OPKO Health, Inc. (NASDAQ:OPK) Q1 2023 Earnings Conference Call May 3, 2023 4:30 PM ET

Company Participants

Yvonne Briggs - LHA Investor Relations
Phillip Frost - Chairman & CEO
Elias Zerhouni - President & Vice Chairman
Adam Logal - SVP, CFO, CAO & Treasurer
Steven Rubin - EVP, Administration & Director

Conference Call Participants

Jeffrey Cohen - Ladenburg Thalmann & Co.
Maurice Raycroft - Jefferies
Yale Jen - Laidlaw & Company
Yi Chen - H.C. Wainwright & Co.

Operator

Good afternoon, and welcome to the OPKO Health First Quarter 2023 Financial Results Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Yvonne Briggs. Please go ahead.

Yvonne Briggs

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 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.

Phillip 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 4 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?

Elias Zerhouni

Thank you, Dr. Frost, and good afternoon, everyone. Let me start first with a discussion of our recently announced exclusive worldwide license and collaboration agreement with Merck, as mentioned by Dr. Frost.

Securing a partner has been our strategy to advance the development of MDX-2201, our Epstein-Barr virus, multivalent nanoparticle vaccine. And EBV infects up to 95% of the global adult population during their life time and is associated with about 1% of all cancer cases worldwide. It also is the leading cause of infectious mononucleosis and recently has been implicated in the development of multiple sclerosis.

Despite the prevalence of this virus and its role in causing life-threatening diseases, there are currently no FDA-approved vaccines or treatments for EBV. Our vaccine leverages ModeX innovative biologics platform to target 4 major EBV proteins. This multi-targeted approach improves upon previous efforts and holds potential to provide a complete protection against this infection.

Under the terms of the agreement, OPKO received an upfront payment of $50 million and is eligible to receive up to an additional $872.5 million upon the achievement of prespecified development and commercial milestones. In addition, upon the commercial launch of MDX-2201, we're eligible to receive up to double-digit royalties on global sales. ModeX and Merck will jointly advance MDX-2201 up to the filing of an investigational new drug application, after which Merck will be responsible for all clinical and regulatory activities as well as product commercialization.

Expenses incurred by OPKO for this program prior to full uptaking the responsibility by Merck will be reimbursed to OPKO as well prior to the IND. We are excited about this collaboration as MDX-2201 not only addresses an important unmet medical need. But as Dr. Frost said, it validates our approach of multi-targeting both in vaccines and with multi-specific antibodies, which is what ModeX does. Along with Merck, we're relying on advancing this vaccine with the goal of benefiting patients globally.

In other parts of the pharmaceutical business, ModeX continues to make progress with other proprietary platforms. During the quarter, including MSTAR and STEALTH, these technologies have advanced. We've been following these multi-specific technologies to provide flexibility to go beyond 3 targets and up to a total of 6. We believe MSTAR is a plug-and-play platform that provides a competitive advantage over all the other multi-specific technologies with 28 patents filed to date. As we progress our therapeutic candidates, we will evaluate which targets we keep in-house and which we seek to partner in order to maximize the value of our pipeline.

For example, we have a partnership with the NIH to provide funding for our Phase I trispecific candidate to both prevent and treat HIV. In addition, we're working on next-generation candidates targeting HIV, including and 1 petrospecific candidates with increasing potency. We believe there is a significant medical need as there are no vaccines or antibodies that can provide long-acting protection to prevent and treat infection and current HIV therapies despite their great progress still have limitations, including drug toxicity due to lifelong treatment and drug resistance that can impact efficacy of viral suppression.

In addition to these efforts, we have worked on a COVID multi-specific antibody program to address the ongoing post-pandemic need to address the continuous appearance of variance of concern around the world even today. It is unclear what the evolution of the pandemic will be but we do believe that the pandemic will -- the virus will remain in the human population and will require a set of therapies to, in particular, help patients at risk because of existing conditions or suppressed immune systems. So we have a particular interest in exploring antibody candidates that can treat those patients at risk and can prevent maybe the development of COVID in these vulnerable populations.

The advantage of our technology platform is that it is modular, which allows for rational selection of antibodies to optimize potency against current and future strains and prevent the emergence of viral resistance. Our SARS-CoV-2 multi-specific antibodies are currently in late preclinical testing and the development is partially funded by DARPA.

In oncology, we have also multi-specific multifunctional antibodies, focused primarily on hard-to-treat solid tumors, but also for the treatment of leukemia and lymphoma. We believe the value proposition of multi-specific T cell engager antibodies has potential to demonstrate clinical efficacy for solid tumors and B-cell malignancies that the current standard of care does not sustain the remission in a large number of patients. Oncology programs are in the preclinical stage with a goal of entering the clinic in 2024. Let me refer you to our new website for more information and updates on publications and portfolio evolution, reachable at both as opko.com or modex.com.

Let me turn now to RAYALDEE. We continue to achieve certain milestones with our international partners. In Germany, RAYALDEE was granted pricing approval, which triggered a milestone payment of $7 million from our . We're eligible to receive up to an additional $10 million in regulatory milestones and up to $207 million in milestone payments tied to launch pricing and sales of RAYALDEE plus tier double-digit royalties. In addition, we received a $2.5 million milestone payment related to Nicoya's submission of RAYALDEE's IND application to the Center for Drug Evaluation of China. We're eligible to receive up to an additional $150 million in payments upon the achievement of certain development, regulatory and sales-based milestones as well as a tiered double low-digit royalty on net sales by Nicoya in China.

Now our program in Alzheimer's disease based primarily on the use of molecules that can mobilize plaques is currently exploring potential strategic partnerships with larger companies given the renewed interest that is now clearly present, including with the news today of the Eli Lilly results that affecting the protein deposits in plaques is actually potentially very effective. And our approach could be complementary to those of the antibodies used today or to be used in the near future in the patient population.

So these programs are of high interest now because they do provide synergy potentially with existing and emerging therapies for Alzheimer's disease.

Now I'd like to turn to our Diagnostics segment and discuss BioReference Health, which is the new name for what was previously called BioReference Laboratories. Our focus post-COVID remains on reducing costs and returning this division to profitability. We're expanding our reach initiative into 2023, which, to date, has been effective to improve efficiencies, enhance productivity and reduce costs. For example, we're starting to realize the economic benefits of shifting out of 13 less productive patient centers to 11 new more productive ones, which are more strategically located.

In addition, we have increased our sales force primarily on the specialty diagnostics and health systems vertical and are also entering the pharmaceutical market in which we have not been present in the past. Our higher-value specialty testing segments continues to grow as we enhance our portfolio through innovation. These segments include oncology, women's health, urology and special ventures.

For example, our GenPath women's health division was one of the first commercial laboratories to offer CINtec PLUS cytology. This is the only approved dual stain, triage test for patients who have a high-risk HPV results, high risk for the development of cancer. The dual stain biomarker test allows health care providers to more accurately and quickly assess the risk for cervical precancer and guide their management. As I mentioned, a key growth driver for BioReference is to offer new tests like this one from Roche to enhance its innovative portfolio and to provide valuable information for health care providers and their patients.

In urology, our expanded commercial team is focusing on marketing and selling our proprietary 4Kscore test which is a blood test to evaluate a patient's likelihood of aggressive prostate cancer and help direct management of these patients. The urology team is also driving new accounts. And more importantly, the recent American Urology Association guidelines have validated the fact that consideration for the use of a 4K score or like tests is actually warranted in terms of the clinical guidelines they now provide to the urologists. And so we're going to expand our access for this test to other clinical services, hospital services and others as we are expanding our reach to those clinical services, hospital services as well as urgent care centers where we want to offer a complete menu of services.

As we implement our strategy, we're getting closer to our goal of returning BioReference to profitable growth in a post pandemic environment, hopefully, over the next 3 quarters, which is what we're working towards.

I will now turn the call over to our CFO, Adam Logal, to discuss our first quarter financial results. Adam?

Adam Logal

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 3 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.

Question-and-Answer Session

Operator

[Operator Instructions]. The first question is from Jeffrey Cohen with Ladenburg Thalmann.

Jeffrey Cohen

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 time line?

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 to Parkinson's as well?

Elias Zerhouni

Thanks, Jeff. In terms of the cost sharing, there is no real cost sharing. I mean we have a $50 million upfront. We have a joint steering committee of the program between now and IND that will actually continue beyond IND. But currently, all expenses incurred by OPKO are reimbursed by Merck. And the reason is very simple is that because we have advanced the products so much that we are close to IND, and we need to really continue that without disruption.

And so Merck has asked us to continue to do this with -- in collaboration with them and with obviously their approval to go forward and incur expenses such as CMC expenses and others between now and the IND and to be reimbursed by Merck fully for those expenses.

And in terms of beyond the IND, it's really in the control of Merck. We may or may not be asked to continue to do certain things. But at this point, I can't comment. So fundamentally, the cost to us ModeX until IND is pretty much assumed by Merck [indiscernible] on that time.

In terms of MS. As you know, the Denmark study that indicated a very, very strong suspicion, not just suspicion, the correlation and potential causation of MS in the 10 million army recruits that were followed for many years is the strongest evidence that we have that beyond cancer, there are other indications. There is also a body of suggested evidence that lupus, Parkinson's, Alzheimer's disease may also be . But the connection there is not as strong as it is for MS and cancer.

Jeffrey Cohen

And then secondly, I wonder if you could dig into BioReference a little bit as far as some of the commentary. It sounds like you expect to turn BioReference around toward profitability by the, I guess, by the end of this year. And then perhaps could you talk about the -- any test menu expansion that's going on as far as specific areas and perhaps the effect that may have on gross margins in that area? And could you call out is there any activity on the genomic side as far as testing as well?

Elias Zerhouni

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 do -- 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 an 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 2 angles there that I'm very familiar with, and I'm asking that we enter this field. Number 1 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 providing 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.

Operator

The next question comes from Maury Raycroft with Jefferies.

Maurice Raycroft

I was wondering if you can provide -- if there are any more specifics you can provide on timing for an update related to Pfizer's efforts with FDA for NGENLA's approval for pediatric growth hormone? And is there anything else you can say about the nature of the efforts that are ongoing between Pfizer and FDA?

Elias Zerhouni

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.

Maurice Raycroft

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?

Steven Rubin

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 prework they've done. So again, I'm limited in guidance until we get the approval in hand.

Maurice Raycroft

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?

Adam Logal

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.

Operator

The next question is from Yale Jen with Laidlaw & Company.

Yale Jen

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.

Elias Zerhouni

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.

Yale Jen

The next question is that in terms of MRD, the mineral residual disease you're testing, my understanding is there's probably a number of, as you said, liquid tumors has been -- the has been identified, but not all of them. So do you guys continue to explore what's over there with the new development outside and others?

Elias Zerhouni

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 a good 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.

Yale Jen

And the last question is for the 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 will wait until next year?

Adam Logal

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.

Yale Jen

Congrats on all the progress.

Operator

The next question is from Yi Chen with H.C. Wainwright.

Yi Chen

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

Elias Zerhouni

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

Yi Chen

The Roche Diagnostics CINtec PLUS otology test?

Elias Zerhouni

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 variance 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. [indiscernible] in second quarter.

Yi Chen

I mean, this test is prescribed by a physician to whoever he considers at high risk for HPV infection?

Elias Zerhouni

OB/GYNs, generally are ordering that test, yes. And they are the ones who make a decision, whether the patient needs to have an immediate procedure or can be followed, followed how fast, how often. If it's -- if we have a negative result, they can wait maybe 2 years. If it's a positive result, they need to decide whether to act right away or give us more extension for a few months before repeating the test.

So it's -- if you look at the total market of these tests for cervical cancer prevention, as I said, it's a low percentage that would be applicable to the patients who have the need for that test. 5% to 6% is what I'm told, but I cannot guarantee you that.

Operator

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

Phillip Frost

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.

Operator

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