Opko Health, Inc. Q1 FY2023 Earnings Call

Thank you, operator. Good afternoon. This is Yvonne Briggs with LHA. Thank you all for joining today's call to discuss OPKO Health's financial results for the first quarter of 2023. I'd like to remind you that any statements made during the call by management other than statements of historical facts will be considered forward-looking, and as such, will be subject to risks and uncertainties that could materially affect the company's expected results. Those forward-looking statements include, without limitation, the various risks described in the company's SEC filings, including the annual report on Form 10-K for the year ended December 31, 2022 and in subsequently filed SEC reports. This conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, May 3, 2023. Except as required by law, OPKO undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. Before we begin, let me review the format for today's call. Dr. Phillip Frost, Chairman and Chief Executive Officer, will open the call. Dr. Elias Zerhouni, Vice Chairman and President of OPKO will then provide an overview of OPKO's pharmaceutical business as well as BioReference Health. After that, Adam Logal, OPKO's CFO, will review the company's first quarter financial results. And then we'll open the call to questions. Now I'd like to turn the call over to Dr. Frost.

Good afternoon, and thank you for joining us today. In early March, we announced that ModeX entered into an exclusive worldwide license collaboration agreement with Merck to develop our multivalent nanoparticle Epstein-Barr virus vaccine. The agreement provides validation of ModeX's multi-targeting technology by simultaneously engaging four key proteins used by EBV to infect cells. This represents a first-in-class strategy to prevent the viral infection, which is the cause of mononucleosis and has also been implicated as the leading cause of certain malignancies and the development of multiple sclerosis. We're delighted to have entered into this transaction with Merck as we believe they are the ideal partner for the development and future commercialization of our EBV vaccine. Elias will detail the terms of the agreement in a few minutes. As for growth hormone, Pfizer continues to drive the sales of NGENLA or Somatrogon, a once-weekly injectable growth hormone product that's expected to ease a patient's burden versus the standard daily injections. NGENLA is now approved in over 40 countries and has been launched in 17, including the major markets of Japan, Germany, and the United Kingdom. Pfizer expects to launch in another 15 or more countries during the remainder of this year, covering all priority international markets by year-end. We're looking forward to significant sales growth for NGENLA with the new launches and as market penetration continues to grow. Adam will provide further detail on OPKO's gross profit share and royalty payments from Pfizer. We look forward to providing updates on somatrogon's regulatory status in the U.S. with the expectation of a forthcoming definitive response from the FDA and also commercial progress in international markets. As for our Diagnostics division, we're pleased with the ongoing turnaround by our references experience as we reduce costs and rightsize the business. As a leading national laboratory, BioReference continues to focus on innovation and higher value testing in its specialty segments, including oncology, women's health, and urology as well as seeking to drive growth with additional partnerships or joint venture arrangements. Our profitable Ibero-American business continues to grow and is currently expanding its veterinary product line from its base in Spain, into France, and other European markets. With that brief overview, I'll now turn the call over to Elias to provide further discussion and commentary on our pharmaceutical and laboratory businesses. Elias?

Thank you, Dr. Frost, and good afternoon, everyone. I want to begin by discussing our recent exclusive worldwide license and collaboration agreement with Merck. Partnering is part of our strategy to advance the development of MDX-2201, our Epstein-Barr virus multivalent nanoparticle vaccine. EBV infects nearly 95% of adults globally during their lifetime and is linked to around 1% of all cancer cases. It is also the primary cause of infectious mononucleosis and has recently been associated with multiple sclerosis. Despite its widespread impact and role in serious diseases, there are currently no FDA-approved vaccines or treatments for EBV. Our vaccine uses ModeX's innovative biologics platform to target four key EBV proteins, enhancing previous efforts and aiming to provide comprehensive protection against this virus. According to the agreement, OPKO received an upfront payment of $50 million, with the potential for an additional $872.5 million upon reaching specified development and commercial milestones. Moreover, once MDX-2201 is commercially launched, we stand to receive double-digit royalties on global sales. ModeX and Merck will collaboratively advance MDX-2201 up until the filing of the investigational new drug application, after which Merck will handle all clinical, regulatory, and commercialization activities. OPKO's expenses for this program before Merck assumes complete responsibility will be reimbursed prior to the IND. We view this collaboration positively as MDX-2201 addresses a significant unmet medical need and reinforces our multi-targeting strategy in both vaccines and multi-specific antibodies. Together with Merck, we are working towards advancing this vaccine for the benefit of patients worldwide. In other areas of our pharmaceutical business, ModeX is making headway with other proprietary platforms, including MSTAR and STEALTH technologies. We are exploring multi-specific technologies that extend our targeting capabilities beyond three targets to six. We believe MSTAR is a flexible platform that offers a competitive edge over other multi-specific technologies, with 28 patents filed to date. As we further develop our therapeutic candidates, we will assess which targets to retain internally and which to partner in order to enhance the value of our pipeline. For instance, we are collaborating with the NIH to fund our Phase I trispecific candidate aimed at both preventing and treating HIV. Additionally, we are developing next-generation candidates targeting HIV, one of which is a petrospecific candidate with increasing potency. There is a substantial medical need here as there are currently no vaccines or antibodies providing long-acting protection for HIV prevention and treatment. Current HIV therapies, despite advancements, still face limitations such as drug toxicity and resistance, impacting viral suppression efficacy. We've also initiated a multi-specific antibody program for COVID to address the ongoing need arising from new variants. Although the future of the pandemic is uncertain, we believe the virus will remain present, necessitating therapies for patients at risk due to pre-existing conditions or compromised immune systems. We are particularly focused on developing antibody candidates to treat these vulnerable populations and prevent COVID development. Our technology platform's modular design permits the rational selection of antibodies to optimize potency against current and future strains and curb viral resistance emergence. Our SARS-CoV-2 multi-specific antibodies are in advanced preclinical testing, partially funded by DARPA. In oncology, we are working on multi-specific multifunctional antibodies primarily targeting hard-to-treat solid tumors, as well as leukemia and lymphoma treatments. We believe that multi-specific T cell engager antibodies can show clinical efficacy in solid tumors and B-cell malignancies, where current standard care fails to sustain remission for many patients. Our oncology programs are in preclinical development, aiming to enter clinical trials in 2024. For more information and updates on publications and portfolio evolution, please refer to our new website at opko.com or modex.com. Now, regarding RAYALDEE, we continue to achieve milestones with our international partners. In Germany, RAYALDEE received pricing approval, leading to a $7 million milestone payment from our partner. We could also earn up to an additional $10 million in regulatory milestones and $207 million linked to launch pricing and sales, along with tiered double-digit royalties. Additionally, we secured a $2.5 million milestone related to Nicoya's IND application for RAYALDEE in China, with further potential payments of up to $150 million upon achieving specific development, regulatory, and sales milestones, plus tiered low-double-digit royalties on net sales in China. Our program in Alzheimer's disease, which focuses on using molecules to mobilize plaques, is exploring potential partnerships with larger companies, especially given renewed interest in effective therapies following recent Eli Lilly results highlighting the effectiveness of targeting protein deposits in plaques. Our approach could complement current and future antibody therapies for this patient population. These programs are gaining attention due to their potential synergy with existing and emerging Alzheimer’s treatments. Now, I’d like to shift to our Diagnostics segment, which is now called BioReference Health. Post-COVID, we are focused on cutting costs and returning this division to profitability. Our reach expansion initiative continues into 2023, which has improved efficiency, productivity, and reduced costs. For instance, we are beginning to see benefits from relocating 13 less productive patient centers to 11 new, strategically placed ones. We have also enhanced our sales force, particularly in specialty diagnostics and health systems, and are entering the pharmaceutical market for the first time. Our high-value specialty testing segments like oncology, women's health, urology, and special ventures are on a growth trajectory as we innovate and enhance our offerings. Our GenPath women's health division was among the pioneers in offering CINtec PLUS cytology, the only approved dual stain, triage test for patients with high-risk HPV results. This test helps healthcare providers evaluate and manage the risk of cervical precancer more accurately and promptly. A major growth driver for BioReference is introducing new tests like this one from Roche to bolster our innovative portfolio and provide valuable insights for healthcare providers and patients. In urology, our expanded commercial team is concentrating on marketing and selling our proprietary 4Kscore test, which assesses aggressive prostate cancer likelihood and directs patient management. The urology team is also acquiring new accounts, and the recent American Urology Association guidelines recognize the clinical necessity for considering tests like 4Kscore in urologists' practices. We are looking to expand access to this test across clinical services, hospital services, and urgent care centers to offer a full range of services. With our strategy implementation, we aim to restore BioReference to profitable growth in a post-pandemic context within the next three quarters. I will now pass the call to our CFO, Adam Logal, for a review of our first-quarter financial results. Adam?

Thank you, Elias. Starting with our Pharmaceutical segment. Revenue increased by $62.5 million for the first quarter of 2023 to $105.2 million. This increase reflects the $50 million upfront payment from Merck, our EBV candidate, and $9.5 million of milestones related to RAYALDEE from pricing received in Germany and development activities achieved in China. In addition, our International Pharmaceutical business revenue increased approximately $3.7 million. Total revenue from the comparable period of 2022 was $42.6 million. Costs and expenses were $86.3 million for the first three months of 2023 compared to $60.7 million for the 2022 period. Costs and expenses for 2023 include a $12.5 million milestone payment to Sanofi related to the EBV program licensed to Merck. Research and development expenses were $31.9 million, inclusive of the Sanofi milestone payment and the remaining $7 million of increase over 2022, $12.3 million of research and development expense primarily reflects the activities for our ModeX development programs. The resulting operating income for the quarter ended March 31 was $19 million, a $37.1 million improvement from the operating loss of $18.1 million from the first quarter of 2022. Amortization expense related to our intangible assets was $16.4 million and $14.3 million, respectively, from the 2023 and 2022 quarters. Moving to our Diagnostics segment. We reported revenue for Q1 2023 of $132.4 million compared to $286.6 million from the 2022 period. This decline reflects the lower COVID testing volume as the market has shifted away to rapid at-home testing and also the 2022 period included revenue from GeneDx, which we sold in April of 2022. As Elias discussed, our focus of BioReference remains in identifying profitable growth verticals and maximizing our operating efficiency. We've strategically invested in our commercial resources in the higher-growth specialty verticals and expect to begin yielding returns on those investments during the second half of 2023. We continue to execute our expense reduction program at BioReference. And as Elias discussed, we've also identified a number of near- and medium-term growth programs that we expect to realize throughout 2023. We expect these initiatives will return BioReference to profitable growth. Operating loss for our Diagnostics segment was $40 million for the quarter compared to $43.5 million from the prior year, which included losses from GeneDx that were offset by Turning to our consolidated financial results. For the first quarter, we reported an operating loss of $30.6 million compared to an operating loss of $72.4 million for the 2022 quarter. Net loss for the first quarter of 2023 was $18.3 million or $0.02 per share. This compares to a net loss of $55.4 million or $0.08 per share for the 2022 quarter. Net loss for the first quarter of 2023 benefited from realizing a milestone from GeneDx for the sales levels achieved during 2022 as well as appreciation in GeneDx's stock price as of March 31. As we look at the quarter ahead, we're providing the following financial guidance. For our Pharmaceuticals segment, we've not assumed the approval of NGENLA by the FDA in our financial forecast. Approval would result in a milestone payment of $90 million. We have also not assumed the U.S. region for NGENLA will be in the gross profit share as the timing of that approval is not certain. During the first quarter of 2023, the European region shifted to a gross profit share and going forward, both the European and Japanese regions will share in gross profit for the HTH franchise consisting of GENOTROPIN and NGENLA. We also assume a stable FX rate for our ex-U.S. pharmaceutical businesses and we have seen a 10% impact on our business over the last 12 months as a result of those FX impacts. For our Diagnostics segment, we assume COVID testing will remain at current levels and continue to decline throughout 2023, and we have assumed consistent core testing volumes with growth in our higher-margin oncology and women's health and urology specialty lines of testing. We continue to carefully manage our investments in new R&D programs and commercial initiatives to align with our available cash resources. As a result, we expect the following for the second quarter of 2023: total revenues between $165 million and $175 million, with revenue from services between $127 million and $135 million; revenue from product sales between $32 million and $36 million; and other revenue between $3 million and $6 million. We expect Q2 2023 cost and expenses to be between $245 million and $255 million, including R&D expense between $24 million and $30 million and depreciation and amortization expense of approximately $25 million. This concludes our prepared remarks. Thank you all for your attention. And now, operator, let's open the call for questions.

I guess, firstly, could we dig into ModeX and Merck a little bit? And I guess 2 items. Firstly, could you walk us through, again, I don't think I caught it all as far as the share cost into an IND filing, what would you anticipate to be that as far as perhaps cost and timeline? And then secondly, can you talk about MS a little bit as far as what data is out there thus far? And has Merck or anyone out there looking into Parkinson's as well?

Thanks, Jeff. Regarding cost sharing, there isn't really any. We have a $50 million upfront payment and a joint steering committee for the program from now until the IND, which will continue beyond the IND. Currently, all expenses incurred by OPKO are reimbursed by Merck. This is straightforward, as we've advanced the products significantly and are close to IND. We need to proceed without interruption, which is why Merck has requested that we continue this collaboration, with their approval for incurring expenses like CMC and others leading up to the IND, which will be fully reimbursed by Merck. After the IND, Merck will have control, and we may or may not be asked to continue certain activities, but I can’t comment further on that now. Essentially, the costs for ModeX until the IND are primarily covered by Merck. Regarding MS, the Denmark study that followed 10 million army recruits over many years provides strong evidence of a correlation, and potential causation of MS. This is the strongest evidence we have for indications beyond cancer. There is some suggested evidence linking lupus, Parkinson's, and Alzheimer's disease, but those connections are not as robust as we see with MS and cancer.

Could you provide more details about BioReference and your expectations for it to become profitable by the end of this year? Additionally, can you discuss any test menu expansions and their potential impact on gross margins? Also, please mention any developments in genomic testing.

So it's a great question. So when we looked at BioReference, obviously, the #1 priority is to get our costs in line with our revenues as they are. I mean, I don't think you should manage a turnaround situation by banking on future revenues that haven't materialized, all right? So that's priority #1, and we are on our way to bring those numbers, revenues and expenses in line with each other. The second part is what you would call growth potential. So we have multiple silos, I mean, not silo but verticals there. Number one, I think, is 4K. We're continuing to develop 4K. The second is new tests. I mentioned CINtec. But for example, we are going to market a what we call a minimal residual disease test in conjunction with our oncology menu. What does that mean? If you talk to oncologists, Jeff, the #1 question they have right now with very effective drugs is, is the disease gone? Is the disease controlled? Can I give my patient a vacation from drugs that are very toxic in many ways? And that can only be done by really looking at cancer DNA in the blood and with multiple techniques to look at whether or not there is any evidence of residual disease or at what level. And then you can actually monitor the patient over time so that whenever there is an increase in the amount of residual disease, you can start treatment again or change therapy, whatever. So you can imagine that our goal is to provide a full portfolio in the cancer field that serves primarily liquid tumors, I would say, because that's where we are excellent. We have a very fast turnaround, so we want to push that. And in that context, we have been working now with large oncology groups, and I think we have some success there. Hopefully, we can report that in the second quarter. In terms of other fields, women's health is obviously a field in evolution. We have an ovarian cancer test that we have considered offering and looking at exactly how that will be marketed. We are also thinking that in the health system relationships, the ability for us to provide management, to provide a comprehensive menu, including reference testing, is another source that we have not maximized. Last but not least, a look at pharma. In pharma, there are two angles there that I'm very familiar with, and I'm asking that we enter this field. Number one is the exploitation of the enormous amount of data we have, and we have already gotten contracts from pharma companies that would like us to identify patients that would be eligible for certain therapies in the market because they have specific mutations in the genome. Others are asking us to identify patients for clinical trials, especially in the underserved population. Others are really looking at us to provide diagnostic panels for their clinical trials and so on. So I don't want to really tell you what I expect in terms of revenues there because I don't know. But I think we'll report on that quarter-by-quarter, and you'll be able to see that, indeed, there's not just an equilibration of revenues versus expenses, but also, as mentioned by myself and by Adam, we do have areas where we're investing as well as areas where we're cutting costs.

Can you share any specifics on the timing for an update regarding Pfizer's efforts with the FDA for NGENLA's approval for pediatric growth hormone? Additionally, can you provide more information about the ongoing collaboration between Pfizer and the FDA?

Maury, unfortunately, as I said before, our hands are somewhat tied on what we can and can't communicate. But as we somewhat guided to, we certainly expect a definitive decision this year, if not this summer. That's pretty much all we can say at this point. Everybody remains highly optimistic for a forthcoming approval.

And if in general, it gets approved this year in the United States, how quickly do you think Pfizer could launch? And is there anything you could say about launch dynamics and expectations around that given Pfizer's existing presence with Genotropin? I guess, what are your latest thoughts on that?

Commercialization is 100% in the hands of Pfizer; whether they'll be able to launch this year depends on a lot of things and how much pre-work they've done. So again, I'm limited in guidance until we get the approval in hand.

And maybe the last question on NGENLA that I wanted to ask is just if you're hearing anything about dynamics in Europe, how that perception has been there? And any metrics you can share on that, if possible?

Yes. So Maury, now, there's not a lot to share. I know that the team continues to be enthused about the prospects, and as we highlighted, there's a number of countries coming online where they're getting regulatory approvals and launching. But beyond that, I think we need to have our partners at Pfizer.

I just want to get some sense in terms of the diagnostic business, that whether the cost savings still ongoing? Or you've pretty much finished that part and more into the revenue growth directions.

No. We are still working on cost savings, Jen. We are continuously, since basically a year ago, going through the entire cost structure and obviously working on it. You'll hear more about that in the subsequent quarters. So we're not just focused on growth. We are still continuing to understand our cost structure and our price per accession, our cost per accession, doing an enormous amount of work on contribution margins test by test, understanding the product mix. And that is ongoing, and we are taking action in many areas actually to reduce costs, not stopping at this point.

The next question is regarding MRD, the mineral residual disease you are testing. My understanding is that while several liquid tumors have been identified, not all of them have been addressed. Are you continuing to explore developments in this area?

That's a very good point, and we are very confident in liquid tumors. We think we have a good grasp of that. I've looked at the data. I think there is consistent sensitivity when you talk about myeloma, leukemia; I mean, liquid tumors we're very confident. The problem is more into other types of tumors where you have a solid component. You're not sure always that the DNA at minimal residual disease will circulate to give you a good result. So we're focusing, but expanding very slowly, very carefully. But again, our main revenue in oncology, if you really look at where we are strong, it's really in the liquid cancer arena.

And the last question is for NGENLA for Adam that when you think that eventually, you will record those revenues or profit sharing in a separate line in the P&L? Or is that something we will wait until next year?

So thanks, Yale. So I would expect that once it becomes individually material, we break it out in some of the disclosures. You would expect that perhaps, and once we have a U.S. region in the gross profit share, it will become more significant, but it could be later this year or into next year.

Could you give us some additional color on the and what would be its clinical utility and how do you forecast its sales trajectory?

Sorry, I couldn't hear. Which test are you referring to?

The Roche Diagnostics CINtec PLUS otology test?

Well, I'll tell you, we are at the beginning of the marketing. We're getting good response for the test. It's a sort of a reflection if you understand when you have a positive HPV result, you really need to know if it's from the high-risk variants where the EV6 and EV7 are present in those cells. And so that's really what happens. Our experience so far is about for all the suspicious HPV results, about 6% really require a move over to CINtec. All right? So I cannot tell you what the numbers are; we just started marketing it. I'll provide more information in the second quarter.

I'd like to thank everyone for participating in this session. And we look forward to being with you again after the next quarter. Thanks again. Bye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.