OPKO Health, Inc.'s (OPK) CEO Philip Frost on Q3 2018 Results - Earnings Call Transcript

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About: OPKO Health, Inc. (OPK)
by: SA Transcripts

OPKO Health, Inc. (NYSEMKT:OPK) Q3 2018 Earnings Conference Call November 9, 2018 4:15 PM ET

Executives

Miriam Miller - IR, LHA Investor Relations

Philip Frost - Chairman and Chief Executive Officer

Steve Rubin - Executive Vice President

Adam Logal - Chief Financial Officer

Analysts

Sudan Loganathan - Cantor Fitzgerald

Yale Jen - Laidlaw & Company

Operator

Welcome to the OPKO Health Inc Business Update Conference Call. At this time all participants are in a listen-only mode. Following management’s prepared remarks, we’ll hold a Q&A session. [Operator Instructions] As a reminder, this conference is being recorded, November 9, 2018.

I would now like to turn the conference over to Miriam Miller. Please go ahead, ma’am.

Miriam Miller

Thank you, operator. Good afternoon. This is Miriam Miller with LHA. Thank you all for joining today’s call. 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 could materially affect the company’s expected results. Those forward-looking statements include, without limitation, the various risks described in the company’s annual report on Form 10-K for the year ended December 31, 2017, and subsequent quarterly report on Form 10-Q.

Importantly, this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, November 9, 2018. 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 the call. Dr. Philip Frost, Chairman and Chief Executive Officer, will open the call; followed by Steve Rubin, OPKO’s Executive Vice President, who will provide an update on the company’s various business and clinical programs. After that, Adam Logal, OPKO’s Chief Financial Officer, will review the company’s third quarter financial performance. Dr. Frost will provide closing remarks, and then we’ll open up the call to questions.

Now let me turn the call over to Dr. Frost.

Philip Frost

Good afternoon. I would like to thank everyone for participating in today’s call. The business of OPKO continues to progress. We have made significant commercial progress as well as with our clinical programs during this past quarter. We have seen month over month growth in RAYALDEE sales throughout 2018. We saw commercial approval for RAYALDEE in Canada through our marketing partner Vifor Fresenius and we initiated a Phase II clinical trial evaluating RAYALDEE in dialysis patients, which opens up the potential for a major expansion beyond the currently approved indication here in the U.S. We also completed enrollment in our Phase III weekly growth hormone trial for the treatment of pediatric growth hormone deficiency. We’re looking forward to continued positive momentum in all aspects of our business.

I will now turn it over to Steve Rubin, who will go into additional detail on our progress.

Steve Rubin

Thank you, Phil. Good afternoon everyone and thank you for joining us today. Before I delve more deeply into the business side of things, I will make some remarks about the SEC complaint filed on September 7, that named both the company and Dr. Frost. Most of you know we had no warning that such a complaint was coming. The SEC did not provide us with a Wells notice or any other indication of its intent to file the action.

We disagree with the SEC’s allegations as we’ve said publicly. We have spent considerable time over the past two months working closely with our advisors to address the allegations in the complaint. We have always prided ourselves on adhering to a high standard of excellence at every level. We are particularly frustrated that this incident has impacted our investors so deeply. Even worse, it came at a time when we were seeing quarter-over-quarter momentum on many fronts.

From improved efficiencies at BRL to impressive prescription growth with RAYALDEE to significant clinical progress across multiple therapeutic candidates. To all of you who have maintained your support of the company, we extend our thanks, and we know it hasn’t been easy. I want to assure you that we are actively working to address the matter. I also want to assure you that the business of OPKO has continued to advance during these challenging times.

Our sales force continues to sell products, our clinical trials continue to enroll patients. BRL and GeneDx continue to make strides. Taken together, this means that we have remained focused on the creation of shareholder value. After we’ve gone through our prepared remarks, we will be opening this call up to your questions, but I ask that you refrain from inquiring about the situation with the SEC.

This is an ongoing legal matter, and as you may realize, we are restricted at what we can say at this time. Also, I’d like to mention the timing of this call and the reporting of our Q3 financial results, both of which are a bit later than our typical practice. This is due to the fact that we were working diligently to secure the additional capital that Adam will be discussing in a moment.

We thank you for your patience and for participating in a Friday afternoon call, and we’re happy to have secured $150 million of additional capital. I’ll now turn to the business update including our overall progress towards long-term growth and the achievement of our business goals.

Our clinical diagnostic business, BioReference Laboratories or BRL, is the country’s third largest reference lab. We are pleased to report sequential quarter gains in revenues, a trend we have seen now for the past five quarters. BRL, again, met its revenue goals, and we continue to see both growth and improved efficiency from the lab.

During Q3, Geoff Monk strengthened his team at BRL. We have new leaders and focus in the clinical laboratory space, the compliant space and the service operations space. We have realigned groups to focus on our core needs, and recently added our last executive team member to lead payer relations and marketing.

In the third quarter, GeneDx continued to show strong year-over-year volume growth. Standouts included tests related to neurologic disorders with 42% year-over-year growth. Exome testing also continued to grow well with 35% year-over-year growth. Many GeneDx tests continue to be added and updated as part of our test menu overhaul. Going back to the example of neurologic disorders, new test launch during the third quarter already consistently account for over 10% of total testing volumes within that clinical division. The roadmap over the next six months will continue to yield several more ways of new tests for the next sets of launches including tests for genetic form of pulmonary gastrointestinal, renal and other adult neurologic disorders.

To help drive growth, GeneDx also implemented a series of changes to improve testing ease of use. These included a recently launched easy ordering system within its online ordering portal as well as increased abilities to perform tests using additional sample types. Finally, GeneDx recently made several platform presentations on its findings at the American Society of Human Genetics meeting, one of the largest genetics focused conferences. As part of its collaboration within the UK-based deciphering developmental disorder study and Radboud University Medical Centre in the Netherlands, a plenary presentation described findings in over 20,000 patients with neurodevelopmental disorders, of which over half were from GeneDx. This collaboration identified over 50 novel disease genes. These findings ensure that GeneDx can maintain superior testing accuracy through its large database of now over 125,000 individuals who have undergone clinical exome or genome sequencing.

Moving on, our 4Kscore blood test gives a man with elevated PSA levels a personalized prediction of his risk of having or developing an aggressive form of prostate cancer. During the third quarter, we processed approximately 18,600 4Kscore tests although volume is down slightly from about 19,000 tests in the comparable quarter of last year. We have been focusing our sales efforts primarily on urologists, which has a short-term impact on the number of tests processed. We’re seeing success as we’ve increased the number of urologists utilizing the test by about 15% for the quarter and continue to see strong retention rate among urologists using the test.

For the trailing 12 months ended September 30, 2018, the total number of 4Kscore tests performed by urologists increased by 19%.

As you know, Novitas released draft non-coverage guidance for the 4Kscore test in May. While the final coverage determination is yet to be made, we remain optimistic it will ultimately go in our favor. Last quarter, we shared with you the work we undertook during the public comment period to demonstrate both the clinical utility and the importance of 4Kscore as an aid to urologists for the diagnosis of the aggressive type of prostate cancer, which requires follow-on treatment.

During this process, Novitas has continued to provide coverage of the 4Kscore to Medicare beneficiaries. Results of five new studies covering the 4Kscore tests were presented at the American Urological Association’s 2018 annual meeting this past May, including a second study demonstrating the 4Kscore tests’ ability to predict prostate cancer mortality in men with elevated PSA.

A study was also presented at the ASCO meeting in June demonstrating the 4Kscore has clinical utility for management decisions of men diagnosed with low and intermediate risk prostate cancer due to its strong associations with radical prostatectomy pathology outcome. We remain focused on driving adoption across target positions and are pleased at the increasing body of evidence that supports its clinical utility.

We have completed a PMA submission to the FDA for our Claros system and a point of care PSA test. This is the first test on our proprietary diagnostic platform that can provide a quantitative blood test result in 10 minutes in the physician’s office with only a finger stick drop of whole blood. We remain on track what we hope will be approval by the FDA early next year.

As I mentioned, Claros 1 is a new platform but we are developing additional tests to interface with our products and programs and expect to submit a 510(k) using the Claros platform to measure testosterone early next year. We are also continuing to work on other biomarkers and biologically meaningful chemistry tests for the platform, including parathyroid hormone and vitamin D.

Turning to our pharmaceuticals division, let me start with RAYALDEE. First and only therapy approved by the FDA that both raises serum total 25-hydroxy vitamin D and lowers parathyroid hormone levels in patients with chronic kidney disease with a safety profile similar to placebo. This has been a big quarter for RAYALDEE. We were pleased to see that Vifor Fresenius was successful in obtaining approval in July to market RAYALDEE in Canada for the treatment of SHPT in adults with Stage 3 or 4 CKD and vitamin D deficiency.

We also announced as promised the initiation of a Phase 2 clinical trial to study the safety and efficacy of RAYALDEE as a new treatment for SHPT in adults with vitamin D insufficiency in Stage 5 CKD requiring hemodialysis. Cost of this study will be shared with our development partner Vifor Fresenius and Japan Tobacco. From a quarterly commercial performance perspective, the RAYALDEE numbers break down as follows. In Q3, the total number of RAYALDEE prescriptions increased approximately 20% versus Q2 and increased 222% versus Q3 of last year.

Importantly, since the launch in 2016, we’ve been seeing steady month-to-month increase in the total number of prescriptions. Our sales team of 64 representatives is demonstrating steadily improving performance as our market penetration continues to grow. 14% of Q3 prescriptions were new to brand and 20% of the prescribers were new to RAYALDEE. We had 1,057 active prescribers in Q3, and this compares with 929 in Q2 and 764 in Q1. Since launch, more than 6,500 unique patients have been prescribed RAYALDEE accounting more than 1.1 million patient days of therapy.

We ended Q2 with RAYALDEE being available to about 79% of the overall insured population with about 52% unrestricted coverage of the Medicare population. With some recent Medicare Part D wins, we expect this number to further increase starting January. RAYALDEE is covered by plans representing some 83% of the commercial population. Overall, we continue to see progress in adoption, reimbursement and awareness of RAYALDEE. Our sales team continues to demonstrate impact, and our market penetration continues to grow.

Regarding our clinical development programs, we remain focused on advancing a diversified portfolio addressing several indications with significant unmet medical need in large markets. We have a robust pipeline of product candidates at varying stages of development, which provides opportunities for creating both near and long-term value for our shareholders.

Starting with our work at renal, as I just mentioned, Vifor Fresenius received marketing approval for RAYALDEE in Canada in late July. They also remain on track to file a market authorization application with the European Medicines Agency by early next year as a trivium for SHPT and CKD patients.

As also mentioned, we initiated a Phase II trial with a higher strength RAYALDEE in patients with Stage 5 CKD and vitamin D insufficiency who require regular dialysis. The first cohort of approximately 44 patients will be treated for 26 weeks in a randomized, open label fashion with either RAYALDEE or placebo to identify the appropriate dosing to be studied in the second cohort. Data readout for this first cohort is expected in 2019.

The second cohort of more than 200 patients will be treated for 26 weeks in a randomized double blind fashion with one of three different doses of RAYALDEE or four placebo. The primary efficacy endpoint will be correction of vitamin D insufficiency and control portfolio SHPT. Patients will then be treated with RAYALDEE for another 26 weeks in an open label extension.

Turning to our metabolic and endocrinology pipeline, we have several late-stage programs underway or nearing initiation. We were pleased to announce in August that we completed enrollment in our global Phase III study in growth hormone deficient children. Our target, which represents more than 80% of the hGH market. It’s a pivotal, non-inferiority study comparing once weekly injection of Somatrogon with daily injections of GENOTROPIN for 12 months.

This pivotal study uses a pen device and formulation intended for commercial launch. We are hopeful that the outcomes will support a dosing change from daily to weekly administration and positively impact the quality of life for children with growth hormone deficiency. We expect to report topline results for this study in Q4 next year. Last fall, we began a pediatric registration study in Japan to assess pharmacokinetics and compare the efficacy of weekly Somatrogon to daily GENOTROPIN in 44 prepubertal growth hormone deficient subjects. We expect to complete enrollment in this study before the end of this year.

Last November, we commenced a Phase IIb dose ranging study with our once daily oral selected androgen receptor modulator or SARM, as the dose finding study in men with BPH or enlarged prostate. This four-month trial is expected to enroll 110 to 120 patients at 30 U.S. sites to identify appropriate safe and effective doses and to assess blood PSA levels, lean body mass and fat mass. We expect to complete enrollment by the end of this year.

In mid-June, we reported that enrollment was complete in our Phase IIb dose escalation trial for our once weekly GLP-1 glucagon dual agonist oxyntomodulin for the treatment of Type 2 diabetes in obesity. This study includes 110 Type 2 diabetics at 35 clinical sites in the U.S. You may recall, we initiated this trial in late March. We are pleased enrollment was completed so quickly – less than three months after trial start. We expect to report findings from the study in the first half of next year. Preclinical and Phase II data show that once weekly dual agonists such as oxyntomodulin can improve glucose control, increase weight loss and improve the lipid profile compared with a GLP-1 therapies currently on the market.

Data from our previous Phase II study with 420 diabetic patients showed greater weight loss compared with the approved, extended release exenatide and placebo. These data also showed improvement in the lipid profile and similar reduction in HbA1c levels compared with the approved once weekly product.

So in closing, we are pleased to announce completion of enrollment in our pediatric hGH program. This represents a significant milestone in our development of this therapeutic. We are also pleased to have completed enrollment in our Phase IIb trial evaluating our oxyntomodulin drug for Type 2 diabetes and weight loss and have initiated a Phase II trial with RAYALDEE in hemodialysis patients. At a high-level, we are advancing a robust clinical development program that addresses several large markets. We expect to continue to make meaningful progress with these programs and to achieve important milestones.

With that overview, let me turn the call over to Adam for discussion of our third quarter financial performance. Adam?

Adam Logal

Thanks, Steve. As we continue to make significant progress on our R&D and commercial activities, we also continue to make improvements in our financial performance. We are pleased to report financial results that were in line with the guidance provided during our call in August. Overall, our net loss during the third quarter of 2018 decreased by $8.3 million to $27.7 million or $0.05 per share compared to a net loss of $35.9 million or $0.06 per share for the comparable period of 2017.

Net revenues improved by $3.8 million to $279.8 million for the third quarter 2018, compared to the quarter of 2017, which had $246 million of revenue. Moving to cost and expenses. We have made significant progress in our efforts to improve our operating efficiency. During the third quarter of 2018, we reduced our cost of revenue as well as selling, general and administrative expenses by 8% for almost $20 million compared to the third quarter of 2017. And on a sequential basis, we took out an additional $3 million of cost.

Our investments in R&D were $30.2 million for the third quarter of 2018, compared to $32.5 million for the 2017 period. During 2018, R&D expense was offset by a $5.3 million related to research and development credits we received in Ireland, which we expect to receive in cash during 2019 related to the construction of our R&D center in Waterford, Ireland.

Moving to diagnostics revenues, as Steve mentioned we continue to see improvements in our overall volumes within our clinical laboratory testing and double-digit growth within our genomics testing. On a comparative basis, revenue from services saw its first year-over-year growth since the first quarter of 2017, a trend we’re encouraged by as we continue to see opportunities to regain volumes lost during 2017 and the first half of 2018.

While we will provide a more detailed update for the outlook for 2019 during our year-end call, we are encouraged that our business is stabilized and with the excellent work of the BioReference team, we are positioned for profitable growth in the coming quarters. Improving our cost to serve remains an important focus as the industry will see another year of reimbursement headwind led by the impact of PMA. We remain enthusiastic about the prospects of our GeneDx business and continued volume and overall reimbursement improvement for our efforts to create a sustainable and effective preauthorization and denial management process.

Regarding our pharmaceuticals division’s performance. We recognized $5.8 million of revenue related to the sales of RAYALDEE during the quarter. A 21% increase on a sequential basis from the second quarter of 2018. Based on our current expectations, RAYALDEE’s commercial activities will be cash flow positive during the fourth quarter resulting in further reductions in cash flow used at operations. Total pharmaceutical product revenue for the quarter was $25.4 million compared to $22.8 million for the 2017 period, reflecting the RAYALDEE revenues, partially offset by a decrease in our Latin American revenues.

Revenue related to the transfer of intellectual property during the third quarter of 2018 was $21.6 million compared to $22.4 million for the 2017period. During the third quarter of 2018, we received $8 million from our partners related to the approval of RAYALDEE in Canada as well as a milestone for the commercial – commencement of our Phase II clinical trials in hemodialysis patients. Of these payments, $6 million was deferred and will be recognized over the dialysis development period.

As we announced this afternoon, we have strengthened our balance sheet through a combination of equity and unsecured debt resulting in an additional $150 million of fresh capital, providing us flexibility to execute on our commercial and R&D plans. We are fortunate to have the continued financial support of Dr. Frost, Dr. Hsiao and our other long-term investors.

We closed the quarter with approximately $43 million in cash, which, of course, does not include our recent financing. Despite the infusion of capital, we’ll remain mindful our cash balance while we make investments into both our R&D pipeline and commercial activities. Improving operating margins and associating cash flow are anticipated to continue within our RAYALDEE and BioReference franchises, and as a result, are expected to reduce our cash flow used in operations.

Looking forward to the fourth quarter, we expect revenues from services to be between $185 million and $205 million. As a reminder, the comparable period of 2017 and revenue from services of $192.7 million after taking into account the adjustment for the adoption of ASC 606 and before nonrecurring adjustments to revenue of $73.3 million consisting of a $30 million payer adjustment and $43 million related to our expected collection amounts.

Turning to product revenues. We expect the fourth quarter to come in between $28 million and $32 million, including revenues from RAYALDEE between $6.5 million and $7.1 million, while the transfer of an intellectual property is expected to be between $18 million and $23 million.

Looking at anticipated expenses for the fourth quarter. We expect costs and expenses to be between $280 million and $290 million, including research and development expense of $33 million to $38 million. We look forward to providing further details on our 2019 financial performance during our year-end update.

With that, I’ll turn the call back to Phil.

Philip Frost

Thanks, Adam. Overall, we were pleased with our progress this past quarter as we advanced sales of our commercial products, continued to work to streamline our BioReference Laboratories unit and to define a urology franchise focused on men’s health. We made significant progress with our clinical programs. We are also pleased to have met our financial guidance for a third consecutive quarter.

At this point, I’d like to express my appreciation to all of our employees for their hard work and dedication to building a great company. Once again, I’d like to thank you all for participating in today’s call. With that, operator, we’re ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Louise Chen with Cantor Fitzgerald.

Sudan Loganathan

Thank you so much. This is Sudan Loganathan in for Louise. So I had a few quick questions. So, basically what are the company’s thoughts about the diagnostics business and its performance over the year for the rest of 2018? And then going into 2019, how much room is there left for growth? What’s the company’s plan to extract maximum value for the business? And what are the biggest drivers for growth? And then, regarding the hGH-CTP program, what updates do you have for the remainder of this year? And then what supports your confidence that the pediatric study will be positive?

Adam Logal

This is Adam, I’ll try to jump in on the BioReference side. So certainly, the business has continued to improve throughout the year. We have continued to improve the operating margins, and we do think there is room for our operating margins to improve significantly in 2019. Of course, there’s headwinds in front of us, and we’re still working through our plans. But we are encouraged where Jeff and the team are bringing the business and see great prospects on the pure clinical lab but also within the genomics segment there. So we feel like there is real opportunity to get into the mid double digits – mid-teen – double digits to mid-teen EBIT margins.

Steve Rubin

For hGH, I mean it’s a blinded study so we’re not going to have a lot of data to talk about – if any data to talk about until we see our topline results. But we obviously feel really good about it, we had very strong Phase II results. Our Phase III is designed – uses one of the dosages we studied in the Phase II. Safety metrics from our open label is continued to be strong, and we’ve had probably more patients on our drug with our ongoing open label Phase II studies than anybody else studying long-acting growth hormone. So we feel probably about as good as you can feel in a blinded clinical study.

Sudan Loganathan

Okay, great. Thank you.

Operator

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

Yale Jen

Good afternoon and thanks for taking the question. We noticed that the third quarter BioReference Lab revenue was slightly lower than the prior quarters and – is there any seasonality toward this? Or there’s other sort of factors that will be depressing the revenue and that that could be a norm going forward?

Adam Logal

So thanks for the question. It’s Adam again. So we – we gave guidance for BioReference to be between $200 million and $220 million during the quarter. Obviously, we came in at the lower end of that range but certainly within where we thought it would be. There’s kind of assumptions around volumes and volume growth and also, I think just across the industry all the other large clinical labs saw some softness in the third quarter. Typically, there’s not a large degree of seasonality, it’s dependent on a number of business days in the quarter and that’s one of the reasons why our fourth quarter is guided between $185 million and $205 million. Just the kind of actual business there.

Yale Jen

Okay. That’s very helpful. And then maybe one more question here, which is that, it seems that your GeneDx operation [indiscernible] revenue side as well as from the new product development side, it seems to both are moving well. So is there a time that eventually you would talk this from a revenue perspective going forward? Or you think that still will blend in the entire BioReference revenue mix?

Adam Logal

Yes. I mean, we manage the business as one, so that’s the reason why we don’t break it out. In the past, we’ve said that it represents between 17% and 20% of the overall revenue. So to give you an indication of where that is. So overall, it’s managed as one business, and we’ll continue to consider it that way.

Yale Jen

Okay. Great. Thanks a lot. That’s really appreciated.

Adam Logal

Sure.

Operator

There are no further questions at this time. Please proceed with your closing presentation.

Philip Frost

Okay. If there are no other questions, we’ll thank you once again for participation, everyone on the call.

Adam Logal

Thank you, Phil.

Operator

Ladies and gentlemen that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your lines.