OPKO Health, Inc. (NASDAQ:OPK) Q1 2024 Earnings Call Transcript

OPKO Health, Inc. (NASDAQ:OPK) Q1 2024 Earnings Call Transcript May 7, 2024

OPKO Health, Inc. misses on earnings expectations. Reported EPS is $-0.11577 EPS, expectations were $-0.09. OPKO Health, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, and welcome to the OPKO Health First Quarter 2024 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to your host today, Yvonne Briggs. Please go ahead.

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 first quarter of 2024. 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. 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, 2023, 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 7, 2024.

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, will then provide an overview of BioReference Health, followed by OPKO's pharmaceutical business. And after that, Adam Logal, OPKO's CFO, will review the company's first quarter financial results and then will open the call to questions. Now I'd like to turn the call over to Dr. Frost.

Phil Frost: Good afternoon, and thank you for joining us today. In March, we announced an agreement to sell certain assets of BioReference Health to Labcorp for $237.5 million. The assets included BioReference's clinical diagnostics and women's health testing services outside of New York and New Jersey. The transaction was specifically structured in a manner so as to increase the likelihood of obtaining expedited clearance from antitrust regulators. But it also streamlines the remaining operations to advance the path to profitability for our diagnostic segment. The transaction is expected to close in the second half of this year, pending FTC clearance. In general, our long-acting growth hormone therapy continues to gain traction as our global commercial partner, Pfizer, expands its launch of the product in over 40 global markets.

This once-weekly injection product to treat growth hormone deficiency is the first new chemical entity developed at OPKO Biologics in Israel, where we now have other preclinical candidates under development. One is a long-acting form of oxyntomodulin analog, which I mentioned in our last quarterly call. The pegylated form of this active peptide has been shown to be effective and safe in treating diabetes and obesity in a Phase 2 study in over 450 patients. The new long-acting form is expected to have the same pharmacology profile as the pegylated form, but permits administering larger doses. We have in development a long-acting hGH antagonist for the treatment of acromegaly caused by the excessive secretion of growth hormone and IGF-1. We are progressing in our work with Entera Bio to develop oral forms of oxyntomodulin and a GLP-2 analog for short bowel syndrome and other disorders involving nutrient malabsorption.

We look forward to keep you apprised of progress with these promising programs. ModeX continues to advance its development work, and two programs are on track to enter the clinic this year, our Epstein-Barr vaccine, licensed to Merck, and our multispecific oncology antibody, which has received FDA clearance for a Phase 1 trial. Our collaboration with BARDA is moving forward and provides non-dilutive financing to develop multispecific antibodies against COVID. As work progresses on this first indication, we will begin to explore alternative targets to tackle other biodefense threats, such as influenza. With that brief overview, I'll turn it over to Elias. Elias?

Elias Zerhouni: Well, thank you, Phil, and good afternoon, everyone. Let me start by apologizing if you hear background noise. I'm in a noisy environment at the airport. But as Phil said, we were very pleased to announce our agreement with Labcorp to sell certain assets of BioReference Health for a cash purchase price of 237.5 million. These assets generate approximately $100 million in annual revenue and include patient service standards, certain customer contracts, and operating assets associated with testing services focused on clinical diagnostics and women's health across the U.S., but outside of New York and New Jersey. We will retain our national oncology and urology franchises and our diagnostic services in New York and New Jersey.

This complements our efforts to improve efficiencies and enhance the productivity of operations. This transaction will streamline our laboratory services business and support our work to reestablish profitability in the near future. As Phil mentioned, we expect the sale to close in the second half of 2024, subject to customary closing conditions and applicable regulatory approvals. As an ongoing initiative, we continue to improve BioReference's performance and in turn build value. Our focus remains on initiatives to reduce costs, improve efficiency and enhance productivity. In addition, we seek to bolster growth through the expansion of insurance coverage in our higher value specialty segments of oncology and urology, with particular focus on our proprietary 4Kscore Test.

As you know, the 4Kscore Test was first introduced in 2014 as a laboratory-developed test. As you know, FDA published new rules to reform the regulation of lab-developed tests. This will have a minimal impact on BioReference Health, as all our tests are approved by New York state regulators who are exempted from the announced FDA reform. In December 2021, I would like to remind you, 4Kscore was approved by the FDA, supported by its analytical and clinical data. FDA concluded that the 4Kscore Test had the appropriate sensitivity of 96.9% and negative predictive value of 95.9% to contribute to an overall beneficial clinical decision as to whether a prostate biopsy should be performed and accordingly minimize unnecessary biopsies without excess risk of missing clinically significant prostate cancers.

In more than 100 independent publications by urologists since then, the 4Kscore has ranked as the best-performing biomarker test for the assessment of risk probability for aggressive prostate cancer. Our urology team delivers strong growth in 4Kscore Test volumes in the first quarter, and we expect these volumes to build as the test is included now in various clinical guidelines for early detection of prostate cancer for follow-up after PSA screening for initial and repeat biopsy risk stratification. In regard to Rayaldee, the program continues to enjoy stable demand, which we hope will grow with new data that Rayaldee may delay the onset of dialysis according to our most recent analysis. In oncology, we are pleased with GenPath's performance due to its innovative testing platform with an expanded hematological malignancy panel and very competitive turnaround times.

We continue to see strong growth in our oncology business with over 12% growth in volume Q1 2024 versus Q1 2023. Much of this growth was through collaborations with large cancer centers and mid-level health systems. As health systems are challenged with cost and staffing in the oncology space, they are looking for a reference laboratory to work with for their testing, opening up possibilities for BioReference Health. GenPath has been able to meet their needs with our enhanced and comprehensive menu across all stages of care. This includes the internalization of our hereditary cancer business in late Q4 2023, which now offers clients an internal solution with fast turnaround times for timely decision-making. We continue to expand our testing portfolio and expect new tests in Q2 to complement our current OncoCyte advance and onco-risk portfolio, which will enable GenPath Oncology to evaluate guideline-recommended genetic components of a prostate's cancer and keep us at the forefront of precision oncology.

Similar to our New York, New Jersey Women's Health and Clinical businesses, our national oncology testing segment will remain with BioReference Health under our GenPath Oncology brand, upon closing of the transaction with NACOR. We believe that BioReference Health is well positioned for further expense reductions and revenue expansion with a focus on the retained businesses in the New York and New Jersey markets after the divestiture. Complementing these efforts to boost performance, we will continue to improve our diagnostic division to further enhance profitability for OPKO Health and best position us as an innovative biopharmaceutical company. Moving to our pharmaceutical segment, as you've heard, NGENLA has been launched in all major global markets, like Pfizer.

We believe this drug is well positioned for significant growth as long-acting growth hormone products become the global standard in treating growth hormone deficiency for children. The launch is progressing as expected with an increasing and significant percentage of patients shifting from daily to the long-acting once a week NGENLA product. In addition, we expect our partnership with Pfizer to expand with additional indications including growth hormone deficiency for adults and other pediatric applications. And combined, these approvals for these two indications will entitle OPKO to an additional $100 million in milestone payments. Let me go to ModeX. As for ModeX, we're proud of the progress to date. In March, we announced favorable results from the Phase 1 clinical study with our trispecific antibody against HIV.

These clinical data are the first reported for a trispecific antibody in humans and strongly support further development of multispecific multivalent antibodies against HIV. The antibody was found to be safe and well tolerated at all dose levels through both intravenous and subcutaneous routes with minimal anti-drug antibodies observed with dosing ranging from 0.3 milligram per kilogram to 30 milligram per kilogram with up to four administrations and a pharmacokinetic which remained consistent and similar to standard molecular antibodies. We therefore believe and our partners at N.I.H. believe, that multispecific antibodies will offer a differentiated approach to long-lasting preventive and therapeutic options against most HIV-1 variants with the possibility of activating the immune system against the latent virus population to affect a functional cure.

We're a partner with N.I.H. on this program. Our collaboration with Merck to develop MDX2201 which is our Epstein-Barr virus multivalent nanoparticle vaccine is advancing on plan. We received a $50 million upfront payment upon licensing this vaccine with a potential $872.5 million in development and commercial milestones, plus royalties on global sales ranging from single-digit to double-digit percentages. In terms of timing, we expect this program to enter the clinic in the later part of this year. Our collaboration with BARDA is also proceeding on schedule and represents another source of non-dilutive funding for the company. We secured an initial $59 million grant to fund R&D and clinical evaluation through a Phase 1 study of our multispecific antibodies against known variants of SARS-CoV-2 for the treatment and prevention of COVID-19.

Additional funding of up to $109 million may be available from BARDA to develop multispecific antibodies and delivery approaches to target other biodefense threats such as influenza. The ultimate goal of this research program is to develop a platform with gene-based delivery methods using mRNA or DNA vectors to supplement the body's natural protein production processes which can then be used efficiently and effectively against future pandemics. Rounding out the ModeX pipeline is our immuno-oncology program which is focused on hard-to-treat solid tumors, as well as certain liquid tumors such as leukemia's and lymphomas. We believe our multispecific antibody candidates can simultaneously target several tumor antigens and enable better control of [indiscernible] immune system activation.

And we expect our Tetraspecific LASER program for solid tumors to enter the clinic this quarter as our first IND application, as indicated by Phil, focused on solid tumors was deemed acceptable to proceed by the FDA. Other immuno-oncology products are advancing through IND-enabling studies and are on target to enter clinical studies next year. So as you can see, it's an exciting time for OPKO, as we execute our strategy to gain profitability for BioReference Health by rightsizing the diagnostic division to its most profitable areas of activities, while advancing our biopharmaceutical segment with several programs set to enter the clinic this year. I will now turn the call over to Adam Logal to discuss our first quarter financial results. Adam?

Adam Logal: Thank you, Elias. As Phil and Elias have discussed, we had a busy start to the year, realizing significant value from some of our underlying assets and strengthening our balance sheet. The convertible debt offering in January reduced our cash interest expense. This refinancing provided us the flexibility to align our cash needs for our research and development investments to debt maturities over the next five years. In addition, we used a portion of the proceeds to buy back 55 million shares of our common stock, reducing our outstanding shares by over 7%. We also announced our agreement with Labcorp for the sale of select assets, which was a competitive process. And when completed, that will allow us to realign our business operations to focus on core markets and test offerings and to support our path to profitability at BioReference.

While we are still within the review window with the Federal Trade Commission, we are diligently working on the profit plan for BioReference to ensure we get to break even and then profitability as quickly as possible. The Labcorp deal was the first large step in the multifaceted plan. Moving to our financial results for our diagnostic segment, we reported revenue for Q1, 2024 of $126.9 million compared with $132.4 million for the 2023 period. Cost and expenses decreased to $161.3 million for the first quarter of 2024 from $172.4 million for the 2023 period. Operating loss for our diagnostic segment of $34.4 million included approximately $2.2 million of nonrecurring costs related to employee severance and programs associated with our efforts to return to profitability.

Depreciation and amortization expense were $7.9 million and $8.7 million for the 2024 and 2023 periods, respectively. Revenues included approximately $27.8 million related to the book of business that is subject to our sale agreement with Labcorp. The cost and expenses related to this business were approximately $34.8 million. As part of the transaction, Labcorp has agreed to offer employment to more than 700 of our impacted employees who support this business. Moving to our pharmaceutical segment, revenue decreased to $46.8 million for the first quarter of 2024 from $105.2 million for the comparable period of 2023. Revenue from products including our intellectual property, our international pharmaceutical businesses decreased by $2.3 million, reflecting lower sales within our Israeli API business, partially offset by higher sales of Rayaldee.

Revenue from the transfer of IP was $8.7 million for the first quarter of 2024 compared to $64.8 million for the 2023 quarter, which included an upfront payment of $50 million from Merck as a result of our EBV vaccine agreement, as well as $9.5 million of milestone payments from our partners for Rayaldee. During the first quarter of 2024, Pfizer was able to substantially reduce the cost of manufacturing of NGENLA by obtaining approval for a significant scale-up of their manufacturing process, in order to support the global launch of NGENLA. In turn, Pfizer has revalued its inventory on-hand at December 31 and amortized that difference in manufacturing costs during the first four months of 2024, which is their standard accounting policy. As a result, our anticipated gross profit share for the first quarter was less than we anticipated, and we reported gross profit share from Pfizer of $5.8 million, which compares to $3.1 million for the 2023 period.

Pfizer has obtained significant payer access in the U.S. in 2024 for NGENLA and we look forward to the continued execution on their global commercialization plan. In addition, other revenue includes approximately $2.2 million from our underlying agreement with BARDA, which offsets R&D and underlying support expenses for that program. Costs and expenses for our pharmaceutical segment were $74.5 million for the first quarter of 2024, compared to $86.3 million for the 2023 period. Research and development expenses for the first quarter of 2024 were $21.2 million, compared to $31.9 million for the 2023 period. The 2023 quarter included the nonrecurring $12.5 million of expense related to our payment to Sanofi for their portion of our upfront payment from Merck.

Partially offsetting this decrease were increased activities for our ModeX development programs. The resulting operating loss for the quarter ended March 31, 2024 was $27.7 million, compared to operating income of $19 million for the first quarter of 2022-'23 which I previously mentioned benefited from the $57.5 million of milestone payments received in the quarter. Amortization expense related to intangible assets were unchanged at $16.4 million for both periods. Turning to our consolidated results, the first quarter of 2024 reported an operating loss of $71.5 million compared with an operating loss of $30.6 million for the 2023 quarter. Net loss for the 2024 period included approximately $26.2 million related to the fair value change on embedded derivatives related to our convertible notes issued in January.

For both periods, we recorded noncash unrealized gains on our investment in GeneDx of $22.7 and $16.8 million respectively, for the 2024 and 2023 periods. As a result, net loss for the first quarter of 2024 was $81.8 million for $0.12 per share and this compares with a net loss of 18.3 million or $0.02 per share for the 2023 quarter. Looking ahead, we're providing the financial guidance with the following assumptions. For our pharmaceutical segment there are a number of factors that will continue to impact our gross profit share payments from Pfizer, including revenue from product sales from Genotropin and NGENLA. Global sales of Genotropin for the first quarter of 2024 as reported by Pfizer, were $130 million and Pfizer has not separately reported sales of NGENLA However, we have continued to observe consistent prescription growth globally for NGENLA as reported by IQVIA and Symphony.

After adjusting for the expected accounting impact for the improved gross margins associated with the increased manufacturing scale of NGENLA, we have revised our estimated gross profit share to be between $30 million and $40 million versus our previous estimate of $40 million to $50 million. We also assume a stable foreign exchange rate for our ex-U.S. pharmaceutical businesses which will allow for continued profitable growth. R&D expenses for the second quarter of 2024 will reflect higher activities related to our ModeX programs including CMC and efforts related to the initiation of our first immuno-oncology clinical trial. A portion of these increased activities will continue to be funded through our BARDA agreement. For our diagnostic segment as the timing of our closing for our Labcorp transaction is not yet certain and is subject to FTC review, we have not adjusted our guidance to remove this business from our second quarter estimates.

As we've outlined, we're working to align the business to achieve cash flow break-even run rate by the middle of 2024 and profitability run rate by the end of the year which are both subject to the timing of closing of our Labcorp transaction. This work continues to include consolidating our geographic footprint and rationalizing our testing offerings as we expect our client mix to improve and our cost structure to appropriately support our go-forward strategy. During this transition phase, we expect consistent core testing volumes with a slight increase in the average price per patient collection amounts due to our revenue cycle management initiatives. Before considering any non-recurring costs that may result from our restructuring activities and other non-recurring expenses, we expect our cost and expense in Q2 to decline by approximately $5 million to approximately $154 to $157 million without giving effect to the approximately $35 million related to the assets as part of the Labcorp transaction.

As a result, we expect the following for the second quarter of 2024. Total revenue between $182 and $187 million, revenue from services between $127 and $130 million including $26 to $27 million from assets related to the Labcorp transaction, revenue from product sales of $40 to $45 million and other revenue between $10 and $14 million inclusive of the Pfizer gross profit share estimates, which are between $7 and $10 million. We expect second quarter costs and expenses to be between $234 and $243 million, again excluding any non-recurring expenses and expenses related to our restructuring of BioReference. It will also include approximately $20 to $26 million for R&D expense that ranges based on the timing of certain CMC activities for our ModeX programs, as well as depreciation and amortization expense of $24 million.

That concludes our prepared remarks. Thank you for your attention. And now, operator, let's open the call for questions.

Operator: Yes. Thank you. We will now begin the question and answer session. And the first question comes from Maury Raycroft with Jefferies.

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