Table of Contents
(Mark One)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2018.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number 001-33528
OPKO Health, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
75-2402409
(I.R.S. Employer
Identification No.)
4400 Biscayne Blvd., Miami, FL 33137
(Address of Principal Executive Offices) (Zip Code)
(Registrant’s Telephone Number, Including Area Code): (305) 575-4100
Securities registered pursuant to section 12(b) of the Act:
Title of Each Class
Common Stock, $.01 par value per share
Name of Each Exchange on Which Registered
NASDAQ Global Select Market
Securities registered pursuant to section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes ý No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes ¨ No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Table of Contents
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller
reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
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Accelerated filer
Smaller reporting company
Emerging growth company
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o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No ý
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at
which the common equity was last sold, as of the last business day of the registrant’s most recently completed second fiscal quarter was:
$1,518,040,596.
As of February 15, 2019, the registrant had 615,600,775 shares of Common Stock outstanding.
Documents Incorporated by Reference
Portions of the registrant’s definitive proxy statement for its 2018 Annual Meeting of Stockholders are incorporated by reference in
Items 10, 11, 12, 13, and 14 of Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
Part I.
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Part II.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Part III.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Part IV.
Item 15.
Signatures
Certifications
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EX-21
EX-23.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101. INS XBRL Instance Document
EX-101.SCH XBRL Taxonomy Extension Schema Document
EX-101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
EX-101.DEF XBRL Taxonomy Extension Definition Linkbase Document
EX-101.LAB XBRL Taxonomy Extension Label Linkbase Document
EX-101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains “forward-looking statements,” as that term is defined under the Private Securities
Litigation Reform Act of 1995 (“PSLRA”), Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include statements about our
expectations, beliefs or intentions regarding our product development efforts, business, financial condition, results of operations, strategies
or prospects. 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 this Annual Report on Form 10-
K. We do not undertake an obligation to update forward-looking statements. We intend that all forward-looking statements be subject to
the safe-harbor provisions of the PSLRA. These forward-looking statements are only predictions and reflect our views as of the date they
are made with respect to future events and financial performance.
Risks and uncertainties, the occurrence of which could adversely affect our business, include the following:
• we have a history of losses and may not generate sustained positive cash flow sufficient to fund our operations and research
and development programs;
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our need for, and ability to obtain, additional financing when needed on favorable terms, or at
all;
adverse results in material litigation matters or governmental inquiries, including, without limitation, recent lawsuits against
the Company and its Chairman and Chief Executive Officer by the SEC, as well as related class action and derivative
lawsuits;
the risks inherent in developing, obtaining regulatory approvals for and commercializing new, commercially viable and
competitive products and treatments;
our research and development activities may not result in commercially viable
products;
that earlier clinical results of effectiveness and safety may not be reproducible or indicative of future
results;
the success of our relationship with
Pfizer;
that we may fail to obtain regulatory approval for hGH-CTP or successfully commercialize Rayaldee and hGH-
CTP;
that we may not generate profits or cash flow from our laboratory operations or substantial revenue from Rayaldee and our
pharmaceutical and diagnostic products;
that currently available over-the-counter and prescription products, as well as products under development by others, may
prove to be as or more effective than our products for the indications being studied;
our ability to build a successful pharmaceutical sales and marketing
infrastructure;
our ability and our distribution and marketing partners’ ability to comply with regulatory requirements regarding the sales,
marketing and manufacturing of our products and product candidates and the operation of our laboratories;
the performance of our third-party distribution partners, licensees and manufacturers over which we have limited
control;
our success is dependent on the involvement and continued efforts of our Chairman and Chief Executive
Officer;
integration challenges for Transition Therapeutics, BioReference, EirGen and other acquired
businesses;
availability of insurance coverage with respect to material litigation
matters;
changes in regulation and policies in the United States (“U.S.”) and other countries, including increasing downward pressure
on healthcare reimbursement;
our ability to manage our growth and our expanded
operations;
increased competition, including price
competition;
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changing relationships with payors, including the various state and multi-state Blues programs, suppliers and strategic
partners;
efforts by third-party payors to reduce utilization and reimbursement for clinical testing
services;
our ability to maintain reimbursement coverage for our products and services, including the 4Kscore
test;
failure to timely or accurately bill and collect for our
services;
failure in our information technology systems, including cybersecurity attacks or other data security or privacy
incidents;
failure to obtain and retain new clients and business partners, or a reduction in tests ordered or specimens submitted by
existing clients;
failure to establish, and perform to, appropriate quality standards to assure that the highest level of quality is observed in the
performance of our testing services;
failure to maintain the security of patient-related
information;
our ability to obtain and maintain intellectual property protection for our
products;
our ability to defend our intellectual property rights with respect to our
products;
our ability to operate our business without infringing the intellectual property rights of
others;
our ability to attract and retain key scientific and management
personnel;
failure to obtain and maintain regulatory approval outside the
U.S.;
legal, economic, political, regulatory, currency exchange, and other risks associated with international operations;
and
our ability to finance and successfully complete construction of a research, development and manufacturing center in
Waterford, Ireland.
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Unless the context otherwise requires, all references in this Annual Report on Form 10-K to the “Company”, “OPKO”, “we”, “our”,
“ours”, and “us” refer to OPKO Health, Inc., a Delaware corporation, including our wholly-owned subsidiaries.
PART I
ITEM 1.
BUSINESS
OVERVIEW
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 Laboratories (“BioReference”), the nation’s third-largest clinical laboratory with
a core genetic testing business and an almost 300-person sales and marketing team to drive growth and leverage new products, including
the 4Kscore prostate cancer diagnostic test and the Claros 1 in-office immunoassay platform. Our pharmaceutical business features
Rayaldee, an 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), OPK88004, a selective androgen receptor modulator which we have
studied for benign prostatic hyperplasia but for which we are exploring other indications, and 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). Our pharmaceutical business also features hGH-CTP, a once-weekly human growth hormone injection
(in phase 3 and partnered with Pfizer). We operate established pharmaceutical business operations in Spain, Ireland, Chile, and Mexico,
which are generating revenue and from which we expect to generate positive cash flow and facilitate future market entry for our products
currently in development. We have a development and commercial supply pharmaceutical company as well as a global supply chain
operation and holding company in Ireland, which we expect will play an important role in the development, manufacturing, distribution and
approval of a wide variety of drugs with an emphasis on high potency products. We also own a specialty active pharmaceutical ingredients
(“APIs”) manufacturer in Israel, which we expect will facilitate the development of our pipeline of molecules and compounds for our
proprietary molecular diagnostic and therapeutic products.
We have a highly experienced management team. Based on their experience in the industry, we believe that our management team has
extensive development, regulatory and commercialization expertise and relationships that provide access to commercial opportunities.
All product or service marks appearing in type form different from that of the surrounding text are trademarks or service marks
owned, licensed to, promoted or distributed by OPKO, its subsidiaries or affiliates, except as noted. All other trademarks or services marks
are those of their respective owners.
GROWTH STRATEGY
We expect our future growth to come from leveraging our commercial infrastructure, proprietary technology and development
strengths, and by opportunistically pursuing complementary, accretive, or strategic acquisitions and investments.
We launched our first pharmaceutical product, Rayaldee, in the U.S. market in the fourth quarter of 2016. We have under
development a broad and diversified portfolio of diagnostic tests, small molecules, and biologics targeting a broad range of unmet medical
needs. We also operate the third largest full service clinical laboratory in the U.S. We intend to continue to leverage our proprietary
technology and our strengths in all phases of research and development to further develop and commercialize our portfolio of proprietary
pharmaceutical and diagnostic products. In support of our strategy, we intend to:
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continue to enhance our commercialization capability in the U.S. and
internationally;
develop and commercialize Rayaldee for new indications, including the treatment of SHPT in patients with vitamin D
insufficiency and stage 5 CKD requiring regular hemodialysis;
obtain requisite regulatory approval and compile clinical data for our most advanced product candidates;
and
expand into other medical markets that provide significant opportunities and that we believe are complementary to and
synergistic with our business.
In addition, we expect to leverage the BioReference business and infrastructure to drive rapid and widespread uptake of our
diagnostic products, including the 4Kscore test. We also intend to leverage the genetic and genomic data generated and accumulated
through BioReference’s genetic sequencing laboratory to enhance drug discovery and clinical trial programs.
We have and expect to continue to be opportunistic and to pursue complementary or strategic acquisitions, licenses and investments.
Our management team has significant experience in identifying, executing and integrating these transactions. We expect to use well-timed,
carefully selected acquisitions, licenses and investments to continue to drive our growth, including:
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Products and technologies. We intend to continue to pursue product and technology acquisitions and licenses that will
complement our existing businesses and provide new product and market opportunities, enhance our profitability, leverage our
existing assets, and contribute to our own organic growth.
Commercial businesses. We intend to continue to pursue acquisitions of commercial businesses that will both drive our
growth and provide geographically diverse sales and distribution opportunities.
Early stage investments. We have and may continue to make investments in early stage companies that we perceive to have
valuable proprietary technology and significant potential to create value for OPKO as a shareholder.
CORPORATE INFORMATION
We were originally incorporated in Delaware in October 1991 under the name Cytoclonal Pharmaceutics, Inc., which was later
changed to eXegenics, Inc. (“eXegenics”). On March 27, 2007, we were part of a three-way merger with Froptix Corporation (“Froptix”)
and Acuity Pharmaceuticals, Inc. (“Acuity”), both research and development companies. On June 8, 2007, we changed our name to OPKO
Health, Inc. Our shares are publicly traded on the NASDAQ Stock Market under the ticker “OPK” and on the Tel Aviv Stock Exchange.
Our principal executive offices are located in leased office space in Miami, Florida.
We currently manage our operations in two reportable segments: diagnostics and pharmaceuticals. The pharmaceutical segment
consists of the pharmaceutical operations we operate in Chile, Mexico, Ireland, Israel and Spain and our pharmaceutical research and
development operations. The diagnostics segment primarily consists of the clinical laboratory operations we acquired through the
acquisition of BioReference in 2015 and our point-of-care operations. There are no significant inter-segment sales. We evaluate the
performance of each segment based on operating profit or loss. There is no inter-segment allocation of interest expense and income taxes.
Refer to Note 17 for financial information about the segments and geographic areas.
CURRENT PRODUCTS AND SERVICES AND RELATED MARKETS
Diagnostics
BioReference Laboratories
Through BioReference, the third largest full service clinical laboratory in the U. S., we offer comprehensive laboratory testing
services utilized by healthcare providers in the detection, diagnosis, evaluation, monitoring, and treatment of diseases, including esoteric
testing, molecular diagnostics, anatomical pathology, genetics, women’s health and correctional healthcare. We market and sell these
services to physician offices, clinics, hospitals, employers and governmental units nationally, with the largest concentration of business in
the larger metropolitan areas across New York, New Jersey, Florida, Texas, Maryland, California, Pennsylvania, Delaware, Washington
DC, Illinois and Massachusetts.
BioReference has an almost 300-person sales and marketing team and operates a network of approximately 200 patient service
centers.
Our BioReference laboratory testing business consists of routine testing and esoteric testing. Routine tests measure various health
parameters, such as the functions of the heart, kidney, liver, thyroid and other organs, including such tests as blood cell counts, cholesterol
levels, pregnancy, substance abuse and urinalysis. We typically operate 24 hours per day, 365 days per year and perform and report most
routine test results within 24 hours.
The esoteric tests we perform require sophisticated equipment and materials, highly skilled personnel and professional attention.
Esoteric tests are ordered less frequently than routine tests and typically are priced higher than routine tests. Esoteric tests include tests
related to endocrinology, genetics and genomics, immunology, microbiology, HIV tests, molecular diagnostics, next generation sequencing,
oncology, serology, and toxicology.
Through BioReference, we operate in the following highly specialized laboratory divisions:
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BioReference Laboratories. BioReference constitutes our core clinical testing laboratory offering automated, high volume
routine testing services, STAT testing, informatics, HIV, Hep C and other molecular tests.
• GenPath (Oncology). National oncology presence with expertise in cancer pathology and diagnostics, as well as molecular
diagnostics. Core tests include FLOW, IHC, MicroArray, FISH, ISH, Morphology, and full service oncology.
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• GenPath (Women’s Health). Innovative technology platform for sexually transmitted infections has enabled expansion
nationally with specimens coming from 41 states, including Image Directed Paps analysis, HPV Plus, and STI Testing.
• GeneDx. Industry leading national laboratory for testing rare and ultra-rare genetic diseases with international reach,
performing testing on specimens from more than 50 countries.
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Laboratorio Buena Salud. National testing laboratory dedicated to serving the Spanish-speaking population in the U. S.,
where all business is conducted in Spanish including patient and physician interaction.
We have one of the largest marketing staffs of any laboratory in the country with sales and marketing groups dedicated to urology,
oncology, women’s health, genetic testing and correctional health, as well as cross-over groups selling to large institutions. All of our sales
and marketing personnel operate in a dual capacity, as both marketing and client support representatives, which we believe provides better
customer service and a strong connection with our customers.
We expect the clinical laboratory testing industry will continue to experience growth in testing volumes due to aging of the population
in the U.S., patient awareness of the value of laboratory tests, a decrease in the cost of tests, the development of sophisticated and
specialized tests for detection and management of disease, increased recognition of early detection and prevention as a means of reducing
healthcare costs, and ongoing research and development in genetics and genomics and personalized medicine. Our mission is to be
recognized by our clients as the premier provider of clinical laboratory testing, information and related services.
BioReference provides us with a significant diagnostics commercial infrastructure for marketing and sales that reached almost 11
million patients in 2018. In addition, its large team of managed care experts complement our efforts to ensure that payors recognize the
value of our diagnostic and laboratory tests for reimbursement purposes. We continue to leverage the national marketing, sales and
distribution resources of BioReference, along with its almost 300-person sales and marketing team, to enhance sales of and reimbursement
for our 4Kscore test, a laboratory developed blood test that provides a personalized risk score for aggressive prostate cancer. We plan to
leverage the BioReference commercial infrastructure and capabilities, as well as its extensive relationships with payors, to commercialize
OPKO’s other diagnostic products under development.
4Kscore Test
We offer the 4Kscore test through our BioReference laboratory located in Elmwood Park, New Jersey. We began selling the 4Kscore
test in the U.S. in March 2014 and in Europe and Mexico in September 2014 and January 2015, respectively. The 4Kscore test is a
laboratory developed test that measures the blood plasma levels of four different prostate-derived kallikrein proteins: Total PSA, Free PSA,
Intact PSA and Human Kallikrein-2 (“hK2”). These biomarkers are then combined with a patient’s age, Digital Rectal Exam (“DRE”)
status (nodule / no nodule), and prior negative biopsy status (yes / no) using a proprietary algorithm to calculate the risk (probability) of
finding a Gleason Score 7 or higher prostate cancer. The four kallikrein panel of biomarkers utilized in the 4Kscore test is based on decades
of research conducted by scientists at Memorial Sloan-Kettering Cancer Center and leading European institutions. Investigators at the Lund
University, Sweden, University of Turku, Finland and Memorial Sloan Kettering Cancer Center, New York, have also demonstrated that
the 4Kscore test can risk stratify the 20-year risk for development of prostate metastases and mortality in men who present at age 50 or 60
years old with an elevated PSA.
The 4Kscore test was developed by OPKO and validated in two prospective, blinded studies of 1,012 and 366 men, respectively. The
first study was done in collaboration with 26 urology centers across the U.S. and the second study was conducted at eight VA centers in the
U.S. with a predominantly African American cohort. African Americans are 1.7 times more likely to be diagnosed with prostate cancer than
Caucasian men and 2.2 times more likely to die from the disease. Results showed that the 4Kscore test was highly accurate for predicting
the presence of high-grade cancer (Gleason score 7 or higher) prior to prostate biopsy, regardless of race. The full data from the blinded,
prospective U.S. clinical validation studies have been published in peer reviewed medical journals.
The clinical data from both studies demonstrated the ability of the 4Kscore test to discriminate between men with high-grade,
aggressive prostate cancer and those men who had no findings of cancer or had low-grade or indolent form of the disease. The
discrimination, measured by Area Under the Curve (“AUC”) analysis, was greater than 0.80 and is significantly higher than previously
developed tests. Furthermore, the 4Kscore test demonstrated excellent risk calibration, indicating the accuracy of the result for an
individual patient, both Caucasian and African American. The high value of AUC and the excellent risk calibration make the 4Kscore test
result valuable information for the shared decision-making between the urologist and patient on whether or not to perform a prostate
biopsy.
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A separate clinical utility study indicated that the 4Kscore test led to 64.6% fewer biopsies. The study, “The 4Kscore® Test Reduces
Prostate Biopsy Rates in Community and Academic Urology Practices”, was published in a peer reviewed medical journal. The study,
which included 611 patients seen by 35 academic and community urologists across the U.S., evaluated the influence of the 4Kscore test on
urologist- patient decisions about whether to perform a biopsy in men who had an abnormal PSA and or DRE result. Test results for
patients were stratified into low risk (< 7.5%), intermediate risk (7.5%-19.9%) and high risk (³20%) for developing aggressive prostate
cancer. Nearly half (49.3%) of the men were categorized as low risk; 25.7% and 25.0% fell into the intermediate-risk and high-risk
categories, respectively. Notably, the 4Kscore test results influenced biopsy decisions in 88.7% of the men. In the three risk groups, a
biopsy was avoided in 94.0%, 52.9% and 19.0% of men in the low, intermediate and high-risk categories, respectively.
The National Comprehensive Cancer Network (“NCCN”) included the 4Kscore test as a recommended test in their 2015, 2016, 2017
and 2018 Guidelines for Prostate Cancer Early Detection. The panel making this recommendation concluded that the 4Kscore test is
indicated for use prior to a first prostate biopsy, or after a negative biopsy, to assist patients and physicians in further defining the
probability of high-grade cancer. In addition, the European Association of Urology (“EAU”) Prostate Cancer Guidelines Panel included the
4Kscore test in the 2018 EAU Guidelines for Prostate Cancer, concluding that the 4Kscore, as a blood test with greater specificity over the
PSA test, is indicated for use prior to a first prostate biopsy or after a negative biopsy to assist patients and physicians in further defining the
probability of high-grade cancer.
We have and will continue to commit substantial efforts to obtaining broad reimbursement coverage for the 4Kscore test. The
4Kscore test has been granted a Category I CPT® code by the AMA (CPT Code 81539). A CPT code is used by insurance companies and
government payors to describe health care services and procedures. A Category I CPT code is critical to facilitate reimbursement in
government programs such as Medicare and Medicaid, as well as private insurance programs. We have obtained a positive coverage
decision from at least one national private payor and pricing agreements from several regional payors.
Novitas Solutions, the local Medicare Administrative Contractor (“MAC”) for our laboratory in New Jersey, issued a proposed non-
coverage policy for the 4Kscore test in May 2018 subject to a public comment period ending July 5, 2018. We made oral presentations at a
Novitas open meeting and submitted substantial evidence and data to address the comments raised in the draft non-coverage determination.
In January 2019, Novitas issued a notice of a future non-coverage determination for the 4KScore test to be effective March 20, 2019. We
are evaluating options to appeal the decision and undertake other steps with the Center for Medicare and Medicaid Services (“CMS”) in an
effort to have this determination rescinded or reversed. We are also developing a strategy to obtain FDA approval for the 4Kscore test,
among other efforts, to assist in securing broad reimbursement coverage.
Point-of-Care Diagnostics
OPKO Diagnostics, LLC (“OPKO Diagnostics”), formerly Claros Diagnostics, Inc., has developed a novel diagnostic instrument
system to provide rapid, high performance blood test results in the point-of-care setting. The technology only requires a finger stick drop of
blood introduced into the test cassette that can then run a quantitative test. The instrument performs the tests on a disposable, one time
usable cassette that is a microfluidics-based diagnostic test system. The credit card-sized test cassette works with a sophisticated desktop
analyzer to provide high performance quantitative blood test results within minutes and permits the transition of complex immunoassays
from the centralized reference laboratory to the physician’s office, hospital nurses station, or other decentralized location.
We completed multiple in vitro analytical validation and field use tests for the PSA test in mid-2017 and filed the pre-marketing
authorization (“PMA”) for the Claros Analyzer and Sangia Total PSA Test with the FDA in November 2017. The key clinical study with
patients who were suspicious for prostate cancer found that the Sangia Total PSA test improved the sensitivity of a digital rectal exam
(“DRE”) to 91%, detecting 2.9 times the prostate cancers compared to DRE alone.
The FDA approved the PMA for the Sangia Total PSA Test using the Claros Analyzer in January 2019. We also intend to commence
a clinical trial of a testosterone diagnostic test for our point-of-care system. We are evaluating commercialization strategies for the Claros
system, including expansion of the test menu prior to commercialization.
We are presently working to add additional tests for our point-of-care system, and we believe that there are many more applications
for the technology, including infectious disease, cardiology, women’s health and companion diagnostics.
Pharmaceutical Business
We currently have one commercial stage pharmaceutical product and several pharmaceutical compounds and technologies in various
stages of research and development for a broad range of indications and conditions, including the following:
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Renal Products
We launched Rayaldee, our lead renal product, in the U.S. market in November 2016. In June 2016, the FDA approved Rayaldee
extended release capsules for the treatment of secondary hyperparathyroidism (“SHPT”) in adults with stage 3 or 4 chronic kidney disease
(“CKD”) and vitamin D insufficiency, defined as serum total 25-hydroxyvitamin D levels less than 30 ng/mL. Rayaldee is a patented
extended release product containing 30 mcg of a prohormone called calcifediol (25-hydroxyvitamin D3).
We have a 79-person highly specialized sales, marketing and market access team dedicated to the launch and commercialization of
Rayaldee as of December 31, 2018. As compared to the fourth quarter of 2017 and the third quarter of 2018, total Rayaldee prescriptions
increased approximately 141% and 17%, respectively, in the fourth quarter of 2018. Efforts are underway to obtain broader commercial and
Part D insurance coverage for Rayaldee. We have already contracted for commercial and Part D coverage for more than seventy percent
(70%) of U.S. covered lives as of the end of 2018.
In connection with the launch of Rayaldee, we have also engaged in a comprehensive ongoing market education campaign
highlighting the unmet need in treating SHPT, including by leveraging key opinion leaders in community outreach programs such as
speakers’ bureaus and patient advocacy programs.
In May 2016, we entered into a collaboration with Vifor Fresenius Medical Care Renal Pharma (“VFMCRP”) for the development
and commercialization of Rayaldee in Europe, Canada, Mexico, Australia, South Korea and certain other international markets for the
treatment of SHPT in patients with stage 3, 4 or 5 CKD and vitamin D insufficiency. Under the terms of the agreement, OPKO received an
upfront payment of $50 million. We also received a $2 million payment triggered by the marketing approval of Rayaldee in Canada and
will receive up to $230 million in additional regulatory and sales-based milestones. In addition, VFMCRP will pay OPKO tiered, double
digit 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. OPKO and VFMCRP are also collaborating to develop and
commercialize a new dosage form of Rayaldee for the treatment of SHPT in hemodialysis patients. OPKO granted VFMCRP an option to
acquire rights to this dosage form for the U.S. market; if exercised, OPKO will receive up to $555 million in additional milestones and
double digit royalties.
On October 12, 2017, we entered into a Development and License Agreement (the “JT Agreement”) with Japan Tobacco Inc. (“JT”)
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, as well as such additional indications as may be added to the scope of the license subject to the terms of the JT
Agreement. Under the terms of the JT Agreement, OPKO received an initial upfront payment of $6 million and received another $6 million
milestone payment triggered by the initiation of OPKO’s U.S. phase 2 study with Rayaldee in dialysis patients. 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 Rayaldee 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. 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.
The FDA approval of Rayaldee was supported by successful results from two identical randomized, double-blind, placebo-controlled,
multi-site phase 3 studies which established the safety and efficacy of Rayaldee as a new treatment for SHPT in adults with stage 3 or 4
CKD and vitamin D insufficiency.
Vitamin D insufficiency arises in CKD due to the abnormal upregulation of CYP24A1, an enzyme that destroys vitamin D and its
metabolites, and from many other causes as well.
Studies in CKD patients have demonstrated that currently available over-the-counter and prescription vitamin D supplements cannot
reliably raise blood vitamin D prohormone levels and effectively treat SHPT, a condition commonly associated with CKD in which the
parathyroid glands secrete excessive amounts of PTH. Prolonged elevation of blood PTH causes excessive calcium and phosphorus to be
released from bone, leading to elevated serum calcium and phosphorus levels, softening of the bones (osteomalacia) and calcification of
vascular and renal tissues. SHPT affects 40-82% of patients with stage 3 or 4 CKD and approximately 95% of patients with stage 5 CKD.
The completed phase 3 trials for Rayaldee successfully met all primary efficacy and safety endpoints. The primary efficacy endpoint
was a responder analysis in which “responder” was defined as any treated subject who demonstrated an average decrease in PTH of at least
30% from pre-treatment baseline during the last six weeks of the 26-week treatment period. A significantly higher response rate was
observed with Rayaldee compared to placebo treatment in both trials and safety and
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tolerability data were comparable in both treatment groups. The PTH-lowering response rates with Rayaldee were similar in both stage 3
and 4 CKD. Patients completing the two pivotal trials were treated, at their election, for an additional six months with Rayaldee during an
open-label extension study. Data from the extension study indicated that the PTH lowering response rate steadily increased with duration of
Rayaldee treatment without deterioration in safety profile.
We also are developing Rayaldee for other indications, including for SHPT in patients with vitamin D insufficiency and stage 5 CKD
requiring regular hemodialysis. A phase 2 study of a higher dose product commenced in this patient population during the third quarter of
2018. We expect to receive data from the study in the second half of 2020.
In August 2014, we also announced the submission of an Investigational New Drug Application (“IND”) to the FDA to evaluate
Rayaldee as an adjunctive therapy for the prevention of skeletal-related events in patients with bone metastases undergoing anti-resorptive
therapy. We commenced a phase 1 dose escalation study in the fourth quarter of 2014 in breast and prostate cancer patients with bone
metastases who were receiving anti-resorptive therapy. The study, which has been completed, was designed to evaluate safety, markers of
vitamin D and mineral metabolism and tumor progression. We are currently collecting the final data and will shortly complete a final
analysis of the study.
We filed an IND for Rayaldee in January 2019 for the treatment of SHPT arising from vitamin D insufficiency in patients who have
undergone bariatric surgery. We intend to commence a phase 2 study in this population in the first half of 2019.
Another renal product in our development pipeline, Alpharen (Fermagate Tablets), is a new and potent non-absorbed phosphate
binder to treat hyperphosphatemia in stage 5 CKD patients requiring regular hemodialysis. Alpharen (Fermagate Tablets) has been shown
to be safe and effective in treating hyperphosphatemia in phase 2 and 3 trials in stage 5 CKD patients undergoing chronic hemodialysis.
Hyperphosphatemia, or elevated serum phosphorus, is common in dialysis patients and tightly linked to the progression of SHPT and
vascular calcification, both of which drive morbidity and mortality. The kidneys provide the primary route of excretion for excess
phosphorus absorbed from ingested food. As kidney function worsens, serum phosphorus levels increase and directly stimulate PTH
secretion. Stage 5 CKD patients requiring dialysis must reduce their dietary phosphate intake and usually require regular treatment with
orally administered phosphate binding agents to lower serum phosphorus to meet the recommendations of the Kidney Disease Improving
Global Outcomes (“KDIGO”) Clinical Practice Guidelines that elevated serum phosphorus levels should be lowered. Hyperphosphatemia
contributes to soft tissue mineralization and affects approximately 90% of dialysis patients. Dialysis patients require ongoing phosphate
binder treatment to maintain controlled serum phosphorus levels. An additional phase 3 clinical trial is required to support marketing
approvals for Alpharen in North America and in Europe, and the Company is evaluating development opportunities.
We believe the CKD patient population is large and growing as a result of obesity, hypertension and diabetes; therefore this patient
population represents a significant global market opportunity. According to the National Kidney Foundation, CKD afflicts over 40 million
people in the U.S., including more than 21 million patients with stage 3 or 4 CKD. In stage 5 CKD, kidney function is minimal to absent
and most patients require regular dialysis or a kidney transplant for survival. An estimated 71-97% of CKD patients have vitamin D
insufficiency which can lead to SHPT and its debilitating consequences. CKD continues to be associated with poor outcomes, reflecting the
inadequacies of the current standard of care.
Vitamin D insufficiency, hyperphosphatemia and SHPT, when inadequately treated, are major contributors to poor CKD outcomes.
We intend to develop and commercialize Rayaldee and other renal products to constitute part of the foundation for a new and markedly
improved standard of care for CKD patients having SHPT and other renal products.
SARM
Through the acquisition of Transition Therapeutics, a Toronto-based biotechnology company, we acquired OPK88004, an orally
administered selective androgen receptor modulator (SARM) which we have been developing for the treatment of Benign Prostatic
Hypertrophy (BPH) and other urologic and metabolic conditions. The selective and antagonistic properties of OPK88004 on the prostate
appear to be well suited to potentially reduce prostate hyperplasia and volume, as well as provide anabolic therapeutic benefits such as
increased lean body mass and physical function, and decreased fat mass in specific patient populations. We believe that SARMs hold
considerable promise as a new class of anabolic therapies for a variety of clinical indications, such as frailty and functional limitations
associated with aging and chronic illnesses, cancer and osteoporosis.
A phase 2 study of 350 male subjects for another indication showed significantly increased lean body mass and muscle strength and
significant fat mass reduction with no change in lower PSA levels. OPK88004 is currently being studied in a phase 2 study in prostate
cancer patients who have undergone radical prostatectomy. The main objective of the study is to examine the effect of OPK88004 on
sexual function and quality of life issues associated with this patient population.
An additional phase 2b study to determine the optimal dose to treat patients with BPH commenced in November 2017 and we
completed enrollment and randomized 114 patients in the U.S. in December 2018. The main focus of the study is to
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determine the optimal dose of OPK88004 that will reduce prostate volume and PSA levels, and increase anabolic effects such as lean body
and decreased fat mass in BPH patients. As previously reported, blinded data from the phase 2b study have shown significant variability in
the measurement of prostate volume, rendering the assessment of prostate volume from treatment impractical. Additionally, a small number
of subjects have shown increased liver enzymes. We have suspended the current trial but continue to analyze data relating to the study’s
other primary endpoint, the effect of OPK88004 on serum PSA levels, and the secondary endpoints, changes in lean body mass and fat
mass. The results of this data analysis are expected in the second quarter of 2019. Additional indications including treatment of symptoms
associated with androgen deprivation therapy in prostate cancer patients and low testosterone levels, muscle weakness and general frailty in
kidney dialysis patients are being planned.
Oxyntomodulin
Our internal product development program is also currently focused on developing a once weekly administered oxyntomodulin for
type 2 diabetes and obesity. Our most advanced oxyntomodulin product candidate, OPK88003, a once-weekly administered peptide for the
treatment of type 2 diabetes and associated obesity, is a dual agonist of the Glucagon-Like Peptide-1 (GLP-1) and glucagon receptors. The
receptors play an integral role in regulating appetite, food intake, satiety and energy utilization in the body. Stimulating both of the
receptors, OPK88003 has the potential to regulate blood glucose.
OPK88003 has been evaluated in a phase 2 study enrolling 420 type 2 diabetes subjects in a 24 week study consisting of a 12-week
randomized blinded stage followed by a 12-week open-label stage. The study included four once-weekly dose arms of OPK88003 (10mg,
15mg, 30mg, 50mg), a placebo arm, and an active comparator arm (exenatide extended release – 2mg). The study was completed in
February, 2016.
Subjects receiving the highest dose of OPK88003 peptide once weekly in the study demonstrated significantly superior weight loss
compared with currently approved extended release exenatide and placebo after 12 and 24 weeks of treatment. OPK88003 also provided a
reduction in HbA1c, a marker of sugar metabolism, similar to exenatide at weeks 12 and 24.
We have evaluated OPK88003 in a dose escalation phase 2b trial in 110 type 2 diabetics where patients have been treated with a dose
escalation regimen over 3 months intended to optimize dose levels, and increase body weight loss and reduce the adverse event profile,
such as nausea and vomiting. The patients were treated for a total of 30 weeks in the study. We have completed the study and expect to
have topline data from the study in March 2019. The key primary endpoint will be HbA1c and secondary endpoints such as weight loss,
lipid profile and safety will also be analyzed.
We believe oxyntomodulin has potential to be a safe, long term therapy for obesity and diabetes type II patients, representing
significant market opportunities. More than 380 million are living with diabetes worldwide, of which approximately 90% have type II
diabetes. According to the World Health Organization, there are more than 500 million severely overweight or obese people.
Biologics
Our biologics business focuses on developing and commercializing longer-acting proprietary versions of already approved therapeutic
proteins. One of our innovative platform technologies uses a short, naturally-occurring amino acid sequence, carboxl terminal peptide
(“CTP”) which has the effect of slowing the removal from the body of the therapeutic protein to which it is attached. This CTP can be
readily attached to a wide array of existing therapeutic proteins, stabilizing the therapeutic protein in the bloodstream and extending its life
span without additional toxicity or loss of desired biological activity. We are using the CTP technology to develop new, proprietary
versions of certain existing therapeutic proteins that have longer life spans than therapeutic proteins without CTP. We believe that our
products will have greatly improved therapeutic profiles and distinct market advantages.
hGH-CTP
Our lead product candidate utilizing CTP, hGH-CTP, is a recombinant human growth hormone product under development for the
treatment of growth hormone deficiency (“GHD”), which is a pituitary disorder resulting in short stature in children and other physical
ailments in both children and adults.
In December 2014, we entered into an exclusive worldwide agreement with Pfizer for the development and commercialization of
hGH-CTP for the treatment of GHD in adults (“Adult GHD”) and in children (“Pediatric GHD”), as well as for the treatment of growth
failure in children born small for gestational age (“SGA”). In connection with the transaction, we granted Pfizer an exclusive license to
commercialize hGH-CTP worldwide, and we received non-refundable and non-creditable upfront payments of $295 million and are eligible
to receive up to an additional $275 million upon the achievement of certain regulatory milestones. In addition, we are eligible to receive
initial tiered royalty payments associated with the commercialization of hGH-CTP for Adult GHD with percentage rates ranging from the
high teens to mid-twenties. Upon the
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launch of hGH-CTP for Pediatric GHD in certain major markets, the royalties will transition to regional, tiered gross profit sharing for both
hGH-CTP and Pfizer’s Genotropin®.
Pursuant to our agreement with Pfizer, we agreed to lead the clinical development activities for the hGH-CTP program and are
responsible for funding the development programs for the key indications, including Adult and Pediatric GHD and Pediatric SGA. Pfizer
agreed to be responsible for all development costs for additional indications as well as all post-marketing studies. In addition, Pfizer agreed
to fund the commercialization activities for all indications and lead the manufacturing activities covered by the global development plan.
The agreement obligated us to fund development up to an agreed cap. We have exceeded the development cap and if we are unable to
reach an agreement with Pfizer regarding cost sharing for the overruns, as well as other obligations, including development obligations, it
could have a material adverse impact on the expected benefits of the Pfizer transaction.
GHD occurs when the production of growth hormone, secreted by the pituitary gland, is disrupted. Since growth hormone plays a
critical role in stimulating body growth and development, and is involved in the production of muscle protein and in the breakdown of fats,
a decrease in the hormone affects numerous body processes. hGH is used for the long-term treatment of children and adults with inadequate
secretion of endogenous growth hormone. The primary indications it treats in children are GHD, SGA, kidney disease, Prader-Willi
Syndrome and Turner’s Syndrome. In adults, the primary indications are replacement of endogenous growth hormone and the treatment of
AIDS-induced weight loss. Patients using hGH receive daily injections six or seven times a week. This is particularly burdensome for
pediatric patients. We believe a significant market opportunity exists for a longer-lasting version of hGH that would require fewer
injections.
Our phase 3 trial of hGH-CTP in pediatric patients was initiated in December 2016 and patient enrollment was completed in August
2018. The global study is a 225-patient study in Pediatric GHD patients designed to evaluate weekly treatment with hGH-CTP versus daily
injections of Genotropin. The hGH-CTP is delivered in a pen device in this multi-regional study in over 21 countries. The GHD subjects
will be treated weekly for 12 months. We expect to perform top-line data analysis from the study in the fourth quarter of 2019. In addition
to the phase 3 pediatric study, we have continued without interruption our ongoing phase 2 pediatric open label extension study for hGH-
CTP. The phase 2 pediatric patients have been treated with hGH-CTP for over four years, and some patients for over five years. We have
switched all of the pediatric patients in this study to the disposable pen device. We have also initiated a 44-patient study in Pediatric GHD
patients in Japan which has completed enrollment. hGH-CTP has orphan drug designation in the U.S. and Europe for both adults and
children with GHD.
In December 2016, we announced preliminary topline data from our phase 3, double blind, placebo controlled study of hGH-CTP in
adults with GHD. The multinational, multi-center study, which utilized a 2:1 randomization between hGH-CTP and placebo, enrolled 203
subjects, 198 of whom received at least one dose of study treatment. Treatment was administered through a weekly injection. The topline
results showed:
•
•
•
•
The active group had a mean change in trunk fat mass of -0.4kg and placebo group was 0;
There was no statistically significant difference (≤ 0.05 (p value)) between the active and placebo group;
97% of hGH-CTP vs 6% of placebo group showed IGF-1 normalization; and
The safety profile of hGH-CTP is consistent with that observed with those treated with daily growth hormone
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 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 completion of the analyses, OPKO and Pfizer have agreed that OPKO may communicate with the FDA regarding a
potential biologics license application (“BLA”) submission.
Factor VII
In addition to hGH-CTP, we are developing a product to extend the life span of Factor VIIa (hemophilia) using the CTP technology.
In February 2013, the FDA granted orphan drug designation to our longer-acting version of clotting Factor VIIa, Factor VIIa-CTP, for the
treatment of bleeding episodes in patients with hemophilia A or B with inhibitors to Factor VIII or Factor IX. Currently, Factor VIIa
therapy is available only as an intravenous (IV) formulation which, due to Factor VIIa’s short half-life, requires multiple infusions to treat a
bleeding episode. In addition, frequent infusions are onerous when used as preventative prophylactic therapy, especially for children.
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We have conducted a phase 1/2a dose escalation study and a phase 1 dose escalating subcutaneous study in healthy volunteers to
determine safety of our long acting Factor VIIa-CTP for the treatment of bleeding episodes in hemophilia A or B patients with inhibitors to
Factor VIII or Factor IX. These two studies are completed, and data assessment is ongoing. Further regulatory and development strategies
will be planned.
We believe that the CTP technology may also be broadly applicable to other therapeutic proteins in the market and provide a
reduction in the number of injections.
APIs
FineTech Pharmaceutical, Ltd. (“FineTech”), is our Israeli-based subsidiary that develops and produces high value, high potency
specialty APIs. Through its FDA registered facility in Nesher, Israel, FineTech currently manufactures commercial APIs for sale or license
to pharmaceutical companies in the U.S., Canada, Europe and Israel. We believe that FineTech’s significant know-how and experience
with analytical chemistry and organic syntheses, together with its production capabilities, may play a valuable role in the development of
our pipeline of proprietary molecules and compounds for diagnostic and therapeutic products, while providing revenues and profits from its
existing API business.
Oligonucleotide Therapeutics
OPKO CURNA, LLC (“CURNA”), previously CURNA Inc., is engaged in the discovery of new drugs for the treatment of a wide
variety of illnesses, including cancer, heart disease, metabolic disorders and a range of genetic anomalies. CURNA’s platform technology
utilizes a short, single strand oligonucleotide and is based on the up-regulation of protein production through interference with non-coding
RNA’s or natural antisense. This strategy contrasts with established approaches which down-regulate protein production. CURNA has
designed a novel type of therapeutic modality, termed AntagoNAT, and has initially demonstrated this approach for up-regulation of
several therapeutically relevant proteins in in vitro and animal models.
CURNA has identified and developed potential active compounds which increase the production of over 80 key proteins involved in a
large number of individual diseases. We have ongoing pre-clinical studies for several of these compounds. A lead compound has been
identified for the treatment of Dravet Syndrome. Orphan disease designations are granted by FDA and EMA.
NK-1 Program
We acquired rolapitant and other neurokinin-1 (“NK-1”) assets from Merck & Co. In December 2010, we exclusively out-licensed the
development, manufacture and commercialization of our lead NK-1 candidate, VARUBI™ (rolapitant), to TESARO, Inc. (“TESARO”).
VARUBI™, a potent and selective competitive antagonist of the NK-1 receptor, had successfully completed clinical testing for prevention
of chemotherapy induced nausea and vomiting (“CINV”) and post-operative induced nausea and vomiting. TESARO’s NDA for oral
VARUBI™ was approved by the FDA in September 2015, and in November 2015, TESARO commenced the commercial launch of oral
VARUBI™ in the U.S. TESARO’s IV formulation of VARUBI™ was approved by the FDA in October 2017 and commercial sales
commenced in November 2017. In January 2018, the package insert for VARUBI™ was updated to include mention of new adverse
effects, including anaphylaxis, anaphylactic shock and other serious hypersensitivity reactions which were reported following its
introduction to the market in November 2017. In late February 2018, TESARO announced it would suspend distribution of VARUBI™ IV,
but would continue to support the oral product.
Under the terms of the license, we received a $6.0 million upfront payment from TESARO and we received $30.0 million of
milestone payments upon achievement of certain regulatory and commercial sale milestones. We are eligible to receive additional
commercial milestone payments of up to $85.0 million if specified levels of annual net sales are achieved. TESARO is also obligated to
pay us tiered royalties on annual net sales achieved in the U.S. and Europe at percentage rates that range from the low double digits to the
low twenties, and outside of the U.S. and Europe at low double-digit percentage rates. TESARO assumed responsibility for clinical
development and commercialization of licensed products at its expense. Under the agreement, we will continue to receive royalties on a
county-by-country and product-by-product basis until the later of the date that all of the patents rights licensed from us and covering
rolapitant expire, are invalidated or are not enforceable, and 12 years from the date of 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 unless we terminate the license earlier for TESARO’s material breach of the license
or bankruptcy. TESARO has a right to terminate the license during the term for any reason on three month’s written notice.
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In June 2018, TESARO assigned its rights and obligations under the agreement to TerSera Therapeutics LLC (“TerSera”) pursuant to
an asset purchase agreement. Under the asset purchase agreement, TerSera is responsible for VARUBI in the U.S.and Canada and
TESARO can continue to commercialize VARUBY® in Europe and the rest of the world though a sublicense with TerSera.
Commercial Operations
We also intend to continue to leverage our global commercialization expertise to pursue acquisitions of commercial businesses that
will both drive our growth and provide geographically diverse sales and distribution opportunities. During 2015, we acquired EirGen
Pharma Ltd. (“EirGen”), a specialty pharmaceutical company based in Ireland. EirGen is focused on the development and commercial
supply of high potency, high barrier to entry, pharmaceutical products. Through its facility in Waterford, Ireland, EirGen currently
manufactures high potency pharmaceutical products and exports to over 50 countries. High potency drugs such as those used for cancer
chemotherapy are typically unsuitable for manufacture in normal multi-product facilities due to cross contamination risks.
To date, EirGen and its commercial partners have filed several product applications with the FDA in Europe and in Japan. EirGen has
a strong research and development portfolio of high barrier to entry drugs and we expect to rapidly expand its drug portfolio. We believe
EirGen will play an important role in the development, manufacturing, distribution and approval of a wide variety of drugs in a variety of
dosage forms with an emphasis on high potency products.
OPKO Health Europe (previously Farmadiet Group Holding, S.L.) operates primarily in Spain and has more than 20 years of
experience in the development, manufacture, marketing and sale of pharmaceutical, nutraceutical and veterinary products in Europe.
OPKO Mexico (previously Pharmacos Exakta S.A. de C.V.), is engaged in the manufacture, marketing, sale and distribution of
ophthalmic and other pharmaceutical products to private and public customers in Mexico. OPKO Mexico is commercializing food
supplements and over the counter products, and manufactures and sells products primarily in the generics market in Mexico, although it
also has some proprietary products as well.
OPKO Chile (previously Pharma Genexx, S.A.) markets, sells and distributes pharmaceutical products to the private, hospital,
pharmacy and public institutional markets in Chile for a wide range of indications, including, cardiovascular products, vaccines, antibiotics,
gastro- intestinal products and hormones, among others. ALS Distribuidora Limitada (“ALS”) is engaged in the business of importation,
commercialization and distribution of pharmaceutical products for private markets in Chile. ALS started operations in 2009 as the exclusive
product distributor of Arama Laboratorios y Compañía Limitada (“Arama”), a company with more than 20 years of experience in the
pharmaceutical products market. In connection with the acquisition of ALS, OPKO acquired all of the product registrations and trademarks
previously owned by Arama, as well as the Arama name. We distribute food supplements and over the counter products through Arama.
Strategic Investments
We have and may continue to make investments in other early stage companies that we perceive to have valuable proprietary
technology and significant potential to create value for OPKO as a shareholder.
RESEARCH AND DEVELOPMENT EXPENSES
During the years ended December 31, 2018, 2017, and 2016, we incurred $125.6 million, $126.4 million, and $113.9 million,
respectively, of research and development expenses related to our various product candidates. During the years ended December 31, 2018,
2017, and 2016, our research and development expenses primarily consisted of hGH-CTP and Rayaldee development programs, including
expenses related to the development of hGH-CTP and phase 3 clinical trials for Rayaldee.
INTELLECTUAL PROPERTY
We believe that technology innovation is driving breakthroughs in healthcare. We have adopted a comprehensive intellectual
property strategy which blends the efforts to innovate in a focused manner with the efforts of our business development activities to
strategically in-license intellectual property rights. We develop, protect, and defend our own intellectual property rights as dictated by the
developing competitive environment. We value our intellectual property assets and believe we have benefited from early and insightful
efforts at understanding diagnostics, as well as the disease and the molecular basis of potential pharmaceutical intervention.
We actively seek, when appropriate and available, protection for our products and proprietary information by means of U.S. and
foreign patents, trademarks, trade secrets, copyrights, and contractual arrangements. Patent protection in the
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pharmaceutical and diagnostic fields, however, can involve complex legal and factual issues. There can be no assurance that any steps taken
to protect such proprietary information will be effective.
We own or license-in thousands of U.S. and foreign patents and applications for our products, product candidates and our outlicensed
product candidates. These patents cover pharmaceuticals, diagnostics and other products and their uses, pharmaceutical and diagnostic
compositions and formulations and product manufacturing processes. Our patents are filed in various locations worldwide as is appropriate
to the particular patent and its use.
Rayaldee
We have multiple U.S. patent families relating to Rayaldee. These patents are also filed in multiple countries worldwide. One patent
family claims a sustained release oral dosage formulation and a method of treating 25-hydroxyvitamin D insufficiency or deficiency and
will not expire until at least February 2027. A second patent family claims a method of administering 25-hydroxyvitamin D3 by controlled
release, a formulation for controlled release of a vitamin D compound, a controlled release oral dosage formulation of a vitamin D
compound and a method of treatment, and will not expire until at least April 2028. We also have additional patents and patent applications
pending relating to the sustained release formulation and its use which will expire in 2034 and have licensed patents covering the capsule
shell. The patents issued in the U.S. covering Rayaldee are listed in the Approved Drug Products with Therapeutic Equivalence
Evaluations, or the Orange Book. OPKO and/or its affiliates have entered into two exclusive license agreements with respect to Rayaldee
patents in certain territories outside of North America with VFMCRP (Europe plus) and JT (Japan).
Rolapitant
The rolapitant line of patents, exclusively licensed to TESARO and TerSera includes multiple patent families that cover anti-nausea
treatment for chemotherapy patients. These U.S. patents are also filed and granted in many countries around the world. One patent family
covers the chemical composition of rolapitant and related compounds and expires in December 2023 (with the patent term adjustment). A
patent term extension request was submitted to the USPTO in October 2015 to obtain an additional 1,716 days which will, upon approval,
extend the rolapitant compound patent expiration date to August 2028.The second patent family covers pharmaceutical formulations,
including a capsule formulation with a related method of use and expires in April of 2027. The third patent family covers particular aspects
of the chemical composition of rolapitant as well as certain methods of treating delayed onset nausea and expires in April 2027. The fourth
patent family covers a powdered pharmaceutical composition of a crystalline salt of rolapitant and expires in March 2028. The current line
of rolapitant patents are approved for oral treatment. Patents and applications directed towards the IV formulation of rolapitant are granted
and/or currently pending in multiple jurisdictions.
hGH-CTP
The hGH-CTP line of patents, which is currently licensed to Pfizer, Inc., includes two main patent families that cover modified
human grown hormone treatment. These U.S. patents are also filed in multiple countries around the world. One patent family covers certain
CTP modified hGH polypeptides relating to growth hormones and their method of use and expires in February of 2027 (with the exception
of two U.S. patents, namely US 8304386 and US 8097435, which expire in January 2028 and April 2027, respectively, due to Patent Term
Adjustment for each). The second patent family covers cytokine-based polypeptides relating to human growth hormone treatment and
expires in 2027. In addition to the CTP patents and applications licensed to Pfizer, OPKO has multiple patent families covering similar
biologicals with patents and applications pending in the U.S. and internationally.
OPK88003 and OPK88004
In 2016, we acquired Transition Therapeutics, Inc. which is developing multiple drug candidates that include OPK88003 (a long
acting oxyntomodulin) and OPK88004 (a selective androgen receptor modulator (SARM)), each of which are licensed from Eli Lilly and
have granted patents worldwide covering the compounds and their use in their respective indications. U.S. Pat. No. 8367607 covers
OPK88003 and expires in December 2030, without extension. U.S. Pat. No. 7968587 covers OPK88004 and expires, without extension, in
November 2027. In addition to the molecule patent covering the selective androgen receptor modulator, Transition Therapeutics
exclusively licensed a method of use patent family covering its use in treating androgen deprivation therapy associated symptoms. These
patents expire in 2035. In addition, Transition and its affiliates have patented compounds (scyllo-inositol) for the treatment of Alzheimer’s
disease. The patents are pending or granted in many countries of the world. We and/or our affiliates will seek all available patent term
extensions for our product candidates and products.
Because the patent positions of pharmaceutical, biotechnology, and diagnostics companies are highly uncertain and involve complex
legal and factual questions, the patents owned and licensed by us, or any future patents, may not prevent other
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companies from developing similar or therapeutically equivalent products or ensure that others will not be issued patents that may prevent
the sale of our products or require licensing and the payment of significant fees or royalties. Furthermore, to the extent that any of our
future products or methods are not patentable, that such products or methods infringe upon the patents of third parties, or that our patents or
future patents fail to give us an exclusive position in the subject matter claimed by those patents, we will be adversely affected. We may be
unable to avoid infringement of third party patents and may have to obtain a license, defend an infringement action, or challenge the
validity of the patents in court. A license may be unavailable on terms and conditions acceptable to us, if at all. Patent litigation is costly
and time consuming, and we may be unable to prevail in any such patent litigation or devote sufficient resources to even pursue such
litigation.
LICENSES AND COLLABORATIVE RELATIONSHIPS
Our strategy is to develop a portfolio of product candidates through a combination of internal development, acquisition, and external
partnerships. Collaborations are key to our strategy and we continue to build relationships and forge partnerships in various areas where
unmet medical need and commercial opportunities exist. In October 2017, we entered into a license and development agreement with JT for
the development and commercialization of Rayaldee in Japan for the treatment of SHPT in non-dialysis and dialysis patients with CKD. In
May 2016, we entered into a license and collaboration with VFMCRP for the development and commercialization of Rayaldee in Europe,
Canada, Mexico, Australia, South Korea and certain other international markets for the treatment of SHPT in patients with CKD and
vitamin D insufficiency. In December 2014, we entered into an exclusive agreement with Pfizer 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 small for gestational age. Previously, we (or entities we have acquired) have completed strategic licensing
transactions with the President and Fellows of Harvard College, Academia Sinica, The Scripps Research Institute, TESARO, INEOS
Healthcare, and Arctic Partners, among others.
COMPETITION
The pharmaceutical and diagnostic testing industries are highly competitive and require an ongoing, extensive search for
technological innovation. The industries are characterized by rapidly advancing technologies, intense competition and a strong emphasis on
proprietary products. They also require, among other things, the ability to effectively discover, develop, test and obtain regulatory
approvals for products, as well as the ability to effectively commercialize, market and promote approved products.
Numerous companies, including major pharmaceutical companies, specialty pharmaceutical companies and specialized biotechnology
companies, are engaged in the development, manufacture and marketing of pharmaceutical products competitive with those that we are or
intend to commercialize ourselves and through our partners. Competitors to our diagnostics business include major diagnostic companies,
reference laboratories, molecular diagnostic firms, universities and research institutions. Most of these companies have substantially greater
financial and other resources, larger research and development staffs and more extensive marketing and manufacturing organizations than
ours. This enables them, among other things, to make greater research and development investments and efficiently utilize their research
and development costs, as well as their marketing and promotion costs, over a broader revenue base. This also provides our competitors
with a competitive advantage in connection with the highly competitive product acquisition and product in-licensing process, which may
include auctions in which the highest bidder wins. Our competitors may also have more experience and expertise in obtaining marketing
approvals from the FDA and other regulatory authorities. In addition to product development, testing, approval, and promotion, other
competitive factors in the pharmaceutical and diagnostics industry include industry consolidation, product quality and price, product
technology, reputation, customer service, and access to technical information.
In our clinical laboratory operations, we compete with three types of providers in a highly fragmented and competitive industry:
hospital laboratories, physician-office laboratories and other independent clinical laboratories. Our major competitors in the New York
metropolitan area are two of the largest national laboratories, Quest Diagnostics and Laboratory Corporation of America. Although we are
much smaller than these national laboratories, we believe that we compete successfully with them in our region due to our innovative
testing services and our level of service. We believe our responses to medical consultation are faster and more personalized than those of
the national laboratories. Our client service staff deals only with basic technical questions and those that have medical or scientific
significance are referred directly to our senior scientists and medical staff.
We are commercializing our 4Kscore product in the U.S., Europe and Mexico in a laboratory setting and seek to capitalize on near-
term commercialization opportunities for our proprietary diagnostic point-of-care system by transitioning laboratory-based tests, including
the PSA, and testosterone and other tests to our point-of-care system. We expect to leverage BioReference’s national marketing, sales and
distribution resources, along with its almost 300-person sales and marketing team
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to support commercialization of the 4Kscore and other diagnostic products. Competitors to our diagnostics business are many and include
major diagnostic companies, molecular diagnostic firms, universities, and research institutions.
Pricing and reimbursement coverage positions, including the recent future non-coverage determination by Novitas, could
substantially impact the competitiveness of the 4Kscore test and our other diagnostic products. See “Risk Factors - If the 4Kscore test is not
covered and eligible for reimbursement from government and third party payors, we may not be able to generate significant revenue for the
product.”
Our ability to commercialize our pharmaceutical and diagnostic test product candidates and compete effectively will depend, in large
part, on:
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our ability to meet all necessary regulatory requirements to advance our product candidates through clinical trials and the
regulatory approval process in the U.S. and abroad;
the perception by physicians and other members of the health care community of the safety, efficacy, and benefits of our
products compared to those of competing products or therapies;
our ability to manufacture products we may develop on a commercial
scale;
the effectiveness of our sales and marketing
efforts;
the willingness of physicians to adopt a new diagnostic or treatment regimen represented by our
technology;
our ability to secure reimbursement for our product
candidates;
the price of the products we may develop and commercialize relative to competing
products;
our ability to accurately forecast and meet demand for our product candidates if regulatory approvals are
achieved;
our ability to develop a commercial scale infrastructure either on our own or with a collaborator, which would include
expansion of existing facilities, including our manufacturing facilities, development of a sales and distribution network, and
other operational and financial systems necessary to support our increased scale;
our ability to maintain a proprietary position in our technologies;
and
our ability to rapidly expand the existing information technology infrastructure and configure existing operational,
manufacturing, and financial systems (on our own or with third party collaborators) necessary to support our increased scale,
which would include existing or additional facilities and or partners.
GOVERNMENT REGULATION
The U.S. government regulates healthcare through various agencies, including but not limited to the following: (i) the FDA, which
administers the Federal Food, Drug and Cosmetic Act (“FDCA”), as well as other relevant laws; (ii) the Centers for Medicare & Medicaid
Services (“CMS”), which administers the Medicare and Medicaid programs; (iii) the Office of Inspector General (“OIG”), which enforces
various laws aimed at curtailing fraudulent or abusive practices, including by way of example, the Anti-Kickback Statute, the Physician
Self-Referral Law, commonly referred to as the Stark law, the Civil Monetary Penalty Law (including the beneficiary inducement
prohibition) (“CMP”), and the laws that authorize the OIG to exclude healthcare providers and others from participating in federal
healthcare programs; and (iv) the Office of Civil Rights, which administers the privacy aspects of the Health Insurance Portability and
Accountability Act of 1996. All of the aforementioned are agencies within the Department of Health and Human Services (“HHS”).
Healthcare is also provided or regulated, as the case may be, by the Department of Defense through its TRICARE program, the Department
of Veterans Affairs, especially through the Veterans Health Care Act of 1992, the Public Health Service within HHS under Public Health
Service Act § 340B (42 U.S.C. § 256b), the Department of Justice through the Federal False Claims Act and various criminal statutes, and
state governments under the Medicaid and other state sponsored or funded programs and their internal laws regulating all healthcare
activities.
The testing, manufacture, distribution, advertising, and marketing of drug and diagnostic products and medical devices, as well as the
performance of clinical testing services, are subject to extensive regulation by federal, state, and local governmental authorities in the U.S.,
including the FDA, and by similar agencies in other countries. Any drug, diagnostic, or device product that we develop must receive all
relevant regulatory approvals or clearances, as the case may be, before it may be marketed in a particular country.
Clinical Laboratory Operations
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Our clinical laboratory operations are subject to regulations, which are designed to ensure the quality and reliability of clinical
laboratories by mandating specific standards in the areas of personnel qualifications, administration and participation in proficiency testing,
patient test management, quality control, quality assurance and inspections. Laboratories must undergo on-site surveys at least every two
years, which may be conducted by CMS under the Federal Clinical Laboratory Improvement Amendments (“CLIA”) program or by a
private CMS approved accrediting agency. The sanction for failure to comply with CLIA requirements may be suspension, revocation or
limitation of a laboratory’s CLIA certificate, which is necessary to conduct business, as well as significant fines and/or criminal penalties.
We are also subject to regulation of laboratory operations under state clinical laboratory laws. State clinical laboratory laws may require
that laboratories and/or laboratory personnel meet certain qualifications, specify certain quality controls or require maintenance of certain
records. Certain states, such as New York, California, Maryland, Pennsylvania, and Rhode Island, each require that we obtain licenses to
test specimens from patients residing in those states and additional states may require similar licenses in the future. Only Washington and
New York State are exempt under CLIA, as these states have established laboratory quality standards at least as stringent as CLIA’s.
Potential sanctions for violation of these statutes and regulations include significant fines and the suspension or loss of various licenses,
certificates and authorizations.
Our clinical laboratory operations are subject to complex laws, regulations and licensure requirements relating to billing and payment
for laboratory services, sales and marketing interactions with ordering physicians and other health care providers, security and
confidentiality of health information, and environmental and occupational safety, among others. Changes in regulations often increase the
cost of testing or processing claims. Also, these laws may be interpreted or applied by a prosecutorial, regulatory or judicial authority in a
manner that could require us to make changes in our operations, including in our pricing, billing and/or marketing practices in a manner
that could adversely affect operations.
Drug Development
The regulatory process, which includes overseeing preclinical studies and clinical trials of each pharmaceutical compound to establish
its safety and efficacy and confirmation by the FDA that good laboratory, clinical, and manufacturing practices were maintained during
testing and manufacturing, can take many years, requires the expenditure of substantial resources, and gives larger companies with greater
financial resources a competitive advantage over us. Delays or terminations of clinical trials that we undertake would likely impair our
development of product candidates. Delays or terminations could result from a number of factors, including stringent enrollment criteria,
slow rate of enrollment, size of patient population, having to compete with other clinical trials for eligible patients, geographical
considerations, failure to meet anticipated clinical success, patient safety concerns, and others.
Although accelerated pathways for approval exist for certain drugs, generally, FDA review processes can be lengthy and
unpredictable, and we may encounter delays or rejections of our applications when submitted. Generally, in order to gain FDA approval, we
must first conduct preclinical studies in a laboratory and in animal models to obtain preliminary information on a compound and to identify
any safety problems. The results of these studies are submitted as part of an IND application that the FDA must review before human
clinical trials of an investigational drug can commence.
Clinical trials are normally done in three sequential phases and generally take two to five years or longer to complete. phase 1 consists
of testing the drug product in a small number of humans, normally healthy volunteers, to determine preliminary safety and tolerable dose
range. Phase 2 usually involves studies in a limited patient population to evaluate the effectiveness of the drug product in humans having
the disease or medical condition for which the product is indicated, determine dosage tolerance and optimal dosage, and identify possible
common adverse effects and safety risks. Phase 3 consists of additional controlled testing at multiple clinical sites to establish clinical
safety and effectiveness in an expanded patient population of geographically dispersed test sites to evaluate the overall benefit-risk
relationship for administering the product and to provide an adequate basis for product labeling. Phase 4 clinical trials may be conducted-
and are sometimes required - after approval to gain additional experience from the treatment of patients in the intended therapeutic
indication. There are also certain situations when drugs and biologics are eligible for one of FDA’s expedited approval programs, designed
to shorten review and development time.
After completion of clinical trials of a new drug product, FDA and foreign regulatory authority marketing approval must be obtained.
Assuming that the clinical data support the product’s safety and effectiveness for its intended use, a Biologics License Application (BLA)
or an NDA is submitted to the FDA for its review. Since the early 1990s, the FDA has managed a user fee program whereby sponsors of
drug applications pay a fee to the agency and the agency commits to meeting a series of performance goals designed to reduce drug review
times. Generally, it takes one to three years to obtain approval. If questions arise during the FDA review process, approval may take a
significantly longer period of time. The testing and approval processes require substantial time and effort and we may not receive approval
on a timely basis, if at all, or the approval that we receive may be for a narrower indication than we had originally sought, potentially
undermining the commercial viability of the product. Even if regulatory approvals are obtained, a marketed product is subject to continual
review, and later discovery of
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previously unknown problems or failure to comply with the applicable regulatory requirements may result in restrictions on the marketing
of a product or withdrawal of the product from the market as well as possible civil or criminal sanctions. For marketing outside the U.S.,
we also will be subject to foreign regulatory requirements governing human clinical trials and marketing approval for pharmaceutical
products. The requirements governing the conduct of clinical trials, product licensing, pricing, and reimbursement vary widely from
country to country.
In addition to clinical trial rules, FDA imposes other requirements on applicants including obligations related to Good Manufacturing
Practices (GMPs), proper labeling, and other issues related to manufacturing and marketing a drug.
Other than Rayaldee, none of our pharmaceutical products under development have been approved for marketing in the U.S. or
elsewhere. We may not be able to obtain regulatory approval for any such products under development in a timely manner, if at all. Failure
to obtain requisite governmental approvals or failure to obtain approvals of the scope requested will delay or preclude us, or our licensees
or marketing partners, from marketing our products, or limit the commercial use of our products, and thereby would have a material
adverse effect on our business, financial condition, and results of operations. See “Risk Factors — The results of pre-clinical trials and
previous clinical trials for our products may not be predictive of future results, and our current and planned clinical trials may not satisfy the
requirements of the FDA or other non-U.S. regulatory authorities.”
Device Development
Medical devices are subject to varying levels of premarket regulatory control, the most comprehensive of which requires human
clinical trials be conducted before a device receives approval for commercial distribution. The FDA classifies medical devices into one of
three classes based upon their risk profile (both to the patient and provider): Class I devices are relatively simple “low risk” technologies,
and can be manufactured and distributed with general controls without a premarket clearance or approval from the FDA; Class II devices
are somewhat more complex “moderate risk” devices, and require greater scrutiny from the agency, requiring a premarket clearance from
the FDA before market entry; Class III devices are “high risk” technologies inserted or implanted in the body, intended to treat life
sustaining functions. These Class III technologies require a premarket approval from the FDA before market entry.
In the U.S., a company generally can obtain permission to distribute a new device in one of two ways. The first applies to a Class II
device that is substantially equivalent to a device first marketed prior to May 1976, or to another device marketed after that date, but which
was substantially equivalent to a pre-May 1976 device. To obtain FDA permission to distribute the device, a company generally must
submit a section 510(k) premarket notification, and receive an FDA order finding substantial equivalence to a predicate device (pre-May
1976 or post-May 1976 device that was substantially equivalent to a pre-May 1976 device) and permitting commercial distribution of that
device for its intended use. A 510(k) submission must provide information supporting a claim of substantial equivalence to the predicate
device. If clinical data from human experience are required to support the 510(k) submission, these data must be gathered in compliance
with investigational device exemption (“IDE”), regulations for investigations performed in the U.S. The 510(k) process is normally used
for products of the type that the Company proposes distributing. The FDA review process for premarket notifications submitted pursuant to
section 510(k) takes, on average, about 90 days, but it can take substantially longer if the FDA has concerns, and there is no guarantee that
the FDA will “clear” the device for marketing, in which case the device cannot be distributed in the U.S. There is also no guarantee that the
FDA will deem the applicable device subject to the 510(k) process, as opposed to the more time-consuming, resource-intensive and
problematic, PMA process described below.
The second, more comprehensive, PMA process, which can take a year or longer, applies to a new device that is not substantially
equivalent to a pre-1976 product or that is to be used in supporting or sustaining life or preventing impairment. These devices are normally
Class III devices. For example, most implantable devices are subject to the approval process. Two steps of FDA approval are generally
required before a company can market a product in the U.S. that is subject to approval, as opposed to clearance. First, a company must
comply with IDE regulations in connection with any human clinical investigation of the device. These regulations permit a company to
undertake a clinical study of a “non-significant risk” device without formal FDA approval. Prior express FDA approval is required if the
device is a significant risk device. Second, the FDA must review the company’s PMA application, which contains, among other things,
clinical information acquired under the IDE. The FDA will approve the PMA application if it finds there is reasonable assurance that the
device is safe and effective for its intended use. The PMA process takes substantially longer than the 510(k) process and it is conceivable
that the FDA would not agree with our assessment that a device that we propose to distribute should be a Class I or Class II device. If that
were to occur we would be required to undertake the more complex and costly PMA process. However, for either the 510(k) or the PMA
process, the FDA could require us to run clinical trials, which would pose all of the same risks and uncertainties associated with the clinical
trials of drugs, described above.
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In December of 2016, Congress enacted the 21st Century Cures Act (P.L. 114-255) which contained provisions establishing a new
Breakthrough Device pathway to allow faster patient access to devices and breakthrough technologies that provide for more effective
treatment or diagnosis for life-threatening or irreversibly debilitating diseases, for which no approved or cleared treatment exists or that
offer significant advantages over existing approved or cleared alternatives. FDA has just begun to implement this program and it is not clear
if any of our products would be eligible.
Even when a clinical study has been approved by the FDA or deemed approved, the study is subject to factors beyond a
manufacturer’s control, including, but not limited to the fact that the institutional review board at a given clinical site might not approve the
study, might decline to renew approval which is required annually, or might suspend or terminate the study before the study has been
completed. Also, the interim results of a study may not be satisfactory, leading the sponsor to terminate or suspend the study on its own
initiative or the FDA may terminate or suspend the study. There is no assurance that a clinical study at any given site will progress as
anticipated; there may be an insufficient number of patients who qualify for the study or who agree to participate in the study or the
investigator at the site may have priorities other than the study. Also, there can be no assurance that the clinical study will provide
sufficient evidence to assure the FDA that the product is safe and effective, a prerequisite for FDA approval of a PMA, or substantially
equivalent in terms of safety and effectiveness to a predicate device, a prerequisite for clearance under 510(k). Even if the FDA approves or
clears a device, it may limit its intended uses in such a way that manufacturing and distributing the device may not be commercially
feasible. For marketing outside the U.S., we also will be subject to foreign regulatory requirements governing clinical trials and marketing
approval for medical devices. The requirements governing the conduct of clinical trials, device clearance/approval, pricing, and
reimbursement vary widely from country to country. In addition to the regulatory clearance and approval processes described herein, the
FDA periodically issues draft guidance documents designed to provide additional detail on or reform aspects of the 510(k) and PMA
clearance and approval processes. To the extent the FDA finalizes and implements these documents, the average 510(k) and PMA
submission requirements and review times may change and devices that might previously have been cleared under the 510(k) process may
require approval under the PMA process (and vice-versa). Additionally, since 2012, the FDA has collected user fees for the review of
certain premarket submissions received on or after October 1, 2012, including 510(k) and PMA applications. These fees are intended to
improve the device review process, but it is still too early to assess the actual impact on the industry.
After clearance or approval to market is given, the FDA and foreign regulatory agencies, upon the occurrence of certain events, are
authorized under various circumstances to withdraw the clearance or approval or require changes to a device, its manufacturing process or
its labeling or additional proof that regulatory requirements have been met.
A manufacturer of a device approved through the PMA is not permitted to make changes to the device, which affects its safety or
effectiveness without first submitting a supplement application to its PMA and obtaining FDA approval for that supplement. In some
instances, the FDA may require clinical trials to support a supplement application. A manufacturer of a device cleared through the 510(k)
process must submit another premarket notification if it intends to make a change or modification in the device that could significantly
affect the safety or effectiveness of the device, such as a significant change or modification in design, material, chemical composition,
energy source or manufacturing process. Any change in the intended uses of a PMA device or a 510(k) device requires an approved PMA
supplement or a cleared premarket notification. Exported devices are subject to the regulatory requirements of each country to which the
device is exported, as well as certain FDA export requirements.
A company that intends to manufacture medical devices is required to register with the FDA before it begins to manufacture the
device for commercial distribution. As a result, we and any entity that manufactures products on our behalf will be subject to periodic
inspection by the FDA for compliance with the FDA’s Quality System Regulation requirements and other regulations. In the European
Community, we will be required to maintain certain International Organization for Standardization (“ISO”), certifications in order to sell
products and we or our manufacturers undergo periodic inspections by notified bodies to obtain and maintain these certifications. These
regulations require us or our manufacturers to manufacture products and maintain documents in a prescribed manner with respect to design,
manufacturing, testing and control activities. Further, we are required to comply with various FDA and other agency requirements for
labeling and promotion. The Medical Device Reporting regulations require that we provide information to the FDA whenever there is
evidence to reasonably suggest that a device may have caused or contributed to a death or serious injury or, if a malfunction were to occur,
could cause or contribute to a death or serious injury. In addition, the FDA prohibits us from promoting a medical device for unapproved
indications.
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Diagnostic Products
Certain of our diagnostic products in development are subject to regulation by the FDA and similar international health authorities.
For these products, we have an obligation to adhere to the FDA’s cGMP regulations. Additionally, we are subject to periodic FDA
inspections, quality control procedures, and other detailed validation procedures. If the FDA finds deficiencies in the validation of our
manufacturing and quality control practices, they may impose restrictions on marketing specific products until corrected.
Regulation by governmental authorities in the U.S. and other countries may be a significant factor in how we develop, test, produce
and market our diagnostic test products. Diagnostic tests like ours may not fall squarely within the regulatory approval process for
pharmaceutical or device products as described above, and the regulatory pathway is not as clear. Although the FDA regulates in vitro
diagnostic devices, some companies have successfully commercialized diagnostic tests for various conditions and disease states without
seeking clearance or approval for such tests through a 510(k) or PMA approval process. These tests are known as laboratory developed tests
(“LDTs”) and are designed, manufactured, and used within a single laboratory that is certified under the Clinical Laboratory Improvement
Amendments of 1988 (“CLIA”). CLIA is a federal law that regulates clinical laboratories that perform testing on specimens derived from
humans for the purpose of providing information for diagnostic, preventative or treatment purpose. Such LDT testing is currently under the
purview of CMS and state agencies that provide oversight of the safe and effective use of LDTs.
However, the FDA has consistently asserted that it has the regulatory authority to regulate LDTs despite historically exercising
enforcement discretion. In furtherance of that position, the FDA issued two draft guidance documents in October 2014: (1) Framework for
Regulatory Oversight of Laboratory Developed Tests (the “Framework Guidance”); and (2) FDA Notification and Medical Device
Reporting for Laboratory Developed Tests (the “Notification Guidance”). The Framework Guidance outlines the FDA’s plan to adopt over
time a risk-based approach to regulating LDTs whereby different classifications of LDTs would be subject to different levels of FDA
oversight and enforcement, including, for example, prohibitions on adulteration and misbranding, establishment registration and device
listing, premarket notification, banned devices, records and reports, good manufacturing practices, adverse event reporting, premarket
review of safety, effectiveness, and clinical validity, and quality system requirements. The Notification Guidance is intended to explain
how clinical laboratories should notify the FDA of the LDTs they develop and how to satisfy Medical Device Reporting requirements.
However, the FDA indicated in November 2016 that it would delay implementation of the Framework Guidance and the Notification
Guidance, and seek additional input from industry. In addition, on January 13, 2017, the FDA published a synthesis of feedback on the
Framework Guidance and Notification Guidance titled, Discussion Paper on Laboratory Developed Tests (the “Discussion Paper”). The
Discussion Paper provided notice that the FDA would not issue a final guidance on the oversight of LDTs to allow for further public
discussion on appropriate oversight approach, and to give congressional authorizing committees the opportunity to develop a legislative
solution.
If finalized in the October 2014 format, the Framework Guidance and the Notification Guidance may have a materially adverse effect
on the time, cost, and risk associated with the Company’s development and commercialization of LDTs for the U.S. market, and there can
be no assurance that clearances or approvals sought by the Company will be granted and maintained. However, the FDA’s authority to
regulate LDTs continues to be challenged and the regulatory situation remains fluid. The FDA has indicated that it will continue dialogue
with the industry, and the timeline and process for finalizing the draft guidance documents is unknown. We will continue to monitor
changes to all domestic and international LDT regulatory policy so as to ensure compliance with the current regulatory scheme.
Impact of Regulation
The FDA in the course of enforcing the FDCA may subject a company to various sanctions for violating FDA regulations or
provisions of the FDCA, including requiring recalls, issuing Warning Letters, seeking to impose civil money penalties, seizing devices that
the agency believes are non-compliant, seeking to enjoin distribution of a specific drug or device seeking to revoke a clearance or approval,
seeking disgorgement of profits and seeking to criminally prosecute a company and its officers and other responsible parties.
The levels of revenues and profitability of biopharmaceutical companies may be affected by the continuing efforts of government and
third party payors to contain or reduce the costs of health care through various means. For example, in certain foreign markets, pricing or
profitability of therapeutic and other pharmaceutical products is subject to governmental control. In the U.S., there have been, and we
expect that there will continue to be, a number of federal and state proposals to implement similar governmental control. In addition, in the
U.S. and elsewhere, sales of therapeutic and other pharmaceutical products are dependent in part on the availability and adequacy of
reimbursement from third party payors, such as the government or private insurance plans. Third party payors are increasingly challenging
established prices, and new products that are more expensive than existing treatments may have difficulty finding ready acceptance unless
there is a clear therapeutic benefit. On April 1,
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2014, the Protecting Access to Medicare Act of 2014 (“PAMA”) was enacted into law. Under PAMA, Medicare payment for clinical
diagnostic laboratory tests are established by calculating a weighted mean of private payor rates with new rates. Effective January 1, 2018,
clinical laboratory fee schedule rates will be based on weighted median private payor rates as required by PAMA. We cannot assure you
that any of our products will be considered cost effective, or that reimbursement will be available or sufficient to allow us to sell them
competitively and profitably.
State and Federal Security and Privacy Regulations
The privacy and security regulations under the Health Insurance Portability and Accountability Act of 1996, as amended by the
Health Information Technology for Economic and Clinical Health Act of 2009 ( the “HITECH Act”, and collectively, “HIPAA”), establish
comprehensive federal standards with respect to the uses and disclosures of protected health information, or PHI, by health plans and health
care providers, in addition to setting standards to protect the confidentiality, integrity and availability of electronic PHI. The regulations
establish a complex regulatory framework on a variety of subjects, including:
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the circumstances under which uses and disclosures of PHI are permitted or required without a specific authorization by the
patient, including but not limited to treatment purposes, to obtain payments for services and health care operations activities;
a patient’s rights to access, amend and receive an accounting of certain disclosures of
PHI;
the content of notices of privacy practices for PHI;
and
administrative, technical and physical safeguards required of entities that use or receive PHI
electronically.
The final omnibus rule implementing the HITECH Act took effect on March 26, 2013. The rule is broad in scope, but certain
provisions are particularly significant in light of our business operations. For example, the final “omnibus” rule implementing the HITECH
Act:
• Makes clear that situations involving impermissible access, acquisition, use or disclosure of protected health information are
now presumed to be a breach unless the covered entity or business associate is able to demonstrate that there is a low
probability that the information has been compromised;
• Defines the term “business associate” to include subcontractors and agents that receive, create, maintain or transmit protected
health information on behalf of the business associate;
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Establishes new parameters for covered entities and business associates on uses and disclosures of PHI for fundraising and
marketing; and
Establishes clear restrictions on the sale of PHI without patient
authorization.
As a provider of clinical laboratory services and as we launch commercial diagnostic tests, we must continue to implement policies
and procedures related to compliance with the HIPAA privacy and security regulations, as required by law. The privacy and security
regulations provide for significant fines and other penalties for wrongful use or disclosure of PHI, including potential civil and criminal
fines and penalties.
Additionally, as we operate in Europe, we may be subject to laws governing the collection, use, disclosure and transmission of personal
and/or patient information. In December 2015, the European Union approved a General Data Protection Regulation (“GDPR”) to replace
the current data protection directive, Directive 95/46/EC, which took effect May 25, 2018. The GDPR governs the use and transfer of
personal data and imposes enhanced penalties for noncompliance. We have made, and will continue to make, certain adjustments to our
operations so as to comply with the GDPR.
Anti-Kickback Laws, Physician Self-Referral Laws, False Claims Act, Civil Monetary Penalties
We are also subject to various federal, state, and international laws pertaining to health care “fraud and abuse,” including anti-
kickback laws and false claims laws. The federal Anti-Kickback Statute prohibits anyone from knowingly and willfully soliciting,
receiving, offering, or paying any remuneration with the intent to refer, or to arrange for the referral or order of, services or items payable
under a federal health care program, including the purchase or prescription of a particular drug or the use of a service or device.
Recognizing that the Anti-Kickback Statute is broad and may technically prohibit many innocuous or beneficial arrangements, Congress
authorized the U.S. Department of Health and Human Services Office of Inspector General, or OIG, to issue a series of regulations, known
as “safe harbors.” These safe harbors set forth requirements that, if met in their entirety, will assure health care providers and other parties
that they will not be prosecuted under the Anti-Kickback Statute. The failure of a transaction or arrangement to fit precisely within one or
more safe harbors does not necessarily mean that it is illegal, or that prosecution will be pursued. However, conduct and business
arrangements that do not fully satisfy each applicable safe harbor may result in increased scrutiny by government enforcement authorities,
such as the OIG.
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Violations of the Anti-Kickback Statute are punishable by the imposition of criminal fines, civil money penalties, treble damages,
and/or exclusion from participation in federal health care programs. Many states have also enacted similar anti-kickback laws. The Anti-
Kickback Statute and similar state laws and regulations are expansive. If the government were to allege against or convict us of violating
these laws, there could be a material adverse effect on our business, results of operations, financial condition, and our stock price. Even an
unsuccessful challenge could cause adverse publicity and be costly to respond to, which could have a materially adverse effect on our
business, results of operations and financial condition. We will consult counsel concerning the potential application of these and other laws
to our business and our sales, marketing and other activities and will make good faith efforts to comply with them. However, given the
broad reach of federal and state anti-kickback laws and the increasing attention given by law enforcement authorities, we are unable to
predict whether any of our activities will be challenged or deemed to violate these laws.
We are also subject to the physician self-referral laws, commonly referred to as the Stark law, which is a strict liability statute that
generally prohibits physicians from referring Medicare patients to providers of “designated health services,” including clinical laboratories,
with whom the physician or the physician’s immediate family member has an ownership interest or compensation arrangement, unless an
applicable exception applies. Moreover, many states have adopted or are considering adopting similar laws, some of which extend beyond
the scope of the Stark law to prohibit the payment or receipt of remuneration for the prohibited referral of patients for designated healthcare
services and physician self-referrals, regardless of the source of the payment for the patient’s care. If it is determined that certain of our
practices or operations violate the Stark law or similar statutes, we could become subject to civil and criminal penalties, including exclusion
from the Medicare programs and loss of government reimbursement. The imposition of any such penalties could harm our business.
Another development affecting the health care industry is the increased use of the federal civil False Claims Act and, in particular,
actions brought pursuant to the False Claims Act’s “whistleblower” or “qui tam” provisions. The False Claims Act, as amended by the
Fraud Enforcement and Recovery Act of 2009 and the Patient Protection and Affordable Care Act of 2010 (“Affordable Care Act”),
imposes liability on any person or entity who, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim
for payment by a federal health care program. We submit claims for services performed at our laboratories. The qui tam provisions of the
False Claims Act allow a private individual to bring actions on behalf of the federal government alleging that the defendant has submitted a
false claim to the federal government, and to share in any monetary recovery. In recent years, the number of suits brought by private
individuals has increased dramatically. In addition, various states have enacted false claim laws analogous to the False Claims Act. Many
of these state laws apply where a claim is submitted to any third-party payor and not merely a federal health care program. When an entity
is determined to have violated the False Claims Act, it may be required to pay up to three times the actual damages sustained by the
government, plus civil penalties for each separate false claim. There are many potential bases for liability under the False Claims Act.
Liability arises, primarily, when an entity knowingly submits, or causes another to submit, a false claim for reimbursement to the federal
government. The False Claims Act has been used to assert liability on the basis of inadequate care, kickbacks and other improper referrals,
improper use of Medicare numbers when detailing the provider of services, and allegations as to misrepresentations with respect to the
services rendered. Our activities relating to the sale and marketing of our products may be subject to scrutiny under these laws. We are
unable to predict whether we would be subject to actions under the False Claims Act or a similar state law, or the impact of such actions.
However, the costs of defending such claims, as well as any sanctions imposed, could significantly adversely affect our financial
performance.
Further, the beneficiary inducement prohibition of the federal Civil Monetary Penalty Law prohibits any entity from offering or
transferring to a Medicare or Medicaid beneficiary any remuneration that the entity knows or should know is likely to influence the
beneficiary’s selection of a particular provider, practitioner or supplier of Medicare or Medicaid payable items or services, including
waivers of copayments and deductible amounts (or any part thereof) and transfers of items or services for free or for other than fair market
value. On December 7, 2016, the OIG released amendments to the CMP. Some of the amendments may impact our business, such as
allowing certain remuneration to financially needy individuals. Entities found in violation may be liable for civil monetary penalties of up
to $10,000 for each wrongful act. Although we believe that our sales and marketing practices are in material compliance with all applicable
federal and state laws and regulations, relevant regulatory authorities may disagree and violation of these laws, or, our exclusion from such
programs as Medicaid and other governmental programs as a result of a violation of such laws, could have a material adverse effect on our
business, results of operations, financial condition and cash flows.
Open Payments Program
With the launch of Rayaldee, part of our business is now subject to the federal Physician Payments Sunshine Act under the
Affordable Care Act, and its implementing regulations, which is implemented though the physicians Open Payments Program (the “Open
Payments Program”). The Open Payments Program requires manufacturers of drugs, devices, biological and medical supplies covered by
Medicare, Medicaid or the Children’s Health Insurance Program, to report information related to certain payments or other transfers of
value made or distributed to physicians and teaching hospitals, or to entities or
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individuals at the request of, or designated on behalf of, the physicians and teaching hospitals. Manufacturers must also report, on an
annual basis, certain ownership and investment interests held by physicians and their immediate family members and payments or other
“transfers of value” made to such physician owners. A failure to report each payment, other transfer of value, or ownership/investment
interest in a timely, accurate, and complete manner may result in civil monetary penalties of up to $150,000 annually. Further, the
“knowing” failure to report each payment, other transfer of value, or ownership/investment interest may result in a one million dollar
annual penalty. Several other states and a number of countries worldwide have adopted or are considering the adoption of similar
transparency laws. Any failure by us to implement proper procedures to track and report on a timely basis transfers of value to physicians
and teaching hospitals could result in substantial penalties.
Foreign Corrupt Practices Act
We are also subject to the U.S. Foreign Corrupt Practices Act (“FCPA”), which prohibits corporations and individuals from paying,
offering to pay, or authorizing the payment of anything of value to any foreign government official, government staff member, political
party, or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in an official capacity. The
FCPA also requires public companies to make and keep books and records that accurately and fairly reflect their transactions and to devise
and maintain an adequate system of internal accounting controls. Our international activities create the risk of unauthorized payments or
offers of payments by our employees, consultants, sales agents or distributors, even though they may not always be subject to our control.
We discourage these practices by our employees and agents. However, our existing safeguards and any future improvements may prove to
be less than effective, and our employees, consultants, sales agents or distributors may engage in conduct for which we might be held
responsible. Any failure by us to adopt appropriate compliance procedures and ensure that our employees and agents comply with the
FCPA and applicable laws and regulations in foreign jurisdictions could result in substantial penalties or restrictions on our ability to
conduct business in certain foreign jurisdictions.
MANUFACTURING AND QUALITY
Other than our facilities in Waterford, Ireland, Guadalajara, Mexico, Nesher, Israel, and Banyoles, Spain, we currently have no
pharmaceutical manufacturing facilities. We have entered into agreements with various third parties for the formulation and manufacture of
our pharmaceutical clinical supplies. These suppliers and their manufacturing facilities must comply with FDA regulations, current good
laboratory practices (“cGLPs”) and current good manufacturing practices (“cGMPs”). We plan to continue to outsource the manufacturing
and formulation of our clinical supplies.
The FDA and similar regulatory bodies may inspect our facilities and the facilities of those who manufacture on our behalf
worldwide. If the FDA or similar regulatory bodies inspecting our facilities or the facilities of our suppliers find regulatory violations in
manufacturing and quality control practices or procedures they may require us to cease partial or complete manufacturing operations until
the violations are corrected. They may also impose restrictions on distribution of specific products until the violations are corrected.
Our point-of-care diagnostic system consists of a disposable test cassette and an analyzer. We prepare all necessary test reagents and
assemble and package the disposable cassettes at our facility in Woburn, Massachusetts. We rely on third parties for the manufacture of the
analyzer.
We are committed to providing high quality products to our customers, and we plan to meet this commitment by working diligently to
continue implementing updated and improved quality systems and concepts throughout our organization.
SALES & MARKETING
Our diagnostics business includes BioReference’s almost 300-person sales and marketing team in the U.S. to drive growth and
leverage new products, including the 4Kscore prostate cancer test. We have a highly specialized, field based 79-person sales and marketing
team in the U.S. dedicated to the launch and commercialization of Rayaldee. We also have limited sales and marketing personnel in Ireland,
Chile, Spain, Mexico and Israel.
EMPLOYEES
As of December 31, 2018, we had 5,690 full-time employees worldwide. None of our employees are represented by a collective
bargaining agreement.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics. We require all employees, including our principal executive officer and
principal accounting officer and other senior officers and our employee directors, to read and to adhere to the Code of Business Conduct
and Ethics in discharging their work-related responsibilities. Employees are required to report any
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conduct that they believe in good faith to be an actual or apparent violation of the Code of Business Conduct and Ethics. The Code of
Business Conduct and Ethics is available on our website at http://www.OPKO.com.
Available Information
We are required to file annual, quarterly and current reports, proxy statements and other information with the SEC. Information that
we file with the SEC is available at the SEC’s web-site at www.sec.gov. We also make available free of charge on or through our web site,
at www.opko.com, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all
amendments to those reports as soon as reasonably practicable after such material is electronically filed with the SEC. The information on
our website is not, and shall not be deemed to be, a part hereof or incorporated into this or any of our other filings with the SEC.
ITEM 1A. RISK FACTORS.
You should carefully consider the risks described below, as well as other information contained in this report, including the
consolidated financial statements and the notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of
Operations.” The occurrence of any of the events discussed below could significantly and adversely affect our business, prospects, results
of operations, financial condition, and cash flows.
RISKS RELATED TO OUR BUSINESS
We have a history of operating losses and may not become profitable in the near future.
We are not profitable and have incurred losses since our inception. We may not 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 the U. S., Chile, Mexico, Israel, Spain, and Ireland, and from sale of the 4Kscore test. We may not
successfully leverage the national marketing, sales and distribution resources of BioReference to enhance sales of, and reimbursement for,
our 4Kscore test and our other diagnostic products under development, which would adversely impact our ability to generate substantial
revenue from the sale of these products for some time. Rayaldee is our only pharmaceutical product that has been approved for marketing,
other than those products sold by our Chilean, Mexican, Israeli, Spanish, and Irish subsidiaries. We continue to incur substantial research
and development and general and administrative expenses related to our operations and, to date, we have devoted most of our financial
resources to research and development, including our pre-clinical development activities and clinical trials. We may incur losses from our
operations for the foreseeable future and these losses could increase as we continue our research activities and conduct development of, and
seek regulatory approvals and clearances for, our product candidates, and prepare for and begin to commercialize any approved or cleared
products, particularly if we are unable to generate profits and cash flow from BioReference and our other commercial businesses. If we are
unable to generate profits and cash flow from BioReference and our other commercial businesses, our product candidates fail in clinical
trials or do not gain regulatory approval or clearance, or if our approved products and product candidates do not achieve market acceptance,
we may never become profitable. In particular, if we are unable to successfully commercialize Rayaldee, we may never generate
substantial revenues from Rayaldee or achieve profitability. In addition, if we are required by the U.S. Food and Drug Administration
(“FDA”), to perform studies in addition to those we currently anticipate, our expenses will increase beyond current expectations and the
timing of any potential product approval may be delayed. Even if we achieve profitability in the future, we may not be able to sustain
profitability in subsequent periods.
We will continue to require additional funding, which may not be available to us on acceptable terms, or at all.
As of December 31, 2018, we have cash and cash equivalents of $96.5 million. We have not generated sustained positive cash flows
sufficient to offset our operating and research and development expenses and our primary source of cash has been from the public and
private placement of stock, the issuance of the 2033 Senior Notes, 2023 Convertible Notes and the 2025 Convertible Notes (each as defined
below) and credit facilities available to us. On November 8, 2018, we entered into stock purchase agreements with certain investors
pursuant to which we agreed to sell to such investors in private placements (the “Private Placements”) an aggregate of approximately 26.5
million shares of our common stock at a purchase price of $3.49 per share, which was the closing bid price of our common stock on the
Nasdaq Global Select Market on such date, for an aggregate purchase price of $92.5 million. On February 7, 2019, we issued $200 million
aggregate principal amount of its 4.50% Convertible Senior Notes due 2025 (the “2025 Convertible Notes”) in a registered public offering
under the Securities Act. In addition, we granted the underwriter in the offering a 30-day option to purchase up to an additional $30 million
aggregate principal amount of the 2025 Convertible Notes to cover over-allotments, if any.
We believe that the cash and cash equivalents on hand or available to us from operations or through our lines of credit, together with
the proceeds of the 2025 Convertible Notes offering, are sufficient to meet our anticipated cash requirements for operations and debt
service beyond the next 12 months. We have based this estimate on assumptions that may prove to be
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wrong or subject to change, and we may be required to use our available capital resources sooner than we currently expect or curtail aspects
of our operations in order to preserve our capital. Because of the numerous risks and uncertainties associated with the development and
commercialization of our products and product candidates, the success of our relationships with Pfizer, VFMCRP and JT and the success of
our integration of BioReference and other acquisitions, we are unable to estimate the amounts of increased capital outlays and operating
expenditures associated with our current and anticipated clinical trials and our expanded commercial operations. Our future capital
requirements will depend on a number of factors, including the successful commercialization of Rayaldee, our continued relationships with
Pfizer, VFMCRP, and JT, cash flow generated by BioReference and costs associated with the integration of the BioReference and other
acquisitions, the continued progress of our research and development of 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
products and product candidates.
Until we can generate a sufficient amount of product and service revenue to finance our cash requirements for research, development
and operations, we will need to finance future cash needs primarily through public or private equity offerings, debt financings, or strategic
collaborations. Our ability to obtain additional capital may depend on prevailing economic conditions and financial, business and other
factors beyond our control. Disruptions in the U.S. and global financial markets may adversely impact the availability and cost of credit, as
well as our ability to raise money in the capital markets. Economic conditions have been, and continue to be, volatile. Continued instability
in these market conditions may limit our ability to replace, in a timely manner, maturing liabilities and access the capital necessary to fund
and grow our business. Additionally, our continuing operating losses and the recent lawsuits involving us and our Chief Executive Officer
(“CEO”) and Chairman of our Board of Directors (“Chairman”) by the SEC and other parties increase the difficulty in obtaining additional
capital.
There can be no assurance that additional capital will be available to us on acceptable terms, or at all, which could adversely impact
our business, results of operations, liquidity, capital resources and financial condition. 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
cease operations altogether. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience
additional significant dilution, and debt financing, if available, may involve restrictive covenants and other onerous terms. To the extent
that we raise additional funds through collaboration and licensing arrangements, it may be necessary to relinquish some rights to our
technologies or our products and product candidates or grant licenses on terms that may not be favorable to us.
Our research and development activities may not result in commercially viable products.
Many of our product candidates are in the early stages of development and are prone to the risks of failure inherent in drug,
diagnostic, and medical device product development. These risks further include the possibility that such products would:
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be found to be ineffective, unreliable, or otherwise inadequate or otherwise fail to receive regulatory
approval;
be difficult or impossible to manufacture on a commercial
scale;
be uneconomical to market or otherwise not be effectively
marketed;
fail to be successfully commercialized if adequate reimbursement from government health administration authorities, private
health insurers, and other organizations for the costs of these products is unavailable;
be impossible to commercialize because they infringe on the proprietary rights of others or compete with products marketed
by others that are superior; or
fail to be commercialized prior to the successful marketing of similar products by
competitors.
The results of pre-clinical trials and previous clinical trials for our products may not be predictive of future results, and our current
and planned clinical trials may not satisfy the requirements of the FDA or other non-U.S. regulatory authorities.
Positive results from pre-clinical studies and early clinical trial experience should not be relied upon as evidence that later-stage or
large-scale clinical trials will succeed. Likewise, there can be no assurance that the results of studies conducted by collaborators or other
third parties will be viewed favorably or are indicative of our own future study results. We may be required to demonstrate with substantial
evidence through well-controlled clinical trials that our product candidates are either (i) with respect to drugs or Class III devices, safe and
effective for use in a diverse population of their intended uses or (ii) with respect to Class I or Class II devices, are substantially equivalent
in terms of safety and effectiveness to devices that are already marketed under section 510(k) of the Food, Drug and Cosmetic Act. Success
in early clinical trials does not mean that future clinical trials will be successful because product candidates in later-stage clinical trials may
fail to demonstrate sufficient safety
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and efficacy to the satisfaction of the FDA and other non-U.S. regulatory authorities despite having progressed through initial clinical trials.
Further, our drug candidates may not be approved or cleared even if they achieve their primary endpoints in phase 3 clinical trials or
registration trials. In addition, our diagnostic test candidates may not be approved or cleared, as the case may be, even though clinical or
other data are, in our view, adequate to support an approval or clearance. The FDA or other non-regulatory authorities may disagree with
our trial design and our interpretation of data from pre-clinical studies and clinical trials. In addition, any of these regulatory authorities may
change requirements for the approval or clearance of a product candidate even after reviewing and providing comment on a protocol for a
pivotal clinical trial that has the potential to result in FDA and other non-U.S. regulatory authorities’ approval. Any of these regulatory
authorities may also approve or clear a product candidate for fewer or more limited indications or uses than we request or may grant
approval or clearance contingent on the performance of costly post-marketing clinical trials. The FDA or other non-U.S. regulatory
authorities may not approve the labeling claims necessary or desirable for the successful commercialization of our product candidates.
The results of our clinical trials may show that our product candidates may cause undesirable side effects, which could interrupt,
delay or halt clinical trials, resulting in the denial of regulatory approval by the FDA and other non-U.S. regulatory authorities.
Safety concerns with drug products over the years have resulted in the withdrawal of drug products, revisions to drug labeling that
further limit use of the drug products, and establishment of risk management programs that may, for instance, restrict distribution of drug
products. Attention to drug safety issues may result in a more cautious approach by the FDA to clinical trials. Data from clinical trials may
receive greater scrutiny with respect to safety, which may make the FDA or other regulatory authorities more likely to terminate clinical
trials before completion, or require longer or additional clinical trials that may result in substantial additional expense and a delay or failure
in obtaining approval or approval for a more limited indication than originally sought.
The failure to successfully commercialize Rayaldee would have a material adverse effect on our business.
In June 2016, the FDA approved the Company’s New Drug Application for Rayaldee (calcifediol) extended release capsules for the
treatment of secondary hyperparathyroidism (SHPT) in adults with stage 3 or 4 chronic kidney disease (CKD) and serum total 25-
hydroxyvitamin D levels less than 30 ng/mL. The commercial launch for Rayaldee began in November 2016. Rayaldee is our only
pharmaceutical product approved for marketing in the U.S. and our ability to generate revenue from product sales and achieve profitability
is substantially dependent on our ability to effectively commercialize Rayaldee. Our failure to successfully commercialize Rayaldee would
have a material adverse effect on our business, financial condition, cash flows and results of operations.
Additionally, the market perception and reputation of Rayaldee and its safety and efficacy are important to our business and the
continued acceptance of our product candidates and products. Any negative publicity about Rayaldee, such as the discovery of safety
issues, adverse events, or even public rumors about such events, could have a material adverse effect on our business. Levels of market
acceptance for Rayaldee could be impacted by several factors, some of which are not within our control, including but not limited to the:
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safety, efficacy, convenience and cost-effectiveness of our product compared to products of our
competitors;
scope of approved uses and marketing
approvals;
availability of patent or regulatory
exclusivity;
timing of market approvals and market
entries;
ongoing regulatory obligations following
approval;
any restrictions or “black box” warnings required on the product
labeling:
availability of alternative products from our
competitors;
acceptance of the price of our
product;
effectiveness of our sales force and promotional
efforts;
the level of reimbursement of our
product;
acceptance of our product on government and private
formularies;
ability to market our product effectively at the retail level or in the appropriate setting of care;
and
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•
the reputation of our
product.
If Rayaldee fails to gain, or loses, market acceptance, our revenues would be adversely impacted and we may be required to take
material impairment charges, all of which could have a material adverse effect on our business, financial condition, cash flows and results
of operations.
We rely on licensing agreements with Vifor Fresenius Medical Renal Care Pharma Ltd (“VFMCRP”) and Japan Tobacco (“JT”) for
the international development and marketing of Rayaldee. Failure to maintain these license agreements could prevent us from
successfully developing and commercializing Rayaldee worldwide.
In May 2016, EirGen, our wholly-owned subsidiary, partnered with VFMCRP through a Development and License Agreement for the
development and marketing of Rayaldee 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 secondary hyperparathyroidism related to patients with stage 3 or 4
chronic kidney disease and vitamin D insufficiency/deficiency. We received a non-refundable and non-creditable upfront payment of $50
million and a $2.0 million payment triggered by the approval of Rayaldee in Canada for the treatment of SHPT in adults with stage 3 or 4
CKD and vitamin D insufficiency. EirGen is also eligible to receive up to an additional $35 million in regulatory milestones and $195
million in launch and sales-based milestones. In addition, we are eligible to receive tiered, double digit royalty payments or a minimum
royalty, whichever is greater, upon commencement of sales of the product. The success of the Development and License Agreement with
VFMCRP is dependent in part on, among other things, the skills, experience and efforts of VFMCRP’s employees responsible for the
project, VFMCRP’s commitment to the arrangement, and the financial condition of VFMCRP, all of which are beyond our control. In the
event that VFMCRP, for any reason, including but not limited to early termination of the agreement, fails to devote sufficient resources to
successfully develop and market Rayaldee internationally, our ability to earn milestone payments or receive royalty payments would be
adversely affected, which would have a material adverse effect on our financial condition and prospects.
In October 2017, we entered into a Development and License Agreement (the “JT Agreement”) with JT under which JT was granted
the exclusive rights for the development and commercialization of Rayaldee in Japan. 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, as well as
such additional indications as may be added to the scope of the license subject to the terms of the JT Agreement. Under the terms of the JT
Agreement, we received an initial upfront payment of $6 million and received another $6 million upon the initiation of our phase 2 study
for Rayaldee in dialysis patients in the U.S. We are 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 Rayaldee in Japan, and $75 million upon the achievement of
certain sales based milestones by JT. We will also receive tiered, double digit royalty payments at rates ranging from low double digits to
mid-teens on net sales within Japan. 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 we have agreed to reimburse JT up to a capped amount. If JT, for any reason, including but not limited to early
termination of the JT Agreement, fails to devote sufficient resources to successfully develop and market Rayaldee in Japan, our ability to
earn milestone payments or receive royalty payments would be adversely affected, which could have a material adverse effect on our
financial condition and prospects.
We currently have a seventy-nine person specialized sales and marketing team for Rayaldee in the U.S. If we are unable to develop or
maintain a strong sales, marketing and distribution capability on our own or through collaborations with marketing partners, we will
not be successful in commercializing Rayaldee or our other pharmaceutical products or product candidates in the U.S.
Other than our 79-person specialized sales and marketing team dedicated to Rayaldee, we currently have no pharmaceutical
marketing, sales or distribution capabilities in the U.S. Any failure or inability to maintain adequate sales, marketing and distribution
capabilities would adversely impact the commercialization of Rayaldee or our other pharmaceutical products or candidates. If we are not
successful in commercializing our existing and future pharmaceutical products and product candidates, either on our own or through
collaborations with one or more third parties, our product revenue will suffer and we may incur significant additional losses.
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Our exclusive worldwide agreement with Pfizer Inc. is important to our business. If we do not successfully develop hGH- CTP and/or
Pfizer Inc. does not successfully commercialize hGH-CTP, our business could be adversely affected.
In December 2014, we entered into a development and commercialization agreement with Pfizer relating to our long-acting hGH-
CTP for the treatment of growth hormone deficiency in adults and children (the “Pfizer Agreement”). Under the Pfizer Agreement, we
received non-refundable and non-creditable upfront payments of $295 million and are eligible to receive up to an additional $275 million
upon the achievement of certain regulatory milestones. In addition, we are eligible to receive initial royalty payments associated with the
commercialization of hGH-CTP for Adult GHD. Upon the launch of hGH-CTP for Pediatric GHD, the royalties will transition to a
regional, tiered gross profit sharing for both hGH-CTP and Pfizer’s Genotropin®. We are responsible for the development program and are
obligated to pay for the development up to an agreed cap, which may be exceeded under certain circumstances. We have exceeded
development cap and if we are unable to reach an agreement with Pfizer regarding cost sharing for the overruns as well as other obligations,
including development obligations, it could have a material adverse impact on the expected benefits to us from the Pfizer transaction and
our overall financial condition. In the event that the parties are able to obtain regulatory approvals to market a product covered by the Pfizer
Agreement, we will be substantially dependent on Pfizer for the successful commercialization of such product. The success of the
collaboration arrangement with Pfizer is dependent in part on, among other things, the skills, experience and efforts of Pfizer’s employees
responsible for the project, Pfizer’s commitment to the arrangement, and the financial condition of Pfizer, all of which are beyond our
control. The Pfizer Agreement is terminable for any reason by Pfizer upon ninety days written notice to OPKO. In the event that Pfizer, for
any reason, including but not limited to early termination of the Pfizer Agreement, fails to devote sufficient resources to successfully
develop and commercialize any product resulting from the collaboration arrangement, our ability to earn milestone payments or receive
royalty or profit sharing payments would be adversely affected, which would have a material adverse effect on our financial condition and
prospects and the trading prices of our securities.
Our business is substantially dependent on the success of clinical trials for hGH-CTP and our ability to achieve regulatory approval for
the marketing of this product.
There is no assurance that clinical trials for hGH-CTP will be successful or support marketing approval, or that we will be able to
obtain marketing approval for the product, or any other product candidate we are developing. Before they can be marketed, our products in
development must be approved by the FDA or similar foreign governmental agencies. The process for obtaining FDA approval is both
time-consuming and costly, with no certainty of a successful outcome. Before obtaining regulatory approval for the sale of any drug
candidate, we must conduct extensive preclinical tests and clinical trials to demonstrate the safety and efficacy in humans of our product
candidates. Although the safety profile for hGH-CTP has been consistent with that observed with those treated with daily growth hormone,
further testing or patient use may undermine those determinations or unexpected side effects may arise. A failure of any preclinical study or
clinical trial can occur at any stage of testing. The results of preclinical and initial clinical testing of these products may not necessarily
indicate the results that will be obtained from later or more extensive testing. It also is possible to suffer significant setbacks in advanced
clinical trials, even after obtaining promising results in earlier trials. 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
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. There can be no assurance that a BLA will be
submitted or that the FDA will consider the sensitivity analysis or consider the product for approval for adults with GHD. If phase 3
clinical trials for hGH-CTP are not successful or we are unable to achieve regulatory approval for this product, our business will be
significantly adversely impacted, which could have a materially adverse effect on our business, financial condition and results of
operations.
Our business is substantially dependent on our ability to develop, launch and generate revenue from our diagnostic products.
Our business is dependent on our ability to successfully commercialize the 4Kscore test and other diagnostic products, including the
Claros 1. We are committing significant resources to the development and commercialization of these products, and there is no guarantee
that we will be able to successfully commercialize these tests. We have limited experience in developing, manufacturing, selling, marketing
and distributing diagnostic tests. If we are not able to successfully develop, market or sell diagnostic tests we develop for any reason,
including the failure to obtain any required regulatory approvals, or obtain reimbursement, we will not generate any meaningful revenue
from the sale of such tests. Even if we are able to develop effective diagnostic tests for sale in the marketplace, a number of factors could
impact our ability to sell such tests or generate any significant revenue from the sale of such tests, including without limitation:
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our ability to establish and maintain adequate infrastructure to support the commercial launch and sale of our diagnostic tests,
including establishing adequate laboratory space, information technology infrastructure, sample collection and tracking
systems, electronic ordering and reporting systems and other infrastructure and hiring adequate laboratory and other
personnel;
the success of the validation studies for our diagnostic tests under development and our ability to publish study results in peer-
reviewed journals;
the availability of alternative and competing tests or products and technological innovations or other advances in medicine
that cause our technologies to be less competitive;
the accuracy rates of such tests, including rates of false-negatives and/or false-
positives;
concerns regarding the safety or effectiveness or clinical utility of our diagnostic
tests;
changes in the regulatory environment affecting health care and health care providers, including changes in laws regulating
laboratory testing and/or device manufacturers;
the extent and success of our sales and marketing efforts and ability to drive adoption of our diagnostic
tests;
coverage and reimbursement levels by government payors and private
insurers;
pricing pressures and changes in third-party payor reimbursement policies;
and
intellectual property rights held by others or others infringing our intellectual property
rights.
Our business is substantially dependent on our ability to generate profits and cash flow from our laboratory operations.
We have made a significant investment in our laboratory operations through the acquisition of BioReference. We compete in the
clinical laboratory market primarily on the basis of the quality of testing, reporting and information systems, reputation in the medical
community, the pricing of services and ability to employ qualified personnel. Our failure to successfully compete on any of these factors
could result in the loss of clients and a reduction in our revenues and profits. To offset efforts by payors to reduce the cost and utilization of
clinical laboratory services, we will need to obtain and retain new clients and business partners and grow the laboratory operations. A
reduction in tests ordered, specimens submitted by existing clients, or payment rates, without offsetting growth in our client base, could
impact our ability to successfully grow our business and could have a material adverse impact on our ability to generate profits and cash
flow from the laboratory operations.
Discontinuation or recalls of existing testing products, failure to develop, or acquire, licenses for new or improved testing technologies
or our clients using new technologies to perform their own tests could adversely affect our business.
From time to time, manufacturers discontinue or recall reagents, test kits or instruments used by us to perform laboratory testing. Such
discontinuations or recalls could adversely affect our costs, testing volume and revenue.
The clinical laboratory industry is subject to changing technology and new product introductions. Our success in maintaining a
leadership position in genomic and other advanced testing technologies will depend, in part, on our ability to develop, acquire or license
new and improved technologies on favorable terms and to obtain appropriate coverage and reimbursement for these technologies. We may
not be able to negotiate acceptable licensing arrangements and it cannot be certain that such arrangements will yield commercially
successful diagnostic tests. If we are unable to license these testing methods at competitive rates, our research and development costs may
increase as a result. In addition, if we are unable to license or develop new or improved technologies to expand our esoteric testing
operations, our testing methods may become outdated when compared with our competition and testing volume and revenue may be
materially and adversely affected.
Currently, most clinical laboratory testing is categorized as “high” or “moderate” complexity, and thereby is subject to extensive and
costly regulation under CLIA. The cost of compliance with CLIA makes it impractical for most physicians to operate clinical laboratories
in their offices, and other laws limit the ability of physicians to have ownership in a laboratory and to refer tests to such a laboratory.
Manufacturers of laboratory equipment and test kits could seek to increase their sales by marketing point-of-care laboratory equipment to
physicians and by selling test kits approved for home or physician office use to both physicians and patients. Diagnostic tests approved for
home use are automatically deemed to be “waived” tests under CLIA and may be performed in physician office laboratories as well as by
patients in their homes with minimal regulatory oversight. Other tests meeting certain FDA criteria also may be classified as “waived” for
CLIA purposes. The FDA has regulatory responsibility over instruments, test kits, reagents and other devices used by clinical laboratories
and has taken responsibility from the Centers for Disease Control for classifying the complexity of tests for CLIA purposes. Increased
approval of “waived” test kits could lead to increased testing by physicians in their offices or by patients at home, which could affect our
market for laboratory testing services and negatively impact our revenues. If our competitors develop and market
31
products that are more effective, safer or less expensive than our products and product candidates, our net revenues, profitability and
commercial opportunities will be negatively impacted.
If our competitors develop and market products or services that are more effective, safer or less expensive than our current and future
products or services, our revenues, profitability and commercial opportunities will be negatively impacted.
The pharmaceutical, diagnostic, and laboratory testing industries are highly competitive and require an ongoing, extensive search for
technological innovation. The industries are characterized by rapidly advancing technologies, intense competition and a strong emphasis on
proprietary products. They also require, among other things, the ability to effectively discover, develop, test and obtain regulatory
approvals for products, as well as the ability to effectively commercialize, market and promote approved products.
Numerous companies, including major pharmaceutical companies, specialty pharmaceutical companies and specialized biotechnology
companies, are engaged in the development, manufacture and marketing of pharmaceutical products competitive with those that we intend
to commercialize ourselves and through our partners. Competitors to our diagnostics business include major diagnostic companies,
reference laboratories, molecular diagnostic firms, universities and research institutions. Most of these companies have substantially greater
financial and other resources, larger research and development staffs and more extensive marketing and manufacturing organizations than
ours. This enables them, among other things, to make greater research and development investments and efficiently utilize their research
and development costs, as well as their marketing and promotion costs, over a broader revenue base. This also provides our competitors
with a competitive advantage in connection with the highly competitive product acquisition and product in-licensing process, which may
include auctions in which the highest bidder wins. Our competitors may also have more experience and expertise in obtaining marketing
approvals from the FDA and other regulatory authorities. We cannot predict with accuracy the timing or impact of the introduction of
potentially competitive products or their possible effect on our sales. In addition to product development, testing, approval, and promotion,
other competitive factors in the pharmaceutical and diagnostics industry include industry consolidation, product quality and price, product
technology, reputation, customer service, and access to technical information.
In our clinical laboratory operations, we compete with three types of providers in a highly fragmented and competitive industry:
hospital laboratories, physician-office laboratories and other independent clinical laboratories. Our major competitors in the New York
metropolitan area are two of the largest national laboratories, Quest Diagnostics and Laboratory Corporation of America. We are much
smaller than these national laboratories.
The clinical laboratory business is intensely competitive both in terms of price and service. Pricing of laboratory testing services is
often one of the most significant factors used by health care providers and third-party payors in selecting a laboratory. As a result of the
clinical laboratory industry undergoing significant consolidation, larger clinical laboratory providers are able to increase cost efficiencies
afforded by large-scale automated testing. This consolidation results in greater price competition. We may be unable to increase cost
efficiencies sufficiently, if at all, and as a result, our net earnings and cash flows could be negatively impacted by such price competition.
Additionally, we may also face changes in contracting with third party payors, fee schedules, competitive bidding for laboratory services or
other actions or pressures reducing payment schedules as a result of increased or additional competition.
If our competitors market products that are more effective, safer, easier to use or less expensive than our current products and product
candidates, or that reach the market sooner than our products and product candidates, we may not achieve commercial success. In addition,
the biopharmaceutical, diagnostic, medical device, and laboratory industries are characterized by rapid technological change. Because our
research approach integrates many technologies, it may be difficult for us to stay abreast of the rapid changes in each technology. If we fail
to stay at the forefront of technological change, we may be unable to compete effectively. Technological advances or products developed
by our competitors may render our technologies, products or product candidates obsolete or less competitive.
Our product development activities could be delayed or stopped.
We do not know whether our current or planned pre-clinical and clinical studies will be completed on schedule, or at all. Furthermore,
we cannot guarantee that our planned pre-clinical and clinical studies will begin on time or at all. The commencement of our planned
clinical trials could be substantially delayed or prevented by several factors, including:
▪
▪
a limited number of, and competition for, suitable patients with the particular types of disease required for enrollment in our
clinical trials or that otherwise meet the protocol’s inclusion criteria and do not meet any of the exclusion criteria;
a limited number of, and competition for, suitable serum or other samples from patients with particular types of disease
required for our validation studies;
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▪
▪
▪
▪
▪
▪
▪
a limited number of, and competition for, suitable sites to conduct our clinical
trials;
delay or failure to obtain FDA or other non-U.S. regulatory authorities’ approval or agreement to commence a clinical
trial;
delay or failure to obtain sufficient supplies of the product candidate for our clinical
trials;
requirements to provide the drugs, diagnostic tests, or medical devices required in our clinical trial protocols or clinical trials
at no cost or cost, which may require significant expenditures that we are unable or unwilling to make;
delay or failure to reach agreement on acceptable clinical trial agreement terms or clinical trial protocols with prospective sites
or investigators;
delay or failure to obtain institutional review board (“IRB”) approval to conduct or renew a clinical trial at a prospective site;
and
insufficient liquidity to fund our preclinical and clinical
studies.
The completion of our clinical trials could also be substantially delayed or prevented by several factors, including:
▪
▪
▪
▪
▪
▪
▪
▪
slower than expected rates of patient recruitment and
enrollment;
failure of patients to complete the clinical
trial;
unforeseen safety
issues;
lack of efficacy evidenced during clinical
trials;
termination of our clinical trials by one or more clinical trial
sites;
inability or unwillingness of patients or medical investigators to follow our clinical trial
protocols;
inability to monitor patients adequately during or after treatment;
and
insufficient liquidity to fund ongoing
studies.
Our clinical trials may be suspended or terminated at any time by the FDA, other regulatory authorities, the IRB for any given site, or
us. Additionally, changes in regulatory requirements and guidance may occur and we may need to amend clinical trial protocols to reflect
these changes with appropriate regulatory authorities. Amendments may require us to resubmit our clinical trial protocols to IRBs for re-
examination, which may impact the costs, timing, or successful completion of a clinical trial. Any failure or significant delay in
commencing or completing clinical trials for our product candidates could materially harm our results of operations and financial condition,
as well as the commercial prospects for our product candidates.
Our approved products or product candidates may have undesirable side effects and cause our products to be taken off the market.
If we or others identify undesirable side effects caused by our products:
•
•
regulatory authorities may require the addition of labeling statements, specific warnings, a contraindication, or field alerts to
physicians and pharmacies;
regulatory authorities may withdraw their approval of the product and require us to take our approved product off the
market;
• we may be required to change the way the product is administered, conduct additional clinical trials, or change the labeling of
the product;
• we may have limitations on how we promote our
products;
•
sales of products may decrease
significantly;
• we may be subject to litigation or product liability claims;
and
•
our reputation may
suffer.
Any of these events could prevent us from achieving or maintaining market acceptance of the affected product or could substantially
increase our commercialization costs and expenses, which in turn could delay or prevent us from generating significant revenues from its
sale.
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Our inability to meet regulatory quality standards applicable to our manufacturing and quality processes and to address quality control
issues in a timely manner could delay the production and sale of our products or result in recalls of products.
Manufacturing or design defects, unanticipated use of our products, or inadequate disclosure of risks relating to the use of our
products could lead to injury or other adverse events. These events could lead to recalls or safety alerts relating to our products (either
voluntary or required by governmental authorities) and could result, in certain cases, in the removal of a product from the market. Any
recall could result in significant costs as well as negative publicity that could reduce demand for our products. Personal injuries relating to
the use of our products can also result in product liability claims being brought against us. In some circumstances, such adverse events
could also cause delays in new product approvals.
We are committed to providing high quality products to our customers, and we plan to meet this commitment by working diligently to
continue implementing updated and improved quality systems and concepts throughout our organization. We cannot assure you that we
will not have quality control issues in the future, which may result in warning letters and citations from the FDA. If we receive any warning
letters from the FDA in the future, there can be no assurances regarding the length of time or cost it will take us to resolve such quality
issues to our satisfaction and to the satisfaction of the FDA. If our remedial actions are not satisfactory to the FDA, we may have to devote
additional financial and human resources to our efforts, and the FDA may take further regulatory actions against us including, but not
limited to, assessing civil monetary penalties or imposing a consent decree on us, which could result in further regulatory constraints,
including the governance of our quality system by a third party. Our inability to resolve these issues or the taking of further regulatory
action by the FDA may weaken our competitive position and have a material adverse effect on our business, results of operations and
financial condition.
We manufacture pharmaceutical products in Ireland, Mexico, Spain, and Israel. We also prepare necessary test reagents and assemble
and package the cassettes for our point-of-care diagnostic system at our facility in Woburn, Massachusetts. Any quality control issues at our
facilities may weaken our competitive position and have a material adverse effect on our business results of operations and financial
condition.
As a medical device manufacturer, we are required to register with the FDA and are subject to periodic inspection by the FDA for
compliance with its Quality System Regulation (“QSR”) requirements, which require manufacturers of medical devices to adhere to certain
regulations, including testing, quality control and documentation procedures. Compliance with applicable regulatory requirements is subject
to continual review and is monitored rigorously through periodic inspections by the FDA. In addition, most international jurisdictions have
adopted regulatory approval and periodic renewal requirements for medical devices, and we must comply with these requirements in order
to market our products in these jurisdictions. In the European Community, we are required to maintain certain ISO certifications in order to
sell our products and must undergo periodic inspections by notified bodies to obtain and maintain these certifications. Further, some
emerging markets rely on the FDA’s Certificate for Foreign Government (“CFG”) in lieu of their own regulatory approval requirements.
Our failure, or our manufacturers’ failure to meet QSR, ISO, or any other regulatory requirements or industry standards could delay
production of our products and lead to fines, difficulties in obtaining regulatory clearances, recalls or other consequences, which could, in
turn, have a material adverse effect on our business, results of operations, and our financial condition.
Failure to establish, and perform to, appropriate quality standards to assure that the highest level of quality is observed in the
performance of our testing services could adversely affect the results of our operations and adversely impact our reputation.
The provision of clinical testing services, including anatomic pathology services, and related services, and the design, manufacture
and marketing of diagnostic products involve certain inherent risks. The services that we provide and the products that we design,
manufacture and market are intended to provide information for healthcare providers in providing patient care. Therefore, users of our
services and products may have a greater sensitivity to errors than the users of services or products that are intended for other purposes.
Similarly, negligence in performing our services can lead to injury or other adverse events. We may be sued under physician liability
or other liability law for acts or omissions by our pathologists, laboratory personnel and other employees. We are subject to the attendant
risk of substantial damages awards and risk to our reputation.
Even after we receive regulatory approval or clearance to market our product candidates, the market may not be receptive to our
products.
Our products may not gain market acceptance among physicians, patients, health care payors and/or the medical community. We
believe that the degree of market acceptance will depend on a number of factors, including:
•
•
timing of market introduction of competitive
products;
safety and efficacy of our product compared to other
products;
34
•
•
•
•
•
•
•
•
prevalence and severity of any side
effects;
potential advantages or disadvantages over alternative
treatments;
strength of marketing and distribution
support;
price of our products, both in absolute terms and relative to alternative
treatments;
availability of coverage and reimbursement from government and other third-party
payors;
potential product liability
claims;
limitations or warnings contained in a product’s regulatory authority-approved labeling;
and
changes in the standard of care for the targeted indications for any of our products or product candidates, which could reduce
the marketing impact of any claims that we could make following applicable regulatory authority approval.
In addition, our efforts to educate the medical community and health care payors on the benefits of our products and product
candidates may require significant resources and may never be successful. If our products do not gain market acceptance, it would have a
material adverse effect on our business, results of operations, and financial condition.
If our products are not covered and eligible for reimbursement from government and third party payors, we may not be able to generate
significant revenue or achieve or sustain profitability.
The coverage and reimbursement status of newly approved or cleared drugs, diagnostic and laboratory tests is uncertain, and failure of
our pharmaceutical products, diagnostic tests or laboratory tests to be adequately covered by insurance and eligible for adequate
reimbursement could limit our ability to market any future product candidates we may develop and decrease our ability to generate revenue
from any of our existing and future product candidates that may be approved or cleared. The commercial success of our existing and future
products in both domestic and international markets will depend in part on the availability of coverage and adequate reimbursement from
third-party payors, including government payors, such as the Medicare and Medicaid programs, managed care organizations, and other
third-party payors, as well as our ability to obtain in network status with such payors. The government and other third-party payors are
increasingly attempting to contain health care costs by limiting both insurance coverage and the level of reimbursement for new drugs and
diagnostic tests and restricting in network status of laboratory providers. As a result, they may not cover or provide adequate payment for
our product candidates. These payors may conclude that our products are less safe, less effective, or less cost-effective than existing or
later-introduced products. These payors may also conclude that the overall cost of the procedure using one of our devices exceeds the
overall cost of the competing procedure using another type of device, and third-party payors may not approve our products for insurance
coverage and adequate reimbursement or approve our laboratory for in network status.
The failure to obtain coverage and adequate or any reimbursement for our products, or health care cost containment initiatives that
limit or restrict reimbursement for our products, may reduce any future product revenue. Even though a drug (not administered by a
physician) may be approved by the FDA, this does not mean that a Prescription Drug Plan (“PDP”), a private insurer operating under
Medicare Part D, will list that drug on its formulary or will set a reimbursement level. PDPs are not required to make every FDA-approved
drug available on their formularies. If our drug products are not listed on sufficient number of PDP formularies or if the PDPs’ levels of
reimbursement are inadequate, our business, results of operations and financial condition could be materially adversely affected. Private
health plans, such as managed care plans and pharmacy benefit management (“PBM”) programs may also not include our products on
formularies, and may use other techniques that restrict access to our products or set a lower reimbursement rate than anticipated.
A significant portion of our revenues come from government subsidized healthcare programs such as Medicaid and Medicare. Our
failure to comply with applicable Medicare, Medicaid and other governmental payor rules could result in our inability to participate in a
governmental payor program, our returning funds already paid to us, civil monetary penalties, criminal penalties and/or limitations on the
operational function of our laboratory. If we were unable to receive reimbursement under a governmental payor program, a substantial
portion of our revenues would be lost, which would adversely affect our results of operations and financial condition. In addition, if a
federal government shutdown were to occur for a prolonged period of time, federal government payment obligations, including its
obligations under Medicaid and Medicare, may be delayed. Similarly, if state government shutdowns were to occur, state payment
obligations may be delayed. If the federal or state governments fail to make payments under these programs on a timely basis, our business
could suffer, and our financial position, results of operations or cash flows may be materially affected.
35
If the 4Kscore test is not covered and eligible for reimbursement from government and third party payors, we may not be able to
generate significant revenue for the product.
On May 18, 2018, Novitas, the MAC for a jurisdiction that includes the State of New Jersey, where our 4Kscore test samples are
processed, issued a draft non-coverage determination (“LCD”) that proposed no coverage for our 4Kscore test. We submitted comments to
the draft LCD during the public comment period, which ended on July 5, 2018. In January 2019, Notivas issued a notice of future non-
coverage determination for the 4Kscore test to be effective March 20, 2019. We are currently evaluating options to appeal the decision and
undertake other steps with CMS in an effort to have this determination rescinded or reversed, however, there can be no assurance that we
will be successful. We are also developing a strategy to obtain FDA approval for the 4Kscore test, among other efforts, to assist in securing
broad reimbursement coverage. If we are not able to successfully appeal Novitas’ decision, we may not be able to obtain Medicare
reimbursement for the 4Kscore test, which could result in a loss of revenues and could have a material adverse effect on our cash flows,
results of operations, net income, and financial condition.
As we evolve from a company primarily involved in development to a company also involved in commercialization of our
pharmaceutical and diagnostic products as well as our laboratory testing services, we may encounter difficulties in managing our
growth and expanding our operations successfully.
As we advance our product candidates and expand our business, we will need to expand our development, regulatory and commercial
infrastructure. As our operations expand, we expect that we will need to manage additional relationships with various third parties,
collaborators and suppliers. Maintaining these relationships and managing our future growth will impose significant added responsibilities
on members of our management. We must be able to: manage our development efforts and operations effectively; manage our clinical trials
effectively; hire, train and integrate additional management, administrative and sales and marketing personnel; improve our managerial,
development, operational and finance systems; implement and manage an effective marketing strategy; and expand our facilities, all of
which may impose a strain on our administrative and operational infrastructure.
Furthermore, we may acquire additional businesses, products or product candidates that complement or augment our existing
business. Integrating any newly acquired business or product could be expensive and time-consuming. We may not be able to integrate any
acquired business or product successfully or operate any acquired business profitably. Our future financial performance will depend, in
part, on our ability to manage any future growth effectively and our ability to integrate any acquired businesses. We may not be able to
accomplish these tasks, and our failure to accomplish any of them could prevent us from successfully growing our company, which would
have a material adverse effect on our business, results of operations and financial condition.
Our success is dependent to a significant degree upon the involvement,efforts and reputation of our Chairman and Chief Executive
Officer, Phillip Frost, M.D.
Our success is dependent to a significant degree upon the efforts of our Chairman and CEO, Phillip Frost, M.D., who is essential to
our business. The departure of our CEO for whatever reason or the inability of our CEO to continue to serve in his present capacity could
have a material adverse effect upon our business, financial condition and results of operations. Our CEO has a highly regarded reputation in
the pharmaceutical and medical industry and attracts business opportunities and assists both in negotiations with acquisition targets,
investment targets and potential joint venture partners. Our CEO has also provided financing to us, both in terms of a credit agreement and
equity investments. If we lost his services or if his reputation was damaged for whatever reason, including, but not limited to, as a result of
the allegations underlying various SEC and shareholder lawsuits against us and Dr. Frost, our relationships with acquisition and investment
targets, joint ventures, customers and investors, as well as our ability to obtain additional funding on acceptable terms, or at all, may suffer
and could cause a material adverse impact on our operations, financial condition and the value of our common stock.
If we fail to attract and retain key management and scientific personnel, we may be unable to successfully operate our business and
develop or commercialize our products and product candidates.
We will need to expand and effectively manage our managerial, operational, sales, financial, development, and other resources in
order to successfully operate our business and pursue our research, development, and commercialization efforts for our products and
product candidates. Our success depends on our continued ability to attract, retain, and motivate highly qualified management and pre-
clinical and clinical personnel. The loss of the services or support of any of our senior management, particularly Dr. Phillip Frost, our
Chairman and CEO, could delay or prevent the development and commercialization of our products and product candidates.
36
If the FDA or other applicable regulatory authorities approve generic products that compete with any of our products or product
candidates, the sale of our products or product candidates may be adversely affected.
Once an NDA is approved, the product covered thereby becomes a “listed drug” which, in turn can be relied upon by potential
competitors in support of an approval of an abbreviated new drug application, or ANDA, or 505(b)(2) application. U.S. laws and other
applicable policies provide incentives to manufacturers to create modified, non-infringing versions of a drug to facilitate the approval of an
ANDA or other application for a generic substitute. These manufacturers might only be required to conduct a relatively inexpensive study
to show that their product has the same active ingredient(s), dosage form, strength, route of administration, and conditions of use, or
labeling, as our product or product candidate and that the generic product is bioequivalent to ours, meaning it is absorbed in the body at the
same rate and to the same extent as our product or product candidate. These generic equivalents, which must meet the same quality
standards as branded pharmaceuticals, would be significantly less costly than ours to bring to market and companies that produce generic
equivalents are generally able to offer their products at lower prices. Thus, after the introduction of a generic competitor, a significant
percentage of sales of any branded product is typically lost to the generic product. Accordingly, competition from generic equivalents to our
products or product candidates would materially adversely impact our revenues, profitability and cash flows and substantially limit our
ability to obtain a return on the investments that we have made in our products and product candidates.
In 2017, Congress reauthorized the Generic Drug User Fee Act (GDUFA). The generic drug user fee program, established in 2012, is
designed to speed the approval of new generic drugs. In addition, over the past few months, the FDA has used its regulatory authority to
enact other programs to streamline the path to market for generic drugs. In addition, a regulatory pathway for biosimilars was established in
2012 including a new user fee program to promote the development of these products that show no clinically meaningful differences from
innovator biologics. Though they have their own statutory market pathway, like generic drugs, biosimilars can receive FDA approval by
providing less clinical data than the innovator product. Biosimilars are expected to be less expensive competitors to innovator biologics
reducing prices overall. We anticipate several new biosimilars reaching the market over the next year.
If we fail to acquire and develop other products or product candidates at all or on commercially reasonable terms, we may be unable to
diversify or grow our business.
We intend to continue to rely on acquisitions and in-licensing as a source of our products and product candidates for development and
commercialization. The success of this strategy depends upon our ability to identify, select, and acquire pharmaceutical and diagnostic
products, drug delivery technologies, and medical device product candidates. Proposing, negotiating, and implementing an economically
viable product acquisition or license is a lengthy and complex process. We compete for partnering arrangements and license agreements
with pharmaceutical, biotechnology and medical device companies, and academic research institutions. Our competitors may have stronger
relationships with third parties with whom we are interested in collaborating and/or may have more established histories of developing and
commercializing products.
Most of our competitors also have substantially greater financial and other resources than us. As a result, our competitors may have a
competitive advantage in entering into partnering arrangements with such third parties, as such partnering arrangements are often decided
in an auction process in which the highest bidder wins. In addition, even if we find promising products and product candidates, and
generate interest in a partnering or strategic arrangement to acquire such products or product candidates, we may not be able to acquire
rights to additional product candidates or approved products on terms that we find acceptable, or at all.
We expect that any product candidate to which we acquire rights will require additional development efforts prior to commercial sale,
including extensive clinical testing and approval or clearance by the FDA and other non-U.S. regulatory authorities. All product candidates
are subject to the risks of failure inherent in pharmaceutical, diagnostic test or medical device product development, including the
possibility that the product candidate will not be shown to be sufficiently safe and effective for approval by regulatory authorities. Even if
the product candidates are approved or cleared for marketing, we cannot be sure that they would be capable of economically feasible
production or commercial success. If we fail to acquire or develop other product candidates that are capable of economically feasible
production and commercial success, our business, results of operations and financial condition and cash flows may be materially adversely
affected.
We rely on third parties to manufacture and supply our pharmaceutical and diagnostic products and product candidates.
If our manufacturing partners are unable to produce our products in the amounts that we require, we may not be able to establish a
contract and obtain a sufficient alternative supply from another supplier on a timely basis and in the quantities we require. We expect to
continue to depend on third-party contract manufacturers for the foreseeable future.
Our products and product candidates require precise, high quality manufacturing. Any of our contract manufacturers will be subject to
ongoing periodic unannounced inspection by the FDA and other non-U.S. regulatory authorities to ensure strict
37
compliance with QSR regulations for devices or cGMPs for drugs, and other applicable government regulations and corresponding
standards relating to matters such as testing, quality control, and documentation procedures. If our contract manufacturers fail to achieve
and maintain high manufacturing standards in compliance with QSR or cGMPs, we may experience manufacturing errors resulting in
patient injury or death, product recalls or withdrawals, delays or interruptions of production or failures in product testing or delivery, delay
or prevention of filing or approval of marketing applications for our products, cost overruns, or other problems that could seriously harm
our business.
Any performance failure on the part of our contract manufacturers could delay clinical development or regulatory approval or
clearance of our product candidates or commercialization of our products and product candidates, depriving us of potential product revenue
and resulting in additional losses. In addition, our dependence on a third party for manufacturing may adversely affect our future profit
margins. Our ability to replace an existing manufacturer may be difficult because the number of potential manufacturers is limited and the
FDA must approve any replacement manufacturer before it can begin manufacturing our products or product candidates. Such approval
would result in additional non-clinical testing and compliance inspections. It may be difficult or impossible for us to identify and engage a
replacement manufacturer on acceptable terms in a timely manner, or at all.
Independent clinical investigators and contract research organizations that we engage to conduct our clinical trials may not be diligent,
careful or timely.
We depend on independent clinical investigators to conduct our clinical trials. Contract research organizations may also assist us in
the collection and analysis of data. These investigators and contract research organizations will not be our employees, and we will not be
able to control, other than by contract, the amount of resources, including time, that they devote to products that we develop. If independent
investigators fail to devote sufficient resources to the development of product candidates or clinical trials, or if their performance is
substandard, it will delay the marketing approval or clearance and commercialization of any products that we develop. Further, the FDA
requires that we comply with standards, commonly referred to as good clinical practice, for conducting, recording and reporting clinical
trials to assure that data and reported results are credible and accurate and that the rights, integrity, and confidentiality of trial subjects are
protected. If our independent clinical investigators and contract research organizations fail to comply with good clinical practice, the results
of our clinical trials could be called into question and the clinical development of our product candidates could be delayed.
Failure of clinical investigators or contract research organizations to meet their obligations to us or comply with federal regulations
and good clinical practice procedures could adversely affect the clinical development of our product candidates and harm our business,
results of operations, and financial condition.
If the validity of an informed consent from a subject was to be challenged, it may negatively impact our product development efforts.
We take steps to ensure that all clinical data and genetic and other biological samples are collected from subjects who provide
informed consent for the data and samples as required by applicable laws and we work to ensure that the subjects from whom our data and
samples are collected do not retain any proprietary or commercial rights to the data or samples or any discoveries derived from them.
However, because we may collect data and samples from countries that are governed by a number of different regulatory regimes, there are
many complex legal questions relating to the adequacy of informed consent that we must continually address. The adequacy of any given
subject’s informed consent may be challenged in the future, and any given informed consent may prove unlawful or otherwise inadequate
for our purposes. Any findings against us, or our clinical collaborators, could obligate us to stop using some of our clinical samples, which
in turn may hinder our product development efforts. Such a result would also likely involve legal challenges that may consume our
management and financial resources.
Failure to timely or accurately bill and collect for our services could have a material adverse effect on our revenues and our business.
Billing for laboratory testing services is extremely complicated and is subject to extensive and non-uniform rules and administrative
requirements. Depending on the billing arrangement and applicable law, we bill various payors, such as patients, insurance companies,
Medicare, Medicaid, physicians, hospitals and employer groups. Changes in laws and regulations and payor practices increase the
complexity and cost of our billing process. Additionally, in the U.S., third-party payors generally require billing codes on claims for
reimbursement that describe the services provided. For laboratory services, the American Medical Association establishes most of the
billing codes using a data code set called Current Procedural Terminology, or CPT, codes and the World Health Organization establishes
diagnostic codes using a data set called International Statistical Classification of Diseases, or ICD-10, codes. Each third-party payor
generally develops payment amounts and coverage policies for their beneficiaries or members that ties to the CPT code established for the
laboratory test and the ICD-10 code selected by the ordering or performing physician. Therefore, coverage and reimbursement may differ
by
38
payor even if the same billing code is reported for claims filing purposes. For laboratory tests without a specific billing code, payors often
review claims on a claim-by-claim basis and there are increased uncertainties as to coverage and eligibility for reimbursement.
In addition to the items described above, third-party payors, including government programs, may decide to deny payment or recoup
payments for testing that they contend was 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 implemented a new billing system for our laboratory business in the third quarter of 2016. The adoption of the new billing
system, which replaced the old billing system, poses several challenges relating to, among other things, training of personnel,
communication of new rules and procedures, changes in corporate culture, migration of data, and the potential instability of the new
system. As an integral part of our billing compliance program, we assess our billing and coding practices in the ordinary course of business,
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 our part. We have in the
ordinary course of business been the subject of recoupments by payors and have from time to time identified and reimbursed payors
for overpayments.
Incorrect or incomplete documentation and billing information, as well as the other items described above, among other factors, could
result in non-payment for services rendered or having to pay back amounts incorrectly billed and collected. Further, the failure to timely or
correctly bill could lead to various penalties, including: (1) exclusion from participation in the CMS and other government programs; (2)
asset forfeitures; (3) civil and criminal fines and penalties; and (4) the loss of various licenses, certificates and authorizations necessary to
operate our business, any of which could have a material adverse effect on our results of operations or cash flows.
Failure in our information technology systems, including by cybersecurity attacks or other data security incidents, could significantly
increase testing turn-around time or billing processes and otherwise disrupt our operations.
Our operations depend, in part, on the continued performance of our information technology systems. Our information technology
systems are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptions. In addition, we are in the
process of integrating the information technology systems of our subsidiaries, and we may experience system failures or interruptions as a
result of this process. Sustained system failures or interruption of our systems in one or more of our laboratory operations could disrupt our
ability to process laboratory requisitions, perform testing, provide test results in a timely manner and/or bill the appropriate party. Failure
of our information technology systems could adversely affect our business, profitability and financial condition.
A successful cybersecurity attack or other data security incident could result in the misappropriation and/or loss of confidential or
personal information, create system interruptions, or deploy malicious software that attacks our systems. It is possible that a cybersecurity
attack might not be noticed for some period of time. The occurrence of a cybersecurity attack or incident could result in business
interruptions from the disruption of our information technology systems, or negative publicity resulting in reputational damage with our
customers, shareholders and other stakeholders and/or increased costs to prevent, respond to or mitigate cybersecurity events. In addition,
the unauthorized dissemination of sensitive personal information or proprietary or confidential information could expose us or other third-
parties to regulatory fines or penalties, litigation and potential liability, or otherwise harm our business.
Healthcare plans have taken steps to control the utilization and reimbursement of healthcare services, including clinical test services.
We also face efforts by non-governmental third-party payors, including healthcare plans, to reduce utilization and reimbursement for
clinical testing services.
The healthcare industry has experienced a trend of consolidation among healthcare insurance plans, resulting in fewer but larger
insurance plans with significant bargaining power to negotiate fee arrangements with healthcare providers, including clinical testing
providers. These healthcare plans, and independent physician associations, may demand that clinical testing providers accept discounted fee
structures or assume all or a portion of the financial risk associated with providing testing services to their members through capped
payment arrangements. In addition, some healthcare plans limit the laboratory network to only a single national or regional laboratory to
obtain improved fee-for-service pricing. There is also an increasing number of patients enrolling in consumer driven products and high
deductible plans that involve greater patient cost-sharing.
39
The increased consolidation among healthcare plans also has increased the potential adverse impact of ceasing to be a contracted
provider with any such insurer.
We expect continuing efforts to limit the number of participating laboratories in payor networks, reduce reimbursements, to impose
more stringent cost controls and to reduce utilization of clinical test services. These efforts, including future changes in third-party payor
rules, practices and policies, or failing to become a contracted provider or ceasing to be a contracted provider to a healthcare plan, may have
a material adverse effect on our business.
The success of our business may be dependent on the actions of our collaborative partners.
We have entered into and expect in the future to enter into collaborative arrangements with established multi-national pharmaceutical,
diagnostic, and medical device companies, which will finance or otherwise assist in the development, manufacture and marketing of
products incorporating our technology. We anticipate deriving some revenues from research and development fees, license fees, milestone
payments, and royalties from collaborative partners. Our prospects, therefore, may depend to some extent upon our ability to attract and
retain collaborative partners and to develop technologies and products that meet the requirements of prospective collaborative partners. In
addition, our collaborative partners may have the right to abandon research projects, guide strategy regarding prosecution of relevant patent
applications and terminate applicable agreements, including funding obligations, prior to or upon the expiration of the agreed-upon research
terms. There can be no assurance that we will be successful in establishing collaborative arrangements on acceptable terms or at all, that
collaborative partners will not terminate funding before completion of projects, that our collaborative arrangements will result in successful
product commercialization, or that we will derive any revenues from such arrangements. To the extent that we are unable to develop and
maintain collaborative arrangements, we would need substantial additional capital to undertake research, development, and
commercialization activities on our own.
If we are unable to obtain and enforce patent protection for our products, our business could be materially harmed.
Our success depends, in part, on our ability to protect proprietary methods and technologies that we develop or license under the
patent and other intellectual property laws of the U.S. and other countries, so that we can prevent others from unlawfully using our
inventions and proprietary information. However, we may not hold proprietary rights to some patents required for us to commercialize our
products and product candidates. Because certain U.S. patent applications are confidential, third parties may have filed patent applications
for technology covered by our pending patent applications without our being aware of those applications, and our patent applications may
not have priority over those applications. For this and other reasons, we or our third-party collaborators may be unable to secure desired
patent rights, thereby losing desired exclusivity. If licenses are not available to us on acceptable terms, we may not be able to market the
affected products or conduct the desired activities, unless we challenge the validity, enforceability, or infringement of the third-party patent
or otherwise circumvent the third-party patent.
Our strategy depends on our ability to rapidly identify and seek patent protection for our discoveries. In addition, we will rely on
third-party collaborators to file patent applications relating to proprietary technology that we develop jointly during certain collaborations.
The process of obtaining patent protection is expensive and time-consuming. If our present or future collaborators fail to file and prosecute
all necessary and desirable patent applications at a reasonable cost and in a timely manner, our business will be adversely affected.
Unauthorized parties may be able to obtain and use information that we regard as proprietary.
The issuance of a patent does not guarantee that it is valid or enforceable. Any patents we have obtained, or obtain in the future, may
be challenged, invalidated, unenforceable, or circumvented. Moreover, the U.S. Patent and Trademark Office (the “USPTO”) may
commence interference proceedings involving our patents or patent applications. In addition, court decisions may introduce uncertainty in
the enforceability or scope of patents owned by biotechnology, pharmaceutical, and medical device companies. Any challenge to, finding
of unenforceability or invalidation or circumvention of, our patents or patent applications would be costly, would require significant time
and attention of our management, and could have a material adverse effect on our business, results of operations and financial condition.
Our pending patent applications may not result in issued patents. The patent position of pharmaceutical, biotechnology, diagnostic,
and medical device companies, including ours, is generally uncertain and involves complex legal and factual considerations. The standards
that the USPTO and its foreign counterparts use to grant patents are not always applied predictably or uniformly and can change. There is
also no uniform, worldwide policy regarding the subject matter and scope of claims granted or allowable in pharmaceutical, biotechnology,
diagnostic, or medical device patents. Accordingly, we do not know the degree of future protection for our proprietary rights or the breadth
of claims that will be allowed in any patents issued to us or to others. The legal systems of certain countries do not favor the aggressive
enforcement of patents, and the laws of foreign countries may not protect our rights to the same extent as the laws of the U.S. Therefore,
the enforceability or scope of our owned or licensed patents in the U.S. or in foreign countries cannot be predicted with certainty, and, as a
result,
40
any patents that we own or license may not provide sufficient protection against competitors. We may not be able to obtain or maintain
patent protection for our pending patent applications, those we may file in the future, or those we may license from third parties.
We cannot assure you that any patents that have issued, that may issue, or that may be licensed to us will be enforceable or valid, or
will not expire prior to the commercialization of our products and product candidates, thus allowing others to more effectively compete
with us. Therefore, any patents that we own or license may not adequately protect our products and product candidates or our future
products, which could have a material adverse effect on our business, results of operations, and financial condition.
If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products
could be adversely affected.
In addition to patent protection, we also rely on other proprietary rights, including protection of trade secrets, know-how, and
confidential and proprietary information. To maintain the confidentiality of trade secrets and proprietary information, we will seek to enter
into confidentiality agreements with our employees, consultants, and collaborators upon the commencement of their relationships with us.
These agreements generally require that all confidential information developed by the individual or made known to the individual by us
during the course of the individual’s relationship with us be kept confidential and not disclosed to third parties. Our agreements with
employees also generally provide that any inventions conceived by the individual in the course of rendering services to us shall be our
exclusive property.
However, we may not obtain these agreements in all circumstances, and individuals with whom we have these agreements may not
comply with their terms. In the event of unauthorized use or disclosure of our trade secrets or proprietary information, these agreements,
even if obtained, may not provide meaningful protection, particularly for our trade secrets or other confidential information. To the extent
that our employees, consultants, or contractors use technology or know-how owned by third parties in their work for us, disputes may arise
between us and those third parties as to the rights in related inventions.
Adequate remedies may not exist in the event of unauthorized use or disclosure of our confidential information. The disclosure of our
trade secrets would impair our competitive position and may materially harm our business, financial condition, and results of operations.
We will rely heavily on licenses from third parties. Failure to comply with the provisions of these licenses could result in the loss of our
rights under the license agreements.
Many of the patents and patent applications in our patent portfolio are not owned by us, but are licensed from third parties. Such
license agreements give us rights for the commercial exploitation of the patents resulting from the respective patent applications, subject to
certain provisions of the license agreements. Failure to comply with these provisions could result in the loss of our rights under these
license agreements. Our inability to rely on these patents and patent applications, which are the basis of our technology, would have a
material adverse effect on our business, results of operations and financial condition.
We license patent rights to certain of our technology from third-party owners. If such owners do not properly maintain or enforce the
patents underlying such licenses, our competitive position and business prospects will be harmed.
We have obtained licenses from, among others, INEOS Healthcare, the President and Fellows of Harvard College, The Scripps
Research Institute, Arctic Partners, and Academia Sinica, that are necessary or useful for our business. In addition, we intend to enter into
additional licenses of third-party intellectual property in the future. We cannot guarantee that no third parties will step forward and assert
inventorship or ownership in our in-licensed patents. In some cases, we may rely on the assurances of our licensors that all ownership rights
have been secured and that all necessary agreements are intact or forthcoming.
Our success will depend in part on our ability or the ability of our licensors to obtain, maintain, and enforce patent protection for our
licensed intellectual property and, in particular, those patents to which we have secured exclusive rights in our field. We or our licensors
may not successfully prosecute the patent applications which are licensed to us. Even if patents issue in respect of these patent applications,
we or our licensors may fail to maintain these patents or may determine not to pursue litigation against other companies that are infringing
these patents. Without protection for the intellectual property we have licensed, other companies might be able to offer substantially
identical products for sale, which could adversely affect our competitive business position and harm our business, results of operations and
financial condition.
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Our commercial success depends significantly on our ability to operate without infringing the patents and other proprietary rights of
third parties.
Other entities may have or obtain patents or proprietary rights that could limit our ability to develop, manufacture, use, sell, offer for
sale or import products, or impair our competitive position. In addition, other entities may have or obtain patents or proprietary rights that
cover our current research and preclinical studies. The U.S. case law pertaining to statutory exemptions to patent infringement for those
who are using third party patented technology in the process of pursuing FDA regulatory approval changes over time. Lawsuits involving
such exemptions are very fact intensive and it is currently unclear under U.S. case law whether preclinical studies would always qualify for
such an exemption, and whether such exemptions would apply to research tools. To the extent that our current research and preclinical
studies may be covered by the patent rights of others, the risk of suit may continue after such patents expire because the statute of
limitations for patent infringement runs for six years. To the extent that a third party develops and patents technology that covers our
products, we may be required to obtain licenses to that technology, which licenses may not be available or may not be available on
commercially reasonable terms, if at all. If licenses are not available to us on acceptable terms, we will not be able to market the affected
products or conduct the desired activities, unless we challenge the validity, enforceability or infringement of the third-party patent, or
circumvent the third-party patent, which would be costly and would require significant time and attention of our management. Third parties
may have or obtain by license or assignment valid and enforceable patents or proprietary rights that could block us from developing
products using our technology. Our failure to obtain a license to any technology that we require may materially harm our business, financial
condition, and results of operations.
If we become involved in patent litigation or other proceedings related to a determination of rights, we could incur substantial costs and
expenses, substantial liability for damages or be required to stop our product development and commercialization efforts.
Third parties may sue us for infringing their patent rights. Likewise, we may need to resort to litigation to enforce a patent issued or
licensed to us or to determine the scope and validity of proprietary rights of others. In addition, a third-party may claim that we have
improperly obtained or used its confidential or proprietary information. Furthermore, in connection with our third-party license agreements,
we generally have agreed to indemnify the licensor for costs incurred in connection with litigation relating to intellectual property rights.
The cost to us of any litigation or other proceeding relating to intellectual property rights, even if resolved in our favor, could be substantial,
and the litigation would divert our management’s efforts. Some of our competitors may be able to sustain the costs of complex patent
litigation more effectively than we can because they have substantially greater resources. Uncertainties resulting from the initiation and
continuation of any litigation could limit our ability to continue our operations. Our involvement in patent litigation and other proceedings
could have a material adverse effect on our business, results of operations, and financial condition.
If any parties successfully claim that our creation or use of proprietary technologies infringes upon their intellectual property rights,
we might be forced to pay damages, potentially including treble damages, if we are found to have willfully infringed on such parties’ patent
rights. In addition to any damages we might have to pay, a court could require us to stop the infringing activity or obtain a license. Any
license required under any patent may not be made available on commercially acceptable terms, if at all. In addition, such licenses are likely
to be non-exclusive and, therefore, our competitors may have access to the same technology licensed to us. If we fail to obtain a required
license and are unable to design around a patent, we may be unable to effectively market some of our technology and products, which could
limit our ability to generate revenues or achieve profitability and possibly prevent us from generating revenue sufficient to sustain our
operations.
We have faced, and may in the future face, intellectual property infringement claims that could be time-consuming and costly to defend,
and could result in our loss of significant rights and the assessment of treble damages.
We may from time to time receive notices of claims of infringement and misappropriation or misuse of other parties’ proprietary
rights. Some of these additional claims may also lead to litigation. We cannot assure you that we will prevail in such actions, or that other
actions alleging misappropriation or misuse by us of third-party trade secrets, infringement by us of third-party patents and trademarks or
the validity of our patents, will not be asserted or prosecuted against us.
We may also initiate claims to defend our intellectual property or to seek relief on allegations that we use, sell, or offer to sell
technology that incorporates third party intellectual property. Intellectual property litigation, regardless of outcome, is expensive and time-
consuming, could divert management’s attention from our business and have a material negative effect on our business, operating results or
financial condition. If there is a successful claim of infringement against us, we may be required to pay substantial damages (including
treble damages if we were to be found to have willfully infringed a third party’s patent) to the party claiming infringement, develop non-
infringing technology, stop selling our tests or using technology that contains the allegedly infringing intellectual property or enter into
royalty or license agreements that may not be available on
42
acceptable or commercially practical terms, if at all. Our failure to develop non-infringing technologies or license the proprietary rights on a
timely basis could harm our business.
It is possible that a third party or patent office might take the position that one or more patents or patent applications constitute prior
art in the field of genomic-based diagnostics. In such a case, we might be required to pay royalties, damages and costs to firms who own the
rights to these patents, or we might be restricted from using any of the inventions claimed in those patents.
We may become subject to product liability for our diagnostic tests, clinical trials, pharmaceutical products and medical device
products.
Our success depends on the market’s confidence that we can provide reliable, high-quality pharmaceuticals, medical devices, and
diagnostics tests. Our reputation and the public image of our products or technologies may be impaired if our products fail to perform as
expected or our products are perceived as difficult to use. Our products are complex and may develop or contain undetected defects or
errors. Furthermore, if product or future product candidate harms people, or is alleged to be harmful, we may be subject to costly and
damaging product liability claims brought against us by clinical trial participants, consumers, health care providers, corporate partners or
others. We have product liability insurance covering commercial sales of current products and our ongoing clinical trials. Any defects or
errors could lead to the filing of product liability claims, which could be costly and time-consuming to defend and result in substantial
damages. If we experience a sustained material defect or error, this could result in loss or delay of revenues, delayed market acceptance,
damaged reputation, diversion of development resources, legal claims, increased insurance costs or increased service and warranty costs,
any of which could materially harm our business. We cannot assure you that our product liability insurance would protect our assets from
the financial impact of defending a product liability claim. A product liability claim could have a serious adverse effect on our business,
financial condition and results of operations.
We are the subject of pending civil litigation which could require us to pay substantial damages or could otherwise have a material
adverse effect on us.
On September 7, 2018, the SEC filed a lawsuit in the Southern District of New York (the “Complaint”), against a number of
individuals and entities (each a “Defendant” and, collectively, the “Defendants”) including us and our CEO and Chairman, Dr. Phillip
Frost. The SEC alleged that we (i) aided and abetted a purported “pump and dump” scheme in connection with one company perpetrated by
a number of the Defendants, and (ii) failed to file required Schedules 13D or 13G with the SEC. The Complaint also alleged that Dr. Frost
(i) participated in the alleged market manipulation in connection with two companies, (ii) failed to file required Schedule 13Ds with the
SEC, and (iii) sold unregistered securities without an applicable exemption. Following the SEC’s announcement of the Complaint, a
number of class action and derivative suits were filed against us and our directors and officers concerning the allegations in the Complaint
and related matters.
In December 2018, we and Dr. Frost entered into settlements with the SEC, which, upon approval by the court in January 2019,
resolved the claims against us and Dr. Frost raised in the Complaint. Pursuant to the settlement between us and the SEC, and without
admitting or denying any of the allegations of the Complaint, we agreed to an injunction from violations of Section 13(d) of the Securities
Exchange Act of 1934 (the “Exchange Act”), a strict liability claim, and to pay a $100,000 penalty, which has been paid. We also agreed to,
within certain stipulated time periods: (i) establish a Management Investment Committee (“MIC”) that will make recommendations to an
Independent Investment Committee (“IIC”) of our Board of Directors in connection with existing and future strategic minority investments;
and (ii) retain an Independent Compliance Consultant (“ICC”) to (a) advise us on whether filings pursuant to Section 13(d) of the Exchange
Act for previous strategic investments made at the suggestion of or in tandem with Dr. Frost should be amended or made to reflect group
membership with Dr. Frost and his related entities; (b) review our existing policies and procedures relating to compliance with Section
13(d) of the Exchange Act; and (c) review the independence of the MIC and IIC of our Board of Directors solely for purposes of the
handling of strategic minority investments. The ICC is required to report its findings (including recommendations as to filings,
amendments, improvements to policies and procedures, and improvement to the composition of the MIC and the IIC to our Board of
Directors) to the SEC within 15 days of completion of its work, and we are required to implement the ICC’s recommendations, and to
certify our compliance with these undertakings in writing.
Under the terms of the settlement between the SEC and Dr. Frost, and without admitting or denying any of the allegations in the
Complaint, Dr. Frost agreed to injunctions from violations of Sections 5(a) and (c) and 17(a)(2) of the Securities Act, claims which may be
satisfied by strict liability and negligence, respectively, and Section 13(d) of the Exchange Act, also a strict liability claim; to pay
approximately $5.5 million in penalty, disgorgement and pre-judgment interest, which has been paid; and to be prohibited, with certain
exceptions, from trading in penny stocks.
The settlements include no restriction on Dr. Frost’s ability to continue to serve as our CEO and Chairman.
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We are separately evaluating our strategic minority investments and reporting under Section 13(d) of the Exchange Act. In connection
with this evaluation, we may make additional or amended filings pursuant to Section 13(d) of the Exchange Act reflecting group
membership.
Although the SEC matter against us and Dr. Frost is resolved, there can be no assurance that additional charges from other
governmental authorities will not be brought against one or more parties named in the Complaint.
We also continue to face a number of class actions and derivative suits concerning the allegations in the SEC Complaint. We cannot
predict with certainty the outcome or effect of the class actions or derivative suits, which could require us to pay substantial damages or
could otherwise have a material adverse effect on us.
Our primary and side A directors and officers liability insurance carrier has denied coverage for the class action and derivative suits
filed against us and our directors and officers concerning the allegations in the Complaint. We believe that this denial is in error and are in
the process of appealing this coverage determination. If we are unsuccessful in this appeal, or if other third-party insurers deny, cancel, or
refuse coverage, which we are not able to successfully appeal, or are otherwise unable to provide us with adequate insurance coverage for
all or any of the aforementioned lawsuits, then our overall risk exposure and operational expenses could increase and the management of
our business operations could be disrupted, which could cause a material adverse impact on our business, operations and financial
condition. Further, an unusually large liability claim or a string of claims, like these lawsuits, could potentially exceed our available
insurance coverage if any. In addition, the availability of, and our ability to collect on, insurance coverage can be subject to factors beyond
our control.
As our current insurance policies expire, increased premiums for renewed or new coverage, if such coverage can be secured at all,
may increase our insurance expense and/or require us to increase our self-insured retention or deductibles. If the number of claims or the
dollar amounts of any such claims rise in any policy year, we could suffer additional costs associated with accessing excess coverage
policies. Also, an increase in the loss amounts attributable to such claims could expose us to uninsured damages if we are unable or elect
not to insure against certain claims because of increased premiums or other reasons. These lawsuits or the resolution of such lawsuits may
affect the availability or cost of some of our insurance coverage, which could materially adversely impact our business, results of
operations and cash flows and potentially expose us to increased risks that would be uninsured.
Adverse results in material litigation matters or governmental inquiries could have a material adverse effect upon our business and
financial condition.
We may from time to time become subject in the ordinary course of business to material legal action related to, among other things,
intellectual property disputes, professional liability, contractual and employee-related matters, as well as inquiries from governmental
agencies and Medicare or Medicaid carriers requesting comment and information on allegations of billing irregularities and other matters
that are brought to their attention through billing audits, third parties or other sources. The health care industry is subject to substantial
federal and state government regulation and audit. Additionally, we are subject to pending legal proceedings with respect to alleged
violations of securities laws. See “We are the subject of pending civil litigation which could require us to pay substantial damages or could
otherwise have a material adverse effect on us” above.
From time to time, we may receive inquiries, document requests, Civil Investigative Demands (“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, various payors and fiscal intermediaries, and other state and federal regulators
regarding investigations, audits and reviews. We are currently responding to CIDs, subpoenas or 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. The Company generally has cooperated, and intends to
continue to cooperate, with appropriate regulatory authorities as and when investigations, audits and inquiries arise.
Legal actions and government investigations could result in substantial monetary damages, negatively impact our ability to obtain
additional funding on acceptable terms, or at all, and damage to our reputation with customers, business partners and other third parties, all
of which could have a material adverse effect upon our results of operations and financial position. Further, the legal actions and
government investigations could damage our reputation with investors and adversely affect the trading prices of our securities.
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RISKS RELATED TO REGULATORY COMPLIANCE
Our ability to successfully operate our laboratories and develop and commercialize certain of our diagnostic tests and LDTs will depend
on our ability to maintain required regulatory licensures and comply with all the CLIA requirements.
In order to successfully operate our laboratory business and offer certain of our diagnostic tests and LDTs, we must maintain our
CLIA certification and comply with all the CLIA requirements. CLIA is designed to ensure the quality and reliability of clinical
laboratories by mandating specific standards in the areas of personnel qualifications, administration and participation in proficiency testing,
patient test management, quality control, quality assurance and inspections. The sanction for failure to comply with CLIA requirements
may be suspension, revocation or limitation of a laboratory’s CLIA certificate, which is necessary to conduct business, as well as
significant fines and/or criminal penalties. Laboratories must undergo on-site surveys at least every two years, which may be conducted by
the Federal CLIA program or by a private CMS approved accrediting agency such as CAP, among others. Our laboratories are also subject
to regulation of laboratory operations under state clinical laboratory laws as will be any new CLIA-certified laboratory that we establish or
acquire. State clinical laboratory laws may require that laboratories and/or laboratory personnel meet certain qualifications, specify certain
quality controls or require maintenance of certain records. Certain states, such as California, Florida, Maryland, New York, Pennsylvania
and Rhode Island, require that laboratories obtain licenses to test specimens from patients residing in those states and additional states may
require similar licenses in the future. If we are unable to obtain and maintain licenses from states where required, we will not be able to
process any samples from patients located in those states. Only Washington and New York States are exempt under CLIA, as these states
have established laboratory quality standards at least as stringent as CLIA’s. Potential sanctions for violation of these statutes and
regulations include significant fines and the suspension or loss of various licenses, certificates and authorizations, which could adversely
affect our business and results of operations.
If we fail to comply with CLIA requirements, HHS or state agencies could require us to cease diagnostic testing. Even if it were
possible for us to bring our laboratories back into compliance after failure to comply with such requirements, we could incur significant
expenses and potentially lose revenues in doing so. Moreover, new interpretations of current regulations or future changes in regulations
under CLIA may make it difficult or impossible for us to comply with the CLIA classification, which would significantly harm our
business and materially adversely affect our financial condition.
The regulatory approval process is expensive, time consuming and uncertain and may prevent us or our collaboration partners from
obtaining approvals for the commercialization of some or all of our product candidates.
The research, testing, manufacturing, labeling, approval, selling, marketing, and distribution of drug products, diagnostic products, or
medical devices are subject to extensive regulation by the FDA and other non-U.S. regulatory authorities, which regulations differ from
country to country. In general, we are not permitted to market our product candidates in the U.S. until we receive approval of a Biologics
License Application (BLA), an approval of a NDA, a clearance letter under the premarket notification process, or 510(k) process, or an
approval of a PMA from the FDA. To date, we have only submitted one NDA which was approved in June 2016. We have received FDA
approval of the PMA for our Sangia Total PSA Test using the Claros Analyzer but we have not received marketing approval or clearance
for any of our other diagnostic product candidates, Obtaining approval of a NDA or PMA can be a lengthy, expensive, and uncertain
process. With respect to medical devices, while the FDA reviews and clears a premarket notification in as little as three months, there is no
guarantee that our products will qualify for this more expeditious regulatory process, which is reserved for Class I and II devices, nor is
there any assurance that even if a device is reviewed under the 510(k) process that the FDA will review it expeditiously or determine that
the device is substantially equivalent to a lawfully marketed non-PMA device. If the FDA fails to make this finding, then we cannot market
the device. In lieu of acting on a premarket notification, the FDA may seek additional information or additional data which would further
delay our ability to market the product. Furthermore, we are not permitted to make changes to a device approved through the PMA or
510(k) which affects the safety or efficacy of the device without first submitting a supplement application to the PMA and obtaining FDA
approval or cleared premarket notification for that supplement. In some cases, the FDA may require clinical trials to support a supplement
application. In addition, failure to comply with FDA, non-U.S. regulatory authorities, or other applicable U.S. and non-U.S. regulatory
requirements may, either before or after product approval or clearance, if any, subject our company to administrative or judicially imposed
sanctions, including, but not limited to the following:
▪
▪
▪
▪
restrictions on the products, manufacturers, or manufacturing
process;
adverse inspectional observations (Form 483), warning letters, or non-warning letters incorporating inspectional
observations;
civil and criminal
penalties;
injunctions;
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▪
▪
▪
▪
▪
▪
suspension or withdrawal of regulatory approvals or
clearances;
product seizures, detentions, or import
bans;
voluntary or mandatory product recalls and publicity
requirements;
total or partial suspension of
production;
imposition of restrictions on operations, including costly new manufacturing requirements;
and
refusal to approve or clear pending NDAs or supplements to approved NDAs, applications or pre-market
notifications.
Regulatory approval of an NDA or NDA supplement, BLA, PMA, PMA supplement or clearance pursuant to a pre-market notification
is not guaranteed, and the approval or clearance process, as the case may be, is expensive and may, especially in the case of an NDA or
PMA application, take several years. The FDA also has substantial discretion in the drug and medical device approval and clearance
process. Failure can occur at any stage, and we could encounter problems that cause us to abandon clinical trials or to repeat or perform
additional pre-clinical studies and clinical trials. The number of pre-clinical studies and clinical trials that will be required for FDA approval
or clearance varies depending on the drug or medical device candidate, the disease or condition that the drug or medical device candidate is
designed to address, and the regulations applicable to any particular drug or medical device candidate. The FDA can delay, limit or deny
approval or clearance of a drug or medical device candidate for many reasons, including:
▪
▪
▪
▪
▪
a drug candidate may not be deemed safe or
effective;
a medical device candidate may not be deemed to be substantially equivalent to a lawfully marketed non-PMA device, in the
case of a premarket notification;
the FDA may not find the data from pre-clinical studies and clinical trials
sufficient;
the FDA may not approve our or our third-party manufacturer’s processes or facilities;
or
the FDA may change its approval or clearance policies or adopt new
regulations.
Beyond these risks, there is also a possibility that our licensees or collaborators could decide to discontinue a study at any time for
commercial, scientific or other reasons.
Regulation by governmental authorities in the U.S. and other countries may be a significant factor in how we develop, test, produce
and market our diagnostic test products. Diagnostic tests like ours may not fall squarely within the regulatory approval process for
pharmaceutical or device products as described above, and the regulatory pathway is not as clear. It is possible that the diagnostic products
developed by us or our collaborators will be regulated as medical devices by the FDA and comparable agencies of other countries and
require either PMA or 510(k) clearance from the FDA prior to marketing. Some companies that have successfully commercialized
diagnostic tests for various conditions and disease states have not sought clearance or approval for such tests through the traditional 510(k)
or PMA processes, and have instead utilized a process involving LDTs through a CLIA- certified laboratory. CLIA is a federal law that
regulates clinical laboratories that perform testing on specimens derived from humans for the purpose of providing information for
diagnostic, preventative or treatment purpose. In such instances, the CLIA lab is solely responsible for the development, validation and
commercialization of the assay.
Such LDT testing is currently under the purview of CMS and state agencies that provide oversight of the safe and effective use of
LDTs. However, the FDA has consistently asserted that it has the regulatory authority to regulate LDTs despite historically exercising
enforcement discretion. In furtherance of that position, the FDA issued two draft guidance documents in October 2014: (1) Framework for
Regulatory Oversight of Laboratory Developed Tests (the “Framework Guidance”); and (2) FDA Notification and Medical Device
Reporting for Laboratory Developed Tests (the “Notification Guidance”). The Framework Guidance outlines the FDA’s plan to adopt over
time a risk-based approach to regulating LDTs whereby different classifications of LDTs would be subject to different levels of FDA
oversight and enforcement, including, for example, prohibitions on adulteration and misbranding, establishment registration and device
listing, premarket notification, banned devices, records and reports, good manufacturing practices, adverse event reporting, premarket
review of safety, effectiveness, and clinical validity, and quality system requirements. The Notification Guidance is intended to explain
how clinical laboratories should notify the FDA of the LDTs they develop and how to satisfy Medical Device Reporting requirements. On
January 13, 2017, the FDA published a synthesis of feedback on the Framework Guidance and Notification Guidance titled, Discussion
Paper on Laboratory Developed Tests (the “Discussion Paper”). The Discussion Paper provided notice that the FDA would not issue a final
guidance on the oversight of LDTs to allow for further public discussion on appropriate oversight
46
approach, and to give congressional authorizing committees the opportunity to develop a legislative solution. The outcome and ultimate
impact of such proposals on the business is difficult to predict at this time. However, the FDA’s authority to regulate LDTs continues to be
challenged and the regulatory situation is fluid. The timeline and process for finalizing the draft guidance documents is unknown. We will
continue to monitor changes to all domestic and international LDT regulatory policy so as to ensure compliance with the current regulatory
scheme.
The terms of approvals and ongoing regulation of our products may limit how we manufacture and market our products and product
candidates, which could materially impair our ability to generate anticipated revenues.
We, our approved or cleared products, and the manufacturers of our products are subject to continual review. Our approved or
cleared products may only be promoted for their indicated uses. Marketing, labeling, packaging, adverse event reporting, storage,
advertising, and promotion for our approved products will be subject to extensive regulatory requirements. We train our marketing and
sales force against promoting our products for uses outside of the cleared or approved indications for use, known as “off-label uses.” If the
FDA determines that our promotional materials or training constitute promotion of unsupported claims or an off-label use, it could request
that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance of an
untitled letter, a warning letter, injunction, seizure, civil fine or criminal penalties. It is also possible that other federal, state or foreign
enforcement authorities might take action if they consider our business activities to constitute promotion of an off-label use, which could
result in significant penalties, including, but not limited to, criminal, civil and/or administrative penalties, damages, fines, disgorgement,
exclusion from participation in government healthcare programs, and the curtailment of our operations.
We and the manufacturers of our products are also required to comply with current Good Manufacturing Practices (“cGMP”)
regulations or the FDA’s QSR regulations, which include requirements relating to quality control and quality assurance as well as the
corresponding maintenance of records and documentation. Moreover, device manufacturers are required to report adverse events by filing
Medical Device Reports with the FDA, which reports are publicly available.
Further, regulatory agencies must approve manufacturing facilities before they can be used to manufacture our products, and these
facilities are subject to ongoing regulatory inspection. If we fail to comply with the regulatory requirements of the FDA and other non-U.S.
regulatory authorities, or if previously unknown problems with our products, manufacturers, or manufacturing processes are discovered, we
could be subject to administrative or judicially imposed sanctions. Furthermore, any limitation on indicated uses for a product or product
candidate or our ability to manufacture and promote a product or product candidate could significantly and adversely affect our business,
results of operations, and financial condition.
In addition, the FDA and other non-U.S. regulatory authorities may change their policies and additional regulations may be enacted
that could prevent or delay marketing approval or clearance of our product candidates. We cannot predict the likelihood, nature or extent of
government regulation that may arise from future legislation or administrative action, either in the U.S. or abroad. If we are not able to
maintain regulatory compliance, we would likely not be permitted to market our products or product candidates and we may not achieve or
sustain profitability, which would materially impair our ability to generate anticipated revenues.
If we fail to comply with complex and rapidly evolving laws and regulations, we could suffer penalties, be required to pay substantial
damages or make significant changes to our operations.
We are subject to numerous federal and state regulations, including, but not limited to:
•
•
•
•
•
•
•
•
federal and state laws applicable to billing and claims
payment;
federal and state laboratory anti-mark-up
laws;
federal and state anti-kickback
laws;
physician self-referral
law;
federal and state false claims
laws;
federal self-referral and financial inducement prohibition laws, commonly known as the Stark Law, and the state
equivalents;
federal and state laws governing laboratory licensing and testing, including
CLIA;
federal and state laws governing the development, use and distribution of
LDTs;
• HIPAA, along with the revisions to HIPAA as a result of the HITECH Act, and analogous state laws and non-US laws,
including the General Data Protection Regulation;
47
•
•
federal, state and foreign regulation of privacy, security, electronic transactions and identity
theft;
federal, state and local laws governing the handling, transportation and disposal of medical and hazardous
waste;
• Occupational Safety and Health Administration rules and
regulations;
•
•
changes to laws, regulations and rules as a result of the implementation and/or repeal of part or all of 2010 Health Care
Reform Legislation; and
changes to other federal, state and local laws, regulations and rules, including tax
laws.
If we fail to comply with existing or future applicable laws and regulations, we could suffer civil or criminal penalties, including the
loss of our licenses to operate our laboratories and our ability to participate in federal and state healthcare programs. Different
interpretations and enforcement policies of existing statutes and regulations applicable to our business could subject our current practices to
allegations of impropriety or illegality, or could require us to make significant changes to our operations. Under the FCA, whistleblower or
qui tam provisions allow a private individual to bring actions on behalf of the federal government alleging that the defendant has submitted
a false claim to the federal government, and to share in any monetary recovery. In recent years, the number of suits brought by private
individuals has increased dramatically and we may be subject to such suits. Violations of the FCA could result in enormous economic
liability and could have a material impact on us. As a result of political, economic, and regulatory influences, the healthcare delivery
industry in the U.S. is under intense scrutiny and subject to fundamental changes. We cannot predict which reform proposals will be
adopted, when they may be adopted, or what impact they may have on us. The costs associated with complying with federal and state
regulations could be significant and the failure to comply with any such legal requirements could have a material adverse effect on our
financial condition, results of operations, and liquidity.
Tax reform may significantly affect us and our stockholders.
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (the “Tax Act”) that significantly reforms the
Internal Revenue Code of 1986, as amended (the “Code”). The Tax Act, among other things, includes changes to U.S. federal tax rates,
including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitations of the tax deduction for
interest expense to 30% of adjusted earnings (except for certain small businesses), limitations of the deduction for net operating losses to
80% of current year taxable income and elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced
rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions),
immediate deductions for certain new investments instead of deductions for depreciation expense over time, modifying or repealing many
business deductions and credits and putting into effect the migration from a “worldwide” system of taxation to a territorial system.
Failure to maintain the security of patient-related information or compliance with security requirements could damage our reputation
with customers, cause us to incur substantial additional costs and become subject to litigation.
Pursuant to HIPAA, and certain similar state laws, we must comply with comprehensive privacy and security standards with respect to
the use and disclosure of protected health information. If we do not comply with existing or new laws and regulations related to protecting
privacy and security of personal or health information, it could be subject to monetary fines, civil penalties, or criminal sanctions. Under
the HITECH amendments to HIPAA, HIPAA was expanded to require certain data breach notification, to extend certain HIPAA privacy
and security standards directly to business associates, to heighten penalties for noncompliance, and enhance enforcement efforts.
We may also be required to comply with the data privacy and security laws of other countries in which it operates or from which it
receives data transfers. The European Union enacted the General Data Protection Regulation (GDPR) to replace the current data protection
directive, Directive 95/46/EC, which took effect May 25, 2018, and which has a broader application and enhanced penalties for
noncompliance. The GDPR, which is wide-ranging in scope, governs the collection and use of personal data in the European Union and
imposes operational requirements for companies that receive or process personal data of residents of the European Union that are different
than those currently in place in the European Union. The GDPR will apply to our European operations and possibly to our laboratory and
clinical development operations. We have implemented policies and procedures required to comply with the new EU regulations and will
continue to evaluate compliance.
In March 2014, CareEvolve, BioReference’s wholly-owned connectivity subsidiary, became aware that there had been a HIPAA
breach with regard to one of its servers managed at an internet service provider site called XAND, where the server was inadvertently
configured so that it was accessible to the Internet for a brief period. Upon becoming aware of the matter, CareEvolve immediately took
the server offline and removed all indexed files that could be located on the internet. In the meantime, an Internet data collection “robot”
operated by Google, Inc. had briefly acquired data from a server and made it available to Internet searches. To the best of our knowledge,
there were no known disclosures of this Patient Health
48
Information (“PHI”) to unauthorized parties. BioReference self-reported this incident to the appropriate government agency, the Office of
Civil Rights (“OCR”). OCR notified BioReference that it has initiated an investigation of the breach report, and we are awaiting further
discussion, investigation and action by OCR. Since March 2014, BioReference has taken meaningful steps to further improve its HIPAA
and cybersecurity platform, including engaging independent and specialized IT consultants to conduct HIPAA and cybersecurity
assessments, reviewing data security and internal safeguards, and continuously implementing enhanced security measures to minimize the
risk of similar occurrences in the future. We have had other data and security breaches in the ordinary course and such breaches may
continue to happen from time to time despite our best efforts to prevent such breaches and safeguard private information. Some of these
other data and security breaches have been reported to OCR and we are awaiting discussion, investigation or action by OCR. Any action by
OCR may require us to pay fines or take remedial actions that may be expensive and require the attention of management, any of which
may have a material adverse effect on us and our results of operations.
We have and will continue to receive certain personal and financial information about our clients and their patients. In addition, we
depend upon the secure transmission of confidential information over public networks. While we take reasonable and prudent steps to
protect this protected information, a compromise in our security systems that results in client or patient personal information being obtained
by unauthorized persons or our failure to comply with security requirements for financial transactions could adversely affect our reputation
with our clients and result in litigation against us or the imposition of penalties, all of which may adversely impact our results of operations,
financial condition and liquidity.
Failure to comply with environmental, health and safety laws and regulations, including the Federal Occupational Safety and Health
Administration Act, the Needlestick Safety and Prevention Act and the Comprehensive Medical Waste Management Act, could result in
fines and penalties and loss of licensure, and have a material adverse effect upon our business.
We are subject to licensing and regulation under federal, state and local laws and regulations relating to the protection of the
environment and human health and safety, including laws and regulations relating to the handling, transportation and disposal of medical
specimens, infectious and hazardous waste and radioactive materials, as well as regulations relating to the safety and health of laboratory
employees. The Federal Occupational Safety and Health Administration has established extensive requirements relating to workplace
safety for health care employers, including clinical laboratories, whose workers may be exposed to blood-borne pathogens such as HIV and
the hepatitis B virus. These requirements, among other things, require work practice controls, protective clothing and equipment, training,
medical follow-up, vaccinations and other measures designed to minimize exposure to, and transmission of, blood-borne pathogens. In
addition, the Needlestick Safety and Prevention Act requires, among other things, that we include in our safety programs the evaluation and
use of engineering controls such as safety needles if found to be effective at reducing the risk of needlestick injuries in the workplace.
Waste management is subject to federal and state regulations governing the transportation and disposal of medical waste including
bodily fluids. Federal regulations require licensure of interstate transporters of medical waste. In New Jersey, we are subject to the
Comprehensive Medical Waste Management Act (“CMWMA”), which requires us to register as a generator of special medical waste. All of
our medical waste is disposed of by a licensed interstate hauler. The hauler provides a manifest of the disposition of the waste products as
well as a certificate of incineration, which is retained by us. These records are audited by the State of New Jersey on a yearly basis. We are
also subject to the Federal Hazardous Materials Transportation Law, 49 U.S.C. 5101 et seq., and the Hazardous Materials Regulations
(“HMR”), 49 CFR parts 171-180. The federal government has classified hazardous medical waste as hazardous materials for the purpose of
regulation. These regulations preempt state regulation, which must be “substantively the same,” meaning that “the non-federal requirement
must conform “in every significant respect to the federal requirement. Editorial and other similar de minimis changes are permitted,” 49
CFR 107.202(d).
Failure to comply with such federal, state and local laws and regulations could subject us to denial of the right to conduct business,
fines, criminal penalties and/or other enforcement actions, any of which could have a material adverse effect on our business. In addition,
compliance with future legislation could impose additional requirements us, which may be costly.
Our failure or the failure of third-party payors or physicians to comply with ICD-10-CM Code Set, and our failure to comply with other
emerging electronic transaction standards could adversely impact our business.
Compliance with the ICD-10-CM Code Set was required to be in place by October 1, 2015. We will continue our assessment of
information systems, applications and processes for compliance with these requirements. Clinical laboratories are typically required to
submit health care claims with diagnosis codes to third party payors. The diagnosis codes must be obtained from the ordering physician for
clinical laboratory testing and from the interpreting pathologist for anatomic pathology services. Our failure or the failure of third party
payors or physicians to comply with these requirements could have an adverse impact on reimbursement, days sales and cash collections.
49
Also, the failure of our IT systems to keep pace with technological advances may significantly reduce our revenues or increase our
expenses. Public and private initiatives to create healthcare information technology (“HCIT”) standards and to mandate standardized
clinical coding systems for the electronic exchange of clinical information, including test orders and test results, could require costly
modifications to our existing HCIT systems. If we fail to adopt or delay in implementing HCIT standards, we could lose customers and
business opportunities.
Failure to comply with complex federal and state laws and regulations related to submission of claims for clinical laboratory services
could result in significant monetary damages and penalties and exclusion from the Medicare and Medicaid programs.
We are subject to extensive federal and state laws and regulations relating to the submission of claims for payment for clinical
laboratory services, including those that relate to coverage of our services under Medicare, Medicaid and other governmental health care
programs, the amounts that may be billed for our services and to whom claims for services may be submitted. These rules may also affect
us in light of the practice management products that we market, to the extent that these products are considered to affect the manner in
which our customers’ submit their own claims for services. Submission of our claims is particularly complex because we provide both
anatomic pathology services and clinical laboratory tests, which generally are paid using different reimbursement principles. The clinical
laboratory tests are often paid under a clinical laboratory fee schedule, and the anatomic pathology services are often paid under a physician
fee schedule.
Our failure to comply with applicable laws and regulations could result in our inability to receive payment for our services or result in
attempts by third-party payors, such as Medicare and Medicaid, to recover payments from us that have already been made. Submission of
claims in violation of certain statutory or regulatory requirements can result in penalties, including substantial civil money penalties for
each item or service billed to Medicare in violation of the legal requirement, and exclusion from participation in Medicare and Medicaid.
Government authorities may also assert that violations of laws and regulations related to submission or causing the submission of claims
violate the federal False Claims Act (“FCA”) or other laws related to fraud and abuse, including submission of claims for services that were
not medically necessary. Under the FCA, whistleblower or qui tam provisions allow a private individual to bring actions on behalf of the
federal government alleging that the defendant has submitted a false claim to the federal government, and to share in any monetary
recovery. In recent years, the number of suits brought by private individuals has increased dramatically and we may be subject to such suits.
Violations of the FCA could result in enormous economic liability. The FCA provides that all damages are trebled, and each false claim
submitted is subject to a penalty of up to $21,916. For example, we could be subject to FCA liability if it was determined that the services
we provided were not medically necessary and not reimbursable, particularly if it were asserted that we contributed to the physician’s
referrals of unnecessary services to us. It is also possible that the government could attempt to hold us liable under fraud and abuse laws for
improper claims submitted by an entity for services that we performed if we were found to have knowingly participated in the arrangement
that resulted in submission of the improper claims.
Changes in regulation and policies, including increasing downward pressure on health care reimbursement, may adversely affect
reimbursement for diagnostic services and could have a material adverse impact on our business.
Reimbursement levels for health care services are subject to continuous and often unexpected changes in policies, and we face a
variety of efforts by government payors to reduce utilization and reimbursement for diagnostic testing services. Changes in governmental
reimbursement may result from statutory and regulatory changes, retroactive rate adjustments, administrative rulings, competitive bidding
initiatives, and other policy changes.
The U.S. Congress has considered, at least yearly in conjunction with budgetary legislation, changes to one or both of the Medicare
fee schedules under which we receive reimbursement, which include the physician fee schedule for anatomical pathology services, and the
clinical laboratory fee schedule for our clinical laboratory services. For example, currently there is no copayment or coinsurance required
for clinical laboratory services, although there is for our services that are paid under the physician fee schedule. However, Congress has
periodically considered imposing a 20 percent coinsurance on laboratory services. If enacted, this would require us to attempt to collect this
amount from patients, although in many cases the costs of collection would exceed the amount actually received. In April 2015, changes to
the physician fee schedule were enacted under the Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”).
Our reimbursement for our pathology services is paid primarily under the physician fee schedule of Medicare and Medicaid.
Historically, the physician fee schedule was governed by a complex formula, referred to as the Sustainable Growth Rate, or SGR.
However, in April 2015, MACRA was passed, which permanently replaces the SGR formula with a value-based payment system. The
passage of MACRA also repealed the 21.1% reduction of the physician fee schedule that was scheduled for April 1, 2015. Under MACRA,
the physician fee schedule conversion factor increases of 0.5% from July 1, 2015 to December 31, 2015, and 0.5% in each of years 2016-
2019, followed by 0.0% updates for 2020-2025. Subsequent years will
50
vary based on participation in alternative payment models. Beginning in 2019, rates were adjusted under the new Merit-based Incentive
Payment System.
The Center for Medicare and Medicaid Services (“CMS”) pays laboratories on the basis of a fee schedule that is reviewed and re-
calculated on an annual basis. CMS may change the fee schedule upward or downward on billing codes that we submit for reimbursement
on a regular basis. Our revenue and business may be adversely affected if the reimbursement rates associated with such codes are reduced.
Even when reimbursement rates are not reduced, policy changes add to our costs by increasing the complexity and volume of
administrative requirements. Medicaid reimbursement, which varies by state, is also subject to administrative and billing requirements and
budget pressures. Recently, state budget pressures have caused states to consider several policy changes that may impact our financial
condition and results of operations, such as delaying payments, reducing reimbursement, restricting coverage eligibility and service
coverage, and imposing taxes on our services.
CMS has changed or discussed making changes to certain types of reimbursement which could affect our rate of reimbursement.
Certain cases are comprised of both a technical component (“TC”) and a professional component (“PC”). In certain specified areas of
testing, primarily in the area of anatomic pathology, CMS has determined that some providers have over-utilized these testing procedures
and CMS has introduced changes in reimbursement policies to discourage over-utilization. We are always subject to review by CMS and
cannot be certain that CMS won’t interpret our practices differently than we do.
Third party payors are increasingly challenging established prices, and new products that are more expensive than existing treatments
may have difficulty finding ready acceptance unless there is a clear therapeutic benefit. On April 1, 2014, the Protecting Access to
Medicare Act of 2014 (“PAMA”) was enacted into law. Under PAMA, Medicare payment for clinical diagnostic laboratory tests is
established by calculating a weighted mean of private payor rates. Effective January 1, 2018, clinical laboratory fee schedule rates will be
based on weighted median private payor rates as required by PAMA. Even though the permitted annual decrease are capped through 2023,
the cap does not apply to new tests or new advanced diagnostic tests. We cannot assure you that any of our products will be considered cost
effective, or that reimbursement will be available or sufficient to allow us to sell them competitively and profitably.
The federal government is faced with significant economic decisions in the coming years. Some solutions being offered in the
government could substantially change the way laboratory testing is reimbursed by government entities. We cannot be certain what or how
any such government changes may affect our business.
Medicare legislation and future legislative or regulatory reform of the health care system may affect our ability to sell our products
profitably.
In the U.S., there have been a number of legislative and regulatory initiatives, at both the federal and state government levels, to
change the healthcare system in ways that, if approved, could affect our ability to sell our products and provide our laboratory services
profitably. As such, we cannot assure you that reimbursement payments under governmental and private third party payor programs will
remain at levels comparable to present levels or will be sufficient to cover the costs allocable to patients eligible for reimbursement under
these programs. Any changes that lower reimbursement rates under Medicare, Medicaid or private payor programs could negatively affect
our business.
Most significantly, on March 23, 2010, President Obama signed into law both the Affordable Care Act and the reconciliation law
known as Health Care and Education Affordability Reconciliation Act (the “Reconciliation Act”) and, combined we refer to both Acts as
the “2010 Health Care Reform Legislation.” The constitutionality of the 2010 Health Care Reform Legislation was confirmed on June 28,
2012 by the Supreme Court of the U. S. However, as discussed in further detail below, the current Presidential administration has
attempted to repeal and replace the 2010 Health Care Reform Legislation.
Beyond coverage and reimbursement changes, the 2010 Health Care Reform Legislation subjects manufacturers of medical devices to
an excise tax of 2.3% on certain U.S. sales of medical devices beginning in January 2013. However, a two-year moratorium on the tax was
issued on December 18, 2015. The moratorium was extended for an additional two-year period on January 22, 2018. As such, the excise
tax does not apply to sales in 2016 through 2019. The return of the tax in January 2020 will likely increase our expense in the future.
Additionally, the 2010 Health Care Reform Legislation included significant fraud and abuse measures, including (i) required
disclosures under the Open Payments Program (which implements the requirements of the Physician Payments Sunshine Act), which in
conjunction with its implementing regulations, requires certain manufacturers of certain drugs, biologics, and devices that are reimbursed
by Medicare and Medicaid to report annually certain payments or “transfers of value” provided to physicians and teaching hospitals and to
report annually ownership and investment interests held by physicians and their immediate family members during the preceding calendar
year, (ii) lower thresholds for violations, and (iii) increasing potential penalties for such violations. Federal funding available for combating
health care fraud and abuse
51
generally has increased. Many of the laws and regulations applicable to our business, particularly those relating to billing and
reimbursement of tests and those relating to relationships with physicians, hospitals and patients, contain language that has not been
interpreted by courts. We must rely on our interpretation of these laws and regulations based on the advice of our counsel and regulatory or
law enforcement authorities may not agree with our interpretation of these laws and regulations and may seek to enforce legal remedies or
penalties against us for violations. From time to time we may need to change our operations, particularly pricing or billing practices, in
response to changing interpretations of these laws and regulations or regulatory or judicial determinations with respect to these laws and
regulations. These occurrences, regardless of their outcome, could damage our reputation and harm important business relationships that
we have with healthcare providers, payors and others. Furthermore, if a regulatory or judicial authority finds that we have not complied with
applicable laws and regulations, we could be required to refund amounts that were billed and collected in violation of such laws and
regulations. In addition, we may voluntarily refund amounts that were alleged to have been billed and collected in violation of applicable
laws and regulations. In either case, we could suffer civil and criminal damages, fines and penalties, exclusion from participation in
governmental healthcare programs and the loss of licenses, certificates and authorizations necessary to operate our business, as well as
incur liabilities from third-party claims, all of which could harm our operating results and financial condition. Moreover, regardless of the
outcome, if we or physicians or other third parties with whom we do business are investigated by a regulatory or law enforcement authority
we could incur substantial costs, including legal fees, and our management may be required to divert a substantial amount of time to an
investigation.
Prior to the 2016 U.S. elections (including the current Presidential administration), regulations under the 2010 Health Care Reform
Legislation were expected to continue being drafted, released and finalized throughout the next several years. In 2017, the President and
members of Congress sought to repeal and replace the 2010 Health Care Reform Legislation. It is uncertain whether such repeal and
replacement legislation will be enacted into law, and if enacted, what the impact might be on our business. It is also uncertain whether
regulatory changes to the implementation of the 2010 Health Care Reform Legislation will restrict patient access to affordable insurance
and impact their access to novel, biosimilar and complex generic products. The full effects of any repeal and replacement of the 2010
Health Care Reform Legislation, or regulatory changes to its implementation, cannot be known until a new law is enacted or existing law is
implemented through regulations or guidance issued by the CMS and other federal and state health care agencies. Because of the continued
uncertainty about the implementation of the 2010 Health Care Reform Legislation, including the potential for further legal challenges or
repeal of that legislation, we cannot quantify or predict with any certainty the likely impact of the 2010 Health Care Reform Legislation or
its repeal on our business model, prospects, financial condition or results of operations. We also anticipate that Congress, state legislatures,
and third-party payors may continue to review and assess alternative healthcare delivery and payment systems and may in the future
propose and adopt legislation or policy changes or implementations effecting additional fundamental changes in the healthcare delivery
system. In addition, litigation may prevent some or all of the legislation from taking effect. We cannot assure you as to the ultimate content,
timing, or effect of changes, nor is it possible at this time to estimate the impact of any such potential legislation.
To enhance compliance with applicable health care laws, and mitigate potential liability in the event of noncompliance, regulatory
authorities, such as the U. S. Health and Human Services Department Office of Inspector General (the “OIG”), have recommended the
adoption and implementation of a comprehensive health care compliance program that generally contains the elements of an effective
compliance and ethics program described in Section 8B2.1 of the U. S. Sentencing Commission Guidelines Manual, and for many years the
OIG has made available a model compliance program targeted to the clinical laboratory industry. In addition, certain states, such as New
York, require that health care providers, such as clinical laboratories, that engage in substantial business under the state Medicaid program
have a compliance program that generally adheres to the standards set forth in the Model Compliance Program. Also, under the 2010
Health Care Reform Legislation, the U.S. Department of Health and Human Services, or HHS, requires suppliers, such as us, to adopt, as a
condition of Medicare participation, compliance programs that meet a core set of requirements. While we have adopted U.S. healthcare
compliance and ethics programs that generally incorporate the OIG’s recommendations and train our employees in such compliance, having
such a program can be no assurance that we will avoid any compliance issues.
RISKS RELATED TO INTERNATIONAL OPERATIONS
Failure to obtain regulatory approval outside the U.S. will prevent us from marketing our products and product candidates abroad.
We intend to market certain of our products and product candidates in non-U.S. markets. In order to market our products and product
candidates in the European Union and many other non-U.S. jurisdictions, we must obtain separate regulatory approvals. We have had
limited interactions with non-U.S. regulatory authorities, the approval procedures vary among countries and can involve additional testing,
and the time required to obtain approval may differ from that required to obtain FDA approval or clearance. Approval or clearance by the
FDA does not ensure approval by regulatory authorities in other countries, and approval by one or more non-U.S. regulatory authority does
not ensure approval by other regulatory authorities
52
in other countries or by the FDA. The non-U.S. regulatory approval process may include all of the risks associated with obtaining FDA
approval or clearance. We may not obtain non-U.S. regulatory approvals on a timely basis, if at all. We may not be able to file for non-U.S.
regulatory approvals and may not receive necessary approvals to commercialize our products and product candidates in any market, which
would have a material adverse effect on our business, results of operations and financial condition.
Non-U.S. governments often impose strict price controls, which may adversely affect our future profitability.
We intend to seek approval to market certain of our products and product candidates in both the U.S. and in non‑U.S. jurisdictions. If
we obtain approval in one or more non-U.S. jurisdictions, we will be subject to rules and regulations in those jurisdictions relating to our
product. In some countries, particularly countries of the European Union, each of which has developed its own rules and regulations,
pricing is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time
after the receipt of marketing approval for a drug or medical device candidate. To obtain reimbursement or pricing approval in some
countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product and product candidates to other
available products. If reimbursement of our products and product candidates is unavailable or limited in scope or amount, or if pricing is set
at unsatisfactory levels, we may be unable to generate revenues and achieve or sustain profitability, which would have a material adverse
effect on our business, results of operations and financial condition.
Potential political, economic and military instability in the State of Israel, where we have office, laboratory and manufacturing
operations, may adversely affect our results of operations.
We maintain office, laboratory and manufacturing facilities in the State of Israel. Political, economic and military conditions in Israel
may directly affect our ability to conduct business. Since the State of Israel was established in 1948, a number of armed conflicts have
occurred between Israel and its neighbors. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its
present trading partners, or a significant downturn in the economic or financial condition of Israel, could affect adversely our operations.
Ongoing and revived hostilities or other Israeli political or economic factors could harm our operations and product development and cause
our revenues to decrease.
Due to the international scope of our business activities, our results of operations may be significantly affected by currency fluctuations.
We derive a significant portion of our consolidated net revenues from international sales, subjecting us to risks relating to fluctuations
in currency exchange rates. Currency variations can adversely affect margins on sales of our products in countries outside of the U.S. and
margins on sales of products that include components obtained from suppliers located outside of the U.S. Through our subsidiaries, we
operate in a wide variety of jurisdictions. Certain countries in which we operate or may operate have experienced geopolitical instability,
economic problems and other uncertainties from time to time. To the extent that world events or economic conditions negatively affect our
future sales to customers in these and other regions of the world, or the collectability of receivables, our future results of operations,
liquidity and financial condition may be adversely affected. We may manage exposures arising in the normal course of business related to
fluctuations in foreign currency exchange rates by entering into offsetting positions through the use of foreign exchange forward contracts.
Certain firmly committed transactions are hedged with foreign exchange forward contracts whereby exchange rates change, gains and
losses on the exposed transactions are partially offset by gains and losses related to the hedging contracts. However, our subsidiaries
receive their income and pay their expenses primarily in their local currencies. To the extent that transactions of these subsidiaries are
settled in their local currencies, a devaluation of those currencies versus the U.S. dollar could reduce the contribution from these
subsidiaries to our consolidated results of operations as reported in U.S. dollars. For financial reporting purposes, such depreciation will
negatively affect our reported results of operations since earnings denominated in foreign currencies would be converted to U.S. dollars at a
decreased value. While we have employed economic cash flow and fair value hedges to minimize the risks associated with these exchange
rate fluctuations, the hedging activities may be ineffective or may not offset more than a portion of the adverse financial impact resulting
from currency variations. Accordingly, we cannot assure you that fluctuations in the values of the currencies of countries in which we
operate will not materially adversely affect our future results of operations.
We may be exposed to liabilities under the Foreign Corrupt Practices Act, and any determination that we violated the Foreign Corrupt
Practices Act could have a material adverse effect on our business.
We are subject to the Foreign Corrupt Practice Act (“FCPA”) and other laws that prohibit U.S. companies or their agents and
employees from providing anything of value to a foreign official or political party for the purposes of influencing any act or decision of
these individuals in their official capacity to help obtain or retain business, direct business to any person or corporate entity or obtain any
unfair advantage. We have operations and agreements with third parties and we generate sales internationally. Our international activities
create the risk of unauthorized and illegal payments or offers of payments by our
53
employees, consultants, sales agents or distributors, even though they may not always be subject to our control. We discourage these
practices by our employees and agents. However, our existing safeguards and any future improvements may prove to be less than effective,
and our employees, consultants, sales agents or distributors may engage in conduct for which we might be held responsible. Any failure by
us to adopt appropriate compliance procedures and ensure that our employees and agents comply with the FCPA and applicable laws and
regulations in foreign jurisdictions could result in substantial penalties or restrictions on our ability to conduct business in certain foreign
jurisdictions.
Violations of the FCPA may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could
negatively affect our business, operating results and financial condition. In addition, the U.S. government may seek to hold our Company
liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.
We are subject to risks associated with doing business globally.
Our operations, both within and outside the U.S., are subject to risks inherent in conducting business globally and under the laws,
regulations and customs of various jurisdictions and geographies. These risks differ in some respects from those associated with our U.S.
business and our exposure to such risks may increase if our international business continues to grow. These risks include fluctuations in
currency exchange rates, changes in exchange controls, loss of business in government tenders that are held annually in many cases,
nationalization, increasingly complex labor environments, expropriation and other governmental actions, changes in taxation, including
legislative changes in U.S. and international taxation of income earned outside of the U.S., importation limitations, export control
restrictions, violations of U.S. or local laws, including the FCPA, dependence on a few government entities as customers, pricing
restrictions, economic destabilization, political and economic instability and disruption or destruction in a significant geographic region -
due to the location of manufacturing facilities, distribution facilities or customers - regardless of cause, including war, terrorism, riot, civil
insurrection or social unrest, or natural or man-made disasters, including famine, flood, fire, earthquake, storm or disease.
Our international business is subject to both U.S. and foreign laws and regulations, including, without limitation, regulations relating
to import-export controls, technology transfer restrictions, repatriation of earnings, data privacy and protection, investment, exchange rates
and controls, the FCPA and other anti-corruption laws, the anti-boycott provisions of the U.S. Export Administration Act, labor and
employment, works councils and other labor groups, taxes, environment, security restrictions, intellectual property, changes in taxation,
including legislative changes in U.S. and international taxation of income earned outside of the U.S., handling of regulated substances, and
other commercial activities. Failure by us, our employees, affiliates, partners or others with whom we work to comply with these laws and
regulations could result in administrative, civil or criminal liabilities. New regulations and requirements, or changes to existing ones in the
various countries in which we operate can significantly increase our costs and risks of doing business internationally. Failure to comply
with the laws and regulations that affect our global operations, could have an adverse effect on our business, financial condition or results
of operations.
Changes in regulations, political leadership and environment, or security risks may dramatically affect our ability to conduct or
continue to conduct business in international markets. Our international business may also be impacted by changes in foreign national
policies and priorities, which may be influenced by changes in the environment, geopolitical uncertainties, government budgets, and
economic and political factors more generally, any of which could impact funding for programs or delay purchasing decisions or customer
payments. We also could be affected by the legal, regulatory and economic impacts of Britain’s exit from the European Union, the impact
of which is not known at this time. The occurrence and impact of these factors is difficult to predict, but one or more of them could have a
material adverse effect on our financial position, results of operations and/or cash flows.
RISKS RELATED TO ACQUISITIONS AND INVESTMENTS
Acquisitions, investments and strategic alliances that we have made or may make in the future may use significant resources, result in
disruptions to our business or distractions of our management, may not proceed as planned, and could expose us to unforeseen liabilities.
We intend to continue to expand our business through the acquisition of, investments in and strategic alliances with companies,
technologies, products and services. Acquisitions, investments and strategic alliances involve a number of special problems and risks,
including, but not limited to:
•
•
•
difficulty integrating acquired technologies, products, services, operations, and personnel with the existing
businesses;
diversion of management’s attention in connection with both negotiating the acquisitions and integrating the
businesses;
strain on managerial and operational resources as management tries to oversee larger operations and
investments;
54
•
•
•
•
•
•
difficulty implementing and maintaining effective internal control over financial reporting at businesses that we acquire or
invest in, particularly if they are not located near our existing operations;
exposure to unforeseen liabilities of acquired companies or companies in which we
invest;
potential costly and time-consuming litigation, including stockholder
lawsuits;
potential issuance of securities to equity holders of the company being acquired with rights that are superior to the rights of
holders of our Common Stock, or which may have a dilutive effect on our stockholders;
the need to incur additional debt or use cash;
and
the requirement to record potentially significant additional future operating costs for the amortization of intangible
assets.
As a result of these or other problems and risks, businesses we acquire or invest in may not produce the revenues, earnings, or
business synergies that we anticipated, and acquired products, services, or technologies might not perform as we expected. As a result, we
may incur higher costs and realize lower revenues than we had anticipated. We may not be able to successfully address these problems and
we cannot assure you that the acquisitions or investments will be successfully identified and completed or that, if completed, the acquired
businesses, investments, products, services, or technologies will generate sufficient revenue to offset the associated costs or other negative
effects on our business.
Any of these risks can be greater if an acquisition or investment is large relative to our size. Failure to manage effectively our growth
through acquisitions could adversely affect our growth prospects, business, results of operations, financial condition and cash flows.
We may fail to realize the anticipated benefits of the mergers with BioReference, Transition Therapeutics, and other acquisitions.
The success of the mergers will depend on, among other things, our ability to combine our business with that of BioReference and
Transition in a manner that facilitates growth opportunities and realizes synergies and cost savings. We believe that the mergers will
provide an opportunity for revenue growth. However, we must successfully combine our business with that of BioReference and Transition
in a manner that permits these benefits to be realized. In addition, we must achieve the anticipated growth and cost savings without
adversely affecting current revenues and investments in future growth. If we are not able to successfully achieve these objectives, the
anticipated benefits of the mergers may not be realized fully, or at all, or may take longer to realize than expected.
The failure to integrate successfully the business and operations of BioReference in the expected time frame may adversely affect our
future results.
Historically, we and BioReference have operated as independent companies. There can be no assurances that our and BioReference’s
businesses can be integrated successfully. It is possible that the integration process could result in the loss of our or BioReference’s key
employees, the loss of customers, the disruption of either company’s or both companies’ ongoing businesses or in unexpected integration
issues, higher than expected integration costs and an overall post-completion integration process that takes longer than originally
anticipated. Specifically, the following issues, among others, must be addressed in integrating our operations with BioReference’s
operations in order to realize the anticipated benefits of the merger so we perform as expected:
•
•
•
•
•
•
combining the companies’ operations and corporate functions, as well as obtaining anticipated
synergies;
combining our business with BioReference’s business and meeting the capital requirements of the combined company, in a
manner that permits us to achieve the cost savings or revenue synergies anticipated to result from the merger, the failure of
which would result in the anticipated benefits of the merger not being realized in the time frame currently anticipated or at all;
integrating the companies’
technologies;
integrating and unifying the offerings and services available to
customers;
identifying and eliminating redundant and underperforming functions and
assets;
harmonizing and/or addressing differences in the companies’ operating practices, employee development and compensation
programs, internal controls and other policies, procedures and processes;
• maintaining existing agreements with customers, distributors, providers and vendors and avoiding delays in entering into new
agreements with prospective customers, distributors, providers and vendors;
55
•
•
•
addressing possible differences in business backgrounds, corporate cultures and management
philosophies;
consolidating the companies’ administrative and information technology
infrastructure;
coordinating distribution and marketing
efforts;
• managing the movement of certain positions to different
locations;
•
•
coordinating geographically dispersed organizations;
and
effecting actions that may be required in connection with obtaining regulatory
approvals.
In addition, at times the attention of our management and resources may be focused on the integration of the businesses of the two
companies and diverted from day-to-day business operations, which may disrupt our ongoing business.
Funding may not be available for us to continue to make acquisitions, investments and strategic alliances in order to grow our business.
We have made and anticipate that we may continue to make acquisitions, investments and strategic alliances with complementary
businesses, technologies, products and services to expand our business. Our growth plans rely, in part, on the successful completion of
future acquisitions. At any particular time, we may need to raise substantial additional capital or to issue additional equity to finance such
acquisitions, investments, and strategic alliances. There is no assurance that we will be able to secure additional funding on acceptable
terms, or at all, or obtain the stockholder approvals necessary to issue additional equity to finance such acquisitions, investments, and
strategic alliances. If we are unsuccessful in obtaining the financing, our business would be adversely impacted.
We have a large amount of goodwill and other intangible assets on our balance sheet that are subject to periodic impairment
evaluations. As a result of the annual impairment test for the year ended December 31, 2018, we wrote down goodwill and intangible
assets and we may have similar charges in the future, which would have a material adverse impact on our financial condition and
results of operations.
We have a large amount of goodwill and other intangible assets and we are required to perform an annual, or in certain situations a
more frequent, assessment for possible impairment for accounting purposes. At December 31, 2018, we have goodwill and other intangible
assets of $2.0 billion, or approximately 79% of our total assets. 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. 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 in-process research and development (“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. IPR&D is tested for impairment 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 amount. If the carrying amount of the IPR&D exceeds its fair
value, an impairment loss will be recognized in an amount equal to that excess.
For the year ended December 31, 2018, we recorded asset impairment charges of $21.8 million, which were related to an impairment
charge of $10.1 million to write our IPR&D assets for Alpharen and OPK88004 down to their estimated fair value and a goodwill
impairment charge of $11.7 million to write the carrying amount of the FineTech reporting unit down to its estimated fair value. We also
took a charge of $2.9 million to write down our investment in InCellDX, Inc. to its fair value as of December 31, 2018.
There can be no assurance that future reviews of our goodwill and other intangible assets will not result in additional impairment
charges. A significant write down of goodwill and/or other intangible assets would have a material adverse effect on our reported results of
operations and net worth and the trading price of our securities.
RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK
56
The trading prices of our securities may fluctuate significantly.
The trading prices of our securities may fluctuate significantly in response to numerous factors, some of which are beyond our
control, such as:
•
•
•
•
•
•
•
•
•
•
•
•
•
the announcement of new products or product enhancements by us or our
competitors;
results of our clinical trials and other development
efforts;
developments concerning intellectual property rights and regulatory
approvals;
variations in our and our competitors’ results of
operations;
changes in earnings estimates or recommendations by securities analysts, if our common stock is covered by
analysts;
developments in the biotechnology, pharmaceutical, diagnostic and medical device
industry;
the announcement and/or commencement and/or settlement of lawsuits or similar claims against us or any of our officers,
directors and affiliates;
the results of product liability or intellectual property
lawsuits;
future issuances of our common stock or other securities, including
debt;
purchases and sales of our common stock by our officers, directors or
affiliates;
the addition or departure of key
personnel;
announcements by us or our competitors of acquisitions, investments or strategic alliances;
and
general market conditions and other factors, including factors unrelated to our operating
performance.
Further, the securities market in general, and the market for biotechnology, pharmaceutical, diagnostic and medical device companies
in particular, has experienced extreme price and volume fluctuations in recent years. Continued market fluctuations could result in extreme
volatility in the trading prices of our securities, which could cause a decline in the value of our securities.
Directors, executive officers, principal stockholders and affiliated entities own a substantial amount of our capital stock, and they may
make decisions that you do not consider to be in the best interests of our stockholders.
As of January 28, 2019, our directors, executive officers, principal stockholders and affiliated entities beneficially owned, in the
aggregate, approximately 44.2% of our outstanding voting securities. Phillip Frost, M.D., our Chairman and CEO, is deemed to beneficially
own, in the aggregate, approximately 36.9% of our common stock as of January 28, 2019. As a result, Dr. Frost, acting with other members
of management, would have the ability to significantly impact the election of our Board of Directors, the adoption or amendment of
provisions in our Certificate of Incorporation, the approval of mergers and other significant corporate transactions and the outcome of
issues requiring approval by our stockholders. This concentration of ownership may also have the effect of delaying or preventing a change
in control of our company that may be favored by other stockholders. This could prevent transactions in which holders of our securities
might otherwise recover a premium for their securities over current market prices.
A significant short position in our stock could have a substantial impact on the trading price of our stock.
Historically, there has been a significant “short” position in our common stock. As of January 31, 2019, investors held a short position
of approximately 59,146,878 million shares of our common stock which represented approximately 9.6% of our outstanding common stock.
The anticipated downward pressure on our stock price due to actual or anticipated sales of our stock by some institutions or individuals who
engage in short sales of our common stock could cause our stock price to decline. Such stock price decrease could encourage further short-
sales that could place additional downward pressure on our stock price. This could lead to further increases in the already large short
position in our common stock and cause volatility in our stock price.
The volatility of our stock may cause the value of a stockholder’s investment to decline rapidly. Additionally, if our stock price
declines, it may be more difficult for us to raise capital and may have other adverse effects on our business.
Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act, including with respect to
companies we acquire, could have a material adverse effect on our business and operating results. In addition, current and potential
stockholders could lose confidence in our financial reporting, which could have a material adverse
57
effect on the price of our Common Stock.
Section 404 of the Sarbanes-Oxley Act of 2002 requires annual management assessments of the effectiveness of our internal control
over financial reporting and a report by our independent registered public accounting firm on the effectiveness of internal control over
financial reporting as of year end. We are required to report, among other things, control deficiencies that constitute material weaknesses or
changes in internal control that, or that are reasonably likely to, materially affect internal control over financial reporting. A “material
weakness” is a significant deficiency or combination of significant deficiencies that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented or detected.
We have identified and remediated control deficiencies in the past, and we cannot assure you that we will at all times in the future be
able to report that our internal controls are effective. In addition, material weaknesses in the design and operation of the internal control
over financial reporting of companies that we acquire could have a material adverse effect on our business and operating results. Our
acquisition of BioReference and Transition Therapeutics and possible future acquisitions may increase this risk by expanding the scope and
nature of operations over which we must develop and maintain internal control over financial reporting. If we cannot provide reliable
financial reports or prevent fraud, our results of operation could be harmed. Our failure to maintain the effective internal control over
financial reporting could cause the cost related to remediation to increase and could cause our stock price to decline. In addition, we may
not be able to accurately report our financial results, may be subject to regulatory sanction, and investors may lose confidence in our
financial statements.
Compliance with changing regulations concerning corporate governance and public disclosure may result in additional expenses.
There have been changing laws, regulations, and standards relating to corporate governance and public disclosure, including the
Sarbanes-Oxley Act of 2002, the Dodd-Frank Act, regulations promulgated by the Securities and Exchange Commission and rules
promulgated by the Nasdaq Global Select Market and the other national securities exchanges. These new or changed laws, regulations, and
standards are subject to varying interpretations in many cases due to their lack of specificity, and, as a result, their application in practice
may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty
regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. As a result, our
efforts to comply with evolving laws, regulations, and standards are likely to continue to result in increased general and administrative
expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. Our board
members, Chief Executive Officer, Chief Financial Officer, and Principal Accounting Officer could face an increased risk of personal
liability in connection with the performance of their duties. As a result, we may have difficulty attracting and retaining qualified board
members and executive officers, which could harm our business. If our efforts to comply with new or changed laws, regulations, and
standards differ from the activities intended by regulatory or governing bodies, we could be subject to liability under applicable laws or our
reputation may be harmed, which could materially adversely affect our business, results of operations and financial condition.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
Our principal corporate office is located at 4400 Biscayne Blvd, Miami, Florida. We lease this space from Frost Real Estate
Holdings, LLC (“Frost Real Estate”), an entity which is controlled by Dr. Phillip Frost, our Chairman of the Board and Chief Executive
Officer. Pursuant to the lease agreement with Frost Real Estate Holdings, we lease approximately 29,500 square feet, which encompasses
space for our corporate offices and administrative services.
The table below summarizes certain information as to our significant physical properties as of December 31, 2018:
58
Location
Miami, FL
Segment and Purpose
Diagnostics & Pharmaceutical: Corporate Headquarters
Type of Occupancy
Leased
Elmwood Park, NJ
Gaithersburg, MD
Kiryat Gat, Israel
Woburn, MA
Nesher, Israel
Guadalajara, Mexico
Banyoles, Spain
Palol de Revardit, Spain
Barcelona, Spain
Waterford, Ireland
Santiago, Chile
Diagnostics: Main Laboratory
Diagnostics: Genetics Laboratory
Pharmaceutical: Research and Development, CTP
Diagnostics
Pharmaceuticals: API Manufacturing
Pharmaceuticals: Pharmaceutical Manufacturing
Pharmaceuticals: Pharmaceutical Manufacturing
Warehouse
Pharmaceuticals: Research and Development
Pharmaceuticals: Pharmaceutical Manufacturing
Pharmaceuticals: Office; Warehouse
Leased
Leased
Leased
Leased
Leased
Owned
Owned
Leased
Leased
Leased
Leased
ITEM 3. LEGAL PROCEEDINGS.
We are involved from time to time in various claims and legal actions arising in the ordinary course of business.
As previously reported, in April 2017, the Civil Division of the U. S. Attorney’s Office for the Southern District of New York (the
“SDNY”) informed 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 health care 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 management cannot predict the outcome of these matters at this time, the ultimate outcome could be material to our
business, financial condition, results of operations, and cash flows.
As previously disclosed, on September 7, 2018, the Securities and Exchange Commission (“SEC”) filed a lawsuit in the Southern
District of New York (the “SEC Complaint”) against a number of individuals and entities (the “Defendants”), including the Company and
its CEO and Chairman, Phillip Frost (“Dr. Frost”). The SEC alleged, among other things, that the Company (i) aided and abetted an illegal
“pump and dump” scheme perpetrated by a number of the Defendants, and (ii) failed to file required Schedules 13D or 13G with the SEC.
On December 27, 2018, the Company announced that the Company and Dr. Frost entered into settlement agreements with the SEC,
resolving the SEC Complaint. Pursuant to the settlement, and without admitting or denying any of the allegations of the Complaint, the
Company is enjoined from violating Section 13(d) of the Exchange Act and paid a $100,000 penalty. Liability under Section 13(d) can be
established without any showing of wrongful intent or negligence. The settlement was approved by the Court in January 2019.
The Company also agreed to, within certain stipulated time periods: (i) establish a Management Investment Committee (“MIC”) that
will make recommendations to an Independent Investment Committee (“IIC”) of the Board of Directors in connection with existing and
future strategic minority investments; and (ii) retain an Independent Compliance Consultant (“ICC”) to (a) advise the Company on whether
filings pursuant to Section 13(d) for previous strategic investments made at the suggestion of or in tandem with Dr. Frost should be
amended or made to reflect group membership with Dr. Frost and his related entities; (b) review the Company’s existing policies and
procedures relating to compliance with Section 13(d) of the Exchange Act; and (c) review the independence of the MIC and IIC of the
Board of Directors solely for purposes of the handling of strategic minority investments. The ICC will report its findings to the SEC within
fifteen (15) days of completion of its work, and the Company will certify its compliance with these undertakings in writing.
Under the terms of the settlement between the SEC and Dr. Frost, and without admitting or denying any of the allegations in the
Complaint, Dr. Frost agreed to injunctions from violations of Sections 5(a) and (c) and 17(a)(2) of the Securities Act, claims which may be
satisfied by strict liability and negligence, respectively, and Section 13(d) of the Exchange Act, also a strict liability claim; to pay
approximately $5.5 million in penalty, disgorgement and pre-judgment interest, which has been paid; and to be prohibited, with certain
exceptions, from trading in penny stocks.
59
Following the SEC’s announcement of the SEC Complaint, a number of class actions and derivative suits were filed concerning the
allegations in the SEC Complaint and related matters.
On or about September 12, 2018, Jason Kerznowski (“Kerznowski”), a purported stockholder, filed a putative class action lawsuit in
the United States District Court for the District of New Jersey against the Company and certain of its current and former executive officers
(the “Kerznowski Lawsuit”). This lawsuit was brought by Kerznowski both individually and on behalf of a putative class of the Company’s
stockholders, claiming that in connection with the facts and circumstances underlying the allegations in the SEC Complaint, the Company
engaged in fraudulent conduct and made false and misleading statements of material fact or omitted to state material facts necessary to
make the statements made not misleading. The Kerznowski Lawsuit seeks to declare the action to be a class action and certify Kerznowski
as the class representative, monetary damages, including prejudgment and post judgment interest, an award of reasonable attorneys’ fees,
expert fees, and other costs, and such other relief as the Court may deem just and proper. On February 4, 2019, the United States District
Court for the District of New Jersey appointed the Amitim Funds as lead plaintiffs and transferred the action to the United States District
Court for the Southern District of Florida.
On or about September 13, 2018, Idan Sharon filed an Application for Approval of a Class Action in the Tel Aviv Israel District
Court against the Company and certain of its current and former executive officers, and certain members of its Board of Directors (the
“Sharon Claim”). This application was filed by a purported stockholder, both individually and on behalf of a putative class of the
Company’s stockholders, claiming that in connection with the facts and circumstances underlying the allegations in the SEC Complaint,
the Company engaged in fraudulent conduct and made false and misleading statements of material fact or omitted to state material facts
necessary to make the statements made not misleading. The Sharon Claim seeks to declare the action to be a class action and monetary
damages.
On or about September 14, 2018, Charles Steinberg (“Steinberg”), a purported stockholder, filed a putative class action lawsuit in the
United States District Court for the Southern District of Florida against the Company and certain of its current and former executive
officers (the “Steinberg Lawsuit”). This lawsuit was brought by Steinberg both individually and on behalf of a putative class of the
Company’s stockholders claiming that in connection with the facts and circumstances underlying the allegations in the SEC Complaint, the
Company engaged in fraudulent conduct and made false and misleading statements of material fact or omitted to state material facts
necessary to make the statements made not misleading. The Steinberg Lawsuit seeks to declare the action to be a class action, monetary
damages, including prejudgment and post judgment interest, an award of reasonable attorneys’ fees and expert fees and other costs, and
such additional or different relief as the interests of law or equity may require.
On or about September 16, 2018, Dalia Avraham filed an Application for Approval of a Class Action in the Tel Aviv Israel District
Court against the Company and Dr. Frost. This application was filed by a purported stockholder, both individually and on behalf of a
putative class of the Company’s stockholders (the “Avraham Claim”). The Avraham Claim alleges a negligent and/or deliberate act related
to the trade of the Company’s shares on the Tel Aviv Stock Exchange (“TASE”) which was intended to or which in fact caused damage to
the Company’s investors based on the Company’s decision to delist from TASE in April 2018 and its subsequent decision to continue to be
listed on TASE. The Avraham Claim seeks to declare the action to be a class action and an estimated NIS 20 million in damages.
On or about September 17, 2018, Adsport, Inc. (“Adsport”), a purported stockholder, filed a putative class action lawsuit in the
United States District Court for the Southern District of New York against the Company and Dr. Frost (the “Adsport Lawsuit”). This
lawsuit was brought by Adsport individually and on behalf of a putative class of the Company’s stockholders, claiming that in connection
with the facts and circumstances underlying the allegations in the SEC Complaint, the Company engaged in fraudulent conduct and made
false and misleading statements of material fact or omitted to state material facts necessary to make the statements made not misleading.
The Adsport Lawsuit seeks to declare the action to be a proper class action, monetary damages, including interest, an award of reasonable
costs, and such equitable/injunctive relief as the Court may deem proper. On December 26, 2018, the Adsport Lawsuit was transferred to
the United States District Court for the Southern District of Florida, which stayed and administratively closed the action on January 4,
2019.
On or about September 21, 2018, Michael Brennan (“Brennan”), a purported stockholder, filed a putative class action lawsuit in the
United States District Court for the Southern District of Florida against the Company and certain of its current and former executive
officers (the “Brennan Lawsuit”). This lawsuit was brought by Brennan individually and on behalf of a putative class of the Company’s
stockholders, claiming that in connection with the facts and circumstances underlying the allegations in the SEC Complaint, the Company
engaged in fraudulent conduct and made false and misleading statements of material fact or omitted to state material facts necessary to
make the statements made not misleading. The Brennan Lawsuit seeks to declare the action to be a class action and certify Brennan as the
class representative, monetary damages, including prejudgment and post judgment interest, an award of reasonable costs, including
attorneys’ fees, expert fees and other costs, and such other relief as the Court may deem proper.
60
On or about September 27, 2018, Frank Lipsius (“Lipsius”), a purported stockholder, filed a shareholder derivative complaint in the
Circuit Court of the Eleventh Judicial Circuit of Florida serving Miami-Dade County against the Company as a nominal defendant, certain
of the Company’s current and former executive officers, and members of its Board of Directors (the “Lipsius Lawsuit”). This lawsuit was
brought by Lipsius and alleges breach of fiduciary duty against the officers and directors named therein, based on the allegations raised by
the SEC in the SEC Lawsuit that the Company made misleading statements, and failed to maintain proper internal controls. The Lipsius
Lawsuit seeks to declare that Lipsius maintain the action on behalf of the Company and that Lipsius is a proper and adequate representative
of the Company, to direct the Company to improve its corporate governance and internal procedures, monetary damages, restitution, an
award of reasonable attorneys’ fees and expert fees and other costs, and such additional or different relief as the Court may deem just and
proper. On November 21, 2018, Lipsius and Louis Alexander filed a motion to consolidate the Lipsius Lawsuit and Alexander Lawsuit
(defined below). On December 14, 2018, the Company and the other defendants named in the Lipsius Lawsuit and the Alexander Lawsuit
filed a motion to dismiss the Lipsius and Alexander Lawsuits arguing that the case should be adjudicated in Delaware, or, in the alternative,
stayed pending resolution of the various pending actions in federal and Delaware state court.
On or around September 27, 2018, the Company received a demand for the inspection of the books and records of the Company from
counsel representing Jamie Gewirtz and Emily Gewirtz Stiebel (“Gewirtz/Stiebel”), each a purported stockholder of the Company, based
on the allegations raised by the SEC in the SEC Complaint. On or around December 4, 2018, Gewirtz/Stiebel filed a shareholder derivative
complaint in the Court of Chancery of the State of Delaware against the Company, as a nominal defendant, certain of the Company’s
current executives and officers, and certain of the Company’s current and former members of its Board of Directors (the “Gewirtz/Stiebel
Lawsuit”). The Gewirtz/Stiebel Lawsuit alleges breach of fiduciary duty against the officers and directors named therein based on the
allegations raised by the SEC in the SEC Complaint. The Gewirtz/Stiebel Lawsuit seeks to declare that Gewirtz/Stiebel may maintain the
action on behalf of the Company and that Gewirtz/Stiebel are proper and adequate representatives of the Company, a finding that the
defendants breached their fiduciary duties, to have the defendants disgorge certain remuneration received from the Company, to direct the
defendants to account for all damages sustained or to be sustained by the Company and all profits obtained by the alleged wrongdoing,
have the Company improve its internal controls, equitable and injunctive relief, an award of monetary damages, including pre- and post-
judgment interest, an award of reasonable attorneys’, expert witness fees and other costs, and such other and further relief as the Court
deems just and proper.
On or about October 2, 2018 Andy Yu (“Yu”), a purported stockholder, filed a shareholder derivative complaint in the United States
District Court for the Southern District of Florida against the Company as a nominal defendant, certain of the Company’s current and
former executive officers, certain current and former members of its Board of Directors, and Frost Gamma Investments Trust (the “Yu
Lawsuit”). The Yu Lawsuit alleges breach of fiduciary duty against the officers and directors named therein based on the allegations raised
by the SEC in the SEC Complaint, unjust enrichment, and that the Company made false and misleading statements of material fact or
omitted to state material facts necessary to make the statements made not misleading and failed to maintain effective internal controls. The
Yu Lawsuit seeks to declare that Yu maintain the action on behalf of the Company and that Yu is a proper and adequate representative of
the Company, to direct the Company to improve its corporate governance and internal procedures, monetary damages, restitution, an award
of reasonable attorneys’ fees and expert fees and other costs, and such additional or different relief as the Court may deem just and proper.
On December 14, 2018, the Company and the other defendants named in the Yu Lawsuit filed a motion to stay proceedings pending
resolution of the SEC Complaint, the federal securities class actions and the various stockholder derivative actions in Delaware, and also
requested an enlargement of time to respond to the Yu Lawsuit pending resolution of such motion to stay. On January 9, 2019, the United
States District Court for the Southern District of Florida granted the defendants’ motion for an enlargement of time to respond to the Yu
Lawusit pending resolution of the motion to stay until May 4, 2019.
On or about October 8, 2018 Paul Camhi (“Camhi”), a purported stockholder, filed a putative class action lawsuit in the United States
District Court for the Southern District of Florida against the Company and Dr. Frost (the “Camhi Lawsuit”). The Camhi Lawsuit was
brought by Camhi individually and on behalf of a putative class of the Company’s stockholders, claiming that in connection with the facts
and circumstances underlying the allegations in the SEC Complaint, the Company engaged in fraudulent conduct and made false and
misleading statements of material fact or omitted to state material facts necessary to make the statements made not misleading. The Camhi
Lawsuit seeks to declare the action to be a class action,to certify Camhi as the class representative, and to award monetary damages,
including prejudgment and post judgment interest, an award of reasonable attorneys’ fees, and such other relief as the Court may deem just
and proper. On November 28, 2018, Camhi voluntarily dismissed the Camhi Lawsuit.
On or around October 10, 2018, counsel for plaintiffs filed a Consolidated Complaint for Violations or the Federal Securities Laws
against MabVax Therapeutics, Inc. in the United States District Court of the Southern District of California, in which the Company and its
CEO, Phillip Frost, M.D, were also named as a defendants. This lawsuit was brought by a purported holder of MabVax’s securities, both
individually and on behalf of a putative class of the MabVax’s stockholders, based on the allegations raised by the SEC in its lawsuit filed
against the Company and others on September 7, 2018. The
61
lawsuit seeks to declare the action to be a class action, monetary damages in an amount to be proven at trial, including interest thereon, an
award of reasonable costs and expenses, including counsel fees and expert fees, and such other and further relief as the Court may deem just
and proper. On November 13, 2018, the case was voluntarily dismissed without prejudice.
On or about October 15, 2018 Richard Tunick (“Tunick”), a purported stockholder, filed a shareholder derivative complaint in the
Court of Chancery of the State of Delaware against the Company as a nominal defendant, Dr. Frost and the Company’s Board of Directors
(the “Tunick Lawsuit”). The Tunick Lawsuit alleges breach of fiduciary duty based on the allegations raised by the SEC in the SEC
Complaint. The lawsuit seeks to declare the action a proper derivative action, monetary damages, equitable and injunctive relief, to direct
the Company to improve its internal controls and Board oversight , an award of reasonable attorneys’ fees and expert fees, and such other
and further relief as the Court deems just and proper. On February 11, 2019, a Verified Consolidated Derivative Complaint was filed in the
Court of Chancery of the State of Delaware (the “Consolidated Delaware Action”) consolidating this matter with the Gewirtz/Stiebel
Lawsuit, Lutzker Lawsuit(as defined below), Davis Lawsuit (as defined below), and the Pawlenko/Breuninger Lawsuit (as defined below).
Gewirtz/Stiebel, Tunick, Lutzker, and Davis were named as Co-Lead Plaintiffs in the filing. On February 12, 2019, the Company and the
other defendants named in the Consolidated Delaware Action, filed a motion to stay proceedings pending resolution of the federal securities
class actions. On February 19, 2019, the Company and the other defendants named in the Consolidated Delaware Action, filed their
opening brief in support of their motion to stay.
On November 1, 2018, Lisette Demetriades (“Demetriades”), a purported stockholder, filed a shareholder derivative complaint in the
United States District Court for the Southern District of Florida against the Company as a nominal defendant, certain of the Company’s
current and former executive officers, certain current and former members of its Board of Directors, and Frost Gamma Investment Trust
(the “Demetriades Lawsuit”). The Demetriades Lawsuit alleges breach of fiduciary duty against the officers and directors named therein,
based on the allegations raised by the SEC in the SEC Lawsuit, unjust enrichment, violations of the federal securities laws, that the
individual defendants and Frost Gamma Investment Trust caused the Company made false and misleading statements of material fact or
omitted to state material facts necessary to make the statements made not misleading, and the Company failed to maintain effective internal
controls. The lawsuit seeks to declare the action a proper derivative action, monetary damages, to direct the Company to improve its
internal controls and Board oversight concerning investments and self-dealing, restitution and disgorgement of profits, an award of
reasonable attorneys’ fees and experts’ fees, and such other and further relief as the Court deems just and proper. On December 14, 2018,
the Company and the other defendants named in the Demetriades Lawsuit filed a motion to stay proceedings pending resolution of the SEC
Complaint, the federal securities class actions and the various stockholder derivative actions in Delaware, and subsequently, on January 10,
2019, requested an enlargement of time to respond to the Demetriades Lawsuit pending resolution of such motion to stay. On January 16,
2019, the United States District Court for the Southern District of Florida granted the defendants’ motion for an enlargement of time to
respond to the Demetriades complaint pending resolution of the motion to stay.
On or about November 2, 2018, Louis T. Alexander (“Alexander”), a purported stockholder, filed a shareholder derivative complaint
in the Circuit Court of the Eleventh Judicial Circuit of Florida serving Miami-Dade County against the Company, as a nominal defendant,
Dr. Frost, certain current and former members of the Company’s Board of Directors and executive officers (the “Alexander Lawsuit”). The
Alexander Lawsuit alleges breach of fiduciary duty against the officers and directors named therein, based on the allegations raised by the
SEC in the SEC Lawsuit. The lawsuit seeks to declare that the Alexander maintain the action on behalf of the Company and that Alexander
is a proper and adequate representative of the Company, monetary damages, to have the Company improve its corporate governance and
internal procedures, a restitution award to the Company and disgorgement of profits, benefits and other compensation, an award of
reasonable attorneys’ fees, accountants’ and experts’ fees, costs and expenses, and such other relief as the Court deems just and proper. On
November 21, 2018, Lipsius and Alexander filed a motion to consolidate the Lipsius and Alexander Lawsuits. On December 14, 2018, the
Company and the other defendants named in the Lipsius Lawsuit and the Alexander Lawsuit filed a motion to dismiss the Lipsius and
Alexander Lawsuits arguing that the cases should be adjudicated in Delaware, or, in the alternative, stayed pending resolution of the
various pending actions in federal and Delaware state court.
On or about November 7, 2018, Esther Susan Lutzker (“Lutzker”), a purported stockholder, filed a shareholder derivative complaint
in the Court of Chancery of the State of Delaware against the Company as a nominal defendant and certain members of the Company’s
Board of Directors (the “Lutzker Lawsuit”). This lawsuit was brought by Lutzker and alleges breach of fiduciary duty against the directors
named therein, based on the allegations raised by the SEC in the SEC Complaint, and that the Company made false and misleading
statements and failed to maintain effective internal controls. The Lutzker Lawsuit seeks to declare that Lutzker maintain the action on
behalf of the Company, that Lutzker is a proper and adequate representative of the Company, monetary damages, appropriate equitable
relief, an award of costs and disbursements, including reasonable attorneys’, accountants’, and experts’ fees costs and expenses, and such
other and further relief as the Court may deem just and proper. On February 11, 2019, a Verified Consolidated Derivative Complaint was
filed in the Court of Chancery of the State of Delaware consolidating this matter with the Gewirtz/Stiebel Lawsuit, Tunick Lawsuit, Davis
Lawsuit, and Pawlenko/
62
Breuninger Lawsuit. Gewirtz/Stiebel, Tunick, Lutzker, and Davis were named as Co-Lead Plaintiffs in the filing. On February 12, 2019, the
Company and the other defendants named in the Consolidated Delaware Action, filed a motion to stay proceedings pending resolution of
the federal securities class actions. On February 19, 2019, the Company and the other defendants named in the Consolidated Delaware
Action filed their opening brief in support of their motion to stay.
On or about November 14, 2018, Sammy Lee (“Lee”), a purported stockholder, filed a shareholder derivative complaint in the United
States District Court for the Southern District of Florida against the Company as a nominal defendant, Dr. Frost, Frost Gamma Investments
Trust, an entity controlled by Dr. Frost, and certain of the Company’s current and former executive officers, and current and former
members of its Board of Directors (the “Lee Lawsuit”). The Lee Lawsuit alleges breach of fiduciary duty based on the allegations raised by
the SEC in the SEC Complaint, unjust enrichment, violations of the federal securities laws, and that the Company made false and
misleading statements and failed to maintain effective internal controls. The lawsuit seeks to declare that Lee maintain the action on behalf
of the Company and that Lee is a proper and adequate representative of the Company, to declare that the defendants breached or aided and
abetted the breach of their fiduciary duties to the Company, monetary damages to the Company together with pre-judgment and post-
judgment interest thereon, to have the Company improve its corporate governance and internal procedures, a restitution award to the
Company, an award of reasonable attorneys’ fees, experts’ fees, costs and expenses, and such other and further relief as the Court may
deem just and proper. The action was dismissed sua sponte by the Judge for failure to state a claim. The lawsuit was amended and refiled on
November 30, 2018.
On or around December 4, 2018, the Company received a demand for the inspection of the books and records of the Company from
counsel representing Ivan Pawlenko (“Pawlenko”), a stockholder of the Company, based on the allegations raised by the SEC in the SEC
Complaint. On or around December 5, 2018, the Company received a demand for the inspection of the books and records of the Company
from counsel representing Martin Breuninger (“Breuninger”), a stockholder of the Company, based on the allegations raised by the SEC in
the SEC Complaint. Pawlenko and Breuninger are represented by the same counsel. The Company is providing the requested documents to
counsel. On or about January 29, 2019, Pawlenko and Breuninger jointly filed a shareholder derivative complaint in the Court of Chancery
of the State of Delaware against the Company as a nominal defendant,Dr. Frost, and certain former and current members of the Company’s
Board of Directors (the “Pawlenko/Breuninger Lawsuit”). This lawsuit alleges breach of fiduciary duty based on the allegations raised by
the SEC in the SEC Complaint. The lawsuit seeks to declare that the action is a proper derivative action and that plaintiffs are proper and
adequate representatives of the Company’s interests, a finding that the defendants breached their fiduciary duties, to have the defendants
disgorge all gains received and repayment of same to the Company, award monetary damages to the Company, including pre- and post-
judgment interest, equitable relief sufficient to remedy alleged harms, an award of the costs, expenses, and disbursements of the action,
including any attorneys’ and experts’ fees, including pre- and post-judgment interest, and such other relief as the Court deems just,
equitable, and proper. On February 11, 2019, a Verified Consolidated Derivative Complaint was filed in the Court of Chancery of the State
of Delaware consolidating this matter with the Gewirtz/Stiebel Lawsuit, Tunick Lawsuit, Lutzker Lawsuit, and Davis Lawsuit.
Gewirtz/Stiebel, Tunick, Lutzker, and Davis were named as Co-Lead Plaintiffs in the filing. On February 12, 2019, the Company and the
other defendants named in the Consolidated Delaware Action, filed a motion to stay proceedings pending resolution of the federal securities
class actions. On February 19, 2019, the Company and the other defendants named in the Consolidated Delaware Action, filed their
opening brief in support of their motion to stay.
On or about December 17, 2018, Thaddeus R. Sobieski and Donnis W. King, purported stockholders of the Company, filed a
shareholder derivative complaint in the United States District Court for the Southern District of Florida against the Company as a nominal
defendant, Dr. Frost, Frost Gamma Investments Trust, and certain of the Company’s current and former executive officers, and current and
former members of its Board of Directors (the “Sobieski King Lawsuit”). The Sobieski King Lawsuit alleges breach of fiduciary duty based
on the allegations raised by the SEC in the SEC Complaint, violations of the federal securities laws, unjust enrichment, waste of corporate
assets, and that the Company made false and misleading statements and failed to maintain effective internal controls. The lawsuit seeks to
declare that the action is a proper derivative action, breach of fiduciary duties, an award monetary damages to the Company, requires the
current and former directors named as defendants to remit to the Company all salaries and other compensation received during the period
of alleged breach of fiduciary duties, to have the Company improve its corporate governance and internal procedures, an award of pre-
judgement and post- judgement interest, reasonable attorneys’ fees, experts’ fees, costs and expenses, and such other and further relief as
the Court may deem just and proper. On February 19, 2019, the Company and other defendants named in the Sobieski Lawsuit filed an
unopposed motion to stay proceedings pending resolution of the federal securities class actions and for an enlargement of time to respond to
the Sobieski complaint.
On December 31, 2018, Connie Wendt (“Wendt”), a purported stockholder, filed a shareholder derivative complaint in the United
States District Court for the Southern District of Florida against the Company as a nominal defendant, certain of its current and former
executive officers, certain current and former members of its Board of Directors, Frost Gamma Investments Trust, and certain other
individuals and an entity named in the SEC Complaint (the “Wendt Lawsuit”). Wendt Lawsuit alleges breach of fiduciary duties, unjust
enrichment, violations of the federal securities laws, and breach of fiduciary duties for insider selling and
63
misappropriation of information. The lawsuit seeks to declare that Wendt maintain the action on behalf of the Company and that Wendt is a
proper and adequate representative of the Company, declare that each of the Company’s named officers and directors breached their
fiduciary duties to the Company, monetary damages, disgorgement of alleged profits, an award of costs and disbursements including
reasonable attorneys’ fees, accountants’ and experts’ fees and costs and expenses, and such other and further relief as the Court deems just
and proper.
On or around November 7, 2018, the Company received a demand for the inspection of the books and records of the Company from
counsel representing Vivian Davis (“Davis”), a stockholder of the Company, based on the allegations raised by the SEC in the SEC
Complaint. The Company provided the requested documents to Davis’ counsel. On or about January 18, 2019, Davis, a purported
stockholder, filed a shareholder derivative complaint in the Court of Chancery of the State of Delaware against the Company as a nominal
defendant, Dr. Frost, and members of its Board of Directors (the “Davis Lawsuit”). The Davis Lawsuit alleges breach of fiduciary duty
based on the allegations raised by the SEC in the SEC Complaint. The Davis Lawsuit seeks a finding of breach of fiduciary duties,
extraordinary equitable and injunctive relief, disgorgement, an award of reasonable attorneys’, accountants’, and experts’ fees, costs and
expenses, and such other further relief as the Court deems just and proper. On February 11, 2019, a Verified Consolidated Derivative
Complaint was filed in the Court of Chancery of the State of Delaware consolidating this matter with the Gewirtz/Stiebel Lawsuit, Tunick
Lawsuit, Lutzker Lawsuit, and the Pawlenko/Breuninger Lawsuit. Gewirtz/Stiebel, Tunick, Lutzker, and Davis were named as Co-Lead
Plaintiffs in the filing. On February 12, 2019, the Company and the other defendants named in the Consolidated Delaware Action, filed a
motion to stay proceedings pending resolution of the federal securities class actions. On February 19, 2019, the Company and the other
defendants named in the Consolidated Delaware Action, filed their opening brief in support of their motion to stay.
On or around January 28, 2019, Robert Davydov (“Davydov”), a purported stockholder, filed a shareholder derivative complaint in
the Circuit Court of the Eleventh Judicial Circuit of Florida serving Miami-Dade County against the Company as a nominal defendant and
the certain members of its Board of Directors (the “Davydov Lawsuit”). The Davydov Lawsuit alleges breach of fiduciary duty based on
the allegations raised by the SEC in the SEC Complaint, corporate waste and unjust enrichment. The Davydov Lawsuit seeks to declare
that Davydov may maintain the action on behalf of the Company and that Davydov is a proper and adequate representative of the
Company, to declare that the defendants breached and/or aided and abetted the breach of their fiduciary duties, an award of monetary
damages, restitution, an award of reasonable attorneys’ fees and expert witness fees and other costs, and such other and further equitable
relief as the Court deems just and proper.
The Company intends to vigorously defend itself against the class action and derivative claims. Based on the early stages of these
legal proceedings, at this time, the Company is not able to reasonably estimate a possible range of loss, if any, that may result from these
allegations.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
64
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES.
Our Common Stock is traded publicly on the NASDAQ Stock Market (“NASDAQ”) and the Tel Aviv Stock Exchange under the
symbol “OPK”.
The following table sets forth for the periods indicated the high and low sales prices per share of our Common Stock during each of
the quarters set forth below as reported on the NASDAQ :
2018
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
$
High
Low
5.14 $
5.02
6.40
3.92
9.55 $
8.04
7.24
7.08
2.66
2.91
3.21
2.34
7.13
5.99
5.85
4.50
As of February 15, 2019, there were approximately 480 holders of record of our Common Stock.
We have not declared or paid any cash dividends on our Common Stock. No cash dividends have been previously paid on our
Common Stock and none are anticipated in fiscal 2019.
Stock Performance Graph
The following graph compares the five-year cumulative total return of our Common Stock with the S&P 500 Index and the NASDAQ
Biotechnology Index. The graph assumes $100 invested on December 31, 2013 in our Common Stock and in each of the foregoing indices.
The stock price performance reflected in the graph below is not necessarily indicative of future price performance.
OPKO Health, Inc.
S&P 500
NASDAQ Biotechnology
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
$
100.00 $
100.00
100.00
118.36 $
113.69
131.71
119.08 $
115.26
140.56
110.19 $
129.05
112.25
58.06 $
157.22
133.67
35.66
150.33
121.24
Recent Sales of Unregistered Securities
All recent sales of unregistered securities were previously disclosed in a Current Report on Form 8-K or Quarterly Report on Form
10-Q.
66
ITEM 6. SELECTED FINANCIAL DATA.
The following selected historical consolidated statement of operations data for the years ended December 31, 2018, 2017, 2016, 2015
and 2014 and the consolidated balance sheet data as of December 31, 2018, 2017, 2016, 2015 and 2014, below are derived from our audited
consolidated financial statements and related notes thereto. This data should be read in conjunction with our “Management’s Discussion
and Analysis of Financial Condition and Results of Operation” and our consolidated financial statements and the related notes thereto.
Effective January 1, 2018, we adopted Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, using
the full retrospective transition method. The information contained in the table below for the years ended December 31, 2017, 2016 and
2015 has been adjusted to to reflect our retrospective adoption of Topic 606. For further discussion on the impact of adopting Topic 606,
refer to Note 2 to the Consolidated Financial Statements, “Summary of Significant Accounting Policies.” The information for the year
ended December 31, 2014 has not been adjusted to reflect the impact of the adoption of ASC 606.
(In thousands, except share and per share information)
Statement of operations data:
Revenues
Costs and expenses:
Cost of revenue
Operating expenses
Total costs and expenses
Operating loss
Other income and (expense), net
Income tax benefit (provision)
Net loss
Net loss attributable to common shareholders
Loss per share:
loss per share, basic
loss per share, diluted
Weighted average number of common shares
outstanding basic:
Weighted average number of common shares
outstanding diluted:
Balance sheet data:
Total assets
Long-term liabilities
Total shareholders’ equity
2018
2017
2016
2015
2014
For the years ended December 31,
$
990,266 $
966,006 $
1,117,494 $
447,517 $
91,125
604,636
556,827
1,161,463
(171,197)
(6,072)
38,726
(153,040)
(153,040) $
620,130
622,318
1,242,448
(276,442)
4,518
(18,855)
(305,250)
(305,250) $
611,482
602,563
1,214,045
(96,551)
(271)
56,115
(48,359)
(48,359) $
235,239
332,858
568,097
(120,580)
(39,517)
113,675
(53,527)
(52,127) $
48,009
188,931
236,940
(145,815)
(25,212)
(24)
(174,638)
(171,666)
(0.27) $
(0.27) $
(0.55) $
(0.55) $
(0.09) $
(0.10) $
(0.11) $
(0.11) $
(0.41)
(0.41)
563,143,663
559,160,565
550,846,553
488,065,908
422,014,039
563,143,663
559,160,565
555,605,448
488,065,908
422,014,039
2,451,072 $
371,460 $
2,589,956 $
434,304 $
2,766,619 $
480,166 $
2,799,188 $
614,423 $
1,267,664
348,812
1,791,291 $
1,843,623 $
2,046,433 $
1,957,695 $
835,741
$
$
$
$
$
$
67
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 (“PSLRA”), Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”), and Section 21E
of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), about our expectations, beliefs, or intentions regarding our
product development efforts, business, financial condition, results of operations, strategies, or prospects. You can identify forward-looking
statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate
to anticipated or expected events, activities, trends, or results as of the date they are made. Because forward-looking statements relate to
matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to
differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual
activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those
contained in “Item 1A — Risk Factors” of this Annual Report on Form 10-K. We do not undertake any obligation to update forward-
looking statements. We intend that all forward-looking statements be subject to the safe harbor provisions of 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.
OVERVIEW
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 Laboratories (“BioReference”), the nation’s third-largest clinical laboratory with
a core genetic testing business and an almost 300-person sales and marketing team to drive growth and leverage new products, including
the 4Kscore prostate cancer test. Our pharmaceutical business features Rayaldee, an 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), OPK88004, a selective androgen receptor modulator which we have studied for benign prostatic hyperplasia, but for
which we are exploring other indications, and 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). Our pharmaceutical business
also features hGH-CTP, a once-weekly human growth hormone injection (in phase 3 and partnered with Pfizer).
We operate established pharmaceutical platforms in Spain, Ireland, Chile and Mexico, which are generating revenue and from which
we expect to generate positive cash flow and facilitate future market entry for our products currently in development. We have a
development and commercial supply pharmaceutical company, as well as a global supply chain operation and holding company in Ireland,
which we expect will play an important role in the development, manufacturing, distribution and approval of a wide variety of drugs with
an emphasis on high potency products. We also own a specialty active pharmaceutical ingredients (“APIs”) manufacturer in Israel, which
we expect will facilitate the development of our pipeline of molecules and compounds for our proprietary molecular diagnostic and
therapeutic products.
RECENT DEVELOPMENTS
In February 2019, we issued $200.0 million aggregate principal amount of Convertible Senior Notes due 2025 (the “2025 Convertible
Notes”) in an underwritten public offering. The 2025 Convertible Notes will bear interest at a rate of 4.50% per year, payable semiannually
in arrears on February 15 and August 15 of each year, beginning on August 15, 2019. The notes mature on February 15, 2025, unless
earlier repurchased, redeemed or converted.
On February 1, 2019, we announced that the FDA has approved our point-of-care Sangia Total PSA Test using the Claros 1
Analyzer. The product is indicated to quantitatively measure total PSA in whole blood from a fingerstick of blood collected by a healthcare
professional and is used in conjunction with a digital rectal exam as an aid in the detection of prostate cancer in men aged 50 years and
older. We are evaluating commercialization strategies for the PSA test on the Claros 1 Analyzer, including the expansion of the test menu,
prior to commercialization.
On January 31, 2019, we announced that Novitas Solutions, Inc. has issued a notice of a future non-coverage determination for the
4Kscore test to be effective March 20, 2019. The notice released by Novitas does not appear to be different from the draft local coverage
determination released by Novitas on May 18, 2018. We are evaluating options to appeal the decision and undertake other steps with
the U.S. Centers for Medicare & Medicaid Services (CMS) in an effort to have this determination rescinded or reversed. We are also
developing a strategy to obtain FDA approval for the 4Kscore test, among other efforts, to assist in securing broad reimbursement coverage.
On December 27, 2018, we announced that both the Company and Dr. Frost, entered into settlement agreements with the
Securities and Exchange Commission (the “Commission”), subject to court approval, resolving the complaint filed by the
68
Commission against the Company and Dr. Frost in the U.S. District Court for the Southern District of New York on September 7, 2018.
Pursuant to the settlement, and without admitting or denying any of the allegations of the Complaint, the Company is enjoined from
violating Section 13(d) of the Exchange Act and paid a $100,000 penalty. Liability under Section 13(d) can be established without any
showing of wrongful intent or negligence. The settlement was approved by the Court in January 2019.
On November 8, 2018, we entered into stock purchase agreements with certain investors pursuant to which we agreed to sell to such
investors in private placements an aggregate of approximately 26.5 million shares of our common stock at a purchase price of $3.49 per
share, which was the closing bid price of our Common Stock on the NASDAQ on such date, for an aggregate purchase price of $92.5
million.
On November 8, 2018, we entered into a credit agreement with an affiliate of Dr. Frost, pursuant to which the lender committed to
provide us with an unsecured line of credit in the amount of $60 million. The credit agreement was terminated on or around February 20,
2019 and amounts borrowed during 2019 were repaid from the proceeds of the 2025 Convertible Notes offering. Borrowings under the line
of credit bore interest at a rate of 10% per annum and could be repaid and reborrowed at any time. The credit agreement included various
customary remedies for the lender following an event of default, including the acceleration of repayment of outstanding amounts under line
of credit. The line of credit would have matured on November 8, 2023.
RESULTS OF OPERATIONS
For The Years Ended December 31, 2018 and December 31, 2017
Effective January 1, 2018, we adopted Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, using
the full retrospective transition method. Under this method, we have revised our Consolidated Financial Statements for the years ended
December 31, 2017 and 2016, as if Topic 606 had been effective for those periods. For further discussion on the impact of adopting Topic
606, refer to Note 2 to the Consolidated Financial Statements, “Summary of Significant Accounting Policies.”
Revenues
(In thousands)
Revenue from services
Revenue from products
Revenue from transfer of intellectual property and other
Total revenues
For the years ended December 31,
2018
2017
Change
$
$
813,248 $
107,112
69,906
990,266 $
782,710 $
107,759
75,537
966,006 $
30,538
(647)
(5,631)
24,260
Revenue from services for the year ended December 31, 2018 increased approximately $30.5 million compared to the year ended
December 31, 2017. The increase in revenue from services is attributable to reduced adjustments to estimated collection amounts from
third-party payors as discussed in the paragraph below. Revenue from services for the year ended December 31, 2017 was also negatively
affected by claims of overpayment as a result of payor error of approximately $30.0 million. In addition, Revenue from services for the
year ended December 31, 2018 increased by $12.9 million from improved collections for our clinical testing resulting from improvements
in our billing cycle and $4.7 million from higher volume in our genomics testing. Partially offsetting these increases, Revenue from
services for the year ended December 31, 2018 was negatively affected by $24.5 million as a result of changes in clinical test volumes as a
result of increased competition, reduced clinical reimbursement of $15.6 million due to PAMA which came into effect in January 2018, and
reduced genomics reimbursement of $11.6 million as a result of an increase in denial rates and changes to medical and procedural
requirements.
Estimated collection amounts are subject to the complexities and ambiguities of billing, reimbursement regulations and claims
processing, as well as issues unique to Medicare and Medicaid programs, and require us to consider the potential for retroactive adjustments
when estimating variable consideration in the recognition of revenue in the period the related services are rendered. For the year ended
December 31, 2018, adjustments to estimated collection amounts from third-party payors decreased revenue by $22.8 million compared to
$66.0 million in 2017. For the year ended December 31, 2017, approximately $35.1 million of adjustments related to our genomics testing
and approximately $30.9 million related to our clinical testing. The adjustments for our genomics testing in 2017 primarily relate to
changes in payor medical and procedural requirements for our genomics testing and the adjustments for our clinical testing in 2017 and
2018 primarily relate to delays in the billing cycle resulting from our implementation of a new clinical testing billing system in late 2016 as
well as reduced clinical reimbursement as discussed above.
69
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 what we believe to be appropriate
corrective action. Settlements with third-party payors for retroactive adjustments due to audits, reviews or investigations are 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. During the year ended
December 31, 2017, a payor informed us it had overpaid BioReference due to an error on its part over a period of several years, including
multiple years prior to the acquisition of BioReference by OPKO in August 2015. For the years ended December 31, 2018 and 2017,
Revenue from services was reduced by approximately $8.1 million and $30.0 million, respectively, related to claims of overpayment.
The composition of Revenue from services by payor for the years ended December 31, 2018 and 2017 is as follows:
(In thousands)
Healthcare insurers
Government payors
Client payors
Patients
Total
For the years ended December 31,
2018
2017
$
$
370,096 $
271,590
150,259
21,303
813,248 $
368,628
264,493
128,867
20,722
782,710
Overall, Revenue from products for the year ended December 31, 2018 was consistent with the comparative period in 2017 as an
increase in sales of Rayaldee of $20.3 million in the year ended December 31, 2018 compared to $9.1 million in the year ended
December 31, 2017, was partially offset by a decrease in revenue at FineTech and in Chile. Revenue from transfer of intellectual property
for the years ended December 31, 2018 and 2017 principally reflected $60.0 million and $61.2 million, respectively, of revenue related to
the Pfizer Transaction. Revenue from transfer of intellectual property for the years ended December 31, 2018 and 2017, also reflects $2.0
million and $10.0 million, respectively, of revenue from milestone payments from our licensees, VFMCRP and TESARO.
Costs of revenue. Costs of revenue for the year ended December 31, 2018 decreased $15.5 million compared to 2017. Cost of service
revenue decreased in 2018 due to a decrease in volume and employee related costs for clinical testing at BioReference. The decrease in cost
of product revenue is attributable to $5.4 million of inventory obsolescence expense recognized in 2017 related primarily to the launch of
Rayaldee and to changes in the product mix of items sold during the period. Cost of revenue for the years ended December 31, 2018 and
2017 were as follows:
Cost of Revenue
(In thousands)
Cost of service revenue
Cost of product revenue
Total cost of revenue
For the years ended December 31,
2018
2017
Change
$
$
546,654 $
57,982
604,636 $
558,953 $
61,177
620,130 $
(12,299)
(3,195)
(15,494)
Selling, general and administrative expenses. Selling, general and administrative expenses for the years ended December 31, 2018
and 2017 were $358.3 million and $414.6 million, respectively. The decrease in selling, general and administrative expenses was primarily
due to decreased expenses at BioReference due to planned cost reduction initiatives and to a decrease in corporate expenses, which was
partially offset by $9.6 million of expenses related to the defense and investigation of actions brought by the U.S. Securities and Exchange
Commission, which were settled in December 2018. Selling, general and administrative expenses for the year ended December 31, 2017
also reflected higher professional fees related to the implementation of a new billing system at BioReference. Selling, general and
administrative expenses for the year ended December 31, 2017 included $8.8 million of expense to write-off certain other current assets.
Selling, general and administrative expenses during the years ended December 31, 2018 and 2017 included equity-based compensation
expense of $14.7 million and $21.2 million, respectively.
70
Research and development expenses . Research and development expenses for the years ended December 31, 2018 and 2017 were
$125.6 million and $126.4 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 such as salaries, benefits and equity-
based compensation expense. Other internal research and development expenses are incurred to support overall research and development
activities and include expenses related to general overhead and facilities.
The following table summarizes the components of our research and development expenses:
External expenses:
Phase 3 clinical trials
Manufacturing expense for biological products
PMA studies
Earlier-stage programs
Research and development employee-related expenses
Other internal research and development expenses
Third-party grants and funding from collaboration agreements
Total research and development expenses
For the years ended December 31,
2018
2017
$
$
16,215 $
39,974
59
15,591
27,318
27,247
(818 )
125,586 $
15,339
47,737
1,089
7,620
29,970
24,680
—
126,435
Overall research and development expenses for the year ended December 31, 2018 were consistent with the comparative period in
2017 as an increase in research and development expenses related to a once or twice weekly oxyntomodulin for type 2 diabetes and to a
selective androgen receptor modulator for benign prostatic hyperplasia were offset by research and development tax credits recognized in
2018. Research and development expenses for the years ended December 31, 2018 and 2017 include equity-based compensation expenses
of $4.2 million and $5.1 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 for the years ended December 31, 2018 and 2017, were $16.8 million and $3.4
million of income, respectively. The change in contingent consideration was primarily attributable to changes in assumptions regarding the
timing of achievement of future milestones for OPKO Renal. The contingent consideration liabilities of $24.6 million at December 31,
2018 related 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 $67.9 million and $71.5 million, respectively, for the years
ended December 31, 2018 and 2017. Amortization expense reflects the amortization of acquired intangible assets with defined useful lives.
Our indefinite lived IPR&D assets will not be amortized until the underlying development programs are completed. Upon obtaining
regulatory approval by the U.S. FDA, the IPR&D assets will be accounted for as a finite-lived intangible asset and amortized on a straight-
line basis over its estimated useful life.
Asset impairment charges. Asset impairment charges was $21.8 million and $13.2 million, respectively, for the years ended
December 31, 2018 and 2017. Asset impairment charges for the year ended December 31, 2018 is related to an impairment charge of $10.1
million to write our IPR&D assets for Alpharen and OPK88004 down to their estimated fair value and a goodwill impairment charge of
$11.7 million to write the carrying amount of the FineTech reporting unit down to its estimated fair value due to the loss of a significant
customer in 2018. Asset impairment charges for the year ended December 31, 2017 is related to an impairment charge of $13.2 million to
write our intangible asset for VARUBI™ down to its estimated fair value.
Interest income. Interest income for the years ended December 31, 2018 and 2017, 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 years ended December 31, 2018 and 2017, was $11.9 million and $6.6 million, respectively.
Interest expense is principally related to interest incurred on the 2033 Senior Notes, on BioReference’s outstanding debt under its credit
facility and on the 2023 Convertible Notes issued in February 2018. The increase in interest
71
expense for the year ended December 31, 2018 is primarily due to interest incurred on the 2023 Convertible Notes and to higher
outstanding debt and interest rates under BioReference’s credit facility in 2018 compared to 2017.
Fair value changes of derivative instruments, net. Fair value changes of derivative instruments, net for the years ended December 31,
2018 and 2017, were $3.0 million and $0.1 million of income, respectively. Derivative income for the year ended December 31, 2018
principally related to the change in fair value of warrants to purchase additional shares of Neovasc. Fair value changes of derivative
instruments, net for the year ended December 31, 2017 is primarily related $3.2 million of income due to the change in the fair value of the
embedded derivatives in the 2033 Senior Notes, which was partially offset by $2.9 million of expense related to the change in the fair value
of warrants and options to purchase additional shares of Neovasc, Inc. (“Neovasc”) and Xenetic Biosciences, Inc. (“Xenetic”).
Other income and (expense), net. Other income and (expense), net for the years ended December 31, 2018 and 2017, were $1.5
million and $10.5 million of income, respectively. Other income for the year ended December 31, 2018 primarily consists of net unrealized
gains recognized during the period on equity securities. Other income for the year ended December 31, 2017 primarily consists of a $3.0
million gain on the sale of non-strategic assets at a wholly-owned BioReference subsidiary, a $1.5 million gain on the sale of certain
available for sale investments, a $2.5 million gain in connection with the acquisition transaction between Eloxx Pharmaceuticals, Inc. and
Sevion Therapeutics, Inc., and a $1.9 million gain in connection with the dilution of our equity method investment in VBI Vaccines Inc.
(“VBI”).
Income tax benefit (provision). Our income tax benefit (provision) for the years ended December 31, 2018 and 2017 was $38.7
million, and $(18.9) million, respectively. The change in income tax benefit is primarily a result of our analysis of the realization of
deferred tax assets and corresponding release of the valuation allowance associated with U.S. and non-U.S. deferred tax assets. As of
December 31, 2017, the Company determined that it was more likely than not that certain U.S. and non-U.S. deferred tax assets would not
be realized and recorded a valuation allowance of $28.7 million. On December 22, 2017, the Tax Act was enacted into law and the new
legislation reduced the corporate income tax rate from 35% to 21% which required us to remeasure our U.S. deferred tax assets and
liabilities and recognize the effect in the period of enactment, resulting in $31.8 million of expense, with an equal offset to valuation
allowance.
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 $14.5 million and $14.5 million for the years ended December 31, 2018 and 2017, respectively. Included in
Loss from investments in investees for the year ended December 31, 2018 is a charge of $2.9 million to write our investment in InCellDx,
Inc. down to its fair value as of December 31, 2018.
For The Years Ended December 31, 2017 and December 31, 2016
Revenues
(In thousands)
Revenue from services
Revenue from products
Revenue from transfer of intellectual property and other
Total revenues
For the years ended December 31,
2017
2016
Change
$
$
782,710 $
107,759
75,537
966,006 $
928,572 $
83,467
105,455
1,117,494 $
(145,862)
24,292
(29,918)
(151,488)
Revenue from services for the year ended December 31, 2017 decreased approximately $145.9 million compared to 2016. The
decrease in revenue from services is attributable to approximately $15.5 million of reduced reimbursement within our genomics testing as a
result of an increase in denial rates and changes to payor medical and procedural requirements, approximately $35.1 million of adjustments
to the estimated collection amounts from third-party payors for our genomics testing, and decreased volume in genomics testing of
approximately $1.5 million. Revenue from services also declined by approximately $21.9 million in clinical test volumes as a result of
increased competition, approximately $30.9 million related to changes in the estimated collection amounts from third-party payors for our
clinical testing and approximately $11.0 million related to lower collections on patient billings for our clinical testing offset in part by
improvements in our billing cycle. Revenue from services for the year ended December 31, 2017 was also affected by claims of
overpayment as a result of payor error of approximately $30.0 million.
Estimated collection amounts are subject to the complexities and ambiguities of billing, reimbursement regulations and claims
processing, as well as issues unique to Medicare and Medicaid programs, and require us to consider the potential for
72
retroactive adjustments when estimating 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 based on actual collection experience. For the year ended
December 31, 2017, changes to estimated collection amounts from third-party payors negatively affected revenue by approximately $35.1
million for our genomics testing and approximately $30.9 million for our clinical testing. The adjustments for our genomics testing
primarily relate to changes in payor medical and procedural requirements for our genomics testing. The adjustments for our clinical testing
primarily relate to delays in the billing cycle resulting from our implementation of a new clinical testing billing system in late 2016.
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 what we believe to be appropriate
corrective action. Settlements with third-party payors for retroactive adjustments due to audits, reviews or investigations are 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. During the year ended
December 31, 2017, a payor informed us it had overpaid BioReference due to an error on its part over a period of several years, including
multiple years prior to the acquisition of BioReference by OPKO in August 2015. For the year ended December 31, 2017, Revenue from
services was reduced by approximately $30.0 million related to claims of overpayment as a result of payor error.
The increase in Revenue from products principally reflects an increase in revenue from OPKO Chile, Spain and EirGen. Revenue
from products in 2017 also reflects $9.1 million of revenue from sales of Rayaldee, which was launched in the U.S. in November 2016.
Revenue from transfer of intellectual property decreased as a result of $50.0 million of revenue from the initial payment in the VFMCRP
Agreement for the year ended December 31, 2016, which was partially offset by $10.0 million of revenue from a milestone payment from
our licensee, TESARO, for the year ended December 31, 2017. Revenue from transfer of intellectual property for the years ended
December 31, 2017 and 2016 also reflects $66.5 million and $51.0 million, respectively, of revenue related to the Pfizer Transaction.
Costs of revenue. Costs of revenue for the year ended December 31, 2017 increased $8.6 million compared to the prior year. The
decrease in cost of service revenue is attributable to decreased revenue at BioReference. The increase in cost of product revenue is
attributable to an increase in revenue at OPKO Chile, Spain and EirGen and to cost of revenue related to sales of Rayaldee, which was
launched in the U.S. in November 2016. Also included in cost of product revenue for the year ended December 31, 2017 is $5.4 million of
inventory obsolescence expense related primarily to the launch of Rayaldee. Cost of revenue for the years ended December 31, 2017 and
2016 were as follows:
Cost of Revenue
(In thousands)
Cost of service revenue
Cost of product revenue
Total cost of revenue
For the years ended December 31,
2017
2016
Change
$
$
558,953 $
61,177
620,130 $
564,103 $
47,379
611,482 $
(5,150)
13,798
8,648
Selling, general and administrative expenses. Selling, general and administrative expenses for the years ended December 31, 2017
and 2016 were $414.6 million and $407.3 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 years ended December 31,
2017 and 2016 are $5.8 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 for the year ended December 31,
2017 also include $8.8 million of expense to write-off certain other current assets.
Selling, general and administrative expenses during the years ended December 31, 2017 and 2016, include equity-based compensation
expense of $21.2 million and $33.4 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 years ended December 31, 2017 and 2016 were
$126.4 million and $113.9 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
73
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:
External expenses:
Phase 3 clinical trials
Manufacturing expense for biological products
PMA studies
Earlier-stage programs
Research and development employee-related expenses
Other internal research and development expenses
Total research and development expenses
For the years ended December 31,
2017
2016
$
$
15,339 $
47,737
1,089
7,620
29,970
24,680
126,435 $
12,161
35,985
—
6,297
28,676
30,752
113,871
The increase in research and development expenses is primarily 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. Research and development expenses for the years ended December 31, 2017 and 2016 include equity-based compensation
expenses of $5.1 million and $7.5 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) for the years ended December 31, 2017 and 2016, were $3.4
million of income and $17.0 million of expense, respectively. The change in contingent consideration income (expense) was attributable to
contingent consideration for OPKO Renal during the year ended December 31, 2017 due to changes in assumptions regarding the timing of
achievement of future milestones of Rayaldee. The contingent consideration liabilities of $41.4 million at December 31, 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 $84.7 million and $64.4 million, respectively, for the years
ended December 31, 2017 and 2016. Amortization expense reflects the amortization of acquired intangible assets with defined useful lives.
Amortization of intangible assets for the years ended December 31, 2017 and 2016 includes $16.0 million and $8.0 million, respectively, 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 Consolidated Balance
Sheets and began to amortize that asset. Our indefinite lived 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 be accounted for as a finite-lived
intangible asset and amortized on a straight-line basis over its estimated useful life.
Asset impairment charges. During the year ended December 31, 2017, we recognized an impairment charge of $13.2 million to write
our intangible asset for VARUBI™ down to its estimated fair value.
Interest income. Interest income for the years ended December 31, 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 years ended December 31, 2017 and 2016, was $6.6 million and $7.4 million, respectively.
Interest expense is principally related to interest incurred on the 2033 Senior Notes including amortization of related deferred financing
costs and to the interest incurred on BioReference’s outstanding debt under its credit facility.
Fair value changes of derivative instruments, net. Fair value changes of derivative instruments, net for the years ended December 31,
2017 and 2016, were $0.1 million and $2.8 million of income, respectively. Fair value changes of derivative instruments, net reflects non-
cash income related to the changes in the fair value of the embedded derivatives in the 2033 Senior Notes of $3.2 million and $7.0 million
for the years ended December 31, 2017 and 2016, respectively. For the year ended December 31, 2017, we observed a decrease in the
market price of our Common Stock which resulted in the decrease in
74
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 year ended December 31, 2017 also reflects $2.9 million of expense related to the change in
the fair value of warrants and options to purchase additional shares of Neovasc, Inc. (“Neovasc”) and Xenetic Biosciences, Inc. (“Xenetic”).
Fair value changes of derivative instruments, net for the year ended December 31, 2016 also reflects $4.2 million of expense related to the
change in the fair value of warrants and options to purchase additional shares of Neovasc , Cocrystal Pharma, Inc. (“Cocrystal”), ARNO
Therapeutics, Inc. (“ARNO”) and MabVax Therapeutics Holdings, Inc. (“MabVax”).
Other income and (expense), net. Other income and (expense), net for the years ended December 31, 2017 and 2016, were $10.5
million and $3.9 million of income, respectively. Other income for the year ended December 31, 2017 primarily consists of a $3.0 million
gain on the sale of non-strategic assets at a wholly-owned BioReference subsidiary, a $1.5 million gain on the sale of certain available for
sale investments, a $2.5 million gain in connection with the acquisition transaction between Eloxx Pharmaceuticals, Inc. and Sevion
Therapeutics, Inc., and a $1.9 million gain in connection with the dilution of our equity method investment in VBI Vaccines Inc. (“VBI”).
Other income (expense), net for the year ended December 31, 2016 primarily consists of a $2.5 million gain recognized in connection with
the merger of SciVac Therapeutics Inc. (“STI”) and VBI, a $5.0 million gain recognized in connection with the settlement of a legal matter
and foreign currency transaction gains recognized during the period, which was partially offset by a $4.8 million other-than-temporary
impairment charge to write our investments in Xenetic, ARNO and RXi Pharmaceuticals Corporation (“RXi”) down to their respective fair
values.
Income tax benefit (provision). Our income tax benefit (provision) for the years ended December 31, 2017 and 2016 was $(18.9)
million, and $56.1 million, respectively. The change in income tax provision is primarily due to the establishment of valuation allowance
against certain U.S. and non-U.S. deferred tax assets. As of December 31, 2017, the Company determined that it is more likely than not that
certain U.S. and non-U.S. deferred tax assets will not be realized and recorded a valuation allowance of $28.7 million. On December 22,
2017, the Tax Act was enacted into law and the new legislation reduced the corporate income tax rate from 35% to 21% which required us
to remeasure our U.S. deferred tax assets and liabilities and recognize the effect in the period of enactment, resulting in $31.8 million of
expense, with an equal offset to valuation allowance.
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 $14.5 million and $7.7 million for the years ended December 31, 2017 and 2016, respectively. The increase in
Loss from investments in investees is attributable to losses recognized on our investment in Pharmsynthez in 2017.
75
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2018, we had cash and cash equivalents of approximately $96.5 million. Cash used in operations of $109.1 million
during 2018 principally reflected expenses related to general and administrative activities of our corporate operations, research and
development activities and commercialization activities related to Rayaldee. Cash used in investing activities primarily reflects capital
expenditures of $27.9 million. Cash provided by financing activities primarily reflects the issuance of $55.0 million of 2023 Convertible
Notes in February 2018 and the sale of approximately 26.5 million shares of our common stock for $92.5 million in November 2018. We
have not generated sustained positive cash flow sufficient to offset our operating and other expenses and our primary source of cash has
been from the public and private placement of stock, the issuance of the 2033 Senior Notes and 2023 Convertible Notes and credit facilities
available to us.
In February 2019, we issued $200.0 million aggregate principal amount of the 2025 Convertible Notes in an underwritten public
offering. The 2025 Convertible Notes will bear interest at a rate of 4.50% per year, payable semiannually in arrears on February 15 and
August 15 of each year, beginning on August 15, 2019. The notes mature on February 15, 2025, unless earlier repurchased, redeemed or
converted.
Holders may convert their 2025 Convertible Notes at their option at any time prior to the close of business on the business day
immediately preceding November 15, 2024 only under the following circumstances: (1) during any calendar quarter commencing after the
calendar quarter ending on March 31, 2019 (and only during such calendar quarter), if the last reported sale price of our common stock for
at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the
immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during
the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000
principal amount of 2025 Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last
reported sale price of our common stock and the conversion rate on each such trading day; (3) if we call any or all of the 2025 Convertible
Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or
(4) upon the occurrence of specified corporate events. On or after November 15, 2024, until the close of business on the business day
immediately preceding the maturity date, holders of the 2025 Convertible Notes may convert their notes at any time, regardless of the
foregoing circumstances. 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 conversion rate for the notes will initially be 236.7424 shares of common stock per $1,000 principal amount of 2025 Convertible
Notes (equivalent to an initial conversion price of approximately $4.22 per share of common stock). The conversion rate for the 2025
Convertible Notes will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest.
On November 8, 2018, we entered into stock purchase agreements with certain investors pursuant to which we agreed to sell to such
investors in private placements an aggregate of approximately 26.5 million shares of our common stock at a purchase price of $3.49 per
share, which was the closing bid price of our common stock on the NASDAQ on such date, for an aggregate purchase price of $92.5
million. The investors in the private placements include an affiliate of Dr. Phillip Frost, our Chairman and Chief Executive Officer ($70
million), and Dr. Jane Hsiao, our Vice Chairman and Chief Technical Officer ($2 million). We intend to use the proceeds from the private
placements for general corporate purposes.
On November 8, 2018, we entered into a credit agreement with an affiliate of Dr. Frost, pursuant to which the lender committed to
provide us with an unsecured line of credit in the amount of $60 million. The credit agreement was terminated on or around February 20,
2019 and amounts borrowed during 2019 were repaid from the proceeds of the 2025 Notes offering. Borrowings under the line of credit
bore interest at a rate of 10% per annum and could be repaid and reborrowed at any time. The credit agreement included various customary
remedies for the lender following an event of default, including the acceleration of repayment of outstanding amounts under line of credit.
The line of credit would have matured on November 8, 2023. As of as of December 31, 2018, no funds were borrowed under the line of
credit.
On February 1, 2019, approximately $28.8 million aggregate principal amount of 2033 Senior Notes were tendered by holders
pursuant to such holders’ option to require us to repurchase the 2033 Senior Notes. At December 31, 2018, $31.9 million principal amount
of 2033 Senior Notes was outstanding. Holders of the remaining $3.0 million principal amount of the 2033 Senior Notes may require us to
repurchase the 2033 Senior Notes for 100% of their principal amount, plus accrued and unpaid interest, again on February 1, 2023 and
February 1, 2028, or following the occurrence of a fundamental change as defined in the indenture governing the 2033 Senior Notes.
In August 2017, we entered into a Commitment Letter (the “Commitment Letter”) with Veterans Accountable Care Group, LLC
(“VACG”) in connection with the submission of a bid by its affiliate, the Veterans Accountable Care Organization, LLC (“VACO”) in
response to a request for proposal (“RFP”) from the Veterans Health Administration (“VA”) regarding its
76
Community Care Network. We were notified in January 2019 that the bid was awarded to a third party. If VACO were to have been
successful in its bid, we would have acquired a fifteen percent (15%) membership interest in VACO. In addition, BioReference, our wholly-
owned subsidiary, would have provided 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 and had VACO been successful in its bid, 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 5 years. Interest on the Facility would be payable at a rate equal to 6.5% per annum, payable quarterly in arrears.
The Facility would be 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.
As of December 31, 2018, the total availability under our Credit Agreement with JPMorgan Chase Bank, N.A. (“CB”) and our lines of
credit with financial institutions in Chile and Spain was $129.4 million, of which $108.7 million was used and outstanding as of December
31, 2018. The weighted average interest rate on these lines of credit is approximately 4.7%. 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 year ended December 31, 2018, was $114.9
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.
In February 2018, we issued the 2023 Convertible Notes in the aggregate principal amount of $55.0 million. The 2023 Convertible
Notes mature 5 years from the date of issuance. Each holder of a 2023 Convertible Note has the option, from time to time, to convert all or
any portion of the outstanding principal balance of such 2023 Convertible Note, together with accrued and unpaid interest thereon, into
shares of our Common Stock, 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, pro ratably among
the holders, 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.
The issuance of the 2023 Convertible Notes and the issuance of the Shares, if any, upon conversion thereof was not, and will not be,
respectively, registered under the Securities Act, pursuant to the exemption provided by Section 4(a)(2) thereof, and we have not agreed to
register the shares of common stock issuable upon conversion if or when such shares are issued. Purchasers of the 2023 Convertible Notes
include Dr. Hsiao and an affiliate of Dr. Frost.
On October 12, 2017, EirGen, our wholly-owned subsidiary, and Japan Tobacco Inc. (“JT”) entered into a Development and License
Agreement (the “JT 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 Rayaldee for (i) SHPT in non-dialysis and dialysis
patients with CKD, (ii) rickets, and (iii) osteomalacia, as well as such additional indications as may be added to the scope of the license
subject to the terms of the JT Agreement. In connection with the transaction, OPKO received an initial upfront payment of $6 million, and
OPKO received another $6 million upon the initiation of OPKO’s phase 2 study for Rayaldee in dialysis patients in the U.S. in September
2018. 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 Rayaldee 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 sales of Rayaldee within the JT Territory. 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.
In May 2016, EirGen, our wholly-owned subsidiary, partnered with VFMCRP through a Development and License Agreement for the
development and commercialization of Rayaldee 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 CKD and
vitamin D insufficiency/deficiency (“VFMCRP Initial Indication”). We have received non-refundable and non-creditable payments of $52
million and are eligible to receive up to an additional $230 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.
77
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 U.S. 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 U.S. VFMCRP would also pay EirGen up to an additional
aggregate amount of $555 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 or a minimum royalty, whichever is greater, upon
commencement of sales of the product.
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, we received non-refundable and non-creditable upfront payments of $295 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. In addition, we are eligible to receive initial tiered royalty payments associated
with the commercialization of hGH-CTP for Adult GHD with percentage rates ranging from the high teens to mid-twenties. Upon the
launch of hGH-CTP for Pediatric GHD in certain major markets, the royalties will transition to regional, tiered gross profit sharing for both
hGH-CTP and Pfizer’s Genotropin®.
Under the agreement, we agreed to 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 agreed to be responsible for all development costs for
additional indications as well as all post-marketing studies. In addition, Pfizer agreed to fund the commercialization activities for all
indications and lead the manufacturing activities covered by the global development plan. The agreement obligated us to fund development
up to an agreed cap
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 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 completion of the analyses, OPKO and Pfizer agreed that OPKO may proceed to discuss a
possible BLA submission with the FDA. We believe there is a path for submission in which the FDA may assess the totality of the data,
including all relevant efficacy and safety data in adult and pediatric patients. We will continue to assess the regulatory strategy for the adult
indication going forward, including the timing of a possible submission.
In August 2018, we announced that we had completed enrollment in a global phase 3 study of hGH-CTP in growth hormone deficient
children. The development project for hGH-CTP has exceeded our original estimates and will result in additional expenses beyond our
estimates and the agreed development cap. If we are unable to reach an agreement with Pfizer regarding cost sharing for overruns, as well
as other obligations, including development obligations, it could have a material adverse impact on the expected benefits of the Pfizer
transaction and our overall financial condition. See “Risk Factors - Our exclusive worldwide agreement with Pfizer Inc. is important to our
business”. If we do not successfully develop hGH- CTP and/or Pfizer Inc. were to terminate the agreement or not successfully
commercialize hGH-CTP for any reason, our business would be adversely affected.
We are constructing a research, development and manufacturing center in Waterford, Ireland, for which we will incur between $40
million and $50 million for 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. Through December 31, 2018, the cumulative expenditures we incurred to date on the construction of the facility was
approximately $39.1 million.
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.
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In November 2015, BioReference and certain of its subsidiaries entered into a credit agreement with JPMorgan Chase Bank, N.A.
(“CB”), as lender and administrative agent, as amended (the “Credit Agreement”). The Credit 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.
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 December 31, 2018, the amounts available to be borrowed under our lines of
credit and the proceeds from the issuance of the 2025 Convertible Notes in February 2019 are sufficient to meet our anticipated cash
requirements for operations and debt service beyond the next 12 months. We based this estimate on assumptions that may prove to be
wrong or are subject to change, and we may be required to use our available cash resources sooner than we currently expect. If we acquire
additional assets or companies, accelerate our product development programs or initiate additional clinical trials, we will need additional
funds. Our future cash requirements will depend on a number of factors, including our relationship with Pfizer, the commercial success of
Rayaldee, BioReference’s financial performance, possible acquisitions, the continued progress of research and development of our product
candidates, the timing and outcome of clinical trials and regulatory approvals, the costs involved in preparing, filing, prosecuting,
maintaining, defending, and enforcing patent claims and other intellectual property rights, the status of competitive products, the
availability of financing, our success in developing markets for our product candidates and results of government investigations, payor
claims, and legal proceedings that may arise, including, without limitation class action and derivative litigation to which we are subject, and
our ability to obtain insurance coverage for such claims. If we are not able to secure additional funding when needed, we may have to
delay, reduce the scope of, or eliminate one or more of our clinical trials or research and development programs or possible acquisitions or
reduce our marketing or sales efforts or cease operations.
The following table provides information as of December 31, 2018, with respect to the amounts and timing of our known contractual
obligation payments due by period.
Contractual obligations
(In thousands)
Open purchase orders
Operating leases
Capital leases
2033 Senior Notes
Deferred payments
Mortgages and other debts payable
Lines of credit
Interest commitments
Total
$
2019
98,409 $
18,387
3,037
31,562
5,000
1,872
3,501
214
$ 161,982 $
2020
2021
2022
2023
Thereafter
Total
87 $
— $
11,535
2,635
—
—
1,176
—
1,213
16,646 $ 115,143 $
7,385
1,924
—
—
514
105,198
122
— $
4,073
829
—
—
414
—
85
5,401 $
— $
2,446
473
—
—
4,277
—
63
7,259 $
— $
98,496
8,898
45,476
86,562
1,650
—
55,000
—
—
—
13,990
15,687
70,640 $ 377,071
108,699
8,253
5,000
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.
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- 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 million.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Accounting estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the U.S.
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 December 31, 2018 and 2017 was $2.0 billion, representing approximately 80% and 79% of total assets,
respectively.
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 $700.2 million and $717.1 million, respectively, at December 31, 2018 and 2017. 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
81
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 excess of fair
value over the carrying value of net assets from the annual impairment test previously performed. Due to the loss of a significant customer
in 2018, we recorded a goodwill impairment charge of $11.7 million in Asset impairment charges in our Consolidated Statement of
Operations for the year ended December 31, 2018 to write the carrying amount of the FineTech reporting unit down to its estimated fair
value. No goodwill impairment was recorded for the years ended December 31, 2017 and 2016 as a result of our testing.
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. If we are unable to generate profits and cash flows from BioReference, or we are unable successfully commercialize or obtain
reimbursement for our 4Kscore test and our other diagnostic products under development, or other changes in projections and assumptions
negatively impact our forecast of net cash flows, we may be exposed to a material impairment charge related to the goodwill at
BioReference.
Intangible assets, net were $1.3 billion and $1.3 billion, including IPR&D of $635.6 million and $647.3 million, respectively, at
December 31, 2018 and 2017. 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.
IPR&D is tested for impairment 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 amount. If the carrying amount of the IPR&D exceeds its fair value, an
impairment loss shall be recognized in an amount equal to that excess. Intangible assets with defined lives are tested for impairment by a
comparison of the carrying amount of the asset to its estimated undiscounted future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated undiscounted future cash flows, then an impairment charge is recognized for the amount
by which the carrying amount of the asset exceeds the fair value of the asset. We recorded an impairment charge of $10.1 million in Asset
impairment charges in our Consolidated Statement of Operations for the year ended December 31, 2018 to write our IPR&D assets for
Alpharen and OPK88004 down to their estimated fair value as a result of our testing. We recorded an impairment charge of $13.2 million
in Asset impairment charges in our Consolidated Statement of Operations for the year ended December 31, 2017 to write our intangible
asset for VARUBI™ down to its estimated fair value as a result of our testing.
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.
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 indicators.
In August 2018, we announced that we had completed enrollment in a global phase 3 study of hGH-CTP in growth hormone deficient
children. The development project for hGH-CTP has exceeded our original estimates and will result in additional expenses beyond our
estimates and the agreed development cap. If we are unable to reach an agreement with Pfizer regarding cost sharing for overruns, as well
as other obligations, including development obligations, it could have a material adverse impact on the expected benefits of the Pfizer
transaction. If we are unable to successfully develop hGH-CTP, or changes in projections and assumptions negatively impact our forecast
of net cash flows, we may be exposed to a material impairment charge related to the IPR&D for hGH-CTP.
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
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benefits of our intangible assets are consumed or otherwise used up. Amortization expense was $67.9 million and $71.5 million for the
years ended December 31, 2018 and 2017, respectively.
Revenue recognition. Effective January 1, 2018, we adopted Accounting Standards Codification Topic 606, Revenue from Contracts
with Customers. 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.
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 issues 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. For the years ended December 31, 2018 and 2017, revenue reductions due to changes in estimates of implicit price concessions for
performance obligations satisfied in prior periods of $22.8 million and $66.0 million, respectively, were recognized.
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 payer denies payment for testing or recoups money from us in a later period,
reimbursement revenue 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
83
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.
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.
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 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 years ended
December 31, 2018, and 2017, we recognized $20.3 million and $9.1 million in net product revenue from sales of Rayaldee.
The following table presents an analysis of product sales allowances and accruals as contract liabilities for the year ended December
31, 2018:
(In thousands)
Balance at December 31, 2017
Provision related to current period sales
Credits or payments made
Balance at December 31, 2018
Chargebacks,
discounts, rebates
and fees
Governmental
Returns
$
$
233 $
5,704
(4,621)
1,316 $
348 $
10,061
(8,319)
2,090 $
437 $
680
(480)
637 $
Total
1,018
16,445
(13,420)
4,043
Total gross Rayaldee sales
Provision for Rayaldee sales allowances and accruals as a
percentage of gross Rayaldee sales
$
36,715
45%
Taxes collected from customers related to revenues from services and revenues from products are excluded from revenues.
Revenue from intellectual property. 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
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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 years ended December 31, 2018, 2017 and 2016 we recorded $69.9 million, $75.5 million and $105.5 million of revenue from
the transfer of intellectual property, respectively. For the year ended December 31, 2018, revenue from the transfer of intellectual property
included $60.0 million related to the Pfizer Transaction and $2.0 million related to a milestone payment from our licensee, Vifor Fresenius
Medical Care Renal Pharma Ltd (“VFMCRP”). For the year ended December 31, 2017, revenue from the transfer of intellectual property
included $61.2 million related to the Pfizer Transaction and $10.0 million related to a milestone payment from our licensee, TESARO, Inc.
(“TESARO”). For the year ended December 31, 2016, revenue from the transfer of intellectual property included $50.0 million related to
the our agreement with VFMCRP and $47.3 million related to the Pfizer Transaction. Refer to Note 15. Total contract liabilities included in
Accrued expenses and
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Other long-term liabilities was $91.1 million and $152.3 million at December 31, 2018 and December 31, 2017, respectively. The contract
liability balance at December 31, 2018 and 2017 relates primarily to the Pfizer Transaction.
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 health
care 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 December 31, 2018 and 2017, receivable balances (net of contractual adjustments) from
Medicare and Medicaid in total were 17% and 16%, 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 December 31,
2018 and 2017, receivables due from patients represent approximately 3.1% and 3.2%, 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 $1.8 million and $1.4 million at December
31, 2018 and 2017, 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. Valuation allowances on certain U.S. deferred tax assets and non-U.S.
deferred tax assets are established, when realization of these tax benefits does not meet the more-likely-than-not threshold.
On December 22, 2017, the 2017 Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law and the new legislation contained
several key tax provisions, including a reduction of the corporate income tax rate from 35% to 21% effective January 1, 2018 and a one-
time mandatory transition tax on accumulated foreign earnings, among others. We were required to recognize the effect of the tax law
changes in the period of enactment, such as remeasuring our U.S. deferred tax assets and liabilities, as well as reassessing the net
realizability of our deferred tax assets and liabilities. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income
Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allowed us to record provisional amounts during a
measurement period not to extend beyond one year of the enactment date. As of December 22, 2018 we completed our analysis in
accordance with SAB 118 and recorded immaterial adjustments.
Effective January 1, 2018, the Tax Act provides for a new global intangible low-taxed income (GILTI) provision. Under the GILTI
provision, certain foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets are included in
U.S. taxable income. The Company currently estimates GILTI will be immaterial for the year ended December 31, 2018, although
interpretive guidance continues to be issued and future guidance may impact this analysis. The Company has not recorded any deferred
taxes for future GILTI inclusions as any future inclusions are expected to be offset by net operating loss carryforwards in the U.S.
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 Consolidated Statement of Operations over the period during
which an employee is required to provide service in exchange for the award. We record excess tax benefits, realized from the exercise of
stock options, as cash flows from operations. 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
86
equity-based awards. We are required to adjust our forfeiture estimates on at least an annual basis based on the number of share-based
awards that ultimately vest. The selection of assumptions and estimated forfeiture rates is subject to significant judgment and future
changes to our assumptions and estimates which may have a material impact on our Consolidated Financial Statements.
Inventories. Inventories are valued at the lower of cost and net realizable value. Cost is determined by the first-in, first-out method.
We consider such factors as the amount of inventory on hand, estimated time required to sell such inventories, remaining shelf-life, and
current market conditions to determine whether inventories are stated at the lower of cost and net realizable value. Inventories at our
diagnostics segment consist primarily of purchased laboratory supplies, which is used in our testing laboratories. Inventory obsolescence
for the years ended December 31, 2018 and 2017 was $1.9 million and $5.4 million, respectively.
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.
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RECENT ACCOUNTING PRONOUNCEMENTS
Recently adopted accounting pronouncements.
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,
“Revenue from Contracts with Customers.” ASU 2014-09, as amended and codified into Topic 606, 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 and simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer.
As required, we adopted Topic 606 on January 1, 2018 using the full retrospective approach, and have elected to use the following practical
expedients that are permitted under the rules of the adoption, which have been applied consistently to all contracts within all reporting
periods presented:
•
•
For all reporting periods presented before January 1, 2018, we have not restated revenue from contracts that begin and are
completed within the same annual reporting period.
For all reporting periods presented before January 1, 2018, we have not disclosed the amount of the transaction price allocated
to the remaining performance obligations or an explanation of when we expect to recognize that amount as revenue.
• We have applied the practical expedient provided for by Topic 606 by not adjusting the transaction price for significant
financing components for periods less than one year.
As a result of adopting Topic 606 on January 1, 2018 using the full retrospective approach, we revised our comparative financial statements
for the prior years as if Topic 606 had been effective for those periods. As a result, the following financial statement line items for 2017 and
2016 were affected:
Consolidated Statement of Operations
For the year ended December 31, 2017
(in thousands)
As adjusted under Topic
606
As originally reported
Effect of change
Revenue from services
Revenue from transfer of intellectual property and other
Selling, general and administrative
Research and development
$
782,710 $
75,537
414,628
126,435
889,076 $
70,668
520,994
125,186
(106,366)
4,869
(106,366)
1,249
For the year ended December 31, 2016
(in thousands)
As adjusted under Topic
606
As originally reported
Effect of change
Revenue from services
Revenue from transfer of intellectual property and other
Selling, general and administrative
Research and development
$
88
928,572 $
105,455
407,331
113,871
1,012,129 $
126,065
490,888
111,205
(83,557)
(20,610)
(83,557)
2,666
Consolidated Balance Sheet
December 31, 2017
(in thousands)
As adjusted under Topic
606
As originally reported
Effect of change
Other current assets and prepaid expenses
Accrued expenses
Other long-term liabilities, principally contract liabilities,
contingent consideration and line of credit
Accumulated deficit
$
42,513 $
225,796
37,113 $
215,102
256,415
(1,048,914 )
219,954
(1,007,159 )
5,400
10,694
36,461
(41,755)
Consolidated Statement of Cash Flows
Net loss
Other current assets and prepaid expenses
Contract liabilities
Net loss
Contract liabilities
For the year ended December 31, 2017
(in thousands)
As adjusted under Topic
606
As originally reported
Effect of change
$
(305,250) $
4,771
(58,876 )
(308,870) $
10,171
(60,656)
3,620
(5,400)
1,780
For the year ended December 31, 2016
(in thousands)
As adjusted under Topic
606
As originally reported
Effect of change
$
(48,359) $
(50,893)
(25,083) $
(74,169)
(23,276)
23,276
The most significant change above relates to amounts in our clinical laboratory operations that were historically classified as provision
for bad debts, primarily related to patient responsibility, which are now considered an element of variable consideration as an implicit price
concession in determining revenues under Topic 606. Accordingly, we report uncollectible balances associated with individual patients as a
reduction of the transaction price and therefore as a reduction in Revenue from services when historically these amounts were classified as
provision for bad debts within Selling, general and administrative expenses.
In addition, under Topic 606, the upfront consideration received for a license and contract services combined performance obligation
is recognized as revenue to the extent of costs incurred based on the length of the expected performance period and the subjectivity in
estimating progress towards satisfaction of the performance obligation. Under previous accounting, we recognized revenue over the
expected performance period. The adoption of Topic 606 resulted in a cumulative revenue reduction of $41.8 million and an increase of our
accumulated deficit balance as of December 31, 2017; with a corresponding increase in our contract liabilities. For the year ended
December 31, 2017, Revenue from the transfer of intellectual property and other was increased by $3.4 million for the change in
accounting. For a further discussion of the adoption of Topic 606, refer to Note 14.
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 consolidation of the investee) to be measured at fair value
with changes in fair value recognized in net income. As a result of the required adoption of ASU 2016-01 on January 1, 2018, we recorded
a cumulative-effect adjustment to reclassify our net unrealized gains on our equity securities of $4.9 million as of January 1, 2018 from
Accumulated other comprehensive loss to Accumulated deficit in our Consolidated Balance Sheet. Changes in the fair value of certain of
our equity securities subsequent to the adoption of ASU 2016-01 on January 1, 2018 will be predominately recognized in net income.
89
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. The required adoption of ASU 2016-15 in
the first quarter of 2018 did not have a significant impact on our Consolidated Financial Statements.
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805),” which clarifies the definition of a
business to assist entities in evaluating whether transactions should be accounted for acquisitions (or disposals) of assets or businesses. The
required adoption of ASU 2017-01 in the first quarter of 2018 did not have a significant impact on our 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. Under ASU 2017-04, an impairment loss will reflect the amount by which the carrying amount
of a reporting unit exceeds its fair value, not to exceed the carrying amount of goodwill. We early adopted the provisions of ASU 2017-04
prospectively in the fourth quarter of 2018. For a further discussion of the adoption of ASU 2017-04, refer to Note 2, Goodwill and
intangible assets.
Pending accounting pronouncements.
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. ASU 2016-02, as amended, requires 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 have
begun a process to identify a complete population of our leases. Such process includes reviewing various contracts to identify whether such
arrangements convey the right to control the use of an identified asset. The determination of the impact of this new guidance is ongoing
and, as such, we are not able to reasonably estimate the effect the adoption of this new standard will have on our financial statements.
Based on our preliminary assessment of this ASU, we believe the new standard will have a significant impact on our Consolidated Balance
Sheet, which has not yet been quantified. In July 2018, the FASB issued an ASU to provide an additional transition method to adopt the
guidance by allowing entities to initially apply the new leases standard at the adoption date and recognize a cumulative effect to the
opening balance of retained earnings. We are currently evaluating the choice of transition options.
In June 2018, the FASB issued ASU No. 2018-07, “Compensation - Stock Compensation (Topic 718),” which expands the scope of
Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 will be
effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year,
with early adoption permitted. We are currently evaluating the impact of this new guidance on our Consolidated Financial Statements.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of doing business, we are exposed to the risks associated with foreign currency exchange rates and changes in
interest rates.
Foreign Currency Exchange Rate Risk – We operate globally and, as such, we are subject to foreign exchange risk in our commercial
operations as portions of our revenues are exposed to changes in foreign currency exchange rates, primarily the Chilean Peso, the Mexican
Peso, the Euro and the New Israeli Shekel.
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 Consolidated Statements of
Operations and offset the impact of the change in exchange rates on the foreign currency cash flows that are hedged. If the counterparties
to the exchange contracts do not fulfill their obligations to deliver the contracted currencies, we could be at risk for currency related
fluctuations. Our foreign exchange forward contracts primarily hedge exchange rates on the Chilean Peso to the U.S. dollar. If Chilean
Pesos were to strengthen or weaken in relation to the U.S. dollar, our loss or gain on hedged foreign currency cash-flows would be offset by
the derivative contracts, with a net effect of zero.
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 December 31, 2018, we had cash and cash equivalents of $96.5 million. The weighted average interest rate related to our cash and
cash equivalents for the year ended December 31, 2018 was less than 1%. As of December 31, 2018, the principal outstanding balance
under our Credit Agreement with JPMorgan Chase Bank, N.A. and our Chilean and Spanish credit lines was $108.7 million in the aggregate
at a weighted average interest rate of approximately 4.7%.
Our $31.9 million aggregate principal amount of our 2033 Senior Notes has a fixed interest rate of 3.0% and our $55.0 million
aggregate principal amount of our 2023 Convertible Notes has a fixed interest rate of 5%, and therefore are not subject to fluctuations in
market interest rates.
The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without
significantly increasing risk. To achieve this objective, we may invest our excess cash in debt instruments of the U.S. Government and its
agencies, bank obligations, repurchase agreements and high-quality corporate issuers, and money market funds that invest in such debt
instruments, and, by policy, restrict our exposure to any single corporate issuer by imposing concentration limits. To minimize the exposure
due to adverse shifts in interest rates, we maintain investments at an average maturity of generally less than three months.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reports of Independent Registered Certified Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
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98
101
102
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of OPKO Health, Inc. and subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of OPKO Health, Inc. and subsidiaries (the Company) as of December 31,
2018 and 2017, the related consolidated statements of operations, comprehensive loss, equity and cash flows for each of the three years in
the period ended December 31, 2018, and the related notes and financial statements schedule included at Item 15(a)(1) (collectively
referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2018, in conformity with U.S generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report dated
March 1, 2019 expressed an unqualified opinion thereon.
Adoption of ASU No. 2014-09
As discussed in Note 2 to the consolidated financial statements, the Company changed its method for recognizing revenue in the
accompanying consolidated financial statements for each of the three years in the period ended December 31, 2018 due to the adoption of
Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), as amended.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud,
and performing procedures that respond to those risks. Such procedures included examining, on a test bases, evidence regarding the
amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2007.
Miami, Florida
March 1, 2019
/s/ Ernst & Young LLP
93
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of OPKO Health, Inc. and subsidiaries
Opinion on Internal Control over Financial Reporting
We have audited OPKO Health, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2018, based on criteria
established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework) (the COSO criteria). In our opinion, OPKO Health, Inc. and subsidiaries (the Company) maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
2018 consolidated financial statements of the Company and our report dated March 1, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on
our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists,
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Miami, Florida
March 1, 2019
/s/ Ernst & Young LLP
94
OPKO Health, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
December 31,
2018
2017
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventory, net
Other current assets and prepaid expenses
Total current assets
Property, plant and equipment, net
Intangible assets, net
In-process research and development
Goodwill
Investments
Other assets
Total assets
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable
Accrued expenses
Current portion of 2033 Senior Notes
Current portion of lines of credit and notes payable
Total current liabilities
2023 Convertible Notes and 2033 Senior Notes
Deferred tax liabilities, net
Other long-term liabilities, principally contract liabilities, contingent consideration and lines of credit
Total long-term liabilities
Total liabilities
Equity:
Common Stock - $0.01 par value, 750,000,000 shares authorized; 586,881,720 and 560,023,745
shares issued at December 31, 2018 and 2017, respectively
Treasury Stock, at cost - 549,907 shares at December 31, 2018 and 2017, respectively
Additional paid-in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
Total shareholders’ equity
Total liabilities and equity
$
$
$
$
96,473 $
143,907
42,299
35,052
317,731
144,674
614,452
635,572
700,193
31,228
7,222
2,451,072 $
47,395 $
203,513
31,562
5,851
288,321
57,299
115,193
198,968
371,460
659,781
5,869
(1,791 )
3,004,422
(20,131 )
(1,197,078 )
1,791,291
2,451,072 $
91,499
165,516
49,333
42,513
348,861
146,557
683,835
647,347
717,099
40,642
5,615
2,589,956
74,307
225,796
—
11,926
312,029
29,160
148,729
256,415
434,304
746,333
5,600
(1,791 )
2,889,256
(528 )
(1,048,914 )
1,843,623
2,589,956
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
95
OPKO Health, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
Revenues:
Revenue from services
Revenue from products
Revenue from transfer of intellectual property and other
Total revenues
Costs and expenses:
Cost of service revenue
Cost of product revenue
Selling, general and administrative
Research and development
Contingent consideration
Amortization of intangible assets
Asset impairment charges
Total costs and expenses
Operating loss
Other income and (expense), net:
Interest income
Interest expense
Fair value changes of derivative instruments, net
Other income (expense), net
Other income and (expense), net
Loss before income taxes and investment losses
Income tax benefit (provision)
Net loss before investment losses
Loss from investments in investees
Net loss
Loss per share:
Loss per share, basic
Loss per share, diluted
Weighted average number of common shares
outstanding, basic
Weighted average number of common shares
outstanding, diluted
$
$
$
$
For the years ended December 31,
2018
2017
2016
813,248 $
107,112
69,906
990,266
782,710 $
107,759
75,537
966,006
546,654
57,982
358,346
125,586
(16,816)
67,933
21,778
1,161,463
(171,197)
1,240
(11,890)
3,043
1,535
(6,072)
(177,269)
38,726
(138,543)
(14,497)
(153,040) $
558,953
61,177
414,628
126,435
(3,423)
71,484
13,194
1,242,448
(276,442)
610
(6,601)
52
10,457
4,518
(271,924)
(18,855)
(290,779)
(14,471)
(305,250) $
928,572
83,467
105,455
1,117,494
564,103
47,379
407,331
113,871
16,954
64,407
—
1,214,045
(96,551)
478
(7,430)
2,778
3,903
(271)
(96,822)
56,115
(40,707)
(7,652)
(48,359)
(0.27) $
(0.27) $
(0.55) $
(0.55) $
(0.09)
(0.10)
563,143,663
559,160,565
550,846,553
563,143,663
559,160,565
555,605,448
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
96
OPKO Health, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
Net loss
Other comprehensive income (loss), net of tax:
Change in foreign currency translation and other comprehensive income (loss)
Investments:
Change in unrealized gain (loss), net of tax
Reclassification adjustments due to adoption of ASU 2016-01
Reclassification adjustments for losses included in net loss, net of tax
Comprehensive loss
For the years ended December 31,
2018
(153,040) $
2017
(305,250) $
2016
(48,359)
$
(14,727)
22,724
(4,955)
—
(4,876)
—
3,790
—
(33)
$
(172,643) $
(278,769) $
(3,810)
—
4,293
(52,831)
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
97
OPKO Health, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except share and per share data)
For the years ended December 31, 2018, 2017, 2016 (continued)
Common Stock
Treasury
Shares
Dollars
Shares
Dollars
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Loss
(22,537 ) $
Accumulated
Deficit
(726,970 ) $
Balance at December 31, 2015
Equity-based compensation expense
Exercise of Common Stock options and
warrants
Issuance of Common Stock upon
exchange of 2033 Senior Notes
Issuance of Treasury Stock in
connection with OPKO Health
Europe’s Contingent
Consideration
Issuance of Treasury Stock for investment
in Xenetic
Issuance of Common Stock for
OPKO Renal earnout
Issuance of Common Stock for
Transition Therapeutics purchase
Net loss
Other comprehensive loss
Balance at December 31, 2016
546,188,516 $ 5,462 (1,120,367 ) $ (3,645 ) $ 2,705,385 $
—
3,292,753
51,235
—
33
1
—
—
—
—
—
—
42,693
8,575
582
—
—
—
39,145
127
186
—
494,462
1,607
3,249
2,611,648
26
—
—
25,960
64
6,431,899
—
—
—
—
558,576,051 $ 5,586
—
—
—
—
—
—
(586,760 ) $ (1,911 ) $ 2,845,096 $
58,466
—
—
—
—
—
—
—
—
—
—
(4,472 )
(27,009 ) $
—
—
—
—
—
—
—
(48,359 )
—
Total
1,957,695
42,693
8,608
583
313
4,856
25,986
58,530
(48,359 )
(4,472 )
(775,329 ) $
2,046,433
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
98
OPKO Health, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except share and per share data)
For the years ended December 31, 2018, 2017, 2016 (continued)
Balance at December 31, 2016
Equity-based compensation expense
Exercise of Common Stock options and
warrants
Reclassification of embedded
derivatives to equity
Issuance of Treasury Stock in
connection with OPKO Health
Europe’s Contingent
Consideration
Adoption of ASU 2016-09
Net loss
Other comprehensive loss
Balance at December 31, 2017
Common Stock
Treasury
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Loss
(27,009 ) $
Accumulated
Deficit
(775,329 ) $
Shares
Dollars
558,576,051 $ 5,586
—
—
Dollars
Shares
(586,760 ) $ (1,911 ) $ 2,845,096 $
—
28,307
—
1,447,694
—
14
—
—
—
—
—
2,118
13,551
—
—
—
—
—
—
Total
2,046,433
28,307
2,132
13,551
—
—
—
—
—
—
—
—
560,023,745 $ 5,600
36,853
—
—
—
120
—
—
—
(549,907 ) $ (1,791 ) $ 2,889,256 $
184
—
—
—
—
—
—
26,481
—
31,665
(305,250 )
—
(528 ) $ (1,048,914 ) $
304
31,665
(305,250 )
26,481
1,843,623
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
99
OPKO Health, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except share and per share data)
For the years ended December 31, 2018, 2017, 2016 (continued)
Common Stock
Treasury
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Loss
Balance at December 31, 2017
Equity-based compensation expense
Exercise of Common Stock options and
warrants
Adoption of ASU 2016-01
Private placement
Net loss
Other comprehensive loss
Balance at December 31, 2018
Shares
Dollars
560,023,745 $ 5,600
—
—
353,677
—
26,504,298
—
—
4
—
265
—
—
586,881,720 $ 5,869
Dollars
Shares
(549,907 ) $ (1,791 ) $ 2,889,256 $
—
21,761
—
—
—
—
—
—
—
—
—
—
—
(549,907 ) $ (1,791 ) $ 3,004,422 $
1,170
—
92,235
—
—
Accumulated
Deficit
Total
(528 ) $ (1,048,914 ) $
1,843,623
—
—
21,761
—
(4,876 )
—
—
(14,727 )
(20,131 ) $ (1,197,078 ) $
—
4,876
—
(153,040 )
—
1,174
—
92,500
(153,040 )
(14,727 )
1,791,291
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
100
Table of Contents
OPKO Health, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash (used in) provided by operating
activities:
Depreciation and amortization
Non-cash interest
Amortization of deferred financing costs
Losses from investments in investees
Equity-based compensation – employees and non-employees
Impairment of assets
Realized loss (gain) on disposal of fixed assets and sales of equity securities
Loss (gain) on conversion of 3.00% convertible senior notes
Change in fair value of equity securities and derivative instruments
Change in fair value of contingent consideration
Deferred income tax provision (benefit)
Changes in assets and liabilities, net of the effects of acquisitions:
Accounts receivable, net
Inventory, net
Other current assets and prepaid expenses
Other assets
Accounts payable
Foreign currency measurement
Contract liabilities
Accrued expenses and other liabilities
Net cash (used in) provided by operating activities
Cash flows from investing activities:
Investments in investees
Proceeds from sale of equity securities
Acquisition of businesses, net of cash acquired
Acquisition of intangible assets
Purchase of marketable securities
Maturities of short-term marketable securities
Proceeds from the sale of property, plant and equipment
Capital expenditures
Net cash used in investing activities
Cash flows from financing activities:
Issuance of common stock
Issuance of 2023 Convertible Notes, including to related parties
Proceeds from the exercise of Common Stock options and warrants
Borrowings on lines of credit
Repayments of lines of credit
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
SUPPLEMENTAL INFORMATION:
Interest paid
Income taxes paid, net of refunds
Non-cash financing:
Shares issued upon the conversion of:
2033 Senior Notes
Common Stock options and warrants, surrendered in net
exercise
Issuance of capital stock to acquire or contingent consideration
For the years ended December 31,
2018
2017
2016
$
(153,040) $
(305,250) $
(48,359)
97,344
4,903
187
14,497
21,761
21,778
46
—
(6,524)
(16,816)
(35,133)
20,397
4,590
2,276
(69)
(26,083)
294
(61,264)
1,715
(109,141)
(1,000)
1,516
—
—
—
—
1,223
(27,858)
(26,119)
102,093
2,575
224
14,471
28,307
13,194
(8,663)
—
(52)
(3,423)
16,092
58,011
(3,539)
4,771
(2,372)
20,171
(255)
(58,876)
30,441
(92,080)
(9,625)
2,211
—
—
—
—
7,271
(46,524)
(46,667)
92,500
55,000
1,173
26,917
(34,681)
140,909
(675)
4,974
91,499
96,473 $
—
—
2,132
92,421
(33,510)
61,043
470
(77,234)
168,733
91,499 $
96,576
2,699
237
7,652
42,693
—
2,321
284
(2,778)
16,954
(66,300)
(25,637)
(6,607)
17,262
(1,899)
(19,819)
(376)
(50,893)
68,036
32,046
(14,424)
—
15,878
(5,000)
(15,644)
15,634
1,401
(18,547)
(20,702)
—
—
8,576
22,407
(66,178)
(35,195)
(1,014)
(24,865)
193,598
168,733
2,076 $
(1,410) $
1,313 $
5,416 $
2,890
(27,122)
— $
— $
806 $
1,546 $
583
350
$
$
$
$
$
settlement:
Transition Therapeutics, Inc.
OPKO Renal
OPKO Health Europe
Issuance of stock for investment in Xenetic
$
$
$
$
— $
— $
— $
— $
— $
— $
304 $
— $
58,530
25,986
313
4,856
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
101
OPKO Health, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Business and Organization
We are a diversified healthcare company that seeks to establish industry-leading positions in large and rapidly growing medical
markets. Our diagnostics business includes BioReference Laboratories, Inc. (“BioReference”), the nation’s third-largest clinical laboratory
with a core genetic testing business and an almost 300-person sales and marketing team to drive growth and leverage new products,
including the 4Kscore prostate cancer test. Our pharmaceutical business features Rayaldee, an 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), OPK88004, a selective androgen receptor modulator which has been studied for benign prostatic hyperplasia, but for
which we are exploring other indications, and 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). Our pharmaceutical business
also features hGH-CTP, a once-weekly human growth hormone injection (in phase 3 and partnered with Pfizer). We are incorporated in
Delaware and our principal executive offices are located in leased offices in Miami, Florida.
Through BioReference, we provide laboratory testing services, primarily to customers in the larger metropolitan areas across New
York, New Jersey, Maryland, Pennsylvania, Delaware, Washington, DC, Florida, California, Texas, Illinois and Massachusetts as well as
to customers in a number of other states. We offer a comprehensive test menu of clinical diagnostics for blood, urine, and tissue analysis.
This includes hematology, clinical chemistry, immunoassay, infectious diseases, serology, hormones, and toxicology assays, as well as Pap
smear, anatomic pathology (biopsies) and other types of tissue analysis. We market our laboratory testing services directly to physicians,
geneticists, hospitals, clinics, correctional and other health facilities.
We operate established pharmaceutical platforms in Ireland, Chile, Spain, and Mexico, which are generating revenue and which we
expect to facilitate future market entry for our products currently in development. In addition, we have a development and commercial
supply pharmaceutical company and a global supply chain operation and holding company in Ireland. We own a specialty active
pharmaceutical ingredients (“APIs”) manufacturer in Israel, which we expect will facilitate the development of our pipeline of molecules
and compounds for our molecular diagnostic and therapeutic products.
Our research and development activities are primarily performed at facilities in Miramar, FL, Woburn, MA, Waterford, Ireland,
Kiryat Gat, Israel, and Barcelona, Spain.
102
Note 2 Summary of Significant Accounting Policies
Basis of presentation. The accompanying Consolidated Financial Statements have been prepared in accordance with accounting
principles generally accepted in the U.S. and with the instructions to Form 10-K and of Regulation S-X.
Principles of consolidation. The accompanying Consolidated Financial Statements include the accounts of OPKO Health, Inc. and of
our wholly-owned subsidiaries. All intercompany accounts and transactions are eliminated in consolidation.
Use of estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the U.S.
(“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ significantly from these estimates.
Cash and cash equivalents. Cash and cash equivalents include short-term, interest-bearing instruments with original maturities of 90
days or less at the date of purchase. We also consider all highly liquid investments with original maturities at the date of purchase of 90
days or less as cash equivalents. These investments include money markets, bank deposits, certificates of deposit and U.S. treasury
securities.
Inventories. Inventories are valued at the lower of cost and net realizable value. Cost is determined by the first-in, first-out method.
We consider such factors as the amount of inventory on hand, estimated time required to sell such inventories, remaining shelf-life, and
current market conditions to determine whether inventories are stated at the lower of cost and net realizable value. Inventories at our
diagnostics segment consist primarily of purchased laboratory supplies, which is used in our testing laboratories. Inventory obsolescence
expense for the years ended December 31, 2018 and 2017 was $1.9 million and $5.4 million, respectively.
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.
Goodwill and intangible assets. Goodwill represents the difference between the purchase price and the estimated fair value of the net
assets acquired accounted for by the acquisition method of accounting. Refer to Note 5. Goodwill, in-process research and development
(“IPR&D”) and other intangible assets acquired in business combinations, licensing and other transactions at both December 31, 2018 and
2017, was $2.0 billion.
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. We determined the fair value of intangible assets, including IPR&D, using the “income
method.”
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. Due to the loss of a significant customer in 2018, we recorded a goodwill
impairment charge of $11.7 million in Asset impairment charges in our Consolidated Statement of Operations for the year ended December
31, 2018 to write the carrying amount of the FineTech reporting unit down to its estimated fair value due to the loss of a significant
customer in 2018. No goodwill impairment was recorded for the years ended December 31, 2017 and 2016 as a result of our testing.
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.
We recorded an impairment charge of $10.1 million in Asset impairment charges in our Consolidated Statement of Operations for the
year ended December 31, 2018 to write our IPR&D assets for Alpharen and OPK88004 down to their estimated fair value as a result of our
testing. We recorded an impairment charge of $13.2 million in Asset impairment charges in our Consolidated Statement of Operations for
the year ended December 31, 2017 to write our intangible asset for VARUBI™ down to its estimated fair value.
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
103
benefits of our intangible assets are consumed or otherwise used up. Amortization expense was $67.9 million, $71.5 million and $64.4
million for the years ended December 31, 2018, 2017 and 2016, respectively. Amortization expense from operations for our intangible
assets is expected to be $65.4 million, $59.2 million, $53.2 million, $52.9 million and $50.1 million for the years ended December 31,
2019, 2020, 2021, 2022 and 2023, respectively.
Fair value measurements. The carrying amounts of our cash and cash equivalents, accounts receivable, accounts payable and short-
term debt approximate their fair value due to the short-term maturities of these instruments. Investments that are considered equity
securities as of December 31, 2018 and 2017 are predominately carried at fair value. Our debt under the credit agreement with JPMorgan
Chase Bank, N.A. approximates fair value due to the variable rate of interest.
In evaluating the fair value information, considerable judgment is required to interpret the market data used to develop the estimates.
The use of different market assumptions and/or different valuation techniques may have a material effect on the estimated fair value
amounts. Accordingly, the estimates of fair value presented herein may not be indicative of the amounts that could be realized in a current
market exchange. Refer to Note 18.
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.
Derivative financial instruments. We record derivative financial instruments on our Consolidated Balance Sheet at their fair value
and recognize the changes in the fair value in our Consolidated Statement of Operations when they occur, the only exception being
derivatives that qualify as hedges. For the derivative instrument to qualify as a hedge, we are required to meet strict hedge effectiveness and
contemporaneous documentation requirements at the initiation of the hedge and assess the hedge effectiveness on an ongoing basis over the
life of the hedge. At December 31, 2018 and 2017, our foreign currency forward contracts held to economically hedge inventory purchases
did not meet the documentation requirements to be designated as hedges. Accordingly, we recognize all changes in the fair values of our
derivatives instruments, net, in our Consolidated Statement of Operations. Refer to Note 19.
Property, plant and equipment. Property, plant and equipment are recorded at cost. Depreciation is provided using the straight-line
method over the estimated useful lives of the assets and includes amortization expense for assets capitalized under capital leases. The
estimated useful lives by asset class are as follows: software - 3 years, machinery, medical and other equipment - 5-8 years, furniture and
fixtures - 5-12 years, leasehold improvements - the lesser of their useful life or the lease term, buildings and improvements - 10-40 years,
and automobiles - 3-5 years. Expenditures for repairs and maintenance are charged to expense as incurred. Depreciation expense was $29.4
million, $30.6 million and $33.3 million for the years ended December 31, 2018, 2017 and 2016, respectively. Assets held under capital
leases are included within Property, plant and equipment, net in our Consolidated Balance Sheets and are amortized over the shorter of their
useful lives or the expected term of their related leases.
Impairment of long-lived assets. Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by
the asset. If the carrying amount of an asset exceeds its estimated future cash flows, then an impairment charge is recognized for the
amount by which the carrying amount of the asset exceeds the fair value of the asset.
Income taxes. Income taxes are accounted for under the asset-and-liability method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities
and the respective tax bases and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the
enactment date. We periodically evaluate the realizability of our
net deferred tax assets. Our tax accruals are analyzed periodically and adjustments are made as events occur to warrant such
adjustment. Valuation allowances on certain U.S. deferred tax assets and non-U.S. deferred tax assets are established, because
realization of these tax benefits through future taxable income does not meet the more-likely-than-not threshold.
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On December 22, 2017, the 2017 Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law and the new legislation contains
several key tax provisions, including a reduction of the corporate income tax rate from 35% to 21% effective January 1, 2018 and a one-
time mandatory transition tax on accumulated foreign earnings, among others. We were required to recognize the effect of the tax law
changes in the period of enactment, such as remeasuring our U.S. deferred tax assets and liabilities, as well as reassessing the net
realizability of our deferred tax assets and liabilities. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income
Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allowed us to record provisional amounts during a
measurement period not to extend beyond one year of the enactment date. As of December 22, 2018 we completed our analysis in
accordance with SAB 118 and recorded immaterial adjustments.
Effective January 1, 2018, the Tax Act provides for a new global intangible low-taxed income (GILTI) provision. Under the GILTI
provision, certain foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets are included in
U.S. taxable income. The Company currently estimates GILTI will be immaterial for the year ended December 31, 2018, although
interpretive guidance continues to be issued and future guidance may impact this analysis. The Company has not recorded any deferred
taxes for future GILTI inclusions as any future inclusions are expected to be treated as a period expense and offset by net operating loss
carryforwards in the U.S.
We operate in various countries and tax jurisdictions globally. For the year ended December 31, 2018, the tax rate differed from the
U.S. federal statutory rate of 21% primarily due to the valuation allowance against certain U.S. and non-U.S. deferred tax assets, the
relative mix in earnings and losses in the U.S. versus foreign tax jurisdictions, and the impact of certain discrete tax events and operating
results in tax jurisdictions which do not result in a tax benefit.
Included in Other long-term liabilities is an accrual of $2.7 million related to uncertain tax positions involving income recognition.
We recognize that local tax law is inherently complex and the local taxing authorities may not agree with certain tax positions taken.
Consequently, it is reasonably possible that the ultimate resolution of tax matters in any jurisdiction may be significantly more or less than
estimated. We evaluated the estimated tax exposure for a range of current likely outcomes to be from $0 to approximately $50.0 million and
recorded our accrual to reflect our best expectation of ultimate resolution.
Revenue recognition. Effective January 1, 2018, we adopted Accounting Standards Codification Topic 606, Revenue from Contracts
with Customers (“Topic 606”). We recognize revenue 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. We apply the
following five-step model in order to determine this amount: (i) identify the contract(s) with a customer; (ii) identify the performance
obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the
contract; and (v) recognize revenue when (or as) we satisfy a performance obligation.
We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in
exchange for the goods or services we transfer to the customer. At contract inception, once the contract is determined to be within the
scope of Topic 606, we review the contract to determine which performance obligations we must deliver and which of these performance
obligations are distinct. We recognize as revenue the amount of the transaction price that is allocated to the respective performance
obligation when the performance obligation is satisfied or as it is satisfied. For a complete discussion of accounting for Revenues from
services, Revenues from products and Revenue from transfer of intellectual property and other, refer to Note 14.
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 health
care 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 December 31, 2018 and 2017, receivable balances (net of contractual adjustments) from
Medicare and Medicaid in total were 17% and 16%, 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 December 31,
2018 and 2017, receivables due from patients represent approximately 3.1% and 3.2%, 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
105
net loss is directly affected by our estimate of the collectability of accounts receivable. The allowance for doubtful accounts was $1.8
million and $1.4 million at December 31, 2018 and 2017, respectively. The provision for bad debts for the years ended December 31, 2018
and 2017 was $0.7 million and $0.9 million, respectively.
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 Consolidated Statement of Operations over the period during
which an employee is required to provide service in exchange for the award. We record excess tax benefits, realized from the exercise of
stock options, as cash flows from operations. 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. During the years ended December 31, 2018, 2017 and 2016, we recorded $21.8 million, $28.3 million
and $42.7 million, respectively, of equity-based compensation expense.
Research and development expenses. Research and development expenses include external and internal expenses. External expenses
include clinical and non-clinical activities performed by contract research organizations, lab services, purchases of drug and diagnostic
product materials and manufacturing development costs. Research and development employee-related expenses include salaries, benefits
and equity-based compensation expense. Other internal research and development expenses are incurred to support overall research and
development activities and include expenses related to general overhead and facilities. We expense these costs in the period in which they
are incurred. We estimate our liabilities for research and development expenses in order to match the recognition of expenses to the period
in which the actual services are received. As such, accrued liabilities related to third party research and development activities are
recognized based upon our estimate of services received and degree of completion of the services in accordance with the specific third
party contract.
Research and development expense includes costs for in-process research and development projects acquired in asset acquisitions
which have not reached technological feasibility and which have no alternative future use. For in-process research and development
projects acquired in business combinations, the in-process research and development project is capitalized and evaluated for impairment
until the development process has been completed. Once the development process has been completed the asset will be amortized over its
remaining useful life.
Segment reporting. Our chief operating decision-maker (“CODM”) is Phillip Frost, M.D., our Chairman and Chief Executive Officer.
Our CODM reviews our operating results and operating plans and makes resource allocation decisions on a Company-wide or aggregate
basis. 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 clinical laboratory operations we acquired through the acquisition of
BioReference and point-of-care operations. There are no significant inter-segment sales. We evaluate the performance of each segment
based on operating profit or loss. There is no inter-segment allocation of interest expense and income taxes. Refer to Note 17.
Shipping and handling costs. We do not charge customers for shipping and handling costs. Shipping and handling costs are classified
as Cost of revenues in the Consolidated Statement of Operations.
Foreign currency translation . The financial statements of certain of our foreign operations are measured using the local currency as
the functional currency. The local currency assets and liabilities are generally translated at the rate of exchange to the U.S. dollar on the
balance sheet date and the local currency revenues and expenses are translated at average rates of exchange to the U.S. dollar during the
reporting periods. Foreign currency transaction gains (losses) have been reflected as a component of Other income (expense), net within the
Consolidated Statement of Operations and foreign currency translation gains (losses) have been included as a component of the
Consolidated Statement of Comprehensive Loss. During the years ended December 31, 2018, 2017 and 2016, we recorded $1.9 million,
$1.4 million and $0.8 million, respectively of transaction gains (losses).
Variable interest entities. The consolidation of a variable interest entity (“VIE”) is required when an enterprise has a controlling
financial interest. A controlling financial interest in a VIE will have both of the following characteristics: (a) the power to direct the
activities of a VIE that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses of the VIE that
could potentially be significant to the VIE. Refer to Note 4.
Investments. We have made strategic investments in development stage and emerging companies. We record these investments as
equity method investments or as equity securities based on our percentage of ownership and whether we have significant influence over the
operations of the investees. For investments classified under the equity method of accounting, we record our proportionate share of their
losses in Losses from investments in investees in our Consolidated Statement of Operations. Refer to Note 4. For investments classified as
equity securities, we record changes in their fair value as Other
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income (expense) in our Consolidated Statement of Operations based on their closing price per share at the end of each reporting period,
unless the equity security does not have a readily determinable fair value. Refer to Note 4.
Recently adopted accounting pronouncements.
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,
“Revenue from Contracts with Customers.” ASU 2014-09, as amended and codified into Topic 606, 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 and simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer.
As required, we adopted Topic 606 on January 1, 2018 using the full retrospective approach, and have elected to use the following practical
expedients that are permitted under the rules of the adoption, which have been applied consistently to all contracts within all reporting
periods presented:
•
•
For all reporting periods presented before January 1, 2018, we have not restated revenue from contracts that begin and are
completed within the same annual reporting period.
For all reporting periods presented before January 1, 2018, we have not disclosed the amount of the transaction price allocated
to the remaining performance obligations or an explanation of when we expect to recognize that amount as revenue.
• We have applied the practical expedient provided for by Topic 606 by not adjusting the transaction price for significant
financing components for periods less than one year.
As a result of adopting Topic 606 on January 1, 2018 using the full retrospective approach, we revised our comparative financial statements
for the prior years as if Topic 606 had been effective for those periods. As a result, the following financial statement line items for 2017 and
2016 were affected:
Consolidated Statement of Operations
For the year ended December 31, 2017
(in thousands)
As adjusted under Topic
606
As originally reported
Effect of change
Revenue from services
Revenue from transfer of intellectual property and other
Selling, general and administrative
Research and development
$
782,710 $
75,537
414,628
126,435
889,076 $
70,668
520,994
125,186
(106,366)
4,869
(106,366)
1,249
For the year ended December 31, 2016
(in thousands)
As adjusted under Topic
606
As originally reported
Effect of change
Revenue from services
Revenue from transfer of intellectual property and other
Selling, general and administrative
Research and development
$
107
928,572 $
105,455
407,331
113,871
1,012,129 $
126,065
490,888
111,205
(83,557)
(20,610)
(83,557)
2,666
Consolidated Balance Sheet
December 31, 2017
(in thousands)
As adjusted under Topic
606
As originally reported
Effect of change
Other current assets and prepaid expenses
Accrued expenses
Other long-term liabilities, principally contract liabilities,
contingent consideration and line of credit
Accumulated deficit
$
42,513 $
225,796
37,113 $
215,102
256,415
(1,048,914 )
219,954
(1,007,159 )
5,400
10,694
36,461
(41,755)
Consolidated Statement of Cash Flows
Net loss
Other current assets and prepaid expenses
Contract liabilities
Net loss
Contract liabilities
For the year ended December 31, 2017
(in thousands)
As adjusted under Topic
606
As originally reported
Effect of change
$
(305,250) $
4,771
(58,876 )
(308,870) $
10,171
(60,656)
3,620
(5,400)
1,780
For the year ended December 31, 2016
(in thousands)
As adjusted under Topic
606
As originally reported
Effect of change
$
(48,359) $
(50,893)
(25,083) $
(74,169)
(23,276)
23,276
The most significant change above relates to amounts in our clinical laboratory operations that were historically classified as provision
for bad debts, primarily related to patient responsibility, which are now considered an element of variable consideration as an implicit price
concession in determining revenues under Topic 606. Accordingly, we report uncollectible balances associated with individual patients as a
reduction of the transaction price and therefore as a reduction in Revenue from services when historically these amounts were classified as
provision for bad debts within Selling, general and administrative expenses.
In addition, under Topic 606, the upfront consideration received for a license and contract services combined performance obligation
is recognized as revenue to the extent of costs incurred based on the length of the expected performance period and the subjectivity in
estimating progress towards satisfaction of the performance obligation. Under previous accounting, we recognized revenue over the
expected performance period. The adoption of Topic 606 resulted in a cumulative revenue reduction of $41.8 million and an increase of our
accumulated deficit balance as of December 31, 2017; with a corresponding increase in our contract liabilities. For the years ended
December 31, 2017 and 2016, Revenue from the transfer of intellectual property and other was increased (decreased) by $3.4 million and
$(23.3) million, respectively, for the change in accounting. For a further discussion of the adoption of Topic 606, refer to Note 14.
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 consolidation of the investee) to be measured at fair value
with changes in fair value recognized in net income. As a result of the required adoption of ASU 2016-01 on January 1, 2018, we recorded
a cumulative-effect adjustment to reclassify our net unrealized gains on our equity securities of $4.9 million as of January 1, 2018 from
Accumulated other comprehensive loss to Accumulated deficit in our Consolidated Balance Sheet. Changes in the fair value of certain of
our equity securities subsequent to the adoption of ASU 2016-01 on January 1, 2018 will be predominately recognized in net income.
108
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. The required adoption of ASU 2016-15 in
the first quarter of 2018 did not have a significant impact on our Consolidated Financial Statements.
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805),” which clarifies the definition of a
business to assist entities in evaluating whether transactions should be accounted for acquisitions (or disposals) of assets or businesses. The
required adoption of ASU 2017-01 in the first quarter of 2018 did not have a significant impact on our 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. Under ASU 2017-04, an impairment loss will reflect the amount by which the carrying amount
of a reporting unit exceeds its fair value, not to exceed the carrying amount of goodwill. We early adopted the provisions of ASU 2017-04
prospectively in the fourth quarter of 2018. For a further discussion of the adoption of ASU 2017-04, refer to Goodwill and intangible
assets earlier in this Note 2.
Pending accounting pronouncements.
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. ASU 2016-02, as amended, requires 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 have
begun a process to identify a complete population of our leases. Such process includes reviewing various contracts to identify whether such
arrangements convey the right to control the use of an identified asset. The determination of the impact of this new guidance is ongoing
and, as such, we are not able to reasonably estimate the effect the adoption of this new standard will have on our financial statements.
Based on our preliminary assessment of this ASU, we believe the new standard will have a significant impact on our Consolidated Balance
Sheet, which has not yet been quantified. In July 2018, the FASB issued an ASU to provide an additional transition method to adopt the
guidance by allowing entities to initially apply the new leases standard at the adoption date and recognize a cumulative effect to the
opening balance of retained earnings. We are currently evaluating the choice of transition options.
In June 2018, the FASB issued ASU No. 2018-07, “Compensation - Stock Compensation (Topic 718),” which expands the scope of
Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 will be
effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year,
with early adoption permitted. We are currently evaluating the impact of this new guidance on our Consolidated Financial Statements.
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Note 3 Loss Per Share
Basic loss per share is computed by dividing our net loss by the weighted average number of shares outstanding during the period.
For diluted earnings per share, the dilutive impact of stock options and warrants is determined by applying the “treasury stock” method.
The dilutive impact of the 2033 Senior Notes and 2023 Convertible Notes (each, as defined herein and as discussed in Note 6) has been
considered using the “if converted” method. In the periods in which their effect would be antidilutive, no effect has been given to
outstanding options, warrants or the potentially dilutive shares issuable pursuant to the 2033 Senior Notes and 2023 Convertible Notes in
the dilutive computation. The following table sets forth the computation of basic and diluted earnings (loss) per share:
(In thousands, except per share data)
Numerator
Net loss, basic
Add: Interest on 2033 Senior Notes
Change in FV of embedded derivative income
Net loss, diluted
Denominator
(Shares in thousands)
Weighted average common shares outstanding, basic
Effect of dilutive securities:
2033 Senior Notes
Dilutive potential shares
Weighted average common shares outstanding, diluted
Loss per share, basic
Loss per share, diluted
For the years ended December 31,
2018
2017
2016
(153,040) $
(305,250) $
—
—
—
—
(153,040) $
(305,250) $
(48,359)
2,451
(7,001)
(52,909)
563,144
559,161
550,847
—
—
563,144
—
—
559,161
4,758
4,758
555,605
(0.27) $
(0.27) $
(0.55) $
(0.55) $
(0.09)
(0.10)
$
$
$
$
A total of 16,568,520, 6,255,624 and 4,736,104 potential shares of Common Stock have been excluded from the calculation of diluted
net loss per share for the years ended December 31, 2018, 2017 and 2016, respectively, because their inclusion would be antidilutive.
During the year ended December 31, 2018, 540,000 Common Stock options and Common Stock warrants to purchase shares of our
Common Stock were exercised, resulting in the issuance of 353,677 shares of Common Stock. Of the 540,000 Common Stock options and
Common Stock warrants exercised, 186,323 shares of Common Stock were surrendered in lieu of a cash payment via the net exercise
feature of the agreements.
During the year ended December 31, 2017, 1,720,649 Common Stock options and Common Stock warrants to purchase shares of our
Common Stock were exercised, resulting in the issuance of 1,447,792 shares of Common Stock. Of the 1,720,649 Common Stock options
and Common Stock warrants exercised, 272,857 shares of Common Stock were surrendered in lieu of a cash payment via the net exercise
feature of the agreements.
During the year ended December 31, 2016, 3,420,697 Common Stock options and Common Stock warrants to purchase shares of our
Common Stock were exercised, resulting in the issuance of 3,292,753 shares of Common Stock. Of the 3,420,697 Common Stock options
and Common Stock warrants exercised, 127,944 shares of Common Stock were surrendered in lieu of a cash payment via the net exercise
feature of the agreements.
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Note 4 Acquisitions, Investments and Licenses
Investments
The following table reflects the accounting method, carrying value and underlying equity in net assets of our unconsolidated
investments as of December 31, 2018:
(in thousands)
Investment type
Investment Carrying Value
Equity method investments
Variable interest entity, equity method
Equity securities
Equity securities with no readily determinable fair value
Warrants and options
Total carrying value of investments
$
$
2,505 $
1,116
26,313
439
855
31,228
Underlying Equity in Net
Assets
11,658
44
Equity method investments
Our equity method investments consist of investments in Pharmsynthez (ownership 9%), Cocrystal Pharma, Inc. (“COCP”) (9%),
Non-Invasive Monitoring Systems, Inc. (“NIMS”) (1%), Neovasc Inc. (“Neovasc”)(4%), InCellDx, Inc. (29%), BioCardia, Inc.
(“BioCardia”) (5%), and Xenetic Biosciences, Inc. (“Xenetic”) (4%). The total assets, liabilities, and net losses of our equity method
investees as of and for the year ended December 31, 2018 were $234.3 million, $85.9 million, and $179.8 million, respectively. We have
determined that we and/or our related parties can significantly influence the success of our equity method investments through our board
representation and/or voting power. Accordingly, we account for our investment in these entities under the equity method and record our
proportionate share of their losses in Loss from investments in investees in our Consolidated Statement of Operations. Included in Loss
from investments in investees for the year ended December 31, 2018 is a charge of $2.9 million to write our investment in InCellDx, Inc.
down to its fair value as of December 31, 2018. The aggregate value of our equity method investments based on the quoted market price of
their common stock and the number of shares held by us as of December 31, 2018 is $15.3 million.
Equity securities
Our equity securities consist of investments in Phio Pharmaceuticals (“Phio”), previously Rxi Pharmaceuticals, (ownership 0%), VBI
Vaccines Inc. (“VBI”) (7%), ChromaDex Corporation (0%), MabVax Therapeutics Holdings, Inc. (“MabVax”) (2%) and Eloxx
Pharmaceuticals, Inc. (“Eloxx”)(4%). We have determined that our ownership, along with that of our related parties, does not provide us
with significant influence over the operations of these investments. Accordingly, we account for our investment in these entities as equity
securities, and we record changes in the fair value of these investments in Other income (expense) each reporting period when they have
readily determinable fair value. Equity securities without a readily determinable fair value are adjusted to fair value when an observable
price change can be identified. Net gains and losses on our equity securities for the year ended December 31, 2018 are as follows:
(in thousands)
Equity Securities
Net gains and losses recognized during the period on equity securities
Less: Net gains and losses recognized during the period on equity securities sold during the period
Unrealized net gains recognized during the reporting period on equity securities still held at the
reporting date
$
$
For the twelve months ended
December 31, 2018
2,752
113
2,865
Sales of investments
Gains (losses) included in earnings from sales of our investments are recorded in Other income (expense), net in our Consolidated
Statement of Operations. Gains (losses) from sale of our investments for the years ended December 31, 2018 and 2017, was $25.8 thousand
and $1.5 million, respectively. No gains (losses) were recognized during the years ended December 31, 2016. The cost of securities sold is
based on the specific identification method.
111
Warrants and options
In addition to our equity method investments and equity securities, we hold options to purchase 0.4 million additional shares of
BioCardia, 0.2 million of which are vested as of December 31, 2018, and 33 thousand, 0.7 million, 0.5 million, 22 thousand and 29
thousand of warrants to purchase additional shares of COCP, InCellDx, Inc., Xenetic, Phio and Neovasc, respectively. We recorded the
changes in the fair value of the options and warrants in Fair value changes of derivative instruments, net in our Consolidated Statement of
Operations. We also recorded the fair value of the options and warrants in Investments, net in our Consolidated Balance Sheet. See further
discussion of the Company’s options and warrants in Note 18 and Note 19.
Investments in variable interest entities
We have determined that we hold variable interests in Zebra Biologics, Inc. (“Zebra”). We made this determination as a result of our
assessment that Zebra does not have sufficient resources to carry out its principal activities without additional financial support.
We own 1,260,000 shares of Zebra Series A-2 Preferred Stock and 900,000 shares of Zebra restricted common stock (ownership 29%
at December 31, 2018). Zebra is a privately held biotechnology company focused on the discovery and development of biosuperior
antibody therapeutics and complex drugs. Dr. Richard Lerner, M.D., a member of our Board of Directors, is a founder of Zebra and, along
with Dr. Frost, serves as a member of Zebra’s Board of Directors.
In order to determine the primary beneficiary of Zebra, we evaluated our investment and our related parties’ investment, as well as
our investment combined with the related party group’s investment to identify if we had the power to direct the activities that most
significantly impact the economic performance of Zebra. Based on the capital structure, governing documents and overall business
operations of Zebra, we determined that, while a VIE, we do not have the power to direct the activities that most significantly impact
Zebra’s economic performance and have no obligation to fund expected losses. We did determine, however, that we can significantly
influence the success of Zebra through our board representation and voting power. Therefore, we have the ability to exercise significant
influence over Zebra’s operations and account for our investment in Zebra under the equity method.
Other
We recorded $8.8 million of expense in Selling, general and administrative expenses in our Consolidated Statement of Operations for
the year ended December 31, 2017 to write certain Other current assets from our investees down to their estimated fair value.
112
Note 5 Composition of Certain Financial Statement Captions
113
(In thousands)
Accounts receivable, net
Accounts receivable
Less: allowance for doubtful accounts
Inventories, net
Consumable supplies
Finished products
Work in-process
Raw materials
Less: inventory reserve
Other current assets and prepaid expenses
Other receivables
Taxes recoverable
Prepaid supplies
Prepaid insurance
Other
Property, plant and equipment, net:
Machinery, medical and other equipment
Leasehold improvements
Furniture and fixtures
Automobiles and aircraft
Software
Building
Land
Construction in process
Less: accumulated depreciation
Intangible assets, net:
Customer relationships
Technologies
Trade names
Covenants not to compete
Licenses
Product registrations
Other
Less: accumulated amortization
(In thousands)
Accrued expenses:
Contract liabilities
Employee benefits
Taxes payable
Contingent consideration
Clinical trials
Capital leases short-term
Milestone payment
Professional fees
Other
Other long-term liabilities:
Contract liabilities
Line of credit
Contingent consideration
Capital leases long-term
$
$
$
$
$
$
$
$
$
$
$
$
$
For the years ended December 31,
2018
2017
145,665 $
(1,758)
143,907 $
23,264 $
15,259
2,473
4,259
(2,956)
42,299 $
2,368 $
15,708
9,693
3,436
3,847
35,052 $
147,757 $
34,607
12,737
10,133
13,425
18,554
2,453
16,670
(111,662)
144,674 $
446,296 $
340,729
50,404
16,322
5,766
7,861
5,613
(258,539)
614,452 $
166,962
(1,446)
165,516
21,546
21,012
5,873
7,467
(6,565)
49,333
3,398
18,138
8,207
3,532
9,238
42,513
112,961
34,121
11,540
11,137
12,469
8,227
2,552
39,397
(85,847)
146,557
448,345
340,921
50,553
16,372
10,305
10,475
5,799
(198,935)
683,835
For the years ended December 31,
2018
2017
63,503 $
45,621
3,233
2,375
10,401
3,280
4,871
7,935
62,294
203,513 $
27,566 $
105,198
22,162
5,620
56,883
50,377
4,609
11,750
12,191
3,399
4,868
2,355
79,364
225,796
95,450
104,152
29,603
7,786
Mortgages and other debts payable
Other
4,654
33,768
198,968 $
1,567
17,857
256,415
$
All of our intangible assets and goodwill acquired relate to our acquisitions of principally OPKO Renal, OPKO Biologics, EirGen
Pharma Limited (“EirGen”) and BioReference. We amortize intangible assets with definite lives on a straight-line basis over their estimated
useful lives. The estimated useful lives by asset class are as follows: technologies - 5-17 years, customer relationships - 7-20 years, product
registrations - 7-10 years, covenants not to compete - 5 years, trade names - 5-10 years, other 9-10 years. We do not anticipate capitalizing
the cost of product registration renewals, rather we expect to expense these costs, as incurred. Our goodwill is not tax deductible for
income tax purposes in any jurisdiction in which we operate.
The changes in value of the intangible assets and goodwill during the years ended December 31, 2018 and 2017 are primarily due to
foreign currency fluctuations between the Chilean Peso, the Euro and the Shekel against the U.S. dollar.
The following table reflects the changes in the allowance for doubtful accounts, provision for inventory reserve and tax valuation
allowance accounts:
(In thousands)
2018
2017
Allowance for doubtful accounts
Inventory reserve
Tax valuation allowance
Allowance for doubtful accounts
Inventory reserve
Tax valuation allowance
Beginning
balance
Charged
to
expense
Written-off
Charged
to other
Ending
balance
$
$
$
$
$
$
(1,446)
(6,565)
(142,062)
(1,671)
(945)
(55,415)
(665)
(1,915)
(12,854)
(891)
(5,390)
(82,358)
353
5,524
—
1,063
(230)
—
— $
— $
— $
(1,758)
(2,956)
(154,916)
53 $
— $
(4,289) $
(1,446)
(6,565)
(142,062)
114
The following table summarizes the changes in Goodwill during the years ended December 31, 2018 and 2017.
(In thousands)
Pharmaceuticals
CURNA
EirGen
FineTech
OPKO Biologics
OPKO Chile
OPKO Health Europe
OPKO Renal
Transition Therapeutics
Diagnostics
BioReference
OPKO Diagnostics
OPKO Lab
2018
Balance at
January 1
Goodwill
impairment
Foreign
exchange and
other
Balance at
December 31st
Balance at
January 1
2017
Foreign
exchange
Balance at
December 31
$
$
4,827
89,226
11,698
139,784
5,203
7,898
2,069
3,608
401,821
17,977
32,988
717,099 $
$
— $
(11,698)
(3,981 )
—
—
(589 )
(352 )
—
(286 )
4,827 $
85,245
—
139,784
4,614
7,546
2,069
3,322
4,827 $
78,358
11,698
139,784
4,785
6,936
2,069
3,360
— $
10,868
—
—
418
962
—
248
4,827
89,226
11,698
139,784
5,203
7,898
2,069
3,608
—
—
—
(5,208 ) $
401,821
17,977
32,988
700,193 $
401,821
17,977
32,988
704,603 $
—
—
—
12,496 $
401,821
17,977
32,988
717,099
(11,698) $
115
Note 6 Debt
On November 8, 2018, we entered into a credit agreement with an affiliate of Dr. Frost, pursuant to which the lender committed to
provide us with an unsecured line of credit in the amount of $60 million. Borrowings under the line of credit will bear interest at a rate of
10% per annum and may be repaid and reborrowed at any time. The credit agreement includes various customary remedies for the lender
following an event of default, including the acceleration of repayment of outstanding amounts under line of credit. The line of credit
matures on November 8, 2023. As of as of December 31, 2018, no funds were borrowed under the line of credit, and in February 2019, we
repaid amounts borrowed in 2019 and terminated the credit agreement.
In February 2018, we issued a series of 5% Convertible Promissory Notes (the “2023 Convertible Notes”) in the aggregate principal
amount of $55.0 million. The 2023 Convertible Notes mature 5 years from the date of issuance. Each holder of a 2023 Convertible Note
has the option, from time to time, to convert all or any portion of the outstanding principal balance of such 2023 Convertible Note, together
with accrued and unpaid interest thereon, into shares of our Common Stock, par value $0.01 per share, at a conversion price of $5.00 per
share of Common Stock (the “Shares”). We may redeem all or any part of the then issued and outstanding 2023 Convertible Notes,
together with accrued and unpaid interest thereon, pro ratably among the holders, 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.
The issuance of the 2023 Convertible Notes and the issuance of the Shares, if any, upon conversion thereof was not, and will not be,
respectively, registered under the Securities Act, pursuant to the exemption provided by Section 4(a)(2) thereof, and we have not agreed to
register the Shares if or when such Shares are issued. Purchasers of the 2023 Convertible Notes include an affiliate of Dr. Phillip Frost,
M.D., our Chairman and Chief Executive Officer, and Dr. Jane H. Hsiao, Ph.D., MBA, our Vice-Chairman and Chief Technical Officer.
In January 2013, we entered into note purchase agreements (the “2033 Senior Notes”) with qualified institutional buyers and
accredited investors (collectively, the “Purchasers”) in a private placement in reliance on exemptions from registration under the Securities
Act. The 2033 Senior Notes were issued on January 30, 2013. The 2033 Senior Notes, which totaled $175.0 million in original principal
amount, bear interest at the rate of 3.0% per year, payable semiannually on February 1 and August 1 of each year. The 2033 Senior Notes
will mature on February 1, 2033, unless earlier repurchased, redeemed or converted. Upon a fundamental change as defined in the
Indenture, dated as of January 30, 2013, by and between the Company and Wells Fargo Bank N.A., as trustee, governing the 2033 Senior
Notes (the “Indenture”), subject to certain exceptions, the holders may require us to repurchase all or any portion of their 2033 Senior
Notes for cash at a repurchase price equal to 100% of the principal amount of the 2033 Senior Notes being repurchased, plus any accrued
and unpaid interest to but not including the related fundamental change repurchase date.
The following table sets forth information related to the 2033 Senior Notes which is included in our Consolidated Balance Sheet as of
December 31, 2018:
(In thousands)
Balance at December 31, 2017
Amortization of debt discount and debt issuance costs
Balance at December 31, 2018
2033 Senior
Notes
Discount
Debt Issuance
Cost
$
$
31,850
—
31,850
$
$
(2,565) $
2,277
(288) $
(125) $
125
— $
Total
29,160
2,402
31,562
The following table sets forth information related to the 2033 Senior Notes which is included in our Consolidated Balance Sheet as of
December 31, 2017:
(In thousands)
Balance at December 31, 2016
Amortization of debt discount and debt issuance costs
Change in fair value of embedded derivative
Reclassification of embedded derivatives to equity
Balance at December 31, 2017
$
$
Embedded
conversion
option
16,736 $
—
(3,185)
(13,551)
— $
2033 Senior
Notes
31,850 $
Discount
Debt Issuance
Cost
—
—
—
31,850 $
(4,612) $
2,047
—
—
(2,565) $
(273) $
148
—
—
(125) $
Total
43,701
2,195
(3,185)
(13,551)
29,160
The 2033 Senior Notes will be convertible at any time on or after November 1, 2032, through the second scheduled trading day
immediately preceding the maturity date, at the option of the holders. Additionally, holders may convert their 2033
116
Senior Notes prior to the close of business on the scheduled trading day immediately preceding November 1, 2032, under the following
circumstances: (1) conversion based upon satisfaction of the trading price condition relating to the 2033 Senior Notes; (2) conversion based
on the Common Stock price; (3) conversion based upon the occurrence of specified corporate events; or (4) if we call the 2033 Senior
Notes for redemption. The 2033 Senior Notes will be convertible into cash, shares of our Common Stock, or a combination of cash and
shares of Common Stock, at our election unless we have made an irrevocable election of net share settlement. The initial conversion rate
for the 2033 Senior Notes will be 141.48 shares of Common Stock per $1,000 principal amount of 2033 Senior Notes (equivalent to an
initial conversion price of approximately $7.07 per share of Common Stock), and will be subject to adjustment upon the occurrence of
certain events. In addition, we will, in certain circumstances, increase the conversion rate for holders who convert their 2033 Senior Notes
in connection with a make-whole fundamental change (as defined in the Indenture). Holders of the 2033 Senior Notes may require us to
repurchase the 2033 Senior Notes for 100% of their principal amount, plus accrued and unpaid interest, on February 1, 2019, February 1,
2023 and February 1, 2028, or following the occurrence of a fundamental change as defined in the indenture governing the 2033 Senior
Notes. On February 1, 2019, approximately $28.8 million aggregate principal amount of 2033 Senior Notes were tendered by holders
pursuant to such holders’ option to require us to repurchase the 2033 Senior Notes.
Before February 1, 2019, we may redeem for cash any or all of the 2033 Senior Notes but only if the last reported sale price of our
Common Stock exceeds 130% of the applicable conversion price for at least 20 trading days during the 30 consecutive trading day period
ending on the trading day immediately prior to the date on which we deliver the redemption notice. The redemption price will equal 100%
of the principal amount of the 2033 Senior Notes to be redeemed, plus any accrued and unpaid interest to but not including the redemption
date. On or after February 1, 2019, we may redeem for cash any or all of the 2033 Senior Notes at a redemption price of 100% of the
principal amount of the 2033 Senior Notes to be redeemed, plus any accrued and unpaid interest up to but not including the redemption
date.
The terms of the 2033 Senior Notes, include, among others: (i) rights to convert into shares of our Common Stock, including upon a
fundamental change; and (ii) a coupon make-whole payment in the event of a conversion by the holders of the 2033 Senior Notes on or
after February 1, 2017 but prior to February 1, 2019. We determined that these specific terms were considered to be embedded derivatives.
Embedded derivatives are required to be separated from the host contract, the 2033 Senior Notes, and carried at fair value when: (a) the
embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host
contract; and (b) a separate, stand-alone instrument with the same terms would qualify as a derivative instrument. We concluded that the
embedded derivatives within the 2033 Senior Notes meet these criteria for periods prior to February 1, 2017 and, as such, were valued
separate and apart from the 2033 Senior Notes and recorded at fair value each reporting period.
For accounting and financial reporting purposes, we combined these embedded derivatives and valued them together as one unit of
accounting. In 2017, certain terms of the embedded derivatives expired pursuant to the original agreement and the embedded derivatives no
longer met the criteria to be separated from the host contract and, as a result, the embedded derivatives were no longer required to be valued
separate and apart from the 2033 Senior Notes and were reclassified to additional paid in capital. Accordingly, there was no derivative
income (loss) for the year ended December 31, 2018.
From 2013 to 2016, holders of the 2033 Senior Notes converted $143.2 million in aggregate principal amount into an aggregate of
21,539,873 shares of the Company’s Common Stock.
On November 5, 2015, BioReference and certain of its subsidiaries entered into a credit agreement with JPMorgan Chase Bank, N.A.
(“CB”), as lender and administrative agent, as amended (the “Credit Agreement”). The Credit 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. As of
December 31, 2018, $2.0 million additional funds were available to be borrowed under the Credit Agreement. Principal under the Credit
Agreement is due upon maturity on November 5, 2020.
At BioReference’s option, borrowings under the Credit Agreement (other than swingline loans) will bear interest at (i) the CB
floating rate (defined as the higher of (a) the prime rate and (b) the LIBOR rate (adjusted for statutory reserve requirements for
Eurocurrency liabilities) for an interest period of one month plus 2.50%) plus an applicable margin of 0.35% for the first 12 months and
0.50% thereafter or (ii) the LIBOR rate (adjusted for statutory reserve requirements for Eurocurrency liabilities) plus an applicable margin
of 1.35% for the first 12 months and 1.50% thereafter. Swingline loans will bear interest at the CB
117
floating rate plus the applicable margin. The Credit Agreement also calls for other customary fees and charges, including an unused
commitment fee of 0.50% of the lending commitments.
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 $55.0 million. 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 $35.0 million. 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. On December 22, 2017, BioReference and certain of its
subsidiaries entered into Amendment No. 6 to Credit Agreement, which amended the Credit Agreement to, among other things, permit
BioReference and its subsidiaries to dividend cash to the Company in the form of intercompany loans, in an aggregate amount not to exceed
$45.0 million. The other terms of the Credit Agreement remain unchanged.
In February 2018, BioReference and certain of its subsidiaries entered into Amendment No. 7 to the Credit Agreement, which
amended the Credit Agreement to permit BioReference and its subsidiaries to use cash on hand, up to a maximum amount set forth in the
amendment, to meet the availability requirements that otherwise would trigger (i) covenants that would require BioReference to maintain a
minimum fixed charge coverage ratio and provide certain increased reporting under the Credit Agreement and (ii) CB’s right, as agent for
the lenders under the Credit Agreement, to exercise sole dominion over funds held in certain accounts of BioReference. The other terms of
the Credit Agreement remain unchanged.
On February 26, 2019, BioReference and certain of its subsidiaries entered into Amendment No. 8 to the Credit Agreement, which
amended the Credit Agreement to add back certain cost savings resulting from work force reductions in the 2018 fiscal year to the
calculation of EBITDA for purposes of complying with the minimum fixed charge coverage ratio covenant. The other terms of the Credit
Agreement remain unchanged.
The Credit Agreement contains customary covenants and restrictions, including, without limitation, covenants that require
BioReference and its subsidiaries to maintain a minimum fixed charge coverage ratio if availability under the new credit facility falls below
a specified amount and to comply with laws and restrictions on the ability of BioReference and its subsidiaries to incur additional
indebtedness or to pay dividends and make certain other distributions to the Company, subject to certain exceptions as specified therein.
Failure to comply with these covenants would constitute an event of default under the Credit Agreement, notwithstanding the ability of
BioReference to meet its debt service obligations. The Credit Agreement also includes various customary remedies for the lenders
following an event of default, including the acceleration of repayment of outstanding amounts under the Credit Agreement and execution
upon the collateral securing obligations under the Credit Agreement. Substantially all the assets of BioReference and its subsidiaries are
restricted from sale, transfer, lease, disposal or distributions to the Company, subject to certain exceptions. BioReference and its
subsidiaries net assets as of December 31, 2018 were approximately $916.4 million, which includes goodwill of $401.8 million and
intangible assets of $405.3 million.
118
In addition to the Credit Agreement with CB, we have line of credit agreements with eleven other financial institutions as of
December 31, 2018 and 2017 in the U.S., Chile and Spain. These lines of credit are used primarily as a source of working capital for
inventory purchases.
The following table summarizes the amounts outstanding under the BioReference, Chilean and Spanish lines of credit:
(Dollars in thousands)
Lender
JP Morgan Chase
Itau Bank
Bank of Chile
BICE Bank
BBVA Bank
Security Bank
Estado Bank
Santander Bank
Scotiabank
Banco De Sabadell
Banco Bilbao Vizcaya
Santander Bank
Total
Balance Outstanding
Interest rate on
borrowings at December
31, 2018
4.02%
5.50%
6.60%
5.50%
5.50%
5.50%
5.50%
5.50%
5.00%
1.45%
2.45%
2.30%
$
$
Credit line
capacity
175,000 $
1,810
3,800
2,500
3,250
—
3,500
4,500
1,800
343
343
343
197,189 $
December 31,
2018
105,198 $
232
432
818
858
—
308
852
2
—
—
10
108,710 $
December 31,
2017
104,152
446
1,598
1,819
1,665
501
2,111
1,988
384
—
—
—
114,664
At December 31, 2018 and 2017, the weighted average interest rate on our lines of credit was approximately 4.7% and 4.2%,
respectively.
At December 31, 2018 and 2017, we had notes payable and other debt (excluding the 2033 Senior Notes, the 2023 Convertible Notes,
the Credit Agreement and amounts outstanding under lines of credit) as follows:
(In thousands)
Current portion of notes payable
Other long-term liabilities
Total
December 31,
2018
December 31,
2017
$
$
2,560 $
5,693
8,253 $
1,632
2,011
3,643
The notes and other debt mature at various dates ranging from 2019 through 2024 bearing variable interest rates from 1.0% up to
6.3%. The weighted average interest rate on the notes and other debt at December 31, 2018 and 2017, was 2.1% and 3.0%, respectively.
The notes are secured by our office space in Barcelona.
119
Note 7 Shareholders’ Equity
Our authorized capital stock consists of 750,000,000 shares of Common Stock, par value $0.01 per share, and 10,000,000 shares of
Preferred Stock, par value $0.01 per share.
Private placements of common stock
On November 8, 2018, we entered into stock purchase agreements with certain investors pursuant to which we agreed to sell to such
investors in private placements an aggregate of approximately 26.5 million shares of our Common Stock (the “Shares”) at a purchase price
of $3.49 per share, which was the closing bid price of our Common Stock on the NASDAQ Global Select Market (“NASDAQ”) on such
date, for an aggregate purchase price of $92.5 million.
The investors in the private placements include an affiliate of Dr. Phillip Frost, our Chairman and Chief Executive Officer ($70
million), and Dr. Jane Hsiao, our Vice Chairman and Chief Technical Officer ($2 million).
The issuance of the Shares were made in reliance on the exemption from registration provided in Section 4(a)(2) of the Securities Act
based upon the representations made by the investors that they are “accredited investors” and that they are purchasing the Shares without a
present view toward a distribution of the Shares.
Common stock
Subject to the rights of the holders of any shares of Preferred Stock currently outstanding or which may be issued in the future, the
holders of the Common Stock are entitled to receive dividends from our funds legally available when, as and if declared by our Board of
Directors, and are entitled to share ratably in all of our assets available for distribution to holders of Common Stock upon the liquidation,
dissolution or winding-up of our affairs subject to the liquidation preference, if any, of any then outstanding shares of Preferred Stock.
Holders of our Common Stock do not have any preemptive, subscription, redemption or conversion rights. Holders of our Common Stock
are entitled to one vote per share on all matters which they are entitled to vote upon at meetings of stockholders or upon actions taken by
written consent pursuant to Delaware corporate law. The holders of our Common Stock do not have cumulative voting rights, which means
that the holders of a plurality of the outstanding shares can elect all of our directors. All of the shares of our Common Stock currently
issued and outstanding are fully-paid and nonassessable. No dividends have been paid to holders of our Common Stock since our
incorporation, and no cash dividends are anticipated to be declared or paid on our Common Stock in the reasonably foreseeable future.
Preferred Stock
Under our certificate of incorporation, our Board of Directors has the authority, without further action by stockholders, to designate
up to 10 million shares of Preferred Stock in one or more series and to fix or alter, from time to time, the designations, powers and rights of
each series of Preferred Stock and the qualifications, limitations or restrictions of any series of Preferred Stock, including dividend rights,
dividend rate, conversion rights, voting rights, rights and terms of redemption (including sinking fund provisions), redemption price or
prices, and the liquidation preference of any wholly issued series of Preferred Stock, any or all of which may be greater than the rights of
the Common Stock, and to establish the number of shares constituting any such series.
Of the authorized Preferred Stock, 4,000,000 shares, 500,000 shares and 2,000,000 shares were designated Series A Preferred Stock,
Series C Preferred Stock and Series D Preferred Stock, respectively. As of December 31, 2018 and 2017, there were no shares of Series A
Preferred Stock, Series C Preferred Stock or Series D Preferred Stock issued or outstanding.
120
Note 8 Accumulated Other Comprehensive Income (Loss)
For the year ended December 31, 2018, changes in Accumulated other comprehensive income (loss), net of tax, were as follows:
(In thousands)
Balance at December 31, 2017
Other comprehensive income (loss) before reclassifications
Reclassification adjustment due to adoption of ASU 2016-01
Net other comprehensive income (loss)
Balance at December 31, 2018
Foreign
currency
translation
$
$
(5,404) $
(14,727)
—
(14,727)
(20,131) $
Unrealized
gain (loss) in
Accumulated
OCI
$
4,876
—
(4,876)
(4,876)
— $
Total
(528)
(14,727)
(4,876)
(19,603)
(20,131)
For the year ended December 31, 2017, changes in Accumulated other comprehensive income, net of tax, were as follows:
(In thousands)
Balance at December 31, 2016
Other comprehensive income (loss) before reclassifications
Reclassification adjustments for losses included in net loss, net of tax
Net other comprehensive income (loss)
Balance at December 31, 2017
Foreign
currency
translation
$
$
(28,128) $
22,724
—
22,724
(5,404) $
Unrealized
gain (loss) in
Accumulated
OCI
1,119 $
3,790
(33)
3,757
4,876 $
Total
(27,009)
26,514
(33)
26,481
(528)
121
Note 9 Equity-Based Compensation
We maintain six equity-based incentive compensation plans, the 2016 Equity Incentive Plan, the Acuity Pharmaceuticals, Inc. 2003
Equity Incentive Plan, the 2007 Equity Incentive Plan, the 2000 Stock Option Plan, the Modigene Inc. 2005 Stock Incentive Plan and the
Modigene Inc. 2007 Equity Incentive Plan that provide for grants of stock options and restricted stock to our directors, officers, key
employees and certain outside consultants. Equity awards granted under our 2016 Equity Incentive Plan are exercisable for a period of up
to 10 years from the date of grant. Equity awards granted under our 2007 Equity Incentive Plan are exercisable for a period of either 7 years
or 10 years from the date of grant. Equity awards granted under our 2000 Stock Option Plan, 2003 Equity Incentive Plan and the two
Modigene Plans are exercisable for a period of up to 10 years from date of grant. Vesting periods range from immediate to 5 years.
We classify the cash flows resulting from the tax benefit that arises when the tax deductions exceed the compensation cost
recognized for those equity awards (excess tax benefits) as cash flows from operations. There were no excess tax benefits for the years
ended December 31, 2018, 2017, and 2016.
Equity-based compensation arrangements to non-employees are accounted for at their fair value on the measurement date. The
measurement of equity-based compensation to non-employees is subject to periodic adjustment over the vesting period of the equity
instruments.
Valuation and Expense Information
We recorded equity-based compensation expense of $21.8 million, $28.3 million and $42.7 million for the years ended December 31,
2018, 2017, and 2016, respectively, all of which were reflected as operating expenses. Of the $21.8 million of equity based compensation
expense recorded in the year ended December 31, 2018, $14.7 million was recorded as selling, general and administrative expenses, $4.2
million was recorded as research and development expenses and $2.8 million was recorded as a cost of revenue. Of the $28.3 million of
equity based compensation expense recorded in the year ended December 31, 2017, $21.2 million was recorded as selling, general and
administrative expense, $5.1 million was recorded as research and development expenses and $2.0 million was recorded as a cost of
revenue. Of the $42.7 million of equity based compensation expense recorded in the year ended December 31, 2016, $33.4 million was
recorded as selling, general and administrative expense, $7.5 million was recorded as research and development expenses and 1.8 million
was recorded as cost of revenue.
We estimate forfeitures of stock options and recognize compensation cost only for those awards expected to vest. Forfeiture rates are
determined for all employees and non-employee directors based on historical experience and our estimate of future vesting. Estimated
forfeiture rates are adjusted from time to time based on actual forfeiture experience.
As of December 31, 2018, there was $24.6 million of unrecognized compensation cost related to the stock options granted under our
equity-based incentive compensation plans. Such cost is expected to be recognized over a weighted-average period of approximately 1.48
years.
Stock Options
We estimate the fair value of each stock option on the date of grant using the Black-Scholes-Merton Model option-pricing formula
and amortize the fair value to expense over the stock option’s vesting period using the straight-line attribution approach for employees and
non-employee directors, and for awards issued to non-employees we recognize compensation expense on a graded basis, with most of the
compensation expense being recorded during the initial periods of vesting. We apply the following assumptions in our Black-Scholes-
Merton Model option-pricing formula:
Expected term (in years)
Risk-free interest rate
Expected volatility
Expected dividend yield
Year Ended
December 31,
2018
3.0 - 10.0
Year Ended
December 31,
2017
3.0 - 10.0
2.32% - 3.09%
1.32% - 2.41%
40% - 54%
0%
38% - 55%
0%
Year Ended
December 31,
2016
1.0 - 10.0
0.71% - 2.51%
38% - 64%
0%
Expected Term: For the expected term of options granted to employees and non-employee directors, we used an estimate of the
expected option life based on historical experience. The expected term of stock options issued to non-employee consultants is the
remaining contractual life of the options issued.
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Risk-Free Interest Rate: The risk-free interest rate is based on the rates paid on securities issued by the U.S. Treasury with a term
approximating the expected life of the option.
Expected Volatility: The expected volatility for stock options was based on the historical volatility of our Common Stock.
Expected Dividend Yield: We do not intend to pay dividends on Common Stock for the foreseeable future. Accordingly, we used a
dividend yield of zero in the assumptions.
We maintain incentive stock plans that provide for the grants of stock options to our directors, officers, employees and non-employee
consultants. As of December 31, 2018, there were 26,668,368 shares of Common Stock reserved for issuance under our 2016 Equity
Incentive Plan and our 2007 Equity Incentive Plan. We intend to issue new shares upon the exercise of stock options. Stock options granted
under these plans have been granted at an option price equal to the closing market value of the stock on the date of the grant. Stock options
granted under these plans to employees typically become exercisable over four years in equal annual installments after the date of grant, and
stock options granted to non-employee directors become exercisable in full one-year after the grant date, subject to, in each case,
continuous service with us during the applicable vesting period. We assumed stock options to grant Common Stock as part of the mergers
with Acuity Pharmaceuticals, Inc., Froptix, Inc., OPKO Biologics and BioReference, which reflected various vesting schedules, including
monthly vesting to employees and non-employee consultants.
A summary of option activity under our stock option plans as of December 31, 2018, and the changes during the year is presented
below:
Options
Outstanding at December 31, 2017
Granted
Exercised
Forfeited
Expired
Outstanding at December 31, 2018
Vested and expected to vest at December 31, 2018
Exercisable at December 31, 2018
Weighted
average
exercise
price
Weighted
average
remaining
contractual
term (years)
Aggregate
intrinsic value
(in thousands)
10.08
4.30
3.69
8.14
8.48
9.31
9.39
10.18
6.37 $
1,886
5.93 $
5.80 $
4.64 $
232
206
58
Number of
options
31,299,385 $
5,880,900 $
(540,000) $
(1,533,025) $
(2,075,962) $
33,031,298 $
31,317,632 $
21,451,856 $
The total intrinsic value of stock options exercised for the years ended December 31, 2018, 2017, and 2016 was $0.5 million, $6.4
million and $9.9 million, respectively.
The weighted average grant date fair value of stock options granted for the years ended December 31, 2018, 2017, and 2016 was
$2.08, $4.50, and $4.78, respectively. The total fair value of stock options vested during the years ended December 31, 2018, 2017, and
2016 was $25.8 million, $34 million and $30.2 million, respectively.
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Note 10 Income Taxes
We operate and are required to file tax returns in the U.S. and various foreign jurisdictions.
The benefit (provision) for incomes taxes consists of the following:
(In thousands)
Current
Federal
State
Foreign
Deferred
Federal
State
Foreign
Total, net
For the years ended December 31,
2018
2017
2016
$
— $
6,318
(2,738)
3,580
2,045
5,673
27,428
35,146
38,726 $
$
2,398 $
(1,737)
(3,424)
(2,763)
(10,759)
(2,738)
(2,595)
(16,092)
(18,855) $
—
(2,931)
(2,438)
(5,369)
25,739
10,657
25,088
61,484
56,115
Deferred income tax assets and liabilities as of December 31, 2018 and 2017 are comprised of the following:
(In thousands)
Deferred income tax assets:
Federal net operating loss
State net operating loss
Foreign net operating loss
Research and development expense
Tax credits
Stock options
Accruals
Equity investments
Bad debts
Lease liability
Foreign credits
Equity securities
Other
Deferred income tax assets
Deferred income tax liabilities:
Intangible assets
Fixed assets
Other
Deferred income tax liabilities
Net deferred income tax assets (liabilities)
Valuation allowance
Net deferred income tax liabilities
December 31, 2018 December 31, 2017
$
$
101,662 $
59,126
34,407
2,893
21,669
30,430
6,294
12,904
414
1,370
10,837
2,447
11,668
296,121
(250,640)
(3,486)
(2,272)
(256,398)
39,723
(154,916)
(115,193) $
79,356
46,571
35,710
4,038
20,040
28,830
5,719
8,454
20,302
2,205
11,113
2,406
17,448
282,192
(280,962)
(5,572)
(2,325)
(288,859)
(6,667)
(142,062)
(148,729)
As of December 31, 2018, we have federal, state and foreign net operating loss carryforwards of approximately $606.6 million,
$801.8 million and $152.3 million, respectively, that expire at various dates through 2038 unless indefinite in nature. Included in the
foreign net operating losses is $86.1 million related to OPKO Biologics. As of December 31, 2018, we have research and development tax
credit carryforwards of approximately $21.7 million that expire in varying amounts through
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2038. As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future
realization of deferred tax assets. We have determined a valuation allowance is required against all of our net deferred tax assets that we do
not expect to be utilized by the reversing of deferred income tax liabilities.
Under Section 382 of the Internal Revenue Code of 1986, as amended, certain significant changes in ownership may restrict the
future utilization of our income tax loss carryforwards and income tax credit carryforwards in the U.S. The annual limitation is equal to the
value of our stock immediately before the ownership change, multiplied by the long-term tax-exempt rate (i.e., the highest of the adjusted
federal long-term rates in effect for any month in the three-calendar-month period ending with the calendar month in which the change date
occurs). This limitation may be increased under the IRC Section 338 Approach (IRS approved methodology for determining recognized
Built-In Gain). As a result, federal net operating losses and tax credits may expire before we are able to fully utilize them.
During 2008, we conducted a study to determine the impact of the various ownership changes that occurred during 2007 and 2008. As
a result, we have concluded that the annual utilization of our net operating loss carryforwards (“NOLs”) and tax credits is subject to a
limitation pursuant to Internal Revenue Code Section 382. Under the tax law, such NOLs and tax credits are subject to expiration from 15
to 20 years after they were generated. As a result of the annual limitation that may be imposed on such tax attributes and the statutory
expiration period, some of these tax attributes may expire prior to our being able to use them. There is no current impact on these financial
statements as a result of the annual limitation. This study did not conclude whether OPKO’s predecessor, eXegenics, pre-merger NOLs
were limited under Section 382. As such, of the $606.6 million of federal net operating loss carryforwards, at least approximately $53.4
million may not be able to be utilized.
We file federal income tax returns in the U.S. and various foreign jurisdictions, as well as with various U.S. states and the Ontario and
Nova Scotia provinces in Canada. We are subject to routine tax audits in all jurisdictions for which we file tax returns. Tax audits by their
very nature are often complex and can require several years to complete. It is reasonably possible that some audits will close within the
next twelve months, which we do not believe would result in a material change to our accrued uncertain tax positions.
U.S. Federal: Under the tax statute of limitations applicable to the Internal Revenue Code, we are no longer subject to U.S. federal
income tax examinations by the Internal Revenue Service for years before 2015. However, because we are carrying forward income tax
attributes, such as net operating losses and tax credits from 2015 and earlier tax years, these attributes can still be audited when utilized on
returns filed in the future.
State: Under the statute of limitations applicable to most state income tax laws, we are no longer subject to state income tax
examinations by tax authorities for years before 2014 in states in which we have filed income tax returns. Certain states may take the
position that we are subject to income tax in such states even though we have not filed income tax returns in such states and, depending on
the varying state income tax statutes and administrative practices, the statute of limitations in such states may extend to years before 2014.
Foreign: Under the statute of limitations applicable to our foreign operations, we are generally no longer subject to tax examination
for years before 2013 in jurisdictions where we have filed income tax returns.
Tax Cuts and Jobs Act
On December 22, 2017, the 2017 Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law and the new legislation contains
several key tax provisions, including a reduction of the corporate income tax rate from 35% to 21% effective January 1, 2018 and a one-
time mandatory transition tax on accumulated foreign earnings, among others. We were required to recognize the effect of the tax law
changes in the period of enactment, such as remeasuring our U.S. deferred tax assets and liabilities, as well as reassessing the net
realizability of our deferred tax assets and liabilities. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income
Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allowed us to record provisional amounts during a
measurement period not to extend beyond one year of the enactment date. As of December 22, 2018 we completed our analysis in
accordance with SAB 118 and recorded immaterial adjustments.
Effective January 1, 2018, the Tax Act provides for a new global intangible low-taxed income (GILTI) provision. Under the GILTI
provision, certain foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets are included in
U.S. taxable income. The Company currently estimates GILTI will be immaterial for the year ended December 31, 2018, although
interpretive guidance continues to be issued and future guidance may impact this analysis. The Company has not recorded any deferred
taxes for future GILTI inclusions as any future inclusions are expected to be treated as a period expense and offset by net operating loss
carryforwards in the U.S.
The Tax Act affects the tax treatment of foreign earnings and profits (“E&P”) and results in a one-time transition tax on our post-1986
foreign E&P that we previously deferred from U.S. income tax expense. We determined that we did not owe any
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transition tax and we have not provided for additional income taxes on any remaining undistributed foreign E&P not subject to the
transition tax, or any outside tax basis differences inherent in our foreign subsidiaries. On January 15, 2019, the U.S. Department of
Treasury released final regulations related to the one-time transition tax. Although the Company's assessment of these final rules is not
complete, they are not expected to materially impact the Company’s financial statements.
Unrecognized Tax Benefits
As of December 31, 2018, 2017, and 2016, the total amount of gross unrecognized tax benefits was approximately $17.5 million,
$21.3 million, and $27.5 million, respectively. As of December 31, 2018, the total gross unrecognized tax benefit of $17.5 million
consisted of increases of $8.4 million as a result of current year activity, and decreases of $4.6 million as a result of the lapse of statutes of
limitations. As of December 31, 2018, the total amount of unrecognized tax benefits that, if recognized, would affect our effective income
tax rate was $(14.2) million. We account for any applicable interest and penalties on uncertain tax positions as a component of income tax
expense and we recognized $(1.9) million and $0.4 million of interest expense for the years ended December 31, 2018 and 2017,
respectively. As of December 31, 2017 and 2016, $(12.4) million and $6.1 million of the unrecognized tax benefits, if recognized, would
have affected our effective income tax rate. We believe it is reasonably possible that approximately $1.3 million of unrecognized tax
benefits may be recognized within the next twelve months, mainly due to anticipated statute of limitations lapses in various jurisdictions.
The following summarizes the changes in our gross unrecognized income tax benefits.
(In thousands)
Unrecognized tax benefits at beginning of period
Gross increases – tax positions in prior period
Gross increases – tax positions in current period
Gross decreases – tax positions in prior period
Lapse of Statute of Limitations
Unrecognized tax benefits at end of period
Other Income Tax Disclosures
For the years ended December 31,
2018
2017
2016
21,347 $
—
8,384
(7,597)
(4,621)
17,513 $
27,545 $
44
—
(1,724)
(4,518)
21,347 $
8,595
1,443
18,472
(671)
(294)
27,545
$
$
The significant elements contributing to the difference between the federal statutory tax rate and the effective tax rate are as follows:
Federal statutory rate
State income taxes, net of federal benefit
Foreign income tax
Income Tax Refunds
Research and development tax credits
Non-Deductible components of Convertible Debt
Valuation allowance
Rate change effect
Non-deductible items
Unrecognized tax benefits
Other
Total
For the years ended December 31,
2018
2017
2016
21.0 %
4.3 %
(6.0)%
3.6 %
1.9 %
(0.2)%
(7.1)%
8.1 %
(2.9)%
(1.8)%
(0.7)%
20.2 %
35.0 %
5.1 %
(5.3)%
— %
0.6 %
0.1 %
(28.4)%
(10.8)%
(1.9)%
(0.7)%
(0.4)%
(6.7)%
35.0 %
5.2 %
(14.2)%
— %
5.4 %
2.2 %
9.5 %
21.2 %
(1.9)%
(1.0)%
(7.7)%
53.7 %
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The following table reconciles our losses before income taxes between U.S. and foreign jurisdictions:
(In thousands)
Pre-tax income (loss):
U.S.
Foreign
Total
For the years ended December 31,
2018
2017
2016
$
$
(132,102) $
(59,664)
(191,766) $
(247,938) $
(38,457)
(286,395) $
(92,175)
(12,299)
(104,474)
Prior to the enactment of the Tax Act, the Company regularly determined certain foreign earnings to be indefinitely reinvested outside
the United States. Our intent is to permanently reinvest these funds outside the U.S. and our current plans do not demonstrate a need to
repatriate the cash to fund U.S. operations. However, if these funds were repatriated, we would be required to accrue and pay applicable
U.S. taxes (if any) and withholding taxes payable to foreign tax authorities.
Note 11 Related Party Transactions
On November 8, 2018, we entered into stock purchase agreements with certain investors pursuant to which we agreed to sell to such
investors in private placements an aggregate of approximately 26.5 million shares of our Common Stock (the “Shares”) at a purchase price
of $3.49 per share, which was the closing bid price of our Common Stock on the NASDAQ on such date, for an aggregate purchase price
of $92.5 million. The investors in the private placements include an affiliate of Dr. Phillip Frost, our Chairman and Chief Executive Officer
($70 million), and Dr. Jane Hsiao, our Vice Chairman and Chief Technical Officer ($2 million).
On November 8, 2018, we entered into a credit agreement with an affiliate of Dr. Frost, pursuant to which the lender committed to
provide us with an unsecured line of credit in the amount of $60 million. Borrowings under the line of credit will bear interest at a rate of
10% per annum and may be repaid and reborrowed at any time. The credit agreement includes various customary remedies for the lender
following an event of default, including the acceleration of repayment of outstanding amounts under line of credit. The line of credit
matures on November 8, 2023. As of as of December 31, 2018, no funds were borrowed under the line of credit. We repaid amounts
borrowed in 2019 and terminated the line of credit on or around February 20, 2019.
In February 2018, we issued the 2023 Convertible Notes in the aggregate principal amount of $55.0 million. Refer to Note 6.
Purchasers of the 2023 Convertible Notes include Dr. Hsiao and an affiliate of Dr. Frost.
We hold investments in Zebra (ownership 29%), Neovasc (4%), ChromaDex Corporation (0%), MabVax (2%), COCP (9%), NIMS
(1% ) and BioCardia (5%). These investments were considered related party transactions as a result of our executive management’s
ownership interests and/or board representation in these entities. See further discussion of our investments in Note 4.
In February 2018, we invested an additional $1.0 million in COCP for a convertible note, which was converted into 538,544 shares of
its common stock in May 2018. In April 2017, we invested an additional $1.0 million in COCP for 138,889 shares of its common stock, and
in August 2016, we invested an additional $2.0 million in COCP for 162,602 shares of its common stock.
In November 2017, we invested an additional $3.0 million in Neovasc for 20,547 shares of its common stock, 20,547 Series A
warrants, 20,547 Series B warrants and 8,221 Series C warrants, after adjusting for a 1-for-100 reverse stock split in 2018. In April 2018,
we exercised our Series B warrants in a cashless exercise and received 1,069,090 shares of Neovasc common stock.
In July 2017, we invested an additional $0.1 million in MabVax for 50,714 shares of common stock and in May 2017, we invested an
additional $0.5 million in MabVax for 1,667 shares of Series L Preferred Stock and 107,607 shares of Series I Preferred Stock. We had also
invested an additional $1.0 million in MabVax in August 2016 for 69,300 shares of its common stock and warrants to purchase 138,600
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 418,977 common stock options, after adjusting for a 1-for-12 reverse stock split in 2017. In
December 2016, we purchased 1,602,564 shares of BioCardia, after adjusting for the reverse stock split, from Dr. Frost for $2.5 million.
We have also purchased shares of BioCardia in the open market. BioCardia is a
127
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.
We lease office space from Frost Real Estate Holdings, LLC (“Frost Holdings”) in Miami, Florida, where our principal executive
offices are located. Effective January 1, 2017, 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 thousand per month in
the first year increasing annually to $86 thousand per month in the third year, plus applicable sales tax. The rent is inclusive of operating
expenses, property taxes and parking.
Our wholly-owned subsidiary, BioReference, purchases and uses certain products acquired from InCellDx, Inc., a company in which
we hold a 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 years ended December 31, 2018, 2017, and 2016, we recognized approximately $238 thousand, $361 thousand, and
$298 thousand, respectively, for Company-related travel by Dr. Frost and other OPKO executives.
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Note 12 Employee Benefit Plans
Effective January 1, 2007, the OPKO Health Savings and Retirement Plan (the “Plan”) permits employees to contribute up to 100%
of qualified pre-tax annual compensation up to annual statutory limitations. The discretionary company match for employee contributions
to the Plan is 100% up to the first 4% of the participant’s earnings contributed to the Plan. Effective January 1, 2017, employees of
BioReference and its subsidiaries are eligible for participation in the Plan. Our matching contributions to our plans, including predecessor
plans for BioReference, were approximately $8.3 million, $8.4 million and $3.5 million for the years ended December 31, 2018, 2017, and
2016 respectively.
Note 13 Commitments and Contingencies
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 December 31, 2018, we have recorded $24.6 million as contingent
consideration, with $2.4 million recorded within Accrued expenses and $22.2 million recorded within Other long-term liabilities in the
accompanying Consolidated Balance Sheets. Refer to Note 5.
As previously disclosed, on September 7, 2018, the Securities and Exchange Commission (“SEC”) filed a lawsuit in the Southern
District of New York (the “SEC Complaint”) against a number of individuals and entities (the “Defendants”), including the Company and
its CEO and Chairman, Phillip Frost (“Dr. Frost”). The SEC alleged, among other things, that the Company (i) aided and abetted an illegal
“pump and dump” scheme perpetrated by a number of the Defendants, and (ii) failed to file required Schedules 13D or 13G with the SEC.
On December 27, 2018, the Company announced that the Company and Dr. Frost entered into settlement agreements with the Securities
and Exchange Commission (the “Commission”), which upon approval of the court would resolve the SEC Complaint against each of them.
The settlement was approved by the Court in January 2019. Pursuant to the settlement, and without admitting or denying any of the
allegations of the Complaint, the Company is enjoined from violating Section 13(d) of the Exchange Act and paid a $100,000 penalty.
Liability under Section 13(d) can be established without any showing of wrongful intent or negligence.
Following the SEC’s announcement of the SEC Complaint, we have been named in seven class action lawsuits and more than a
dozen derivative suits relating to the allegations in the SEC Complaint among other matters. The Company intends to vigorously defend
itself against the claims. Based on the early stages of these legal proceedings, at this time, the Company is not able to reasonably estimate a
possible range of loss, if any, that may result from these allegations. For a more detailed discussion of pending matters, please see Part II,
Item 1, “Legal Proceedings.”
In August 2017, we entered into a Commitment Letter (the “Commitment Letter”) with Veterans Accountable Care Group, LLC
(“VACG”) in connection with the submission of a bid by its affiliate, the Veterans Accountable Care Organization, LLC (“VACO”) in
response to a request for proposal (“RFP”) from the Veterans Health Administration (“VA”) regarding its Community Care Network. We
were notified in January 2019 that the bid was awarded to a third party. If VACO were to have been successful in its bid, we would have
acquired a fifteen percent (15%) membership interest in VACO. In addition, BioReference, our wholly-owned subsidiary, would have
provided 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 and had VACO been successful in its bid, 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 6.5% per annum, payable quarterly in
arrears. The Facility would be 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 believe that it is both probable that a liability has been incurred and that we can
reasonably estimate the amount of the loss. 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. For the matters referenced in 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 accordance with the relevant
authoritative guidance, for matters which the likelihood of material loss is at least reasonably possible, we provide disclosure of the
possible loss or range of loss; however, if a reasonable estimate cannot be made, we will provide disclosure to that effect.
129
From time to time, we may receive inquiries, document requests, Civil Investigative Demands (“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, 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 or 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.
In April 2017, the Civil Division of the United States Attorney’s Office for the Southern District of New York (the “SDNY”)
informed 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 management cannot predict the outcome of these matters at this time, the ultimate outcome could be material to our business,
financial condition, results of operations, and cash flows.
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.
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, fail to generate expected cash flow from BioReference, 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 years ended December 31, 2018, 2017 and 2016, we recognized $4.9
million, $5.8 million and $17.9 million, respectively, of severance costs pursuant to these employment agreements as a component of
Selling, general and administrative expense.
At December 31, 2018, we were committed to make future purchases for inventory and other items in 2019 that occur in the ordinary
course of business under various purchase arrangements with fixed purchase provisions aggregating $98.5 million.
Note 14 Revenue Recognition
Effective January 1, 2018, we adopted Accounting Standards Codification Topic 606, Revenue from Contracts with Customers. 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.
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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.
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 issues 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. For the years ended December 31, 2018 and 2017, revenue reductions due to changes in estimates of implicit price concessions for
performance obligations satisfied in prior periods of $22.8 million and $66.0 million, respectively, were recognized. No material revenue
reductions due to changes in estimates of implicit price concessions for performance obligations satisfied in prior periods were recognized
during the year ended December 31, 2016.
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 payer denies payment for testing or recoups money from us in a later period,
reimbursement revenue 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.
During 2017, a payor informed us it had overpaid BioReference due to an error on its part over a period of approximately ten years,
including multiple years prior to the acquisition of BioReference by OPKO in August 2015. As of December 31,
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2018 and 2017, we have liabilities of approximately $35.9 million and $30.0 million within Accrued expenses and Other long-term
liabilities related to reimbursements for payor overpayments.
The composition of Revenue from services by payor for the years ended December 31, 2018, 2017 and 2016 is as follows:
(In thousands)
Healthcare insurers
Government payors
Client payors
Patients
Total
Revenue from products
For the years ended December 31,
2018
2017
2016
370,096 $
271,590
150,259
21,303
813,248 $
368,628 $
264,493
128,867
20,722
782,710 $
649,036
118,526
127,363
33,647
928,572
$
$
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.
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 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 years ended
December 31, 2018, and 2017, we recognized $20.3 million and $9.1 million in net product revenue from sales of Rayaldee.
The following table presents an analysis of product sales allowances and accruals as contract liabilities for the year ended December
31, 2018:
(In thousands)
Balance at December 31, 2017
Provision related to current period sales
Credits or payments made
Balance at December 31, 2018
Chargebacks,
discounts, rebates
and fees
Governmental
Returns
$
$
233 $
5,704
(4,621)
1,316 $
348 $
10,061
(8,319)
2,090 $
437 $
680
(480)
637 $
Total
1,018
16,445
(13,420)
4,043
Total gross Rayaldee sales
Provision for Rayaldee sales allowances and accruals as a
percentage of gross Rayaldee sales
$
36,715
45%
Taxes collected from customers related to revenues from services and revenues from products are excluded from revenues.
Revenue from intellectual property
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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.
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For the years ended December 31, 2018, 2017 and 2016 we recorded $69.9 million, $75.5 million and $105.5 million of revenue from
the transfer of intellectual property, respectively. For the year ended December 31, 2018, revenue from the transfer of intellectual property
included $60.0 million related to the Pfizer Transaction and $2.0 million related to a milestone payment from our licensee, Vifor Fresenius
Medical Care Renal Pharma Ltd (“VFMCRP”). For the year ended December 31, 2017, revenue from the transfer of intellectual property
included $61.2 million related to the Pfizer Transaction and $10.0 million related to a milestone payment from our licensee, TESARO, Inc.
(“TESARO”). For the year ended December 31, 2016, revenue from the transfer of intellectual property included $50.0 million related to
the our agreement with VFMCRP and $47.3 million related to the Pfizer Transaction. Refer to Note 15. Total contract liabilities included in
Accrued expenses and Other long-term liabilities was $91.1 million and $152.3 million at December 31, 2018 and December 31, 2017,
respectively. The contract liability balance at December 31, 2018 and 2017 relates primarily to the Pfizer Transaction.
Note 15 Strategic Alliances
Japan Tobacco Inc.
On October 12, 2017, EirGen, our wholly-owned subsidiary, and Japan Tobacco Inc. (“JT”) entered into a Development and License
Agreement (the “JT 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 JT Agreement (the JT Additional Indications” and together with the JT Initial
Indications, the “JT Field”).
In connection with the license, OPKO received an initial upfront payment of $6 million and received another $6 million upon the
initiation of OPKO’s phase 2 study for Rayaldee in dialysis patients in the U.S. in September 2018. 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 Rayaldee
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 sales of Rayaldee within the JT
Territory. 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.
The JT Agreement provides for the following: (1) an exclusive license in the JT Territory in the JT Field for the development and
commercialization of Rayaldee; and (2) at JT’s option, EirGen will supply products to support the development, sale and
commercialization of the products to JT in the JT Territory.
The initial consideration primarily includes the non-refundable $6 million upfront payment and the $6 million we received upon the
initiation of our phase 2 study for Rayaldee in dialysis patients in the U.S. The initial consideration will be recognized over the
performance period through 2021, when we anticipate completing the transfer of license materials specified in the JT Agreement and our
performance obligation is complete.
We are also eligible to receive up to $31 million in regulatory and development milestones and $75 million in sales milestones.
Payments received for regulatory, development and sales milestones are non-refundable. The milestones are payable if and when the
associated milestone is achieved and will be recognized as revenue in the period in which the associated milestone is achieved, assuming
all other revenue recognition criteria are met. To date, no revenue has been recognized related to these milestones.
Vifor Fresenius Medical Care Renal Pharma Ltd
In May 2016, EirGen, our wholly-owned subsidiary, and Vifor Fresenius Medical Care Renal Pharma Ltd (“VFMCRP”), entered into
a Development and License Agreement (the “VFMCRP Agreement”) for the development and commercialization of Rayaldee (the
“Product”) worldwide, except for (i) the U.S., (ii) any country in Central America or South America (excluding Mexico), (iii) Russia, (iv)
China, (v) Japan, (vi) Ukraine, (vii) Belorussia, (viii) Azerbaijan, (ix) Kazakhstan, and (x) Taiwan (the “VFMCRP Territory”). The license
to VFMCRP potentially covers all therapeutic and prophylactic uses of the Product in human patients (the “VFMCRP 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 CKD and
vitamin D insufficiency/deficiency (the “VFMCRP Initial Indication”).
Under the terms of the VFMCRP Agreement, EirGen granted to VFMCRP an exclusive license in the VFMCRP Territory in the
VFMCRP Field to use certain EirGen 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. EirGen received a non-refundable and non-creditable
initial payment of $50 million, which was recognized in Revenue from the transfer of intellectual
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property and other in our Consolidated Statement of Operations in 2016. EirGen also received a $2.0 million payment triggered by the
approval of Rayaldee in Canada for the treatment of SHPT in adults with stage 3 or 4 CKD and vitamin D insufficiency in July 2018.
EirGen is also eligible to receive up to an additional $35 million in regulatory milestones (“Regulatory Milestones”) and $195 million in
launch and sales-based milestones (“Sales Milestones”), and will 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 the commencement of sales of the Product
within the VFMCRP Territory and in the VFMCRP Field.
We plan to share responsibility with VFMCRP 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 VFMCRP Territory
and the commercialization activities outside the VFMCRP Territory and outside the VFMCRP Field in the VFMCRP Territory and
VFMCRP will lead the commercialization activities in the VFMCRP Territory and the VFMCRP Field. 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 use of the Product for the VFMCRP Initial Indication in the VFMCRP
Territory in the VFMCRP Field except as otherwise provided in the VFMCRP Agreement. The first of the clinical studies provided for in
the development activities commenced in September 2018.
In connection with the VFMCRP Agreement, the parties entered into a letter agreement pursuant to which EirGen granted to
VFMCRP an exclusive option (the “Option”) to acquire an exclusive license under certain EirGen patents and technology to use, import,
offer for sale, sell, distribute and commercialize the Product in the U.S. solely for the treatment of SHPT in dialysis patients with CKD and
vitamin D insufficiency (the “Dialysis Indication”). Upon exercise of the Option, VFMCRP will reimburse EirGen for all of the
development costs incurred by EirGen with respect to the Product for the Dialysis Indication in the U.S. VFMCRP 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 U.S. for the
Dialysis Indication. To date, VFMCRP has not exercised its option.
Payments received for Regulatory Milestones and Sales Milestones are non-refundable. The Regulatory Milestones are payable if and
when VFMCRP obtains approval from certain regulatory authorities and will be recognized as revenue in the period in which the
associated milestone is achieved, assuming all other revenue recognition criteria are met. We account for the Sales Milestones as royalties
and Sales Milestones payments will be recognized as revenue in the period in which the associated milestone is achieved or sales occur,
assuming all other revenue recognition criteria are met.
Pfizer Inc.
In December 2014, we entered into an exclusive worldwide agreement with Pfizer Inc. (“Pfizer”) for the development and
commercialization of our long-acting 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”).
The Pfizer Transaction closed in January 2015 following the termination of the waiting period under the Hart-Scott-Rodino Act.
Under the terms of the Pfizer Transaction, 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. Pfizer received the exclusive
license to commercialize hGH-CTP worldwide. In addition, we are eligible to receive initial tiered royalty payments associated with the
commercialization of hGH-CTP for Adult GHD with percentage rates ranging from the high teens to mid-twenties. Upon the launch of
hGH-CTP for Pediatric GHD in certain major markets, the royalties will transition to regional, tiered gross profit sharing for both hGH-CTP
and Pfizer’s Genotropin®.
The agreement with Pfizer will remain in effect until the last sale of the licensed product, unless earlier terminated as permitted under
the agreement. In addition to termination rights for material breach and bankruptcy, Pfizer is permitted to terminate the Agreement in its
entirety, or with respect to one or more world regions, without cause after a specified notice period. If the 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 are recognizing the non-refundable $295.0 million upfront payments as the research and development services are completed and
had contract liabilities related to the Pfizer Transactions of $83.1 million at December 31, 2018, of which $60.6 million was classified in
Accrued expenses and $22.5 million was classified in Other long-term liabilities.
The Pfizer Transaction includes milestone payments of $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
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regulatory approval and price approval in other major markets. The milestone payments will be recognized as revenue in the period in
which the associated milestone is achieved, assuming all other revenue recognition criteria are met. To date, no 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 $30.0 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 $85.0 million if specified levels of annual net sales are
achieved. The sales based milestone payments will be recognized as revenue in full in the period in which the associated sales occur.
During year ended December 31, 2017, $10.0 million of revenue was recognized related to the achievement of the milestones under the
TESARO License. During the years ended December 31, 2018 and 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 U.S. and Europe at percentage rates that range
from the low double digits to the low twenties, and outside of the U.S. and Europe at low double-digit percentage rates. Royalties will be
recognized in the period the sales occur. 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. TESARO announced during the first quarter of 2018 that it has elected to suspend
further distribution of Varubi IV.
TESARO assigned its rights and obligations under the agreement to TerSera Therapeutics LLC (“TerSera”) in June 2018 pursuant to
an asset purchase agreement. Under the asset purchase agreement, TerSera is responsible for VARUBI in the U.S. and Canada and
TESARO can continue to commercialize VARUBY® in Europe and the rest of the world though a sublicense with TerSera.
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.
RXi Pharmaceuticals Corporation
In March 2013, we completed the sale to RXi (now known as Phio Pharmaceuticals Corp.) 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.
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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.
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Note 16 Leases
Operating leases
We conduct certain of our operations under operating lease agreements. Rent expense under operating leases was approximately
$18.9 million, $18.9 million, and $18.8 million for the years ended December 31, 2018, 2017, and 2016, respectively.
As of December 31, 2018, the aggregate future minimum lease payments under all non-cancelable operating leases with initial or
remaining lease terms in excess of one year are as follows:
Year Ending
2019
2020
2021
2022
2023
Thereafter
Total minimum operating lease commitments
Capital leases
(In thousands)
18,386
11,535
7,385
4,074
2,446
1,650
45,476
$
$
Capital leases are included within Property, plant and equipment, net in our Consolidated Balance Sheet with imputed interest rates of
approximately 2% as follows:
Capital leases
Automobiles
Less: Accumulated Depreciation
Net capital leases in Property, plant and equipment
Year ended December
31, 2018
$
$
10,133
(5,056)
5,077
As of December 31, 2018, the aggregate future minimum lease payments under all non-cancelable capital leases with initial or
remaining lease terms in excess of one year are as follows:
Year Ending
2019
2020
2021
2022
2023
Total minimum capital lease commitments
Less: Amounts representing interest
Net capital liability
Current
Long-term
138
(In thousands)
2,995
2,692
2,012
871
479
9,049
149
8,900
3,280
5,620
$
$
$
$
Note 17 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 laboratory operations we acquired through the acquisition of
BioReference and our point-of-care operations. There are no significant inter-segment sales. We evaluate the performance of each segment
based on operating profit or loss. There is no inter-segment allocation of interest expense 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:
139
(In thousands)
Revenue from services:
Pharmaceutical
Diagnostics
Corporate
Revenue from products:
Pharmaceutical
Diagnostics
Corporate
Revenue from transfer of intellectual property and other:
Pharmaceutical
Diagnostics
Corporate
Operating loss:
Pharmaceutical
Diagnostics
Corporate
Depreciation and amortization:
Pharmaceutical
Diagnostics
Corporate
Income (loss) from investment in investees:
Pharmaceutical
Diagnostics
Corporate
Revenues:
United States
Ireland
Chile
Spain
Israel
Mexico
Other
For the years ended December 31,
2018
2017
2016
— $
— $
813,248
—
782,710
—
813,248 $
782,710 $
107,112 $
107,759 $
—
—
—
—
107,112 $
107,759 $
69,906 $
—
—
69,906 $
75,537 $
—
—
75,537 $
(82,641) $
(44,942)
(43,614)
(171,197) $
(84,287) $
(136,540)
(55,615)
(276,442) $
28,007 $
69,246
91
97,344 $
(10,822) $
(3,675)
—
(14,497) $
837,509 $
78,102
41,216
18,195
9,479
5,598
167
990,266 $
27,513 $
74,442
138
102,093 $
(12,646) $
(1,825)
—
(14,471) $
803,853 $
80,905
44,286
18,285
13,951
4,605
121
966,006 $
—
928,572
—
928,572
83,467
—
—
83,467
105,455
—
—
105,455
(33,117)
(3,394)
(60,040)
(96,551)
18,254
78,233
89
96,576
(7,665)
13
—
(7,652)
933,498
114,509
35,364
15,812
15,317
2,988
6
1,117,494
$
$
$
$
$
$
$
$
$
$
$
$
$
$
140
(In thousands)
Assets:
Pharmaceutical
Diagnostics
Corporate
Goodwill:
Pharmaceutical
Diagnostics
Corporate
December 31,
2018
December 31,
2017
$
$
$
$
1,236,499 $
1,162,160
52,413
2,451,072 $
1,282,564
1,241,388
66,004
2,589,956
247,407 $
452,786
—
700,193 $
264,313
452,786
—
717,099
No customer represented more than 10% of our total consolidated revenue during the years ended December 31, 2018, 2017 and
2016. As of December 31, 2018 and 2017, no customer represented more than 10% of our accounts receivable balance.
The following table reconciles our Property, plant and equipment, net between U.S. and foreign jurisdictions:
(In thousands)
PP&E:
U.S.
Foreign
Total
Note 18 Fair Value Measurements
December 31, 2018 December 31, 2017
$
$
76,907 $
67,767
144,674 $
89,114
57,443
146,557
We record fair values at an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants. As such, fair value is a market-based measurement determined based on assumptions
that market participants would use in pricing an asset or liability. We utilize a three-tier fair value hierarchy, which prioritizes the inputs
used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2,
defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as
unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
As of December 31, 2018, we have equity securities (refer to Note 4), forward foreign currency exchange contracts for inventory
purchases (refer to Note 19) and contingent consideration related to the acquisitions of CURNA, OPKO Diagnostics and OPKO Renal that
are required to be measured at fair value on a recurring basis. In addition, in connection with our investment and our consulting agreement
with BioCardia, we record the related BioCardia options at fair value as well as the warrants from COCP, InCellDx, Inc., Xenetic, Phio and
Neovasc.
141
Our financial assets and liabilities measured at fair value on a recurring basis are as follows:
(In thousands)
Assets:
Money market funds
Equity securities
Common stock options/warrants
Forward contracts
Total assets
Liabilities:
Contingent consideration:
Total liabilities
(In thousands)
Assets:
Money market funds
Equity securities
Common stock options/warrants
Total assets
Liabilities:
Forward contracts
Contingent consideration:
Total liabilities
Fair value measurements as of December 31, 2018
Quoted
prices in
active
markets for
identical
assets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
— $
26,313
—
—
26,313 $
— $
— $
— $
—
855
21
876 $
— $
— $
— $
—
—
—
— $
24,537
24,537 $
Fair value measurements as of December 31, 2017
Quoted
prices in
active
markets for
identical
assets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
107 $
12,461
—
12,568 $
— $
—
— $
— $
—
3,333
3,333 $
317 $
—
317 $
— $
—
—
— $
— $
41,353
41,353 $
$
$
$
$
$
$
$
$
Total
—
26,313
855
21
27,189
24,537
24,537
Total
107
12,461
3,333
15,901
317
41,353
41,670
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 December 31, 2018 and 2017, the carrying value of our other financial instrument assets approximates their fair value due to
their short-term nature or variable rate of interest.
The following tables reconcile the beginning and ending balances of our Level 3 assets and liabilities as of December 31, 2018 and
2017:
(In thousands)
Balance at December 31, 2017
Total losses (gains) for the period:
Included in results of operations
Balance at December 31, 2018
142
December 31, 2018
Contingent
consideration
$
$
41,353
(16,816)
24,537
(In thousands)
Balance at December 31, 2016
Total losses (gains) for the period:
Included in results of operations
Foreign currency impact
Payments
Reclassification of embedded derivatives to equity
Balance at December 31, 2017
December 31, 2017
Contingent
consideration
Embedded
conversion
option
45,076 $
16,736
(3,423)
3
(303)
—
41,353 $
(3,185)
—
—
(13,551)
—
$
$
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
$1.6 million. As of December 31, 2018, of the $24.6 million of contingent consideration, $2.4 million is recorded in Accrued expenses and
$22.2 million is recorded in Other long-term liabilities. As of December 31, 2017, of the $41.4 million of contingent consideration, $11.8
million is recorded in Accrued expenses and $29.6 million is recorded in Other long-term liabilities.
143
Note 19 Derivative Contracts
The following table summarizes the fair values and the presentation of our derivative financial instruments in the Consolidated
Balance Sheets:
(In thousands)
Derivative financial instruments:
Common stock options/warrants
Forward contracts
Balance Sheet Component
December 31,
2018
December 31,
2017
Investments, net
Unrealized gains on forward contracts are recorded
in Other current assets and prepaid expenses.
Unrealized (losses) on forward contracts are
recorded in Accrued expenses.
$
$
855 $
3,333
21
$
(317)
We enter into foreign currency forward exchange contracts to cover the risk of exposure to exchange rate differences arising from
inventory purchases on letters of credit. Under these forward contracts, for any rate above or below the fixed rate, we receive or pay the
difference between the spot rate and the fixed rate for the given amount at the settlement date.
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 December 31, 2018 and 2017, our derivative financial instruments do not meet the documentation requirements to be designated as
hedges. Accordingly, we recognize the changes in Fair value of derivative instruments, net in our Consolidated Statement of Operations.
The following table summarizes the losses and gains recorded for the years ended December 31, 2018, 2017 and 2016:
(In thousands)
Derivative gain (loss):
Common stock options/warrants
2033 Senior Notes
Forward contracts
Total
For the years ended December 31,
2018
2017
2016
$
$
$
2,643 $
—
400 $
3,043 $
(2,533) $
3,185
(600) $
52 $
(4,262)
7,001
39
2,778
144
Note 20 Selected Quarterly Financial Data (Unaudited)
(In thousands, except per share data)
Total revenues
Total costs and expenses
Net income (loss)
Earnings (loss) per share, basic and diluted
(In thousands, except per share data)
Total revenues
Total costs and expenses
Net income (loss)
Earnings (loss) per share, basic
Earnings (loss) per share, diluted
For the 2018 Quarters Ended
March 31
June 30
September 30
December 31
254,914 $
297,525
(43,114)
(0.08) $
263,685 $
268,793
(6,201)
(0.01) $
249,815 $
283,279
(27,655)
(0.05) $
221,852
311,866
(76,070)
(0.13)
For the 2017 Quarters Ended
March 31
June 30
September 30
December 31
266,382 $
311,597
(34,503)
(0.06) $
(0.06) $
292,601 $
318,432
(16,916)
(0.03) $
(0.04) $
246,040 $
293,805
(35,917)
(0.06) $
(0.06) $
160,983
318,614
(217,914)
(0.39)
(0.39)
$
$
$
$
$
Total revenues for the quarters ended December 31, 2018 includes an adjustment of $3.9 million related to prior quarter revenues
which were not significant.
Note 21 Subsequent Events
In February 2019, we issued $200.0 million aggregate principal amount of Convertible Senior Notes due 2025 (the “2025 Notes”) in
an underwritten public offering. The 2025 Notes will bear interest at a rate of 4.50% per year, payable semiannually in arrears on
February 15 and August 15 of each year, beginning on August 15, 2019. The notes mature on February 15, 2025, unless earlier
repurchased, redeemed or converted.
Holders may convert their 2025 Notes at their option at any time prior to the close of business on the business day immediately
preceding November 15, 2024 only under the following circumstances: (1) during any calendar quarter commencing after the calendar
quarter ending on March 31, 2019 (and only during such calendar quarter), if the last reported sale price of our common stock for at least
20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the
immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during
the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000
principal amount of 2025 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale
price of our common stock and the conversion rate on each such trading day; (3) if we call any or all of the 2025 Notes for redemption, at
any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence
of specified corporate events. On or after November 15, 2024, until the close of business on the business day immediately preceding the
maturity date, holders of the 2025 Notes may convert their notes at any time, regardless of the foregoing circumstances. 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 conversion rate for the notes will initially be 236.7424 shares of common stock per $1,000 principal amount of 2025 Notes
(equivalent to an initial conversion price of approximately $4.22 per share of common stock). The conversion rate for the 2025 Notes will
be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate
events that occur prior to the maturity date of the notes or if we deliver a notice of redemption, in certain circumstances we will increase the
conversion rate of the 2025 Notes for a holder who elects to convert its notes in connection with such a corporate event or notice of
redemption as the case may be.
We may not redeem the 2025 Notes prior to February 15, 2022. We may redeem for cash any or all of the notes, at our option, on or
after February 15, 2022, if the last reported sale price of our common stock has been at least 130% of the conversion price for the notes
then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last
trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of
redemption at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to,
but excluding, the redemption date. No sinking fund is provided for the 2025 Notes.
145
If we undergo a fundamental change prior to the maturity date of the 2025 Notes, holders may require us to repurchase for cash all or
any portion of their notes at a repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and
unpaid interest to, but excluding, the fundamental change repurchase date. The 2025 Notes will be our senior unsecured obligations and
will rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the 2025 Notes; equal in
right of payment to any of our existing and future liabilities that are not so subordinated; effectively junior in right of payment to any of our
secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and
other liabilities (including trade payables) of our current or future subsidiaries.
On November 8, 2018, we entered into a credit agreement with an affiliate of Dr. Frost, pursuant to which the lender committed to
provide us with an unsecured line of credit in the amount of $60 million. The credit agreement was terminated on or around February 20,
2019 and amounts borrowed during 2019 were repaid from the proceeds of the 2025 Convertible Notes offering.
On February 1, 2019, approximately $28.8 million aggregate principal amount of 2033 Senior Notes were tendered by holders
pursuant to such holders’ option to require us to repurchase the 2033 Senior Notes. Holders of the 2033 Senior Notes issued in January
2013 may require us to repurchase the 2033 Senior Notes for 100% of their principal amount, plus accrued and unpaid interest, again on
February 1, 2023 and February 1, 2028, or following the occurrence of a fundamental change as defined in the indenture governing the
2033 Senior Notes.
On February 26, 2019, BioReference and certain of its subsidiaries entered into Amendment No. 8 to the Credit Agreement, which
amended the Credit Agreement to add back certain cost savings resulting from work force reductions in the 2018 fiscal year to the
calculation of EBITDA for purposes of complying with the minimum fixed charge coverage ratio covenant. The other terms of the Credit
Agreement remain unchanged.
In December 2018, we and Dr. Frost entered into settlements with the SEC, which, upon approval by the court in January 2019,
resolved the claims against us and Dr. Frost raised in the SEC complaint. Pursuant to the settlement between us and the SEC, and without
admitting or denying any of the allegations of the complaint, we agreed to an injunction from violations of Section 13(d) of the Securities
Exchange Act of 1934 (the “Exchange Act”), a strict liability claim, and to pay a $100,000 penalty, which has been paid. We also agreed to,
within certain stipulated time periods: (i) establish a Management Investment Committee (“MIC”) that will make recommendations to an
Independent Investment Committee (“IIC”) of our Board of Directors in connection with existing and future strategic minority investments;
and (ii) retain an Independent Compliance Consultant (“ICC”) to (a) advise us on whether filings pursuant to Section 13(d) of the Exchange
Act for previous strategic investments made at the suggestion of or in tandem with Dr. Frost should be amended or made to reflect group
membership with Dr. Frost and his related entities; (b) review our existing policies and procedures relating to compliance with Section
13(d) of the Exchange Act; and (c) review the independence of the MIC and IIC of our Board of Directors solely for purposes of the
handling of strategic minority investments. The ICC is required to report its findings (including recommendations as to filings,
amendments, improvements to policies and procedures, and improvement to the composition of the MIC and the IIC to our Board of
Directors) to the SEC within 15 days of completion of its work, and we are required to implement the ICC’s recommendations, and to
certify our compliance with these undertakings in writing.
Under the terms of the settlement between the SEC and Dr. Frost, and without admitting or denying any of the allegations in the
Complaint, Dr. Frost agreed to injunctions from violations of Sections 5(a) and (c) and 17(a)(2) of the Securities Act, claims which may be
satisfied by strict liability and negligence, respectively, and Section 13(d) of the Exchange Act, also a strict liability claim; to pay
approximately $5.5 million in penalty, disgorgement and pre-judgment interest, which has been paid; and to be prohibited, with certain
exceptions, from trading in penny stocks. The settlements include no restriction on Dr. Frost’s ability to continue to serve as our CEO and
Chairman.
We have reviewed all subsequent events and transactions that occurred after the date of our December 31, 2018 Consolidated Balance
Sheet date, through the time of filing this Annual Report on Form 10-K.
146
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. 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”)) as of December 31, 2018. 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 December 31, 2018.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended. Our internal control over financial
reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. All internal control systems, no
matter how well designed, have inherent limitations. Therefore, even those systems determined effective could provide only reasonable
assurance with respect to financial statement preparation and presentation.
Our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31,
2018, based on the framework in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the “2013 Internal Control-Integrated Framework”). Based on our evaluation under the 2013 Internal
Control-Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December
31, 2018.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2018 has been audited by Ernst &
Young LLP, our independent registered public accounting firm, who also audited our Consolidated Financial Statements included in this
Annual Report on Form 10-K, as stated in their report which appears with our accompanying Consolidated Financial Statements.
Changes to the Company’s Internal Control Over Financial Reporting
We have implemented new controls as part of our effort to adopt Accounting Standards Update (“ASU”) No. 2014-09, Revenue from
Contracts with Customers. The adoption of the ASU required the implementation of new accounting processes which necessitated changes
to our internal controls over financial reporting.
These changes to the Company’s internal control over financial reporting that occurred since the beginning of 2018 have materially
affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
147
ITEM 9B. OTHER INFORMATION
On February 26, 2019, BioReference and certain of its subsidiaries entered into Amendment No. 8 to the Credit Agreement, which
amended the Credit Agreement to add back certain cost savings resulting from work force reductions in the 2018 fiscal year to the
calculation of EBITDA for purposes of complying with the minimum fixed charge coverage ratio covenant. The other terms of the Credit
Agreement remain unchanged.
148
PART III
The information required in Items 10 (Directors, Executive Officers and Corporate Governance), Item 11 (Executive Compensation),
Item 12 (Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters), Item 13 (Certain
Relationships and Related Transactions, and Director Independence), and Item 14 (Principal Accounting Fees and Services) is incorporated
by reference to the Company’s definitive proxy statement for the 2019 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission within 120 days of December 31, 2018.
149
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
PART IV.
(a)
(1) Financial Statements: See Part II, Item 8 of this report.
Schedule I - Condensed Financial Information of Registrant. Additionally, the financial statement schedule entitled
“Schedule II – Valuation and Qualifying Accounts” has been omitted since the information required is included in the
consolidated financial statements and notes thereto. Other schedules are omitted because they are not required.
(2) Exhibits: See below.
Exhibit
Number
1.1(12)
2.1(1)
2.2(3)+
2.3(9)
2.4(14)+
2.5(15)
2.6(17)+
2.7(18)
2.8(19)+
2.9(21)+
2.10(22)+
2.11(23)
2.12(24)
Description
Underwriting Agreement, dated March 9, 2011, by and among OPKO Health, Inc., Jefferies & Company,
Inc. and J.P. Morgan Securities LLC, as representatives for the underwriters named therein.
Merger Agreement and Plan of Reorganization, dated as of March 27, 2007, by and among Acuity
Pharmaceuticals, Inc., Froptix Corporation, eXegenics Inc., e-Acquisition Company I-A, LLC, and e-
Acquisition Company II-B, LLC.
Securities Purchase Agreement, dated May 2, 2008, by and among Vidus Ocular, Inc., OPKO
Instrumentation, LLC, OPKO Health, Inc., and the individual sellers and noteholders named therein.
Purchase Agreement, dated February 17, 2010, by and among Ignacio Levy García and José de Jesús Levy
García, Inmobiliaria Chapalita, S.A. de C.V., Pharmacos Exakta, S.A. de C.V., OPKO Health, Inc., OPKO
Health Mexicana S. de R.L. de C.V., and OPKO Manufacturing Facilities S. de R.L. de C.V.
Agreement and Plan of Merger, dated January 28, 2011, by and among CURNA, Inc., KUR, LLC, OPKO
Pharmaceuticals, LLC, OPKO CURNA, LLC, and certain individuals named therein.
Agreement and Plan of Merger, dated October 13, 2011, by and among OPKO Health, Inc., Claros Merger
Subsidiary, LLC, Claros Diagnostics, Inc., and Ellen Baron, Marc Goldberg and Michael Magliochetti on
behalf of the Shareholder Representative Committee.
Stock Purchase Agreement, dated December 20, 2011, by and among FineTech Pharmaceutical Ltd., Arie
Gutman, OPKO Holdings Israel Ltd, and OPKO Health, Inc.
Purchase Agreement, dated January 20, 2012, by and among OPKO Health, Inc., OPKO Chile S.A.,
Samuel Alexandre Arama, Inversiones SVJV Limitada, Bruno Sergiani, Inversiones BS Limitada, Pierre-
Yves LeGoff, and Inversiones PYTT Limitada.
Stock Purchase Agreement, dated August 2, 2012, by and among Farmadiet Group Holding, S.L., the
Sellers party thereto, OPKO Health, Inc., and Shebeli XXI, S.L.U.
Agreement and Plan of Merger, dated October 18, 2012, by and among Prost-Data, Inc. d/b/a OurLab, Our
Labs, Endo Labs and Gold Lab, Jonathan Oppenheimer, M.D., OPKO Health, Inc., OPKO Laboratories
Inc., and OPKO Labs, LLC.
Share Purchase Agreement, dated January 8, 2013, by among Cytochroma Inc., Cytochroma Holdings
ULC, Cytochroma Canada Inc., Cytochroma Development Inc., Proventiv Therapeutics, LLC, Cytochroma
Cayman Islands, Ltd., OPKO Health, Inc., and OPKO IP Holdings, Inc.
Asset Purchase Agreement, dated March 1, 2013, by and between RXi Pharmaceuticals Corporation and
OPKO Health, Inc.
Agreement and Plan of Merger, dated April 23, 2013, by and among OPKO Health, Inc., POM Acquisition
Inc., and PROLOR Biotech, Inc.
150
2.13(27)+
2.14(27)+
2.15(28)+
2.16(31)
Agreement for the Sale and Purchase of Shares in EirGen Pharma Limited, dated May 5, 2015 by and
among OPKO Ireland Limited, OPKO Health, Inc. and the Sellers named therein.
Form of Additional Agreement for the Sale and Purchase of Shares in EirGen Pharma Limited, dated
May 5, 2015 by and among OPKO Ireland Limited and the Sellers named therein.
Agreement and Plan of Merger by and among the Company, Bamboo Acquisition, Inc. and Bio-Reference
Laboratories, Inc. dated as of June 3, 2015.
Arrangement Agreement by and among the Company, OPKO Global Holdings, Inc. and Transition
Therapeutics Inc. dated as of June 29, 2016.
3.1(26)
Amended and Restated Certificate of Incorporation, as amended.
3.2(2)
3.3(7)
4.1(1)
4.2(7)
4.3(25)
4.4(39)
4.5(39)
Amended and Restated Bylaws.
Certificate of Designation of Series D Preferred Stock.
Form of Common Stock Warrant.
Form of Common Stock Warrant.
Indenture, dated January 30, 2013, between OPKO Health, Inc. and Wells Fargo Bank, National
Association.
Base Indenture related to the 4.50% Convertible Senior Notes due 2025, dated as of February 7, 2019, by
and between OPKO Health, Inc. and U.S. Bank National Association, as trustee.
Supplemental Indenture related to the 4.50% Convertible Senior Notes due 2025, dated as of February 7,
2019, by and between OPKO Health, Inc. and U.S. Bank National Association, as trustee.
10.1(1)
Form of Lockup Agreement.
10.2(2)
10.3(3)
10.4(3)
10.5(4)
10.6(5)
10.7(6)
10.8(6)
10.9(7)
Stock Purchase Agreement, dated December 4, 2007, by and between OPKO Health, Inc. and the members
of The Frost Group, LLC.
Form of Director Indemnification Agreement.
Form of Officer Indemnification Agreement.
Stock Purchase Agreement, dated August 8, 2008 by and between OPKO Health, Inc. and the Purchasers
named therein.
Stock Purchase Agreement, dated February 23, 2009 by and between OPKO Health, Inc. and Frost Gamma
Investments Trust.
Form of Stock Purchase Agreement for transactions between OPKO Health, Inc. and Nora Real Estate SA.,
Vector Group Ltd., Oracle Partners LP, Oracle Institutional Partners, LP., Chung Chia Company Limited,
Gold Sino Assets Limited, and Grandtime Associates Limited.
Stock Purchase Agreement, dated June 10, 2009, by and among OPKO Health, Inc. and Sorrento
Therapeutics, Inc.
Form of Securities Purchase Agreement for Series D Preferred Stock.
151
10.10(8)*
Form of Restricted Share Award Agreement for Directors.
10.11(8)
Cocrystal Discovery, Inc. Agreements.
Stock Purchase Agreement, dated October 1, 2009, by and among the Laboratoria Volta S.A., Farmacias
Ahumada S.A., FASA Chile S.A., OPKO Chile Limitada and Inversones OPKO Limitada, subsidiaries of
OPKO Health, Inc.
Asset Purchase Agreement, dated October 12, 2009, by and between OPKO Health, Inc. and Schering
Corporation.
10.12(11)
10.13(10)+
10.14(10)
Letter Agreement, dated June 29, 2010, by and between OPKO Health, Inc. and Schering Corporation.
10.15(16)+
10.16(13)
10.17(15)+
10.18(20)
Exclusive License Agreement by and between TESARO, Inc. and OPKO Health, Inc. dated December 10,
2010.
Third Amended and Restated Subordinated Note and Security Agreement, dated February 22, 2011,
between OPKO Health, Inc. and The Frost Group, LLC.
Asset Purchase Agreement dated September 21, 2011, by and among Optos plc, Optos Inc., OPKO Health,
Inc., OPKO Instrumentation, LLC, Ophthalmic Technologies, Inc., and OTI (UK) Limited.
Form of Note Purchase Agreement, dated as of January 25, 2013, by and among OPKO Health, Inc. and
each purchaser a party thereto.
10.19(29)+
Development and Commercialization License Agreement by and between OPKO Ireland, Ltd., a subsidiary
of OPKO Health, Inc., and Pfizer, Inc. dated December 13, 2014.
10.20(32)
Credit Agreement by and between Bio-Reference Laboratories, Inc. and certain of its subsidiaries and
JPMorgan Chase Bank, N.A. dated November 5, 2015.
10.21(33)
OPKO Health, Inc. 2016 Equity Incentive Plan.
10.22(34)
Development and License Agreement between OPKO Health, Inc. and Vifor Fresenius Medical Care Renal
Pharma Ltd., dated May 8, 2016.
10.23(35)
Amendment No. 3 to Credit Agreement, dated as of March 17, 2017, among Bio-Reference Laboratories,
Inc. and certain of its subsidiaries and JPMorgan Chase Bank, N.A.
Amendment No. 4 to Credit Agreement, dated as of August 7, 2017, among Bio-Reference Laboratories,
Inc. and certain of its subsidiaries and JPMorgan Chase Bank, N.A.
10.24(36)
10.25(36)
10.26(37)+
10.27(37)
Commitment Letter by and between OPKO Health, Inc. and Veterans Accountable Care Group, LLC, dated
August 15, 2017
Development and License Agreement by and between EirGen Pharma Limited, a subsidiary of OPKO
Health, Inc., and Japan Tobacco Inc., dated October 12, 2017.
Amendment No. 5 to Credit Agreement, dated as of November 8, 2017, among Bio-Reference Laboratories,
Inc. and certain of its subsidiaries and JPMorgan Chase Bank, N.A.
152
10.28(37)
Amendment No. 6 to Credit Agreement, dated as of December 22, 2017, among Bio-Reference
Laboratories, Inc. and certain of its subsidiaries and JPMorgan Chase Bank, N.A.
10.29(37)
Form of 5% Convertible Promissory Note dated February 27, 2018.
10.30(38)
Amendment No. 7 to Credit Agreement by and between BioReference Laboratories, Inc. and certain of its
subsidiaries, and JPMorgan Chase, N.A. dated February 28, 2018.
10.31(39)
10.32**
10.33**
21
23.1
31.1
31.2
32.1
32.2
Share Lending Agreement, dated February 4, 2019, by and between the OPKO Health, Inc. and Jefferies
Capital Services, LLC.
Credit Agreement, dated as of November 8, 2018, by and between the OPKO Health, Inc. and Frost Gamma
Investments Trust.
Stock Purchase Agreement, dated as of November 8, 2018, between certain investors and OPKO Health,
Inc.
Subsidiaries of the Company.
Consent of Ernst & Young LLP.
Certification by Phillip Frost, Chief Executive Officer, pursuant to Rule 13a-14(a) and 15d-14(a) of the
Securities and Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
for the year ended December 31, 2018.
Certification by Adam Logal, Chief Financial Officer, pursuant to Rule 13a-14(a) and 15d-14(a) of the
Securities and Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
for the year ended December 31, 2018.
Certification by Phillip Frost, Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the year ended December 31, 2018.
Certification by Adam Logal, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the year ended December 31, 2018.
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
153
*
**
+
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
(19)
(20)
(21)
(22)
(23)
(24)
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
Denotes management contract or compensatory plan or
arrangement.
Filed
herewith.
Certain confidential material contained in the document has been omitted and filed separately with the Securities and Exchange
Commission.
Filed with the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 2, 2007,
and incorporated herein by reference.
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.
Filed with the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 8,
2008 for the Company’s three-month period ended June 30, 2008, and incorporated herein by reference.
Filed with the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on
November 12, 2008 for the Company’s three-month period ended September 30, 2008, and incorporated herein by reference.
Filed with the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 8, 2009
for the Company’s three-month period ended March 31, 2009, and incorporated herein by reference.
Filed with the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 7,
2009 for the Company’s three-month period ended June 30, 2009, and incorporated herein by reference.
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.
Filed with the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9,
2009 for the Company’s three-month period ended September 30, 2009, and incorporated herein by reference.
Filed with the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 10, 2010
for the Company’s three-month period ended March 31, 2010, and incorporated herein by reference.
Filed with the Company’s Amendment to Annual Report on Form 10-K filed with the Securities and Exchange Commission on
February 3, 2011.
Filed with the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 17,
2010.
Filed with the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 10, 2011,
and incorporated herein by reference.
Filed with the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 10, 2011
for the Company’s three-month period ended March 31, 2011, and incorporated herein by reference.
Filed with the Company’s Quarterly Report on Form 10-Q/A filed with the Securities and Exchange Commission on July 5,
2011, and incorporated herein by reference.
Filed with the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9,
2011 for the Company’s three-month period ended September 30, 2011, and incorporated herein by reference.
Filed with the Company’s Annual Report on Form 10-K/A filed with the Securities and Exchange Commission on July 28,
2011.
Filed with the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 15,
2012.
Filed with the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 10, 2012
for the Company’s three-month period ended March 31, 2012, and incorporated herein by reference.
Filed with the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9,
2012 for the Company’s three-month period ended September 30, 2012, and incorporated herein by reference.
Filed with the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 29,
2013, and incorporated herein by reference.
Filed with the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 18,
2013.
Filed with the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 10, 2013
for the Company’s three-month period ended March 31, 2013, and incorporated herein by reference.
Filed with the Company’s Schedule 13D filed with the Securities and Exchange Commission on March 22, 2013, and
incorporated herein by reference.
Filed as Annex A to the Company’s Preliminary Joint Proxy Statement/Prospectus, Form S-4, with the Securities Exchange
Commission on June 27, 2013, as amended, and incorporated herein by reference.
154
(25)
(26)
(27)
(28)
(29)
(30)
(31)
(32)
(33)
(34)
(35)
(36)
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.
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.
Filed with the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 5,
2015 for the Company’s three month period ended June 30, 2015, and incorporated herein by reference.
Filed with the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 4, 2015,
and incorporated herein by reference.
Filed with the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 27,
2015, and incorporated herein by reference.
Filed under Part II, Item 8, of the Bio-Reference Laboratories, Inc. Form 10-K filed with the Securities and Exchange
Commission on January 13, 2015 (File No. 0-15266), and incorporated herein by reference.
Filed with the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 30, 2016
and incorporated herein by reference.
Filed with the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 29,
2016, and incorporated herein by reference.
Filed with the Company’s Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on
March 25, 2016, and incorporated herein by reference.
Filed with the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 8,
2016 for the Company’s three month period ended June 30, 2016, and incorporated herein by reference.
Filed with the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 23, 2017
and incorporated herein by reference.
Filed with the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 8,
2017 and incorporated herein by reference.
(37) Filed with the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2018 and
incorporated herein by reference.
(38) Filed with the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 7, 2018 for
the Company’s three month period ended June 30, 2018, and incorporated herein by reference
(39)
Filed with the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 7, 2019
and incorporated herein by reference.
155
Schedule I - Condensed Financial Information of Registrant
OPKO Health, Inc.
PARENT COMPANY CONDENSED BALANCE SHEETS
(In thousands, except share and per share data)
ASSETS
Current assets:
Cash and cash equivalents
Other current assets and prepaid expenses
Total current assets
Property, plant and equipment, net
Investments
Other assets
Total assets
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable
Accrued expenses
Current portion of 2033 Senior Notes
Current portion of notes payable
Total current liabilities
2033 Senior Notes, net of discount
Deferred tax liabilities, net
Total long-term liabilities
Total liabilities
Equity:
Common Stock - $0.01 par value, 750,000,000 shares authorized; 560,023,745 and 560,023,745
shares issued at December 31, 2018 and 2017, respectively
Treasury Stock, at cost - 549,907 shares at December 31, 2018 and 2017, respectively
Additional paid-in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
Total shareholders’ equity
Total liabilities and equity
December 31,
2018
2017
14,724 $
2,545
17,269
59
1,873,009
113
1,890,450 $
1,085 $
8,213
31,562
521
41,381
57,299
479
57,778
99,159
5,869
(1,791 )
3,004,422
(20,131 )
(1,197,078)
1,791,291
1,890,450 $
21,385
4,586
25,971
150
1,851,616
146
1,877,883
1,077
3,023
—
521
4,621
29,160
479
29,639
34,260
5,600
(1,791 )
2,889,256
(528)
(1,048,914)
1,843,623
1,877,883
$
$
$
$
The accompanying Notes to Parent Company Condensed Financial Statements are an integral part of these statements.
156
OPKO Health, Inc.
PARENT COMPANY CONDENSED STATEMENTS OF INCOME
(In thousands)
Revenues:
Revenue from products
Revenue from transfer of intellectual property and other
Total revenues
Costs and expenses:
Costs of revenue
Selling, general and administrative
Research and development
Total costs and expenses
Operating loss
Other income and (expense), net:
Interest income
Interest expense
Fair value changes of derivative instruments, net
Other income (expense), net
Other income and (expense), net
Loss before income taxes and investment losses
Income tax benefit (provision)
Net loss before investment losses
Loss from investments in investees
Net income (loss) from subsidiaries, net of taxes
Net loss attributable to common shareholders
For the years ended December 31,
2018
2017
2016
$
$
— $
1,069
1,069
— $
1,069
1,069
2,358
52,397
4,184
58,939
(57,870)
631
(8,608)
1,991
3,906
(2,080)
(59,950)
(11)
(59,961)
(10,822)
(82,257)
(153,040) $
1,438
57,410
4,426
63,274
(62,205)
260
(4,426)
652
5,177
1,663
(60,542)
(247)
(60,789)
(12,646)
(231,815)
(305,250) $
—
—
—
875
60,819
3,791
65,485
(65,485)
440
(3,585)
2,738
(2,387)
(2,794)
(68,279)
(686)
(68,965)
(7,665)
28,271
(48,359)
The accompanying Notes to Parent Company Condensed Financial Statements are an integral part of these statements.
157
OPKO Health, Inc.
PARENT COMPANY CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Net loss
Other comprehensive income (loss), net of tax:
Change in foreign currency translation and other comprehensive income (loss)
Investments:
Change in unrealized gain (loss), net of tax
Reclassification adjustments due to adoption of ASU 2016-01
Reclassification adjustments for losses included in net loss, net of tax
Comprehensive loss
For the years ended December 31,
2018
(153,040) $
2017
(305,250) $
2016
(48,359)
$
(14,727)
22,724
(4,955)
—
(4,876)
—
3,790
—
(33)
$
(172,643) $
(278,769) $
(3,810)
—
4,293
(52,831)
The accompanying Notes to Parent Company Condensed Financial Statements are an integral part of these statements.
158
OPKO Health, Inc.
PARENT COMPANY CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
Non-cash interest
Amortization of deferred financing costs
Losses from investments in investees
(Income) loss from subsidiaries
Equity-based compensation – employees and non-employees
Realized loss (gain) on equity securities and disposal of fixed assets
Loss (gain) on conversion of 3.00% convertible senior notes
Change in fair value of derivative instruments
Changes in other assets and liabilities
Net cash used in operating activities
Cash flows from investing activities:
Investments in investees
Subsidiary financing
Proceeds from sale of equity securities
Capital expenditures
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Proceeds from the exercise of Common Stock options and warrants
Issuance of common stock
Issuance convertible notes, net
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
SUPPLEMENTAL INFORMATION:
Interest paid
Income taxes paid, net of refunds
Non-cash financing:
Shares issued upon the conversion of:
2033 Senior Notes
Common Stock options and warrants, surrendered in net
exercise
Issuance of capital stock to acquire or contingent consideration
settlement:
Transition Therapeutics, Inc.
OPKO Renal
OPKO Health Europe
Issuance of stock for investment in Xenetic
For the years ended December 31,
2018
2017
2016
$
(153,040) $
(305,250) $
(48,359)
91
4,564
551
10,822
82,257
21,761
208
—
(6,124)
6,847
(32,063)
(1,000)
(123,787)
1,516
—
(123,271)
138
2,049
574
12,646
231,815
28,308
(652)
—
(4,953)
4,258
(31,067)
(9,625)
41,990
2,211
—
34,576
1,173
92,500
55,000
148,673
(6,661)
21,385
14,724 $
2,132
—
—
2,132
5,641
15,744
21,385 $
956 $
(578) $
956 $
327 $
— $
— $
806 $
1,546 $
89
1,866
149
7,665
(28,271)
42,693
(2,738)
284
2,347
(6,844)
(31,119)
(14,424)
(44,568)
—
(368)
(59,360)
8,576
—
—
8,576
(81,903)
97,647
15,744
966
—
583
350
— $
— $
— $
— $
$
— $
— $
304 $
— $
—
58,530
25,986
313
4,856
$
$
$
$
$
$
$
$
$
The accompanying Notes to Parent Company Condensed Financial Statements are an integral part of these statements.
159
OPKO Health, Inc.
Notes to Parent Company Condensed Financial Statements
Note 1. Organization and Basis of Presentation
We are a diversified healthcare company that seeks to establish industry-leading positions in large and rapidly growing medical
markets. The parent company condensed financial statements included in this Schedule I represent the financial statements of OPKO
Health, Inc., the parent company (or “OPKO”), on a stand-alone basis and do not include results of operations from our consolidated
subsidiaries. The Parent Company Condensed Financial Statements should be read in conjunction with our audited consolidated financial
statements included in Item 8 of Part II of this Form 10-K. As of December 31, 2018 and 2017, approximately $1.9 billion and $1.9 billion,
respectively, of our Investments, net have not been eliminated in the parent company condensed financial statements.
The Parent Company Condensed Financial Statements included herein have been prepared in accordance with Rule 12-04, Schedule I
of Regulation S-X, as substantially all the assets of BioReference, a wholly-owned subsidiary, and its subsidiaries are restricted from sale,
transfer, lease, disposal or distributions to OPKO under the credit agreement with JPMorgan Chase Bank, N.A. (the “Credit Agreement”),
subject to certain exceptions. BioReference and its subsidiaries’ net assets as of December 31, 2018 were approximately $0.9 billion, which
includes goodwill of $401.8 million and intangible assets of $405.3 million. BioReference’s restricted net assets exceeds 25% of OPKO’s
consolidated net assets of $2.5 billion as of December 31, 2018.
Note 2 Debt
On November 8, 2018, we entered into a credit agreement with an affiliate of Dr. Frost, pursuant to which the lender committed to
provide us with an unsecured line of credit in the amount of $60 million. Borrowings under the line of credit will bear interest at a rate of
10% per annum and may be repaid and reborrowed at any time. The credit agreement includes various customary remedies for the lender
following an event of default, including the acceleration of repayment of outstanding amounts under line of credit. The line of credit
matures on November 8, 2023. As of as of December 31, 2018, no funds were borrowed under the line of credit, and in February 2019, we
repaid amounts borrowed in 2019 and terminated the credit agreement.
In February 2018, we issued a series of 5% Convertible Promissory Notes (the “2023 Convertible Notes”) in the aggregate principal
amount of $55.0 million. The 2023 Convertible Notes mature 5 years from the date of issuance. Each holder of a 2023 Convertible Note
has the option, from time to time, to convert all or any portion of the outstanding principal balance of such 2023 Convertible Note, together
with accrued and unpaid interest thereon, into shares of our Common Stock, par value $0.01 per share, at a conversion price of $5.00 per
share of Common Stock (the “Shares”). We may redeem all or any part of the then issued and outstanding 2023 Convertible Notes,
together with accrued and unpaid interest thereon, pro ratably among the holders, 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.
The issuance of the 2023 Convertible Notes and the issuance of the Shares, if any, upon conversion thereof was not, and will not be,
respectively, registered under the Securities Act, pursuant to the exemption provided by Section 4(a)(2) thereof, and we have not agreed to
register the Shares if or when such Shares are issued. Purchasers of the 2023 Convertible Notes include an affiliate of Dr. Phillip Frost,
M.D., our Chairman and Chief Executive Officer, and Dr. Jane H. Hsiao, Ph.D., MBA, our Vice-Chairman and Chief Technical Officer.
In January 2013, we entered into note purchase agreements (the “2033 Senior Notes”) with qualified institutional buyers and
accredited investors (collectively, the “Purchasers”) in a private placement in reliance on exemptions from registration under the Securities
Act. The 2033 Senior Notes were issued on January 30, 2013. The 2033 Senior Notes, which totaled $175.0 million in original principal
amount, bear interest at the rate of 3.0% per year, payable semiannually on February 1 and August 1 of each year. The 2033 Senior Notes
will mature on February 1, 2033, unless earlier repurchased, redeemed or converted. Upon a fundamental change as defined in the
Indenture, dated as of January 30, 2013, by and between the Company and Wells Fargo Bank N.A., as trustee, governing the 2033 Senior
Notes (the “Indenture”), subject to certain exceptions, the holders may require us to repurchase all or any portion of their 2033 Senior
Notes for cash at a repurchase price equal to 100% of the principal amount of the 2033 Senior Notes being repurchased, plus any accrued
and unpaid interest to but not including the related fundamental change repurchase date.
160
The following table sets forth information related to the 2033 Senior Notes which is included in our Consolidated Balance Sheet as of
December 31, 2018:
(In thousands)
Balance at December 31, 2017
Amortization of debt discount and debt issuance costs
Balance at December 31, 2018
2033 Senior
Notes
Discount
Debt Issuance
Cost
$
$
31,850
—
31,850
$
$
(2,565) $
2,277
(288) $
(125) $
125
— $
Total
29,160
2,402
31,562
The following table sets forth information related to the 2033 Senior Notes which is included in our Consolidated Balance Sheet as of
December 31, 2017:
(In thousands)
Balance at December 31, 2016
Amortization of debt discount and debt issuance costs
Change in fair value of embedded derivative
Reclassification of embedded derivatives to equity
Balance at December 31, 2017
$
$
Embedded
conversion
option
16,736 $
—
(3,185)
(13,551)
— $
2033 Senior
Notes
31,850 $
Discount
Debt Issuance
Cost
—
—
—
31,850 $
(4,612) $
2,047
—
—
(2,565) $
(273) $
148
—
—
(125) $
Total
43,701
2,195
(3,185)
(13,551)
29,160
The 2033 Senior Notes will be convertible at any time on or after November 1, 2032, through the second scheduled trading day
immediately preceding the maturity date, at the option of the holders. Additionally, holders may convert their 2033 Senior Notes prior to
the close of business on the scheduled trading day immediately preceding November 1, 2032, under the following circumstances:
(1) conversion based upon satisfaction of the trading price condition relating to the 2033 Senior Notes; (2) conversion based on the
Common Stock price; (3) conversion based upon the occurrence of specified corporate events; or (4) if we call the 2033 Senior Notes for
redemption. The 2033 Senior Notes will be convertible into cash, shares of our Common Stock, or a combination of cash and shares of
Common Stock, at our election unless we have made an irrevocable election of net share settlement. The initial conversion rate for the
2033 Senior Notes will be 141.48 shares of Common Stock per $1,000 principal amount of 2033 Senior Notes (equivalent to an initial
conversion price of approximately $7.07 per share of Common Stock), and will be subject to adjustment upon the occurrence of certain
events. In addition, we will, in certain circumstances, increase the conversion rate for holders who convert their 2033 Senior Notes in
connection with a make-whole fundamental change (as defined in the Indenture). Holders of the 2033 Senior Notes may require us to
repurchase the 2033 Senior Notes for 100% of their principal amount, plus accrued and unpaid interest, on February 1, 2019, February 1,
2023 and February 1, 2028, or following the occurrence of a fundamental change as defined in the indenture governing the 2033 Senior
Notes. On February 1, 2019, approximately $28.8 million aggregate principal amount of 2033 Senior Notes were tendered by holders
pursuant to such holders’ option to require us to repurchase the 2033 Senior Notes.
Before February 1, 2019, we may redeem for cash any or all of the 2033 Senior Notes but only if the last reported sale price of our
Common Stock exceeds 130% of the applicable conversion price for at least 20 trading days during the 30 consecutive trading day period
ending on the trading day immediately prior to the date on which we deliver the redemption notice. The redemption price will equal 100%
of the principal amount of the 2033 Senior Notes to be redeemed, plus any accrued and unpaid interest to but not including the redemption
date. On or after February 1, 2019, we may redeem for cash any or all of the 2033 Senior Notes at a redemption price of 100% of the
principal amount of the 2033 Senior Notes to be redeemed, plus any accrued and unpaid interest up to but not including the redemption
date.
The terms of the 2033 Senior Notes, include, among others: (i) rights to convert into shares of our Common Stock, including upon a
fundamental change; and (ii) a coupon make-whole payment in the event of a conversion by the holders of the 2033 Senior Notes on or
after February 1, 2017 but prior to February 1, 2019. We determined that these specific terms were considered to be embedded derivatives.
Embedded derivatives are required to be separated from the host contract, the 2033 Senior Notes, and carried at fair value when: (a) the
embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host
contract; and (b) a separate, stand-alone instrument with the same terms would qualify as a derivative instrument. We concluded that the
embedded derivatives within the 2033 Senior Notes meet these criteria for periods prior to February 1, 2017 and, as such, were valued
separate and apart from the 2033 Senior Notes and recorded at fair value each reporting period.
161
For accounting and financial reporting purposes, we combined these embedded derivatives and valued them together as one unit of
accounting. In 2017, certain terms of the embedded derivatives expired pursuant to the original agreement and the embedded derivatives no
longer met the criteria to be separated from the host contract and, as a result, the embedded derivatives were no longer required to be valued
separate and apart from the 2033 Senior Notes and were reclassified to additional paid in capital. Accordingly, there was no derivative
income (loss) for the year ended December 31, 2018.
From 2013 to 2016, holders of the 2033 Senior Notes converted 143.2 million in aggregate principal amount into an aggregate of
21,539,873 shares of the Company’s Common Stock.
In November 2015, BioReference and certain of its subsidiaries entered into the Credit Agreement with JPMorgan Chase Bank, which
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. The Credit Agreement matures on November 5, 2020 and is 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.
Note 3 Commitments and Contingencies
We have no significant direct commitments and contingencies, but our subsidiaries do. See Note 13 of our Consolidated Financial
Statements in Item 8 of Part II of this Form 10-K.
Note 4 Dividends
We did not receive any dividend payments from our consolidated subsidiaries for the years ended December 31, 2018, 2017 and
2016.
Note 5 Income Taxes
The Parent Company Condensed Financial Statements recognize the current and deferred income tax consequences that result from
our activities during the current and preceding periods pursuant to the provisions of Accounting Standards Codification Topic 740, Income
Taxes (ASC 740), as if we were a separate taxpayer rather than a member of the consolidated income tax return group. The tax expense and
benefit recorded in OPKO’s consolidated financial statements was the result of activity at the subsidiaries and therefore all tax benefit and
expense was reported in the Net income (loss) from subsidiaries, net of taxes line in the Condensed Statement of Income.
Note 6 Subsequent Events
In February 2019, we issued $200.0 million aggregate principal amount of Convertible Senior Notes due 2025 (the “2025 Notes”) in
an underwritten public offering. The 2025 Notes will bear interest at a rate of 4.50% per year, payable semiannually in arrears on
February 15 and August 15 of each year, beginning on August 15, 2019. The notes mature on February 15, 2025, unless earlier
repurchased, redeemed or converted.
Holders may convert their 2025 Notes at their option at any time prior to the close of business on the business day immediately
preceding November 15, 2024 only under the following circumstances: (1) during any calendar quarter commencing after the calendar
quarter ending on March 31, 2019 (and only during such calendar quarter), if the last reported sale price of our common stock for at least
20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the
immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during
the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000
principal amount of 2025 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale
price of our common stock and the conversion rate on each such trading day; (3) if we call any or all of the 2025 Notes for redemption, at
any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence
of specified corporate events. On or after November 15, 2024, until the close of business on the business day immediately preceding the
maturity date, holders of the 2025 Notes may convert their notes at any time, regardless of the foregoing circumstances. 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 conversion rate for the notes will initially be 236.7424 shares of common stock per $1,000 principal amount of 2025 Notes
(equivalent to an initial conversion price of approximately $4.22 per share of common stock). The conversion rate for the 2025 Notes will
be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate
events that occur prior to the maturity date of the notes or if we deliver a notice of
162
redemption, in certain circumstances we will increase the conversion rate of the 2025 Notes for a holder who elects to convert its notes in
connection with such a corporate event or notice of redemption as the case may be.
We may not redeem the 2025 Notes prior to February 15, 2022. We may redeem for cash any or all of the notes, at our option, on or
after February 15, 2022, if the last reported sale price of our common stock has been at least 130% of the conversion price for the notes
then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last
trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of
redemption at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to,
but excluding, the redemption date. No sinking fund is provided for the 2025 Notes.
If we undergo a fundamental change prior to the maturity date of the 2025 Notes, holders may require us to repurchase for cash all or
any portion of their notes at a repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and
unpaid interest to, but excluding, the fundamental change repurchase date. The 2025 Notes will be our senior unsecured obligations and
will rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the 2025 Notes; equal in
right of payment to any of our existing and future liabilities that are not so subordinated; effectively junior in right of payment to any of our
secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and
other liabilities (including trade payables) of our current or future subsidiaries.
On November 8, 2018, we entered into a credit agreement with an affiliate of Dr. Frost, pursuant to which the lender committed to
provide us with an unsecured line of credit in the amount of $60 million. The credit agreement was terminated on or around February 20,
2019 and amounts borrowed during 2019 were repaid from the proceeds of the 2025 Convertible Notes offering.
On February 1, 2019, approximately $28.8 million aggregate principal amount of 2033 Senior Notes were tendered by holders
pursuant to such holders’ option to require us to repurchase the 2033 Senior Notes. Holders of the 2033 Senior Notes issued in January
2013 may require us to repurchase the 2033 Senior Notes for 100% of their principal amount, plus accrued and unpaid interest, again on
February 1, 2023 and February 1, 2028, or following the occurrence of a fundamental change as defined in the indenture governing the
2033 Senior Notes.
On February 26, 2019, BioReference and certain of its subsidiaries entered into Amendment No. 8 to the Credit Agreement, which
amended the Credit Agreement to add back certain cost savings resulting from work force reductions in the 2018 fiscal year to the
calculation of EBITDA for purposes of complying with the minimum fixed charge coverage ratio covenant. The other terms of the Credit
Agreement remain unchanged.
In December 2018, we and Dr. Frost entered into settlements with the SEC, which, upon approval by the court in January 2019,
resolved the claims against us and Dr. Frost raised in the SEC complaint. Pursuant to the settlement between us and the SEC, and without
admitting or denying any of the allegations of the complaint, we agreed to an injunction from violations of Section 13(d) of the Securities
Exchange Act of 1934 (the “Exchange Act”), a strict liability claim, and to pay a $100,000 penalty, which has been paid. We also agreed to,
within certain stipulated time periods: (i) establish a Management Investment Committee (“MIC”) that will make recommendations to an
Independent Investment Committee (“IIC”) of our Board of Directors in connection with existing and future strategic minority investments;
and (ii) retain an Independent Compliance Consultant (“ICC”) to (a) advise us on whether filings pursuant to Section 13(d) of the Exchange
Act for previous strategic investments made at the suggestion of or in tandem with Dr. Frost should be amended or made to reflect group
membership with Dr. Frost and his related entities; (b) review our existing policies and procedures relating to compliance with Section
13(d) of the Exchange Act; and (c) review the independence of the MIC and IIC of our Board of Directors solely for purposes of the
handling of strategic minority investments. The ICC is required to report its findings (including recommendations as to filings,
amendments, improvements to policies and procedures, and improvement to the composition of the MIC and the IIC to our Board of
Directors) to the SEC within 15 days of completion of its work, and we are required to implement the ICC’s recommendations, and to
certify our compliance with these undertakings in writing.
Under the terms of the settlement between the SEC and Dr. Frost, and without admitting or denying any of the allegations in the
Complaint, Dr. Frost agreed to injunctions from violations of Sections 5(a) and (c) and 17(a)(2) of the Securities Act, claims which may be
satisfied by strict liability and negligence, respectively, and Section 13(d) of the Exchange Act, also a strict liability claim; to pay
approximately $5.5 million in penalty, disgorgement and pre-judgment interest, which has been paid; and to be prohibited, with certain
exceptions, from trading in penny stocks. The settlements include no restriction on Dr. Frost’s ability to continue to serve as our CEO and
Chairman.
We have reviewed all subsequent events and transactions that occurred after the date of our December 31, 2018 Consolidated Balance
Sheet date, through the time of filing this Annual Report on Form 10-K.
163
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 1, 2019
OPKO HEALTH, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
By:
/s/ Phillip Frost, M.D.
Phillip Frost, M.D.
Chairman of the Board and
Chief Executive Officer
Signature
/s/ Phillip Frost, M.D.
Phillip Frost, M.D.
/s/ Jane H. Hsiao, Ph.D., MBA
Jane H. Hsiao, Ph.D., MBA
/s/ Steven D. Rubin
Steven D. Rubin
/s/ Adam Logal
Adam Logal
/s/ Richard Krasno, Ph.D.
Richard Krasno, Ph.D.
/s/ Richard A. Lerner, M.D.
Richard A. Lerner, M.D.
/s/ John A. Paganelli
John A. Paganelli
/s/ Richard C. Pfenniger, Jr.
Richard C. Pfenniger, Jr.
/s/ Alice Lin-Tsing Yu, M.D., Ph.D.
Alice Lin-Tsing Yu, M.D., Ph.D.
/s/ Robert S. Fishel, M.D.
Robert S. Fishel, M.D.
Title
Chairman of the Board and Chief Executive
Officer
(Principal Executive Officer)
Date
March 1, 2019
Vice Chairman and Chief Technical Officer
March 1, 2019
Director and Executive Vice President –
Administration
March 1, 2019
Senior Vice President, Chief Financial Officer,
Chief Accounting Officer and Treasurer
(Principal Financial Officer)
March 1, 2019
Director
March 1, 2019
Director
March 1, 2019
Director
March 1, 2019
Director
March 1, 2019
Director
March 1, 2019
Director
March 1, 2019
164
Exhibit Number
Description
10.32
10.33
21
31.1
31.2
32.1
32.2
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
Credit Agreement, dated as of November 8, 2018, by and between the OPKO Health, Inc. and Frost
Gamma Investments Trust.
Stock Purchase Agreement, dated as of November 8, 2018, between certain investors and OPKO
Health, Inc.
Subsidiaries of the Company.
Certification by Phillip Frost, Chief Executive Officer, pursuant to Rule 13a-14(a) and 15d-14(a) of the
Securities and Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 for the year ended December 31, 2018.
Certification by Adam Logal, Chief Financial Officer, pursuant to Rule 13a-14(a) and 15d-14(a) of the
Securities and Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 for the year ended December 31, 2018.
Certification by Phillip Frost, Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the year ended December 31, 2018.
Certification by Adam Logal, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the year ended December 31, 2018.
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
165
OPKO HEALTH, INC.
CREDIT AGREEMENT
November 8, 2018
OPKO HEALTH, INC.
CREDIT AGREEMENT
This Credit Agreement (this "Agreement") is made as of the 8th day of November, 2018 by and
among OPKO Health, Inc., a Delaware corporation (the "Company") and Frost Gamma Investments Trust,
a Florida trust (the "Lender").
RECITAL
The Company desires to borrow from the Lender, and the Lender desires to loan to the Company up
to an aggregate principal amount of $60,000,000 (the "Commitment"), pursuant to the terms set forth in this
Agreement.
AGREEMENT
In consideration of the mutual promises contained herein and other good and valuable consideration,
receipt of which is hereby acknowledged, the parties to this Agreement agree as follows:
1.
Definitions.
As used in this Agreement, the following capitalized terms have the following meanings:
"Advance" means the amount of US Dollars advanced pursuant to this Agreement and as evidenced
by the Note.
"Affiliate" means, with respect to any Person, a Person that owns or controls directly or indirectly
such Person, any Person that controls or is controlled by or is under common control with such Person, and
each of that Person's senior executive officers, directors, partners and, for any Person that is a limited
liability company, that Person's managers and members;
"Agreement" means this Credit Agreement, as amended from time to time;
"Business Day" means any day other than a day on which commercial banks in New York are
required or permitted by law to be closed;
"Closing" means the closing of the issuance of the Note;
"Common Stock" means the shares of common stock, $.01 par value, per share, of the Company;
"Company" has the meaning set forth in the introductory paragraph above;
"Event of Default" has the meaning set forth in Section 7 below;
“Exchange Act” has the meaning set forth in Section 3.5 below;
"Material Adverse Effect" means a change or effect that is materially adverse to the financial
condition, assets, or operations of the Company, or will prevent the transactions contemplated by this
Agreement;
"Maturity Date" shall have the meaning set forth in the Note;
"Note" means the promissory note issued pursuant to this Agreement at the Closing, in substantially
the form attached to this Agreement as Exhibit A;
"Person" shall mean and include any individual, partnership, corporation (including a business trust),
joint stock company, limited liability company, unincorporated association, joint venture, governmental entity
or other entity;
"Lender" has the meaning set forth in the introductory paragraph above; and
"Securities Act" means the Securities Act of 1933, as amended;
“SEC” has the meaning set forth in Section 3.5 below; and
“SEC Documents” has the meaning set forth in Section 3.5 below.
2. Amount and Terms of Credit
2.1 Closing and Advances. (a) Subject to the terms and conditions of this Agreement and
the Note, the Lender agrees to make advances (the “Advance(s)”) to the Company, from time to time from
the date of this Agreement until the Maturity Date (as such terms are defined in the Note), at such times as
the Company may request in writing. Each Advance, up to the Commitment, shall be in increments of
$5,000,000. Each Advance to the Company shall be made on ten days prior written notice by the Company
to the Lender at its address as set forth on the signature page herein. Subject to the terms and conditions of
this Agreement and the Note, the Lender agrees to make any requested Advance to the Company on the
date specified in the Advance Notice.
(b) The Company shall execute and deliver to the Lender the Note to evidence the
Commitment and the Advances, dated the date hereof, and substantially in the form of Exhibit A hereto (the
“Note”). The Note shall represent the obligation of the Company to pay the amount of the Commitment or, if
less, the aggregate unpaid principal amount of all Advances made by the Lender to the Company. The date
and amount of each Advance and any payment of principal with respect thereto shall be recorded by the
Company on its books and records, and by the Lender on the grid portion of the Note.
3. Representations and Warranties of the Company.
The Company hereby represents and warrants to the Lender that:
2
3.1 Organization, Good Standing and Qualification.
The Company is a corporation duly organized, validly existing and in good standing under the laws of
the State of Delaware and has all requisite corporate power and authority to carry on its business as
presently conducted or proposed to be conducted. The Company or its representatives are duly qualified to
transact business and is in good standing in each jurisdiction in which the failure so to qualify would have a
Material Adverse Effect.
3.2 Authorization.
All corporate actions on the part of the Company, its officers, directors and stockholder necessary for
(i) the authorization, execution and delivery of this Agreement and the Note, (ii) the performance of all
obligations of the Company under this Agreement and the Note and (iii) the authorization, issuance and
delivery of the Note have been taken or will be taken prior to the Closing, and this Agreement and the Note,
when executed and delivered by the Company, shall constitute valid and legally binding obligations of the
Company, enforceable against the Company in accordance with their respective terms except (i) as limited
by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, or other laws of
general application relating to or affecting the enforcement of creditors' rights generally, or (ii) as limited by
laws relating to the availability of specific performance, injunctive relief, or other equitable remedies.
3.3 Compliance with Other Instruments; No Events of Default.
The Company is not in violation or default of any provisions of its Certificate of Incorporation, as
amended, or Bylaws, as amended, or of any instrument, judgment, order, writ, or decree, or under any note,
indenture, mortgage, lease, agreement, contract or purchase order to which it is a party or by which it is
bound or of any provision of state or federal statute, rule or regulation applicable to the Company, the
violation of which would have a Material Adverse Effect. The execution, delivery and performance of this
Agreement, the issuance of the Note and the consummation of the transactions contemplated hereby or
thereby will not result in any such violation or be in conflict with or constitute, with or without the passage of
time and giving of notice, either a default under any such provision, instrument, judgment, order, writ, decree
or contract or an event which results in the creation of any lien, charge or encumbrance upon any assets of
the Company in either case which would have a Material Adverse Effect. No Event of Default shall have
occurred or occur as a result of the Company's execution of this Agreement or the Note.
3.4 Disclosure.
The Company has made available to the Lender such information as the Lender has requested for
deciding whether to acquire the Note.
3
3.5 Financial Statements.
As of the date hereof, the Company has filed all reports required to be filed by it under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), including pursuant to Section 13(a) or 15(d)
thereof (as the “SEC Documents”) and has filed any such SEC Documents in a timely fashion. As of their
respective dates, to the Company’s knowledge, the SEC Documents complied in all material respects with
the requirements of the Securities Act and the Exchange Act and the rules and regulations of the United
States Securities and Exchange Commission (the “SEC”) promulgated thereunder, and none of the SEC
Documents, when filed, contained any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. All material agreements to which the Company
is a party or to which the property or assets of the Company are subject have been appropriately filed as
exhibits to the SEC Documents as and to the extent required under the Exchange Act. The financial
statements of the Company included in the SEC Documents comply in all material respects with applicable
accounting requirements and the rules and regulations of the SEC with respect thereto as in effect at the
time of filing, were prepared in accordance with GAAP applied on a consistent basis during the periods
involved (except as may be indicated in the notes thereto, or, in the case of unaudited statements as
permitted by Form 10-Q of the SEC), and fairly present in all material respects (subject in the case of
unaudited statements, to normal, recurring audit adjustments) the financial position of the Company as of the
dates thereof and the results of its operations and cash flows for the periods then ended. The Common
Stock is traded on the Nasdaq Stock Exchange.
4. Representations and Warranties of the Lender.
The Lender hereby represents and warrants to the Company that:
4.1 Authorization.
The Lender has full power and authority to enter into this Agreement. This Agreement, when
executed and delivered by the Lender, will constitute a valid and legally binding obligation of the Lender,
enforceable in accordance with its terms, except as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance, and any other laws of general application affecting
enforcement of creditors' rights generally, and as limited by laws relating to the availability of a specific
performance, injunctive relief, or other equitable remedies.
4.2 Purchase Entirely for Own Account.
This Agreement is made with the Lender in reliance upon the Lender's representation to the
Company, which by the Lender's execution of this Agreement, the Lender hereby confirms, that the Note to
be acquired by the Lender will be acquired for investment for the Lender's own account, not as a nominee or
agent, and not with a view to the resale or distribution of any part thereof, and that the Lender has no present
4
intention of selling, granting any participation in, or otherwise distributing the same. By executing this
Agreement, the Lender further represents that the Lender does not presently have any contract, undertaking,
agreement or arrangement with any person to sell, transfer or grant participations to such person or to any
third person, with respect to any of the Note.
4.3 Knowledge.
The Lender is aware of the Company's business affairs and financial condition and has acquired
sufficient information about the Company to reach an informed and knowledgeable decision to acquire the
Note.
4.4 Restricted Securities.
The Lender understands that the Note has not been, and will not be, registered under the Securities
Act, by reason of a specific exemption from the registration provisions of the Securities Act which depends
upon, among other things, the bona fide nature of the investment intent and the accuracy of the Lender's
representations as expressed herein. The Lender understands that the Note is a "restricted security" under
applicable U.S. federal and state securities laws and that, pursuant to these laws, the Lender must hold the
Note indefinitely unless it is registered with the Securities and Exchange Commission and qualified by state
authorities or an exemption from such registration and qualification requirements is available. The Lender
acknowledges that the Company has no obligation to register or qualify the Note for resale. The Lender
further acknowledges that if an exemption from registration or qualification is available, it may be conditioned
on various requirements including, but not limited to, the time and manner of sale, the holding period for the
Note, and on requirements relating to the Company which are outside of the Lender's control, and which the
Company is under no obligation and may not be able to satisfy.
4.5 No Public Market.
The Lender understands that, except for the Common Stock, no public market now exists for any of
the securities issued by the Company and the Company has made no assurances that a public market will
ever exist for any of the Company's securities.
4.6 Accredited Investor.
The Lender is an accredited investor as defined in paragraphs (a)(1), (a)(2), (a)(3), (a)(7) or (a)(8) of
Rule 501(a) of Regulation D promulgated under the Securities Act.
5. Conditions to the Lender's Obligations to make any Advance.
The obligation of the Lender to make an Advance under the Note is subject to the fulfillment of each
of the following conditions, unless otherwise waived by the Lender:
5
5.1 Representations and Warranties.
The representations and warranties of the Company contained in Section 3 shall be true on and as of
each applicable Advance with the same effect as though such representations and warranties had been
made on and as of the date of such Advance;
5.2 Compliance with Agreements.
The Company shall have performed under and complied in all material respects with each
agreement, covenant and obligation required by this Agreement to be so performed by or complied with by
the Company on or before any Advance;
5.3 Consents.
The obtaining of all third party consents, approvals and waivers required for the Company to
consummate the transactions contemplated by this Agreement;
5.4 Compliance with Laws.
Compliance by the Company with all applicable federal and state securities laws with respect to the
issuance of the Note.
6. Affirmative Covenants of the Company.
The Company will do all of the following for so long as the Note is outstanding:
6.1 Taxes.
Make timely payment of all material federal, state, and local taxes or assessments other than any
taxes or assessments that the Company is contesting in good faith and deliver to the Lenders, on demand,
appropriate certificates attesting to such payment.
6.2 Corporate Existence and Compliance with Laws.
Maintain its and its operating subsidiaries corporate existence and good standing under the laws of
their state of incorporation and remain in good standing in each jurisdiction in which the failure to do so
would have a Material Adverse Effect.
7. Events of Default.
Any one of the following is an "Event of Default":
7.1 Payment Default.
If the Company fails to pay (i) any of the principal amount of and accrued interest on the Note on the
Maturity Date, or (ii) any fees or interest related to the Note when due, and such failure to pay such fees or
interest remains unremedied after the Company has received ten (10) Business Days prior written notice.
6
7.2 Covenant Default.
If the Company fails to perform any obligation under Section 6 and as to any default that can be
cured, has failed to cure such default within thirty (30) days after the occurrence thereof; provided, however,
that if the default cannot by its nature be cured within the thirty (30) day period or cannot after diligent
attempts by the Company be cured within such thirty (30) day period, and such default is likely to be cured
within a reasonable time, then the Company shall have an additional reasonable period (which shall not in
any case exceed sixty (60) additional days) to attempt to cure such default, and within such reasonable time
period the failure to have cured such default shall not be deemed an Event of Default;
7.3 Insolvency.
If the Company becomes insolvent or if the Company begins an insolvency proceeding or an
insolvency proceeding is begun against the Company and not dismissed or stayed within ninety (90) days;
8. Miscellaneous.
8.1 Successors and Assigns.
Subject to the limitations set forth herein, the Lender may assign this Agreement and the rights and
obligations conferred hereby, in whole or in part upon the written consent of the Company. Any assignment
made in violation of this Section 8.1 is null and void. The terms and conditions of this Agreement shall be
binding upon and inure to the benefit of and be binding upon the respective successors and assigns of the
parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the
parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities
under or by reason of this Agreement, except as expressly provided in this Agreement.
8.2 Governing Law.
This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the
parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of
Florida, without giving effect to principles of conflicts of law.
8.3 Counterparts.
This Agreement may be executed in two or more counterparts, each of which shall be deemed an
original and all of which together shall constitute one instrument.
8.4 Titles and Subtitles.
The titles and subtitles used in this Agreement are used for convenience only and are not to be
considered in construing or interpreting this Agreement.
7
8.5 Notices.
Any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient
upon receipt, when delivered personally or by courier, overnight delivery service or confirmed facsimile, or 48
hours after being deposited in the U.S. mail as certified or registered mail with postage prepaid, if such
notice is addressed to the party to be notified at such party's address or facsimile number as set forth below
or as subsequently modified by written notice.
8.6 Amendments and Waivers.
Any term of this Agreement may be amended or waived only with the written consent of the Company
and the holder of the Note.
8.7 Severability.
If one or more provisions of this Agreement are held to be unenforceable under applicable law, the
parties agree to renegotiate such provision in good faith, in order to maintain the economic position enjoyed
by each party as close as possible to that under the provision rendered unenforceable. In the event that the
parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (i) such
provision shall be excluded from this Agreement, (ii) the balance of the Agreement shall be interpreted as if
such provision were so excluded and (iii) the balance of the Agreement shall be enforceable in accordance
with its terms.
8.8 Entire Agreement.
This Agreement, and the documents referred to herein constitute the entire agreement between the
parties hereto pertaining to the subject matter hereof, and any and all other written or oral agreements
existing between the parties hereto are expressly canceled.
8.9 Exculpation By Lender.
The Lender acknowledges that it is not relying upon any person, firm or corporation, other than the
Company and its officers and directors, in making its investment or decision to invest in the Company.
[Signature Pages Follow]
8
The parties have executed this Credit Agreement as of the date first written above.
COMPANY:
OPKO HEALTH, INC.
By:
Name: Steven D. Rubin
Title: Executive Vice President of
Administration
Address: 4400 Biscayne Blvd.
Miami, FL 33137
LENDER:
FROST GAMMA INVESTMENTS TRUST
By:
Phillip Frost, M.D.
Address: 4400 Biscayne Blvd.
Miami, FL 33137
EXHIBIT A
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS
AMENDED, OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY OTHER JURISDICTION. THIS
NOTE MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT OR AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
$60,000,000 Date: November __, 2018
Promissory Note
FOR VALUE RECEIVED, the undersigned OPKO Health, Inc., a Delaware corporation (the "Company"),
promises to pay to the order of Frost Gamma Investments Trust (the "Holder") the lesser of (x) SIXTY
MILLION US DOLLARS (US $60,000,000) and (y) the aggregate unpaid principal amount of Advances (as
hereinafter defined) made under this Note to the Company pursuant to the terms of this Note and the Credit
Agreement (as hereinafter defined), together in either case, with unpaid interest on the unpaid balance of the
principal amount outstanding, on the Maturity Date, and subject to the following provisions. Unless otherwise
provided herein, accrued interest hereon shall be paid quarterly on the Interest Payment Dates (as
hereinafter defined).
The following is a statement of the rights of the Holder and the conditions to which this Note is subject, and
to which the Holder, by the acceptance of this Note, agrees:
1. Definitions.
The capitalized terms in this Note shall have the meanings ascribed to such terms in the Credit
Agreement unless otherwise defined herein:
"Advance" and "Advances" shall have the meaning as set forth in Section 2.1 below;
"Credit Agreement" means that certain Credit Agreement dated as of the first date set forth above,
by and among the Company and the Holder.
"Borrowing Commitment" means an aggregate of $60,000,000.
"Business Day" shall mean any day that is not a Saturday, a Sunday or a day on which banks are
required or permitted to be closed in the State of New York.
"Company" has the meaning set forth in the introductory paragraph to this Note;
"Default Rate" shall have the meaning set forth in Section 6.1 below;
"Holder" has the meaning set forth in the introductory paragraph to this Note;
“Interest Payment Date(s)” means the last Business Day of each March, June, September and
December;
"Interest Rate" means the rate of 10% per annum, calculated on the basis of a 360 day year based
on the number of days elapsed including the first day, but excluding the day on which such calculation is
being made;
"Maturity Date" means the day that is the fifth anniversary of the making of this Note.
"Note" means this Promissory Note;
"Principal Amount" means the total Advances made hereunder; or
2. Advances and Time of Payment.
2.1 Advances. With respect to each proposed additional advance to the Company under this
Note (any advance, an "Advance" and, collectively, the "Advances"), the Company shall give at least 10
days prior written notice to the Holder of its intention to borrow hereunder, which notice shall specify the
date and the principal amount of the proposed Advance (a "Borrowing Request"). All Advances shall be in
increments of $5,000,000. Following the receipt of a Borrowing Request, the Holder shall make the Advance
on the date and in the amount as outlined in the Borrowing Request and the Borrowing Commitment shall be
reduced by the amount of such Advance. Anything to the contrary herein notwithstanding, Holder shall have
no obligation to make any Advance to the extent that the aggregate of all Advances made, including the
Advance contemplated by the first sentence of this Section 2.1, exceeds the Borrowing Commitment.
2.2 Payment at Maturity Date.
The Principal Amount together with all accrued but unpaid interest under this Note shall be
due and payable on the Maturity Date, in accordance with the terms of this Note. If the payment of the
Principal Amount and interest on this Note becomes due on a day which is not a Business Day, such
payment shall be made on the next succeeding Business Day, and any such extension of time shall be
included in computing interest in connection with such payment.
2.3 Interest Payments.
The Company shall pay accrued interest to the Holder on each applicable Interest Payment
Date based upon the Principal Amount outstanding from time to time at the Interest Rate.
2.4 Prepayment.
The Company may prepay the Principal Amount and/or the accrued but unpaid interest on this
Note or any part thereof without penalty at any time in the Company's sole discretion.
3. Application of Payments.
All payments of the indebtedness evidenced by this Note shall be applied first to any accrued but
unpaid interest on this Note then due and payable hereunder, and then to the Principal Amount of this Note
then outstanding.
4. Currency.
All payments of Principal Amount or of interest on this Note shall be made in US dollars at the
address of Holder indicated on the signature page hereof, or such other place as Holder shall designate in
writing to Company.
5. Events of Default.
The occurrence of any of the following shall constitute an Event of Default under this Note: (a) The
Company's failure to pay the outstanding Principal Amount and accrued interest on this Note due on the
Maturity Date; (b) the Company's failure to pay any fees or interest related to this Note when due and any
such failure to pay shall remain unremedied after the Company has been provided with ten (10) Business
Days prior written notice or (c) an Event of Default under, and as defined in, the Credit Agreement.
6. Remedies.
6.1 Remedy Upon an Event of Default.
Upon the occurrence of an Event of Default, (i) this Note shall become due and payable upon
the demand of the Holder, and upon such demand shall thereafter become automatically due and payable,
without presentment, demand, protest, or further notice of any kind, all of which are hereby expressly waived
by the Company, and (ii) the Interest Rate shall increase by 2% above the Interest Rate (the "Default
Rate").
7. Waiver.
The Company waives presentment for payment, notice of nonpayment, protest, demand, notice of
protest, notice of intent to accelerate, notice of acceleration and dishonor, diligence in enforcement and
indulgences of every kind.
8. No Waiver.
The acceptance by Holder of any payment under this Note which is less than the payment in full of all
amounts due and payable at the time of such payment shall not (i) constitute a waiver of or impair, reduce,
release or extinguish any right, remedy or recourse of Holder, or nullify any prior exercise of any such right,
remedy or recourse, or (ii) impair, reduce, release or extinguish the obligations of any party as originally
provided herein.
9. Cumulative Remedies.
The rights, remedies and recourses of Holder, as provided in this Note, shall be cumulative and
concurrent and may be pursued separately, successively or together as often as occasion therefore shall
arise, at the sole discretion of Holder.
10. Governing Law.
This Note shall be governed by, and interpreted in accordance with, the laws of the State of Florida,
without giving effect to the rules respecting conflicts of law.
11. Severability.
If any provision hereof or the application thereof to any Person or circumstance shall, for any reason
and to any extent, be invalid or unenforceable, neither the application of such provision to any other Person
or circumstance nor the remainder of the instrument in which such provision is contained shall be affected
thereby and shall be enforced to the greatest extent permitted by law.
12. Interpretation.
The headings in this Note are included only for convenience and shall not affect the meaning or
interpretation of this Note. The words "herein" and "hereof" and other words of similar import refer to this
Note as a whole and not to any particular part of this Note.
13. Notices.
All notices, demands, and other communications hereunder shall be in writing and shall be deemed
given if delivered personally or by commercial delivery service, or mailed by registered or certified mail
(return receipt requested) or sent via facsimile (with acknowledgment of complete transmission), to Holder at
its address set forth below, or to the Company at its principal executive office (or at such other address for a
party as shall be specified by like notice).
14. Exchange or Loss of Note.
Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction
or mutilation of this Note, and (in the case of loss, theft or destruction) of reasonably satisfactory
indemnification, and upon surrender and cancellation of this Note, if mutilated, the Company will execute
and deliver a new Note of like tenor and date.
15. Enforceability.
This Note shall be binding upon and inure to the benefit of both parties hereto and their respective
successors and assigns. If any provision of this Note shall be held to be invalid or unenforceable, in whole or
in part, neither the validity nor the enforceability of the remainder hereof shall in any way be affected.
16. Limitation on Interest.
Nothing contained in this Note shall be deemed to require the payment of interest or other charges by
the Company or any other Person in excess of the amount which Holder may lawfully charge under the
applicable usury laws. In the event that Holder shall collect moneys which are deemed to constitute interest
which would increase the effective Interest Rate to a rate in excess of that permitted to be charged by
applicable law, all such sums deemed to constitute interest in excess of the legal rate shall be credited
against the Principal Amount then outstanding and the excess shall be returned to the Company.
[Remainder of Page Intentionally Left Blank]
IN WITNESS WHEREOF, the undersigned has executed this Promissory Note as of the date
first written above.
OPKO HEALTH, INC.
By:
Name:
Title:
ACKNOWLEDGED AND AGREED TO BY:
Frost Gamma Investments Trust
By:
Name:
Title:
Address:
TRANSACTIONS
ON
PROMISSORY NOTE
Date
Amount of
Loan
Made This Date
Outstanding Principal
Balance This Date
Notation
Made By
______________
______________
______________
______________
______________
______________
______________
______________
______________
______________
______________
______________
______________
______________
______________
______________
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement is dated as of November 8, 2018 (this “ Agreement”), between OPKO Health,
Inc., a Delaware corporation (the “Company”), and __________________ (the “ Purchaser”).
WHEREAS, the Company desires to sell to Purchaser, and Purchaser desires to purchase from the Company,
shares of the Company’s common stock, par value $.01 per share (the “Common Stock”), on the terms and subject to
the conditions set forth in this Agreement (the “Transaction”).
NOW, THEREFORE, in consideration of the premises and the mutual covenants contained in this Agreement
and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and
intending to be legally bound, the parties agree as follows:
Article 1
Purchase and Sale of Common Stock
1.1 Purchase and Sale of the Shares . Subject to the terms and conditions hereof, the Company hereby agrees
to issue and sell to Purchaser, and Purchaser hereby agrees to purchase from the Company, a number of shares of
Common Stock (the “Shares”) equal to (a) ______________________ (the “Purchase Price”), divided by (b) the last
closing bid price of the Common Stock on the NASDAQ Global Select Market on the date hereof.
1.2 Closing. The issuance, sale and delivery of the Shares (the “ Closing”) shall take place at the Company’s
offices in Miami, Florida on November 8, 2018, or as soon as possible thereafter (the “Closing Date”). As payment in
full for the Shares being purchased at the Closing, Purchaser shall pay to the Company the Purchase Price by wire
transfer. The obligation of the Company to deliver the Shares on the Closing Date as provided herein is subject to the
approval for listing of the Shares by the NASDAQ Global Select Market.
Article 2
Additional Agreements
The Company and Purchaser shall cooperate with each other and use their respective commercially reasonable
best efforts to take or cause to be taken all actions, and do or cause to be done all things, necessary, proper or advisable
under this Agreement and applicable laws and regulations to consummate and make effective the sale of the Shares (the
“Sale”) and the other transactions contemplated by this Agreement as soon as practicable, including preparing and
filing
1
as promptly as practicable all documentation to effect all necessary applications, notices, petitions, filings and other
documents and to obtain as promptly as practicable all permits, consents, approvals and authorizations necessary or
advisable to be obtained from any third party and/or any governmental entity in order to consummate the sale or any of
the other transactions contemplated by this Agreement.
Article 3
Representations and Warranties of the Company
The Company represents and warrants to Purchaser as of the date hereof as follows:
3 . 1 Authorization of Agreements, etc . The execution and delivery by the Company of this Agreement, the
performance by the Company of its obligations hereunder, and the issuance, sale and delivery of the Shares have been
duly authorized by all requisite corporate action and will not result in any violation of, be in conflict with, or constitute
a default under, with or without the passage of time or the giving of notice: (a) any provision of the Company’s
Certificate of Incorporation, as amended, or Bylaws, as amended; (b) any provision of any judgment, decree or order to
which the Company is a party or by which it is bound; ( c) any material contract or agreement to which the Company is
a party or by which it is bound; or ( d) any statute, rule or governmental regulation applicable to the Company, except
where such violation, conflict, or default would not have a material adverse effect on the Company.
3 . 2 Valid Issuance of Common Stock . The Shares have been duly authorized and, when issued, sold and
delivered in accordance with this Agreement for the consideration expressed herein will be validly issued, fully paid
and nonassessable with no personal liability attaching to the ownership thereof and will be free and clear of all liens,
charges and encumbrances of any nature whatsoever except for restrictions on transfer under this Agreement and under
applicable Federal and state securities laws.
3.3 Validity. This Agreement has been duly executed and delivered by the Company and constitutes the legal,
valid and binding obligation of the Company, enforceable in accordance with its terms except (i) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting
enforcement of creditors’ rights generally, and (ii) as limited by laws relating to the availability of specific
performance, injunctive relief, or other equitable remedies.
3.4 Brokers and Finders. Neither the Company nor any of its subsidiaries, officers, directors or employees has
employed any broker or finder or incurred any liability for any brokerage
2
fees, commissions or finders’ fees in connection with the Sale or the other transactions contemplated by this
Agreement.
Article 4
Representations and Warranties of Purchaser
The Purchaser represents and warrants to the Company as of the date hereof as follows:
4.1 Validity. This Agreement has been duly executed and delivered by Purchaser and constitutes the legal, valid
and binding obligation of Purchaser, enforceable in accordance with its terms except:
(a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of
general application affecting enforcement of creditors’ rights generally; and
(b) as limited by laws relating to the availability of specific performance, injunctive relief, or other
equitable remedies.
4.2 Investment Representations.
(a) Purchaser is an “accredited investor” within the meaning of Rule 501 of Regulation D under the
Securities Act of 1933, as amended (the “Securities Act”) and was not organized for the specific purpose of acquiring
the Shares;
(b) Purchaser has sufficient knowledge and experience in investing in companies similar to the
Company in terms of the Company’s stage of development so as to be able to evaluate the risks and merits of its
investment in the Company and it is able financially to bear the risks thereof and it has independently evaluated the
merits and risks of its participation in the transaction contemplated hereby and, in so evaluating, has not relied upon any
other person in connection with its decision to participate in such transactions;
(c) it is the present intention that the Shares being purchased by Purchaser are being acquired for
Purchaser’s own account for the purpose of investment and not with a present view to or for sale in connection with any
distribution thereof;
(d) Purchaser understands that:
(i) the Shares have not been registered under the Securities Act by reason of their issuance in a
transaction exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof or Rule 505
or 506 promulgated under the Securities Act;
3
under the Securities Act or is exempt from such registration;
(ii) the Shares must be held indefinitely unless a subsequent disposition thereof is registered
(iii) the Shares will bear a legend to such effect; and
(iv) the Company will make a notation on its transfer books to such effect; and
(e) the Company has made available to Purchaser all documents and information that the Purchaser
has requested relating to an investment in the Company.
4 . 3 Brokers and Finders. The Purchaser has not employed any broker or finder or incurred any liability for
any brokerage fees, commissions or finders’ fees in connection with the Sale or the other transactions contemplated by
this Agreement.
Article 5
Miscellaneous
5 . 1 Legend. Each certificate that represents Shares shall have conspicuously endorsed thereon the following
legends:
THIS STOCK HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE “SECURITIES ACT”), OR ANY STATE SECURITIES LAWS. THIS STOCK MAY NOT BE
OFFERED OR TRANSFERRED BY SALE, ASSIGNMENT, PLEDGE OR OTHERWISE UNLESS (A) A
REGISTRATION STATEMENT FOR THE STOCK UNDER THE SECURITIES ACT IS IN EFFECT OR (B)
THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL, WHICH OPINION IS SATISFACTORY
TO THE COMPANY, TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE
SECURITIES ACT OR THE RELEVANT STATE SECURITIES LAWS.
5 .2 Brokerage. Each party hereto will indemnify and hold harmless the other against and in respect of any
claim for brokerage or other commissions relative to this Agreement or to the transactions contemplated hereby, based
in any way on agreements, arrangements or understandings made or claimed to have been made by such party with any
third party.
4
5 . 3 Parties in Interest. All representations, covenants and agreements contained in this Agreement by or on
behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the
parties hereto whether so expressed or not.
5.4 Notices. All notices, requests, consents, demands, and other communications under this Agreement shall
be in writing and shall be deemed to have been duly given on the date of service if served personally on the party to
whom notice is to be given, on the date of transmittal of services via telecopy to the party to whom notice is to be given
(with a confirming copy delivered within 24 hours thereafter), or on the third day after mailing if mailed to the party to
whom notice is to be given, by first class mail, registered or certified, postage prepaid, or overnight mail via a
nationally recognized courier providing a receipt for delivery and properly addressed as follows:
If to the Company: OPKO Health, Inc.
4400 Biscayne Blvd.
Miami, FL 33137
Attn: Kate Inman, General Counsel
If to the Purchaser: To the address specified on the signature pages hereto.
Any party may change its address for purposes of this paragraph by giving notice of the new address to each of the
other parties in the manner set forth above.
5 . 5 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the
State of Florida for all purposes and in all respects, without regard to the conflict of law provisions of such state.
5.6 Entire Agreement. This Agreement constitutes the sole and entire agreement of the parties with respect to
the subject matter hereof.
5 . 7 Counterparts. This Agreement may be executed in two or more counterparts (including facsimiles), each
of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
5.8 Amendments and Waivers . This Agreement may be amended or modified, and provisions hereof may be
waived, only with the written consent of the Company and the Purchaser.
5.9 Severability. If any provision of this Agreement shall be declared void or unenforceable by any judicial or
administrative authority, the validity of any other provision and of the entire Agreement shall not be affected thereby.
5
5.10 Titles and Subtitles. The titles and subtitles used in this Agreement are for convenience only and are not
to be considered in construing or interpreting any term or provision of this Agreement.
[Signatures on Following Pages]
6
NOW THEREFORE, the Company and Purchaser have executed this Stock Purchase Agreement as of the date
first above written.
OPKO HEALTH, INC.
By:
Name:
Title:
Steve D. Rubin
Executive Vice President
Address:
4400 Biscayne Boulevard
Miami, FL 33137
7
INVESTOR:
_____________________________________
By:
Name:
Address:
8
NAME
OPKO Instrumentation, LLC
OPKO Pharmaceuticals, LLC
OPKO Diagnostics, LLC
OPKO Chile, S.A.
Arama Natural Products Distribuidora, Ltda
Pharmacos Exakta S.A. de C.V.
FineTech Pharmaceutical Ltd
Farmadiet Group Holdings, S.C.
OPKO Biologics, Ltd
OPKO Ireland Global Holdings, Ltd
OPKO Ireland, Ltd
OPKO Canada Corp, ULC
OPKO Renal, LLC
Curna, Inc.
BioReference Laboratories, Inc.
GeneDX, Inc.
Genome Diagnostics, Ltd
EirGen Pharma Limited
Transition Therapeutics, Inc.
SUBSIDIARIES OF OPKO HEALTH, INC.
JURISDICTION OF INCORPORATION
Exhibit 21
Delaware
Delaware
Delaware
Chile
Chile
Mexico
Israel
Spain
Israel
Ireland
Ireland
Canada
Canada
Delaware
New Jersey
New Jersey
Canada
Ireland
Canada
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
We consent to the incorporation by reference in the following Registration Statements:
1. Registration Statement (Form S-3 No. 333-229400) of OPKO Health, Inc. and
subsidiaries,
2. Registration Statement (Form S-8 No. 333-211209) pertaining to the 2016 Equity Incentive Plan of OPKO Health, Inc. and
subsidiaries,
3. Registration Statement (Form S-8 No. 333-144040) pertaining to the 2007 Equity Incentive Plan of OPKO Health, Inc. and
subsidiaries,
4. Registration Statement (Form S-8 No. 333-190899) pertaining to the 2005 Stock Incentive Plan and 2007 Equity Incentive Plan of
PROLOR Biotech, Inc. (formerly Modigene Inc.),
5. Registration Statement (Form S-8 No. 333-190900) pertaining to the 2007 Equity Incentive Plan of OPKO Health, Inc. and
subsidiaries, and
6. Registration Statement (Form S-8 No. 333-206489) pertaining to the 2003 Employee Incentive Stock Option Plan of
BioReference Laboratories, Inc.
of our reports dated March 1, 2019, with respect to the consolidated financial statements and schedule of OPKO Health, Inc. and
subsidiaries and the effectiveness of internal control over financial reporting of OPKO Health, Inc. and subsidiaries included in this Annual
Report (Form 10-K) of OPKO Health, Inc. and subsidiaries for the year ended December 31, 2018.
/s/ Ernst & Young LLP
Miami, Florida
March 1, 2019
Exhibit 31.1
I, Phillip Frost, certify that:
(1)
I have reviewed this Annual Report on Form 10-K of OPKO Health,
Inc.;
CERTIFICATIONS
(2)
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
(3)
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
(4)
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
(5)
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 1, 2019
/s/Phillip Frost, M.D.
Phillip Frost, M.D.
Chief Executive Officer
Exhibit 31.2
I, Adam Logal, certify that:
(1)
I have reviewed this Annual Report on Form 10-K of OPKO Health,
Inc.;
CERTIFICATIONS
(2)
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
(3)
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
(4)
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
(5)
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 1, 2019
/s/ Adam Logal
Adam Logal
Senior Vice President, Chief Financial Officer,
Chief Accounting Officer and Treasurer
Exhibit 32.1
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant section 906 of the Sarbanes-Oxley Act of 2002, I, Phillip Frost, Chief Executive
Officer of OPKO Health, Inc. (the “Company”), hereby certify that:
The Annual Report on Form 10-K for the year ended December 31, 2018 (the “Form 10-K”) of the Company fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Form 10-K fairly
presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 1, 2019
/s/ Phillip Frost, M.D.
Phillip Frost, M.D.
Chief Executive Officer
Exhibit 32.2
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant section 906 of the Sarbanes-Oxley Act of 2002, I, Adam Logal, Chief Financial
Officer of OPKO Health, Inc. (the “Company”), hereby certify that:
The Annual Report on Form 10-K for the year ended December 31, 2018 (the “Form 10-K”) of the Company fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Form 10-K fairly
presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 1, 2019
/s/ Adam Logal
Adam Logal
Senior Vice President, Chief Financial Officer
Chief Accounting Officer and Treasurer