Good day, and welcome to the OPKO Health Second Quarter 2023 Financial Results Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Yvonne Briggs.

Thank you, operator, and 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 second quarter of 2023. I'd like to remind you that any statements made during this call by management other than statements of historical fact will be considered forward-looking and as such, will be subject to risks and uncertainties that can materially affect the company's expected results. These 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 has subsequently filed SEC reports. This conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, August 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. Philip 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 second 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 June, we were pleased to announce what we had been expecting for more than a year: FDA approval of NGENLA, our long-acting, once-weekly human growth hormone analogue to treat pediatric patients aged 3 and older. Our global commercial partner, Pfizer, has indicated it expects NGENLA to become available this month for prescribing in the U.S. This approval triggered a $90 million milestone payment from Pfizer and leads to a profit-sharing arrangement that Adam will discuss in more detail. That decision by the FDA involves approvals in over 40 countries with commercial launches to date in over 18, including the major markets of Japan, Germany, France, Spain, and the United Kingdom. Pfizer expects to launch NGENLA in another 18 or more countries during the remainder of this year, covering all priority international markets by year-end. With the U.S. approval, we expect to see significant ramp-up in sales for NGENLA as market penetration continues to expand globally. With Pfizer's global commercial infrastructure and long-standing experience in this particular market segment, we couldn't have a better partner. On another front, we continue to advance the sophisticated science of our ModeX unit toward clinical trials. ModeX novel approaches are validated by the exclusive worldwide collaboration with Merck that we announced in March to develop our multivalent nanoparticle Epstein-Barr virus vaccine. Our strategy was to secure a large pharmaceutical partner to develop the EBV vaccine, and we have a great one in Merck. Despite the significant prevalence of this virus and its potential to cause head and neck, stomach, and other cancers, as well as multiple sclerosis, there are currently no FDA-approved vaccines for EBV. At BioReference Health, we continue to drive cost control efforts in parallel with work to enhance innovation and productivity. We look forward to our Diagnostics segments returning to profitability in the near future. Our international operations continue to perform well with both our Iberia American and CINtec businesses demonstrating profitability and growth this past quarter. With that brief overview, I'll turn the call over to Elias to provide further discussion and commentary on our pharmaceutical and diagnostic businesses.

Thank you, Dr. Frost, and good afternoon, everyone. As Dr. Frost just mentioned, we were extremely proud to announce the approval of NGENLA in the U.S. This long-acting treatment reduces the burden on children with growth hormone deficiency by decreasing injection frequency from daily administration to once weekly. Upon the upcoming launch later this month in the U.S., OPKO will be entitled to profit sharing and management with Pfizer on a worldwide basis, which is based on regional tiered gross profit on both NGENLA and Genotropin, Pfizer's daily human growth hormone. Now turning to ModeX, as mentioned by Dr. Frost, we are advancing our recently announced collaboration with Merck to develop our Epstein-Barr virus multivalent nanoparticle vaccine. This collaboration is significant as it addresses an important unmet clinical need, but also validates ModeX's innovative multi-targeting technologies. Our vaccine targets the four major Epstein-Barr virus proteins known to allow the virus to enter human cells. This multi-targeted approach holds potential to provide complete protection against this virus, which affects up to 95% of the global adult population during their lifetime, with over 200,000 cases of related cancers per year and a strong link to multiple sclerosis. We're now jointly working with Merck on IND-enabling studies to enter the clinic as soon as possible. In addition to the EBV vaccine, our antiviral program is focused on other indications, including the treatment and prevention of HIV and COVID-19. We have a partnership with the NIH to develop a tri-specific candidate to both prevent and treat HIV. The NIH is providing funding for this program, which is in Phase I. We are also working on next-generation candidates that offer up to tenfold improvements in potency and greater breadth of antiviral activity against the majority of global HIV strains. Current HIV medicines still have limitations, including drug toxicity due to lifelong therapy and drug resistance that can impact the efficacy of viral suppression. Additionally, we're working on the COVID multi-specific antibody program to address the emergence of resistant variants on a global basis. We believe the virus will remain in the human population for some time to come and will require novel therapies, especially for at-risk patients who have underlying medical conditions or a suppressed immune system. Since our technology platform is modular, it allows for the rational selection of antibodies to optimize potency against current and future strains and prevent the emergence of viral resistance. This program is partially funded by DARPA, and we are in late-stage preclinical testing. Recently, we applied for further funding from DARPA to support our COVID-19 multi-specific antibody program and platform as well as for seasonal influenza therapy and prevention. Now on another side of our programs, our oncology program focuses on hard-to-treat solid tumors, but also the treatment of leukemia and lymphoma. As you know, many cancer therapies still fail to achieve or maintain a positive response, with the loss of tumor antigen expression being one of the main reasons. Our multi-specific antibody candidates are designed to engage and optimize T cell function while preventing tumor antigen escape. These programs are in the preclinical stage with plans to enter two programs in the clinic in 2024. Moving now to RAYALDEE, our treatment for secondary hyperparathyroidism in adults with stage 3 or 4 chronic kidney disease and low vitamin D levels. The numbers for the quarter break down as follows: the total prescriptions for RAYALDEE in the second quarter of 2023, as reported by IQVIA, were approximately 13,100, representing an increase of 5.8% from approximately 12,385 in the previous quarter. Private sales are steadily recovering from the impact of pandemic-related challenges in onboarding new patients. Let me go now to our Diagnostics segment at BioReference Health, where our focus remains on improving the performance of the company following the major drop in COVID revenues by driving cost efficiencies, improving revenue cycle management, and achieving volume growth with the ultimate goal of improving operating margins towards profitability in the upcoming quarters. Through these initiatives, we've been able to further reduce our workforce by 7% in the second quarter, with more than 200 positions eliminated. In the laboratories, we have realized further cost reductions by better reagent and supply pricing and utilization, as well as streamlining management structures and operations. In regard to revenue cycle management, we're improving the realization on our billed services by increasing payer access, enhancing our preauthorization procedures, reducing unbillable items, and introducing co-pay and point-of-care collections, as well as improving bad debt collections. For example, our market access team has succeeded in negotiating contracts that will result in more covered lives and improved payer reimbursement. For example, we received status as a preferred lab network by United Healthcare for 2023 for the fifth consecutive year. We reached a three-year contract agreement with Humana, which includes reimbursement on the 4Kscore test and negotiated a new amendment with Cigna for additional CPT code coverage. We also reached an agreement with CareSource, which will open up the Ohio, Georgia, Indiana, Kentucky, North Carolina, Arkansas, and West Virginia markets, among others. We have also reorganized our commercial team based on three regions: the Northeast, the Southeast, and the West. This structure will allow us to more effectively address growth opportunities aligned with the local healthcare industry as local market conditions vary by region. We continue to focus growth efforts in specialty diagnostics and health systems, with growing pipelines in both areas, and have begun to develop services for pharmaceutical industry clients. In oncology, for example, we've seen volume growth predominantly led by our molecular genomics Oncocyte and OncoCyte advanced portfolio, which have been well received and are growing in volume and scope of services. In women's health, last quarter, we introduced CINtec PLUS cytology, which is the only FDA-approved triage test that uses HPV dual biomarker technology to triage women with HPV-positive results, with test orders steadily increasing in the second quarter. We also continue to see strong volume growth in the OVA1 test, a blood test that detects ovarian cancer risk in women diagnosed with a pelvic mass and planning surgery. Our urology segment remains focused on marketing our proprietary 4Kscore test, which is now included in the American Urology Association clinical guidelines for urologists. Our expanded health systems commercial team continues to build our hospital and health system business line by increasing our reach in hospital laboratory management, outreach and reference work, creating meaningful and collaborative solutions that address the challenges many hospitals and health systems are facing currently. In summary, as we keep a disciplined approach to improve margins performance, we're seeing steady progress on our path back towards profitable growth. I will now turn the call over to Adam Logal to discuss our second quarter financial results.

Thank you, Elias. Starting with our Pharmaceutical segment, revenue increased to $138.4 million for the second quarter of 2023 from $123.1 million for the comparable period of 2022. This increase reflects the $90 million milestone payment due from Pfizer related to the approval in the U.S. for NGENLA during the second quarter of 2023 versus $85 million in milestone payments from Pfizer for the approvals of NGENLA in Japan and the European Union during the 2022 quarter, as well as higher gross profit share payments from Pfizer during the quarter. Revenue from RAYALDEE in our International Pharmaceutical businesses increased by $7.6 million, reflecting improvements in overall prescriptions, net pricing, as well as gains from currency exchange in Chile and Mexico. Costs and expenses for our Pharmaceutical segment were $74.7 million for the second quarter of 2023 compared to $67.7 million for the 2022 period. Research and development expense for the second quarter of 2023 was $17.5 million compared with $14.8 million for the 2022 period. This increase reflects activities from our ModeX development programs, partially offset by decreased spending for our NGENLA development activities. The resulting operating income for the quarter ended June 30, 2023, was $63.6 million, an $8.2 million improvement from operating income of $55.4 million for the second quarter of 2022. Amortization expense related to intangible assets was $16.5 million and $16.7 million, respectively, for the 2023 and 2022 quarters. Moving to our Diagnostics segment, we reported revenue for the second quarter of 2023 of $127 million compared to $186.8 million for the 2022 period. This decline primarily reflects lower COVID testing volumes. As Elias discussed, our focus at BioReference remains to identify profitable growth verticals and maximize operating efficiency. We've strategically invested in additional commercial resources in our 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. As Elias discussed, we also identified a number of near- and medium-term growth programs that we continue to expect through the balance of the year. Operating expense for our Diagnostics segment was $44.3 million for the quarter compared to $57.5 million for the prior year. Amortization and depreciation expense included in operating loss were $8.6 million and $10.2 million respectively, for the 2023 and 2022 periods. Turning to consolidated financial results for the second quarter, we reported operating income of $7 million compared with an operating loss of $10.7 million for the 2022 quarter. Net loss for the second quarter of 2023 was $19.6 million or $0.03 per share. This compares to a net loss of $101.7 million or $0.14 per share for the 2022 quarter. Net loss for both periods was negatively impacted by the mark-to-market losses from GeneDx' stock price decline of $19.9 million and $71.2 million, respectively, for the 2022 and 2023 periods. As we look at the current quarter, we are providing financial guidance with the following assumptions. For our Pharmaceuticals segment, we have assumed the U.S. region for NGENLA will be in the gross profit share commencing in September as Pfizer's U.S. launch is expected to begin in late August. During the first quarter of 2023, the European region shifted to gross profit share. Going forward, both the European and Japanese regions will result in gross profit share consisting of GENOTROPIN and NGENLA. For the first six months of 2023, Pfizer reported approximately $222 million in global GENOTROPIN sales. We assume a stable foreign currency exchange for our U.S. Pharmaceutical businesses. We have seen a 10% favorable impact on our businesses over the last 12 months. For costs and expenses related to R&D, we expect to wind down the clinical operations of NGENLA for the pediatric indication as quickly as possible, with final clinical site closure visits occurring now through the first half of 2024. The decreases are expected to be offset by increased R&D activities related to our ModeX development programs that Elias discussed. Regarding the assumptions for our Diagnostics segment, we assume COVID testing volumes remain an insignificant portion of our overall testing volumes. We have also assumed consistent core testing volumes with growth in our higher-margin oncology and urology specialty lines, as well as a slight increase in the average per patient collection amount due to our revenue cycle management initiatives. As a result, we expect the following for the third quarter of 2023: total revenue between $165 million and $180 million. This includes revenue from services between $126 million and $135 million, revenue from product sales between $32 million and $36 million, and other revenue between $5 million and $10 million, inclusive of the estimated Pfizer gross profit share. We expect Q3 2023 costs and expenses to be between $240 million and $250 million, including R&D expense of $21 million to $24 million and depreciation and amortization expense of approximately $26 million. That concludes our prepared remarks. Thank you all for your attention. And now operator, let's open the call for questions.

We will now begin the question-and-answer session. Our first question comes from Maurice Raycroft from Jefferies.

This is Kevin on for Maurice. Congrats on the quarter. First question on the NGENLA profit share. I know you mentioned that this would come about likely in September. Do you know when we could get more details on the agreement there? And then, also your latest thoughts on when we could break out the NGENLA revenue?

Thanks, Kevin, for the question. So we guided the total revenue coming from the profit share lines to be between $5 million and $10 million for the third quarter, which is pretty conservative, given that Pfizer is really just going to start launching in the U.S. region in the next couple of weeks. So as that continues to develop, we'll provide some better insights into that. But from our overall guide, we've talked about the total potential opportunity being significant. Just in these early days, it's difficult for us to be very specific about how Pfizer is going to launch the product.

Okay. Yes. And then, just one on the diagnostics business. So you mentioned returning to profitability in the near future. Are you guiding more specifically in that regard in terms of maybe by the end of this year or by early next year? And then also in terms of returning to profitability, are you also guiding to return to growth as well?

Elias, I don't know if you want to go with any comments that I can add in...

Our plans are to achieve breakeven by the end of this year or the beginning of 2024, and then to experience profitable growth in 2024. The question about growth is crucial to our success, and we are focused on continuous growth. We are not solely relying on cost reductions; as Adam mentioned, we have invested in the commercial sector and are targeting new areas such as the pharmaceutical industry, which I am familiar with and believe has launch potential. We are also focused on the health systems business line.

Yes. So maybe I'll just add on our guide here. We guided $126 million to $135 million against the second quarter, which reported $127 million. So from that perspective, Kevin, we do see some upside in the near term and hope to, to Elias' point, continue to build on that into the future quarters.

Makes sense. Thanks.

Our next question comes from Jeffrey Cohen from Ladenburg Thalmann.

Thank you all for taking our questions. Firstly, Adam, could you break out for us service revenue, the cost of service revenue, and the cost of product revenue? I actually see your Quest momentarily.

Yes. So the queue is out there. I can break it down for you, Jeff, if you need.

But it's in the queue, yes.

Yes, it's in the K.

Okay. Perfect. And could you talk anyone there a little bit about the OVA1 test and perhaps some of the traction or pricing or geographical presence that you're generating thus far?

Yes. The OVA1 test is growing quite a bit. In our catchment area at this point, where our sales force is present, our women's health presence is strong. I cannot give you specific numbers, but I can certainly follow up with you on that.

Okay. That's helpful. Any commentary specific to RAYALDEE? I saw 7.7% for the quarter. Any outlook or guidance there on revenues or prescriptions or growth?

We didn't provide specific details, but Elias mentioned that the year-over-year prescription growth is just below 6%. We're seeing continued development in that area. As with previous years, we expect net reimbursement for RAYALDEE to improve throughout the year, so we anticipate ongoing sequential growth, although we didn't specify exact figures.

Just a little clarification. It was 6% quarter on previous quarter, Q2 over Q1, not previous year.

Okay, that's helpful. I noticed the breakdown of revenue from services and products. Can you provide any insights on margins? Should we expect margins on the service side to improve with some cost reductions for the rest of this year, or is that something we should look forward to in 2024?

We're working on improving the margins this year. As you know, I just mentioned, we've reduced headcount by 7%. We're looking at multiple areas where margins need to be improved. We have renegotiations with payers as well, along with pricing reviews for contributions. My expectation is to improve the margins to narrow and get to breakeven, hopefully, at the end of the year or beginning of the first quarter of 2024.

Okay. And then lastly, Adam, could you give us an update on cash, the $101 million plus the $90 million expected this month, I think?

Yes, that's right.

Okay, perfect. That's it for us.

Thanks, Jeff.

Our next question comes from Yi Chen from H.C. Wainwright.

Just a quick question on behalf of your team on all the progress. My first question is on ModeX. Any color on the type of cancer indications that you would like to target next year in Phase I?

So we have two programs that are the most advanced. One is for solid tumors, which will be tested against various types of solid tumors to identify where we get the most response. So the focus is on prostate cancer, gastric cancer, pancreatic cancer, and non-small cell lung cancer. I can’t tell you which one will emerge first, but that's the thrust of the program regarding solid tumors. Then we also have a program focused on liquid tumors, leukemia, and lymphomas, which is a parallel program set to emerge in the clinic, hopefully as early as possible in 2024. But by the end of 2024, we expect to have two cancer programs in the clinic.

And regarding your diagnostics business. I know you mentioned some of the cost-cutting steps in your prepared remarks. And I'm sorry if I missed it, but could you highlight some of the other growth initiatives that you have planned for that business unit? I know you mentioned a few, but are there any important ones that we need to know?

We are doing a full review of the business and its mechanisms. In addition to cost reduction, we are also looking at revenue improvements in the business we have. Our revenue cycle management initiative is quite promising; we had significant losses in billables due to incomplete CPT codes, ICD codes, and preauthorization issues. We put countermeasures in place, and they are paying off. Additionally, the company has never really focused on point-of-care collections like co-pay collections. Capturing a few dollars can make a huge difference. That’s, if you will, rightsizing the spend versus the collections we make. The second major thrust is obviously growth. We have grown in oncology, women’s health, and continue to focus on specialty services. Notably, we made some announcements regarding large systems that are facing tough margins. We now manage Westchester Medical Center laboratories, capturing an increasing share of the outreach business with that. We have increased our sales force in that area from 1 or 2 salespeople before to 5 or 6 today, focusing on a regional approach because the situation in hospitals and the need for laboratory management and outreach services is very different from region to region. We are definitely looking for growth in specialty businesses and health systems, and that is ongoing, and we have started a new line of potential revenue in the pharmaceutical business, given that we have a laboratory that can conduct biomarker research, which is valuable to pharmaceutical and biotech companies. We're exploring that opportunity; I can't quantify it yet, but it's a promising line based on my background leading R&D in a major pharmaceutical company where I know there is a high demand for reliable laboratories to support clinical trials and development. So those are the multiple lines of activities we are pursuing on the larger front, and so far, so good.

Excellent. Thank you, and congrats, again.

Our next question comes from Edward from Piper Sandler.

My congratulations on NGENLA approval; very exciting. And I know it's been a long path coming. So that's great to see. My question actually is just a real quick housekeeping one. Adam, I missed what you said; I think it was about R&D, maybe ’24. What is the top end of the guidance?

It's ’21 to ’24.

’21 to ’24, not that possible. And then, also just a quick accounting question. I don't believe so for the guidance that you mentioned, but the $90 million milestone won't be recognized in the P&L in any way. It's really just going to go straight to the balance sheet.

So it was in the P&L in Q2, and we have a receivable recorded for it. We'll get the cash.

Or I didn't see that yet; awesome. Great. Very exciting. Looking forward to seeing growth from that product and also great progress in the ModeX work. So, thank you.

Our next question comes from Michael Petusky from Barrington Research.

So Adam, I may have missed this if it was mentioned earlier, but what is the cost takeout so far at BRL?

Yes. So far this year, we had set a target of about $40 million, and we're about at the halfway point for that, probably a little bit ahead. Elias, I don't know if you have the specific number. I know last week we tracked it; it was just beyond the halfway point with more to go for the rest of the year.

And remember, we took out $100 million before that.

Okay, so I just reviewed the quarterly report, and it appears that you incurred a loss of $44 million at the operating level in that business, which is actually worse than the first quarter. It seems that you're not on track to reach breakeven in that business by the end of the year. Can you explain how you plan to achieve that, given the growth initiatives and ongoing expense reductions?

I think Adam can share some of the numbers from Q2, which include one-time expenses related to workforce reductions. According to the WARN Act, these one-time costs must be considered at the time of the layoffs. Therefore, the figure you're referring to is somewhat inflated due to these actions we took to cut costs. While these are expensive, they are one-time expenses. If you adjust for that, the actual progress is significantly better. Looking ahead to Q3, Q4, and Q1 '24, we aim to close a gap of $10 million to $12 million between revenue and expenses. We believe we can effectively resume cost reductions, which we clearly understand, along with increasing revenue from our existing business, which is currently our focus.

Yes. I'll just add in, Mike, if you don't mind. There are a couple of additional things to think about. As Elias mentioned, there are numerous revenue cycle management initiatives ongoing at BioReference, which usually drop straight to the bottom line without significant cost reductions associated. As we make progress there, benefits are expected to be realized throughout the remainder of the year. We're in the early days, and as Elias mentioned, those initiatives have shown promise. Additionally, the volume growth that we're targeting is needed because as you know, BioReference and any lab business is very fixed cost in nature. You need to bring volumes in to absorb those fixed costs. The incremental contribution from even an additional dollar of revenue gets absorbed by the fixed cost structure, which only comprises about 20% variable costs. So, there are meaningful contributions expected from the growth initiatives that Elias detailed earlier. Lastly, we talked about the nonrecurring costs incurred during the second quarter and really in the first half of the year as we adjust the organization, and we'll see those benefits materialize as we continue on a monthly basis throughout the year.

Could I just ask you, so on the sort of that one-time nonrecurring costs, if you were to give yourself full credit for that, is the $44 million loss really something closer to 30 or 35 or like the loss at the operating line? I mean, what magnitude are we talking about in terms of nonrecurring?

During the second quarter, we didn't get benefits from the nonrecurring costs because most came in late in the second quarter, but it's in the magnitude of about $8 million on a gross basis.

So that takes you down to 36. I guess let me ask this question. What level of revenue do you have to be at based on what you think you take out in terms of costs and the benefits of revenue cycle management? What level of revenue do you have to be at at the end of this year or early next year in that business to sort of be breakeven? What is the top line growth assumption that gets you there?

Yes. So it’s not just volume, Mike. Volume growth must happen, but the dollars associated with the growth are more important for breakeven. It's going to depend on how successful we are on each of those programs. We would sit back and say if we can achieve our guidance that we've provided at the top end of our guidance from this quarter and continue to see that level of growth, it will get us to breakeven, as Elias mentioned, late fourth quarter, early first quarter 2024.

That has to be sort of a $600 million annual run rate?

That's right.

All right. That's helpful. I really appreciate it.

Our next question comes from Yale Jen from Laidlaw & Company.

And I apologize; I came in late. So if some of the questions have been answered, I apologize for reasking them. So my first question is in terms of NGENLA, concerning the revenue going forward, when might you be able to start to bring it to a separate line in reporting from the P&L?

Yes. So Yale, thanks for the question. Once it becomes material, we're going to start talking about it. It's in the $5 million to $10 million guide that we had for our other revenue line, so it's included there, allowing you to gauge the scale. We believe with Pfizer's launch underway in the next couple of weeks, it could be as early as next quarter that we start breaking it out, but at this point, we haven't.

Okay, great. And maybe just one more question regarding the collaboration with Merck for the vaccine. Could you provide an update on where things stand? And do you have any projections on when human studies might commence?

Thank you. We are collaborating effectively with Merck. We've received an upfront payment, and Merck is covering the costs of our work, which is aimed at advancing the product to an IND. There are some unknowns regarding the choice of adjuvant for the vaccine that we must test out. Those timelines can vary, anywhere from short-term to about six months. However, given the natural progression of such programs, we should be in the clinic by next year, in my mind. The timeline will fluctuate plus or minus six months based on how things progress, but everything is going well.

Okay, great. Well, I appreciate it. And again, congrats on the progress and I look forward to speaking with you guys soon.

This concludes our question-and-answer session. I would like to turn the conference back over to Dr. Phillip Frost for any closing remarks.

Well, I'd like to thank you all for attending the conference, and we look forward to meeting with you again at the end of next quarter. Thank you again.

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