017, we have determined that we do not yet meet the criteria for the recognition of revenue for shipments of Rayaldee at the time of shipment to Rayaldee Customers as allowances for Sales Deductions and product returns are not known
or cannot be reasonably estimated. We will not recognize revenue upon shipment until such time as we can reasonably estimate and record provisions for Sales Deductions and product returns utilizing historical information and market research projections.
During the nine months ended September 30, 2017, we did not recognize any product revenues related to Rayaldee sales. Payments received from Rayaldee Customers in advance of recognition of revenue are recorded as deferred revenue included in Accrued expenses in our Condensed Consolidated Balance Sheets. The related deferred revenue balance as of September 30, 2017 was $6.5 million. The corresponding costs of product revenues for which we have not recognized product revenue have similarly not yet been reflected in our Condensed Consolidated Statements of Operations.
Revenue from transfer of intellectual property includes revenue related to the sale, license or transfer of intellectual property such as upfront license payments, license fees, milestone and royalty payments received through our license, and 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 qualifies for treatment as a separate unit of accounting under multiple-element arrangement guidance. License fees with ongoing involvement or performance obligations that do not have standalone value are recorded as deferred revenue, included in Accrued expenses or Other long-term liabilities, when received and generally are recognized ratably over the period of such performance obligations only after both the license period has commenced and we have delivered the technology.
The 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 periodic basis.
Revenue from milestone payments related to arrangements under which we have continuing performance obligations are recognized as Revenue from transfer of intellectual property 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 payment is commensurate with either our performance to achieve the milestone or the enhancement of the value of the delivered item by us; the milestone relates solely to past performance; and the amount of the milestone payment 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 from transfer of intellectual property over the term of the arrangement as we complete our performance obligations.
Concentration of credit risk and allowance for doubtful accounts. Financial instruments that potentially subject us to concentrations of credit risk consist primarily of accounts receivable. Substantially all of our accounts receivable are with either companies in the healthcare industry or patients. However, credit risk is limited due to the number of our clients as well as their dispersion across many different geographic regions.
While we have receivables due from federal and state governmental agencies, we do not believe that such receivables represent a credit risk since the related healthcare programs are funded by federal and state governments, and payment is primarily dependent upon submitting appropriate documentation. At September 30, 2017 and December 31, 2016, receivable balances (net of contractual adjustments) from Medicare and Medicaid were 22.0% and 22.9%, respectively, of our consolidated Accounts receivable, net.
The portion of our accounts receivable due from individual patients comprises the largest portion of credit risk. At September 30, 2017 and December 31, 2016, receivables due from patients represent approximately 2.4% and 4.1%, respectively, of our consolidated Accounts receivable, net.
We assess the collectability of accounts receivable balances by considering factors such as historical collection experience, customer credit worthiness, the age of accounts receivable balances, regulatory changes and current economic conditions and trends that may affect a customer’s ability to pay. Actual results could differ from those estimates. Our reported net income (loss) is directly affected by our estimate of the collectability of accounts receivable. The allowance for doubtful accounts was $57.6 million and $36.3 million at September 30, 2017 and December 31, 2016, respectively.
Income taxes. Income taxes are accounted for under the asset-and-liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases and for operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. We periodically evaluate the realizability of our net deferred tax assets. Our tax accruals are analyzed periodically and adjustments are made as events occur to warrant such adjustment.
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 Condensed Consolidated Statements of Operations over the period during which an employee is required to provide service in exchange for the award. We record excess tax benefits, realized from the exercise of stock options, as cash flows from operations. Equity-based compensation arrangements to non-employees are recorded at their fair value on the measurement date. The measurement of equity-based compensation to non-employees is subject to periodic adjustment as the underlying equity instruments vest. We 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.” 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 analyses to calculate and select the appropriate variable assumptions used in the Black-Scholes Model and to estimate forfeitures of equity-based awards. We 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 futurematerial changes to our assumptionscritical accounting policies and estimates which maydescribed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 that have had a material impact on our Condensed Consolidated Financial Statements.
Inventories. Inventories are valued at the lower of costStatements and net realizable value. Cost is determined by the first-in, first-out method. We consider such factors as the amount of inventory on hand, estimated time required to sell such inventories, remaining shelf-life, and current market conditions to determine whether inventories are stated at the lower of cost and net realizable value. Inventories at our diagnostics segment consist primarily of purchased laboratory supplies, which is used in our testing laboratories.
Pre-launch inventories. We may accumulate commercial quantities of certain product candidates prior to the date we anticipate that such products will receive final U.S. FDA approval. The accumulation of such pre-launch inventories involves the risk that such products may not be approved for marketing by the FDA on a timely basis, or ever. This risk notwithstanding, we may accumulate pre-launch inventories of certain products when such action is appropriate in relation to the commercial value of the product launch opportunity. In accordance with our policy, this pre-launch inventory is expensed.
Contingent consideration. Each period we revalue the contingent consideration obligations associated with certain prior acquisitions to their fair value and record increases in the fair value as contingent consideration expense and decreases in the fair value as a reduction in contingent consideration expense. Changes in contingent consideration result from changes in the assumptions regarding probabilities of successful achievement of related milestones, the estimated timing in which the milestones are achieved and the discount rate used to estimate the fair value of the liability. Contingent consideration may change significantly as our development programs progress, revenue estimates evolve and additional data is obtained, impacting our assumptions. The assumptions used in estimating fair value require significant judgment. The use of different assumptions and judgments could result in a materially different estimate of fair value which may have a material impact on our results from operations and financial position.notes.
RECENT ACCOUNTING PRONOUNCEMENTS
Recently adopted accounting pronouncements.
In May 2014,August 2020, the FASB issued Accounting Standards Update (“ASU”)ASU No. 2014-09, “Revenue from 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts with Customers.in Entity's Own Equity (Subtopic 815-40).” ASU 2014-09, as amended, clarifies the principles for recognizing revenue and develops a common revenue standard for GAAP that removes inconsistencies and weaknesses in revenue requirements, provides a more robust framework for addressing revenue issues, improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets, provides more useful information to users of financial statements through improved disclosure requirements and2020-06 simplifies the preparation of financial statementsaccounting for convertible instruments by reducing the number of requirements to which an entity must refer.accounting models for convertible debt instruments and convertible preferred stock. The ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Companies can choose to apply the ASU using either the full retrospective approach or a modified retrospective approach.
We have commenced our implementation analysis, including identification of revenue streams and reviews of customer contracts under ASU 2014-09’s framework. Our analysis includes reviewing current accounting policies and practices to identify potential differences that would result from applying the requirements under this new standard. The Company has reviewed certain contracts with its customers that the Company believes are representative of its revenue streams and continues to review additional contracts across its global business units. ASU 2014-09 requires increased disclosure which in turn is
expected to require certain new processes. The determination of the impact of adoption of ASU 2014-09 on our financial condition, results of operations, cash flows and disclosures, is ongoing, and, as such, we have not yet concluded on a transition method and are not able to reasonably estimate the effect that the adoption of the new standard will have on our financial statements. Based on our preliminary assessment of this ASU, however, the majority of the amounts that were historically classified as provision for bad debts, primarily related to patient responsibility, will be considered an implicit price concession in determining net revenues. Accordingly, we will report uncollectible balances associated with individual patients as a reduction of the transaction price and therefore as a reduction in net revenues when historically these amounts were classified as provision for bad debts within Selling, general and administrative expenses.
In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory,” which changes the measurement principle forpublic entities that do not measure inventory using the last-in, first-out (“LIFO”) or retail inventory method from the lower of cost or market to lower of cost and net realizable value. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years,2021, with early adoption permitted. As required, we adopted ASU 2020-06 on January 1, 2022 and used the modified retrospective approach for all convertible debt instruments at the beginning of the period of adoptions. Results for reporting periods beginning January 1, 2022 are presented under ASU 2020-06, while prior period amounts were not adjusted and continue to be reported in accordance historic accounting guidance.
Under the modified approach, entities will apply the guidance to all financial instruments that are outstanding as of the beginning of the year of adoption with the cumulative effect recognized as an adjustment to the opening balance of retained earnings. ASU 2020-06 eliminates the cash conversion and beneficial conversion feature models in ASC 470-20 that require an issuer of certain convertible debt and preferred stock to separately account for embedded conversion features as a component of equity. The adoption of ASU 2015-112020-06 at January 1, 2022 resulted in the first quarter of 2017 did not have a significant impact on our Condensed Consolidated Financial Statements.
In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,” which requires deferred tax liabilities and assets to be classified as noncurrent in a classified statement of financial position. The adoption of this ASU simplifies the presentation of deferred income taxes and reduces complexity without decreasing the usefulness of information provided to users of financial statements. We early adopted the provisions of this ASU prospectively in the fourth quarter of 2015, and did not retrospectively adjust the prior periods. The adoption of ASU 2015-17 did not have a significant impact on our Condensed Consolidated Financial Statements.
In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10),” which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The ASU requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidationan increase of the investee) to be measured at fair value with changes in fair value recognized in net income. ASU 2016-01 will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the impactConvertible notes of this new guidance on our Condensed Consolidated Financial Statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which will require organizations that lease assets with lease terms of more than 12 months to recognize assets and liabilities for the rights and obligations created by those leases on their balance sheets. The ASU will also require new qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact of this new guidance on our Condensed Consolidated Financial Statements.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718),” which simplifies several aspects$25.6 million, a reduction of the accounting for share-based payment award transactions, including the income tax consequences, classificationAccumulated deficit of awards as either equity or liabilities, classification on the statement$17.5 million and a reduction of cash flows and accounting for forfeitures. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, with early adoption permitted. We adopted this standard in the first quarterAdditional paid-in capital of 2017. As required by ASU 2016-09, excess tax benefits are classified as an operating activity in our Condensed Consolidated Statement$39.1 million.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230),” which addresses the classification of eight specific cash flow issues with the objective of reducing the existing diversity in practice. ASU 2016-15 will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact of this new guidance on our Condensed Consolidated Financial Statements.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350),” which simplifies how an entity is required to test for goodwill impairment. ASU 2017-04 will be effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted after January 1, 2017. We are currently evaluating the impact of this new guidance on our Condensed Consolidated Financial Statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of doing business, we are exposed to the risks associated with foreign currency exchange rates and changes in interest rates.
Foreign Currency Exchange Rate Risk – We operate globally and, as such, we are subject to foreign exchange risk in our commercial operations as a significant portionportions of our revenues are exposed to changes in foreign currency exchange rates, primarily the Chilean Peso, the Mexican Peso, the Euro and the New Israeli Shekel.Euro.
Although we do not speculate in the foreign exchange market, we may from time to time manage exposures that arise in the normal course of business related to fluctuations in foreign currency exchange rates by entering into offsetting positions through the use of foreign exchange forward contracts. Certain firmly committed transactions may be hedged with foreign exchange forward contracts. As exchange rates change, gains and losses on the exposed transactions are partially offset by gains and losses related to the hedging contracts. Both the exposed transactions and the hedging contracts are translated and fair valued, respectively, at current spot rates, with gains and losses included in earnings.
Our derivative activities, which consist of foreign exchange forward contracts, are initiated to economically hedge forecasted cash flows that are exposed to foreign currency risk. The foreign exchange forward contracts generally require us to exchange local currencies for foreign currencies based on pre-established exchange rates at the contracts’ maturity dates. As exchange rates change, gains and losses on these contracts are generated based on the change in the exchange rates that are recognized in the Condensed Consolidated Statements of Operations and offset the impact of the change in exchange rates on the foreign currency cash flows that are hedged. If the counterparties to the exchange contracts do not fulfill their obligations to deliver the contracted currencies, we could be at risk for currency related fluctuations. Our foreign exchange forward contracts primarily hedge exchange rates on the Chilean pesoPeso to the U.S. dollar. If Chilean pesosPesos were to strengthen or weaken in relation to the U.S. dollar, our loss or gain on hedged foreign currency cash-flows would be offset by the derivative contracts, with a net effect of zero.
Approximately 18.5% of revenue for the three months ended March 31, 2023, and approximately 10.9% of revenue for the three months ended March 31, 2022, were denominated in currencies other than the U.S. Dollar (USD). Our financial statements are reported in USD and, accordingly, fluctuations in exchange rates will affect the translation of revenues and expenses denominated in foreign currencies into USD for purposes of reporting the consolidated financial results. In the first quarter of 2023 and during the year ended December 31, 2022, the most significant currency exchange rate exposures were the Euro and Chilean Peso. Gross accumulated currency translation adjustments recorded as a separate component of shareholders’ equity were $34.2 million and $39.9 million at March 31, 2023 and December 2022, respectively. For information on such open foreign exchange forward contracts for the three months ended March 31, 2023 and 2022 see “Management’s Discussion and Analysis—Results of Operations— Foreign Currency Exchange Rates.”
We do not engage in trading market risk sensitive instruments or purchasing hedging instruments or “other than trading” instruments that are likely to expose us to significant market risk, whether interest rate, foreign currency exchange, commodity price, or equity price risk.
Interest Rate Risk – Our exposure to interest rate risk relates to our cash and investments and to our borrowings. We generally maintain an investment portfolio of money market funds and marketable securities. The securities in our investment portfolio are not leveraged, and are, due to their very short-term nature, subject to minimal interest rate risk. We currently do not hedge interest rate exposure. Because of the short-term maturities of our investments, we do not believe that a change in market interest rates would have a significant negative impact on the value of our investment portfolio except for reduced income in a low interest rate environment.
At September 30, 2017,March 31, 2023, we had cash and cash equivalents of $100.4$110.8 million. The weighted average interest rate related to our cash and cash equivalents for the ninethree months ended September 30, 2017March 31, 2023 was less than 1%. As of September 30, 2017,March 31, 2023, the principal outstanding balancebalances under ourBioReference’s Credit Agreement with JPMorgan Chase Bank, N.A.CB and our Chilean and Spanish lines of credit was $105.9$22.3 million in the aggregate at a weighted average interest rate of approximately 4.5%5.4%.
Our $31.9$55.0 million aggregate principal amount of our 2033 Senior2023 Convertible Notes has a fixed interest rate of 5%, and our $200.0 million aggregate principal amount of the 2025 Notes has a fixed interest rate of 4.50%, and therefore isare not subject to fluctuations in market interest rates.
The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we may invest our excess cash in debt instruments of the U.S. Government and its agencies, bank obligations, repurchase agreements and high-quality corporate issuers, and money market funds that invest in such debt instruments, and, by policy, restrict our exposure to any single corporate issuer by imposing
concentration limits. To minimize the exposure due to adverse shifts in interest rates, we maintain investments at an average maturity of generally less than three months.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”))Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, management concluded that our disclosure controls and procedures were effective as of September 30, 2017.March 31, 2023.
Changes to the Company’s Internal Control Over Financial Reporting
In connection with the acquisition of Transition Therapeutics in August 2016, we began implementing standards and procedures at Transition Therapeutics, including establishing controls over accounting systems and establishing controls over the preparation of financial statements in accordance with generally accepted accounting principles to ensure that weThere have in place appropriate internal control over financial reporting at Transition Therapeutics. We are continuing to integrate the acquired operations of Transition Therapeutics into our overall internal control over financial reporting process.
We are in the process of implementing a new comprehensive enterprise resource planning (“ERP”) system on a company-wide basis, which is one of the systems used for financial reporting. The implementation of the ERP system involves changes to our financial systems and other systems and accordingly, necessitated changes to our internal controls over financial reporting.
Thesebeen no changes to the Company’s internal control over financial reporting that occurred during the most recent quarter ended September 30, 2017March 31, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are, from time to time, party to various legal proceedings arising out of our business. DuringExcept as described below, during the reporting period covered by this Quarterly Report on Form 10-Q, there have been no material changes to the description of legal proceedings set forth in our Annual Report on Form 10-K for the year ended December 31, 20162022. The following should be read in conjunction with the information provided in Part I, Item 3 of such Annual Report on Form 10-K.
In February 2023, the Office of the Attorney General for the State of Texas (“TX OAG”) informed BioReference that it believes that, from 2005 to February 2023, BioReference may have violated the Texas Medicaid Fraud Prevention Act with respect to claims it presented to Texas Medicaid for reimbursement. BioReference has not determined whether there is any merit to the TX OAG claims nor can it determine the extent of any potential liability. While management cannot predict the outcome of this matters at this time, the ultimate outcome could be material to our business, financial condition, results of operations, and ourcash flows.
See Note 12 to the interim unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q for information regarding the quarters ended March 31, 2017 and June 30, 2017.status of legal proceedings involving the Company, which information is incorporated by reference herein.
Item 1A. Risk Factors
Our operations and financial results are subjectThere have been no material changes to various risks and uncertainties, including those described in Part I, Item 1A, “Risk Factors”our risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31 2016, which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common and capital stock. There have been no material changes to our risk factors since our Annual Report on Form 10-K for the year ended December 31, 2016.2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None.
On November 8, 2017, BioReference and certain of its subsidiaries entered into Amendment No. 5 to Credit Agreement, which amended the Credit Agreement to, among other things, ease certain thresholds that require increased reporting by BioReference and reduce the pro forma availability condition for BioReference to make certain cash dividends to the Company. The other terms of the Credit Agreement remain unchanged.
Item 6. Exhibits
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Exhibit 101.INS | Inline XBRL Instance Document |
Exhibit 101.SCH | Inline XBRL Taxonomy Extension Schema Document |
Exhibit 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
Exhibit 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document |
Exhibit 101.LAB | inline XBRL Taxonomy Extension Label Linkbase Document |
Exhibit 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
Exhibit 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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(1)
| Filed with the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 12, 2013 for the Company’s three month period ended September 30, 2013, and incorporated herein by reference. |
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(2)
| Filed with the Company’s 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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(3)
| Filed with the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 24, 2009, and incorporated herein by reference. |
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(4)
| Filed with the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 5, 2013, and incorporated herein by reference. |
* Pursuant to Item 601(b)(10)(iv) of Regulation S-K, portions of this exhibit have been omitted because the Company customarily and actually treats the omitted portions as private or confidential, and such portions are not material and is the type that the Company treats as private and confidential. The Company will supplementally provide a copy of an unredacted copy of this exhibit to the U.S. Securities and Exchange Commission or its staff upon request.
+ Filed herewith.
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 3, 2023 | | OPKO Health, Inc. |
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Date: November 8, 2017 | | OPKO Health, Inc. |
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| | /s/ Adam Logal |
| | Adam Logal |
| | Senior Vice President and Chief Financial Officer, |
| | Chief Accounting Officer and Treasurer |