OPKO Health, Inc. (OPK) Q4 2015 Earnings Report, Transcript and Summary

Welcome to the OPKO Health Inc. Fourth Quarter 2015 Conference Call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks we will hold a Q&A session. [Operator Instructions]. As a reminder, this conference is being recorded today, February 29, 2016. I would now like to turn the conference over to Anne Marie Fields. Please go ahead Ma'am.

Thank you, Doris. Before we begin I’d like to remind you that any statements made during this call which are historical will be considered forward-looking, and as such will be subject to risk and uncertainties, which could materially affect the companies expected results, including without limitation the various risks describing the company’s Annual Report on Form 10-K for the year ended December 31, 20145 and its subsequent filings with the SEC. Now, I’d like to discuss the format for today’s call. First Steven Rubin OPKO’s Executive Vice President will provide an update on the company’s business operation, followed by Adam Logal, OPKO’s Chief Financial Officer who will provide financial a review. Then Dr. Frost, OPKO’s Chairman and CEO will provide closing remarks and then Dr. Frost will follow with answering any questions you might have. I’d now like to turn the call over to over Mr. Rubin. Steve?

Thanks, Anne Marie and thank you all for joining us this afternoon. During Q4 we continue to build on the business momentum we’ve gathered following a transformational third quarter. We are already beginning to realize the synergies we anticipated with our acquisition of Bio-Reference Laboratories. This acquisition has significantly enhanced our P&L and brought us to leadership position in the diagnostic sector while also providing critical strategic value as we ramp our sales and marketing for the 4Kscore test and prepare for the launch of the credit Claros-1 point of care product. Of note a fully trained VRL sales force is now behind 4Kscore, which is available as a simple blood test from our Bio-Reference facilities following the recent approval by the New York State Department of Health. We also continue to advance in number of important clinical programs during Q4. Let me provide an overview of our progress in diagnostics, therapeutics and biologics and with certain partnered programs. Starting with diagnostics the integration of BRL is progressing well and much of our focus is on the commercialization of new test products. BRL’s reimbursement team has done a great job with sphere heading our efforts to gain reimbursement coverage for our 4Kscore test, which as you know is the only blood test that accurately identifies a man’s risk progressive prostate cancer. During the quarter the American Medical Association announced the granting of a CPT I code with 4Kscore. This will be published in August and be effective as of January 1, 2017. In the mean time we’ve had a number of positive payer meetings and we are making great progress in increasing the number of payers reimbursing for the test. This is where we really see the strategy for the acquisition coming together as BRL has 13 staff members dedicated to this effort. We validated performance of 4Kscore testing using serum rather than plasma and are running the test from our BRL facility in New Jersey, which is an important milestone in our commercialization progress because we can now fully benefit from BRL's expansion logistics and operational infrastructure. Additionally running the test on serum rather than plasma provide significant advantages to improve patient care. When an elevated PSA result suggest further valuation physician can now simply reflex to the 4Kscore of a same blood sample. This follows the Q3 recommendation from the National Comprehensive Cancer Network guidelines for prostate cancer early detection. Recall that this panel determine that the 4Kscore as a blood test with greater specificity than the PSA test indicated for use prior to a first prostate biopsy or after a negative biopsy to assist patients and physicians and further define the probability of high-grade cancer. Significantly a study demonstrating the 4Kscore test clinical utility in reducing the number of prostate biopsies performed while increasing the probability of detecting aggressive prostate cancer in men with elevated PSA levels. It was published in the January 2016 edition of the peer-reviewed journal reviews in neurology. This study included 611 patients seen by 35 academic and community neurologist across United States and indicated that consideration results from the 4Kscore test led to approximately 65% fewer prostate biopsies being performed among participating patients and influenced approximately 89% of decisions of outperforming a prostate biopsy. This study is important evidence for payers and supports 4Kscore adoption given the peer-reviewed evidence of the efficacy and cost effectiveness of the 4Kscore test. Ongoing progress in obtaining support of clinical trial data and the support BRL’s commercial organization particularly with reimbursement efforts well positions us to achieve our goal of making the 4Kscore test the new standard-of-care for prostate risk assessment. We continue to make significant progress with GeneDx our higher margin genetic testing business. the GeneDx business further underscores the financial rationale for the Bio-Reference Lab transaction and enhances expectations for growth. During the recently ended fourth quarter of 2015 we formed an important alliance of one of the largest healthcare systems in the country the Northwell Healthcare System formerly known as North Shore-LIJ Health System to provide genomic testing, molecular diagnostic testing and ancillary support services such as genetic counseling. This alliance represents a new approach to provide a cooperation and an opportunity for diagnostics to play a critical role in an improvement to patient care. We intend to seek similar opportunities throughout the country. As a reminder Claros-1 is a noble multiplex estimate system to provide rapid high performance blood test results at the point of care. Using a single droplet of blood, Claros-1 can run multiple test in a physician's office or hospital nurse station to provide quick results for the physician and patient. We have made significant progress in our efforts to advance Claros-1 with the regulatory pathway towards commercialization. We expect to commence clinical trials for our Claros PSA and testosterone test this year with the modular PMA for PSA and a 510K for testosterone expected to be submitted to FDA towards the end of this year or early 2017. We expect to launch both products in 2017 using PRL expansive marketing, sales and distribution resources. Now I’ll turn to therapeutics, turning to progress with Rayaldee, which is pending FDA approval for the prevention and treatment for secondary hyperparathyroidism in patients with stage 3 or 4 chronic kidney disease with vitamin D insufficiency. As you know, our NDA was filed on July 28, 2015 and we have March 29, 2016 PDUFA date. We expect that the FDA will hear to the state. Our dialogue with the FDA has been active throughout the NDA review process. Initially focused primarily on issues related to chemistry, manufacturing and controls or CMC has recently focused on product labeling and proposed package insert. During Q4 and into 2016 we have been initiating certain pre-commercial activities. We’re conducting research on product pricing, reimbursement and messaging, validating, manufacturing processes and preparing for inventory build, planning for key hires and sales force build out as commercialization years, developing reimbursement strategies and planning for medium of players and establishing national product distribution capabilities. We expect to be able to cover the United States with approximately 75 sales representatives and 20 clinical support specialists also known as Medical Science Liaison. The target for commercial launch is the second half of 2016. We believe Rayaldee will be the first drug in the U.S. to address secondary hyperparathyroidism arising from vitamin D insufficiency. Most healthcare professionals currently consider renal rather than vitamin D insufficiency to be the primary cause of SHPT in pre-dialysis patients. However the latest published research suggests that vitamin D insufficiency is the primary driver of SHPT in this patient population. And that the requirement for vitamin D is much higher than for healthy normal individuals. Currently there is no vitamin D repletion therapy that can reliably, sufficiently raise Vitamin D status to defend or control SHPT being a large market opportunity open for Rayaldee. I’ll now turn to biologics. Last week we announced that we have begun dosing patients in the Phase 2A study evaluating safety of a long acting factor VIIA in hemophilia patients. Our phase 2A study is a 24 patient dose escalation study to determine safety and explore efficacy endpoints. Our novel long acting factor VIIA product uses the same naturally occurring peptide, CTP as used in our long acting human growth hormone to extend the circulatory half-life of factor VIIA. The market for factor VII treatment is approximately $1.7 billion and growing at a rate of about 7% a year. And only 25% of the patients are currently treated. Current treatment options with Factor VII may require multiple infusions to treat a bleeding FSO because of its short half-life. It also requires frequent infusions our own risk when used as preventive prophylactic therapy especially for children. Our product has been granted orphan drug designation in the U.S. and Europe. Our efforts to develop a long acting subcutaneous Oxyntomodulin a natural appetite suppressor for the once weekly treatment of obesity and type 2 diabetes are also advancing. And we expect to commence human studies by the end of this quarter. Preclinical data indicate that our compound reduces food consumption and body weight and lead to improvements in glycimic control and lipid profile. Pharmecokinetic study showed extended activity compared to native Oxyntomodulin. We believe, Oxyntomodulin has the potential to be a safe, long-term therapy for obest and type 2 diabetics, both of which represents significant market opportunities. More than 380 million people are living with diabetes worldwide, which approximately 90% of type 2 diabetes. According to the World Health Organization, there are more than 500 million severely ill [indiscernible] these people, you can see the market opportunities with this product. We turn to our partner products first the VARUBI. Our partner TESARO commercially launched VARUBI in the United States in November for the treatment of chemotherapy educed nausea and vomiting. In accordance with our agreement, we have received $20 million in milestone payments and are eligible to receive an additional $95 million if certain regulatory and commercial milestones are reached. In addition there are tier double-digit royalties our net sales in the United States and the EU. TESARO’s goal is to submit NDA for intravenous formulation this quarter and apply for approval in Europe for oral VARUBI in Q2. We have also made significant advancements with our long acting human growth hormone product hGH-CPT, which is partnered worldwide with Pfizer. We completed enrollment at the Phase 3 clinical trials in adults in late June and top-line data from that trial is expected by year-end. We have been presenting data from our Phase 2 pediatric hGH-CPT clinical trial in various scientific conferences. Our Phase 3 pediatric study is expected to initiate before the end of this year. This agreement Pfizer is worth a total of $570 million in milestone payments to be filed at first by royalties and then a profit share. To-date we have received $295 million. To close, 2015 was a transformational year for OPKO Health and these activities have positioned us for significant revenue growth this year and beyond. We expect 2016 to be even more transformative as we advance towards fully reimbursement of 4Kscore test and we continue to leverage expansive resources of our Bio-Reference Labs. We will launch Rayaldee and we will advance our late and early state clinical pipeline. Before I turn the call over to Adam for a review of our financial performance, I’d like to note that we will be holding an Analyst Day event in New York City likely on the afternoon of June 15th. I realized that it lays off and we will be providing details as we get closer to the event. But for now I encourage you to pencil in that date on your calendar. Adam?

Thank you, Steve and good afternoon, everyone. During the quarter ended December 31, 2015, we saw an improvement of our overall financial performance, which for the first time included a full quarter of activity after our combination with Bio-Reference. Revenue in the fourth quarter 2015 increased to $276 million from $25 million in 2014 period. Our bottom line also improved for the fourth quarter of 2015 as we had net income of $3 million compared to a loss of $53 million for the comparable period of 2014. The fourth quarter of 2015 includes an income tax benefit of $26 million. Our operating loss for the fourth quarter decreased to $8 million from $32 million compared to the 2014 period. There were several items for this improvement. Importantly, we received a milestone payment from TESARO related to their launch of VARUBI, the revenue recognized from our collaboration with Pfizer and the positive results from our acquisitions of EirGen and Bio-Reference. Revenue for the year ended December 31, 2015 increased to $492 million, up from 2014 revenue of $91 million an increase of over $400 million as a result of our acquisition of Bio-Reference, revenue recognized from our collaboration with Pfizer, our acquisition of EirGen and milestone payments received from TESARO. Operating loss decreased to $99 million reflecting our continued investment in our research and development programs during the period ended December 31, 2015. Net loss for the full year 2015 decreased to $30 million compared to a net loss of $171 million for the 2014 year. This improvement was principally the result of $115 million income tax benefit as well as the positive impacts of our Pfizer transaction, our VARUBI milestone payments and the acquisitions of Bio-Reference and EirGen. Our cash position remain strong at $193 million. We believe our balance sheet provides us with the ability to fund our ongoing development programs and the commercial launch of Rayaldee. I would now like to turn the call over to Dr. Frost, our Chairman and CEO. Phil?

Thank you, Logal. I’ll be brief. I am satisfied with what’s happening at OPKO, I am satisfied with our results financial and operational, I am satisfied with the Bio-Reference Laboratories’ acquisition as Steve mentioned the reimbursement and marketing and sales teams are doing a remarkable job with helping make our 4Kscore test, a real contribution to men’s health the commercial success it deserves to be. I’m also optimistic that the Bio-Reference traditional laboratory business as well as their Genomics division GeneDx are capable of significant growth. I’m pleased with the progress of all our development projects and thrilled about the second of our projects hopefully to be approved by the FDA soon Rayaldee. This is after VARUBI or rolapitant was recently approved for our partner TESARO. TESARO held their fourth quarter conference call last Thursday and they indicated VARUBI represents a $1 billion market opportunity. They also reported significant progress with payers noting that during the first 60 days of launch an estimated a 120 million covered lives gained access to VARUBI under insurance plans. Most of our foreign units are doing well particularly our API Company in Israel FineTech. Also EirGen and [indiscernible]. I look forward with really great anticipation and continued progress on all fronts. Thank you. We’ll take questions now.

[Operator Instructions] Our first question is from the line of Dana Flanders from JPMorgan.

Hi, thanks for the questions. I have a couple that I’ll just ask upfront. First and sorry if I missed this, can you provide any usage metrics for the 4Kscore this quarter? How many physicians used it in 4Q versus 3Q and any early feedback from the expanded sales force now marketing the product? Two, just in light of some of the positive news around the 4Kscore reimbursement landscape just how should we think about the net price protest in 2016? And then how do you expect that to progress over the next several years just as that reimbursement access improves? And then thirdly, just what were the legacy Bio-Reference sales in the quarter and now that you have had for a couple months. Is it still fair to think about this business as a double-digit top line growth business for the next couple of years? Thank you.

Okay Dana thanks for the questions, I’ll start on the bottom, the last question first. Revenue from Bio-Reference for the quarter was just about $220 million of revenue from our services, was just about $220 million, which is from a patient perspective we’ve continued to see that double-digit growth we’ll be we have expect that patient growth will continue on the Bio-Reference base business. From the other questions that you asked on the metrics for physicians utilizing the 4Kscore test, we continue to see similar quarter-over-quarter growth on the number of physicians. And I think with the Bio-Reference sales force introduction. They are targeting now they are continuing to target the urologist, but they’re also expanding that into primary care. So we expect that ramp to start to increase pretty drastically once the Bio-Reference sales force is out promoting the test actively. And from a net price perspective we continue to work with the insurers on obtaining pricing that we hope to be in the mid-point of our $1,900 list price. Where we’re expecting to try to get as close to that number as we can. We haven’t certainly as we get more contracts in place we’ll be able to address that more directly.

Our next question is from the line of Kevin DeGeeter with Ladenburg.

Hi, good afternoon guys thanks for taking my question. Steve can you just comment with regard to the Phase 3 pediatric study for human growth hormone. Is that going to be a study that might support global registration all this U.S. and EU or should we think about separate Phase 3 programs for each jurisdictions?

No it’s going to be -- the only separate will be Japan, but it will be a global study that will certainly encompass registrations throughout the EU and the United States.

Great. And then maybe one or two more quick ones from me. With regard to Rayaldee, should we think about just generally speaking the medical education component of the initial launch? Obviously very novel mechanism of action here. And kind of a side note to that, should we expect additional clinical trials post-approval is being an important part of our education effort.

Kevin we will be considering doing additional clinical studies with Rayaldee. And we do view the data coming from those studies is being an important part of the med ed component of launch. One of the things that we did not mentioned is that we have intentions of developing Rayaldee for the hemodialysis market starting probably no later than the first half of next year. So those data will also feed into the med ed effort as we continue to expand the use of Rayaldee in the non-dialysis population.

Okay. And just maybe one more from me same on Rayaldee, as we think about the initial addressable market for stage 3 and stage 4 patients and CKD population. Specifically, how should we think about the bifurcation of that market and segmentation. Who do you envision as the kind of the early adaptors for Rayaldee for the balance of 2015? Thanks, that’s all from me.

So Kevin, could you clarify your question please?

So my question really pertains to the initial launch out Rayaldee who exactly are you targeting with regard to group access versus more of the hospital setting. Just kind of where in the distribution channel are you initially going to be targeting?

Right. So Kevin we see this as pretty much a blend between typical retail and specialty pharma. We don’t see the hospital market is being a big target early on in the launch of Rayaldee. So about 75% of our distribution will go out through retail according to our current estimates, about 25% will go out through specialty pharma. And that of course could adjust depending on how we set pricing as we get a little closer to launch. As Steve mentioned we are currently thinking of launch in second half of this year and we’ll make that as soon as we can during the second half, but it will be dependent on our manufacturing being able to support pipeline fill.

Thanks, that’s all from me.

Our next question is from the line of Yale Jen with Laidlaw.

Good afternoon and thanks for taking the questions. First of all you just this quarter seems that you have net earnings do you anticipate for 2016 you will start becoming a cash positive or potentially earning positive in going forward?

So Yale at this point we’re not providing financial guidance. I think one of the things that we’ve talked about is that the important driver for us to become cash flow positive is going to be obtaining wide spreads in 2016 as we’ll be getting widespread reimbursement for the 4Kscore coupled with the fourth quarter beginning looks at the launch of Rayaldee. So until we get those further behind us I think we’re not in a position where we’ll provide any more specific guidance.

Okay, great. And just a follow-up on a question in terms of 4Kscore. I know the Bio-Reference Lab sales will start to promoting to general practitioner. Do you anticipate this effort start to I guess more intensify maybe in the second half of this year or how should we think about that that effort?

Sure. We just started with the Bio-Reference for sales group launch earlier this month. So they have been fully trained, but their efforts are two to three week old. And we are already ourselves seeing significant ramps, we expect that to continue to grow overtime. And when you add in more and more reimbursements we have very high expectations.

Okay. And the last question I have is that you guys mentioned that the sales -- expected sales force for the Rayaldee probably upto 75. Would that be added sequentially is that a one step in second half of this year. So how should we think about at this point in terms of modeling the expense for 2016? Thanks.

Well we will probably start with a number closer to 25 and 75 is we expect our peak sales, but how that ramp up depends quite honestly on how sales are progressing if they progress very rapidly as we would hope then we’ll add sales people quicker. But it won’t be 75 this year. We’ll start with a number closer to 25.

Okay, great. Thank you very much.

And our final question comes from the line of Rohit Vanjani with Oppenheimer.

Good afternoon, every. Thanks for taking the questions. On the 4Kscore I think you said you were the Category 1 CPT code. I thought you had been saying that originally you’re saying that’s going to be 2017 it was going to become active and then in December you said it become active in January 2016, but in the press release it’s pushed back to 2017. Do you know what that switch was about?

We got different guidance from the American Medical Association. So we have written letters that gave us an earlier date and then they changed their procedure back to the later date, but it doesn’t make a huge difference for us, because we were already as you know building and it’s really a question of coming up with pricing. So even from Medicare, we you’re allowed to bill as far back as a year back. So the fact that the big factor is the fact that we awarded the code when we actually get their true number isn’t as important as the fact that as awarded level 1.

But then, so when you’re billing Medicare you’re billing under the MAA CPT code and then you have to go back.

Preliminarily yes, that’s correct.

Okay. And then are there any… sorry go ahead.

In payers we can either use an administrative code or the level 3.

Okay. And so is there any metrics on kind of the insurance or the reimbursement for 4Kscore how is that panning out or how many lives do you have on our coverage or how many plans that you’ve grown?

So Rohit I think from that perspective we’re continuing to see excitement from the payers around the test. We are spending time working with them showing the benefits -- the cost benefits to their health programs. And that’s principally to make sure that our reimbursement price is as we would hope. We’re working hard on that, we don’t have covered lives number that we’re ready to talk about today obviously the big one will be once we have CMS, which we hope to have a coverage decision mid-year.

Is that when you expect the real ramp to take off then after the CMS coverage decision mid-year?

Once we have reimbursement for CMS, yes.

Okay. And then I think you said you started using the Bio-Reference sales force to promote 4Kscore I think originally you said you were going to use 100, right? Have you started using the whole 100 and then you were eventually going to move to 200 people from Bio-Reference promoting it? When do you -- first of all have you started using the whole 100 and then when do you anticipate going to 200 to promote?

This is Phil Frost. We starting using their sales force a few weeks ago and we’re starting with 200.

Okay.

They have a total of 400 sales people. But we’ve trained 200 so far and the remarkable thing is that without specifying the exact number whereas we had been selling it with our 10 men sales force for over a year. Within two weeks there are 200 men coming on they doubled the daily number that were being ordered. So what we are seeing is a truly remarkable effect of the Bio-Reference addition to our effort and not only as the number doubled, but it continues to increase very rapidly. I won’t say on a daily basis, but certainly each week. So we couldn’t be more optimistic or more pleased then we are at the effect of the Bio-Reference strategy that we thought would be useful and is turning out to be son in speed.

And so did I get that right from the fair commentary and then obviously what you said right there that you are still saying double-digit volume growth every month?

That’s right, Rohit.

Okay. And then for Claros-1 it was second half ‘16 or 2017 launch for testosterone and PSA and then vitamin D what’s the timeline there or what’s the plan there?

So that will be probably the next in the pipeline unless we go something in the women’s South panel, which Bio-Reference Lab of course has an expertise in. So the plan is this will be the first time those the device in the carts go before FDA and as you know PSA is actually a PMA, it’s moderate a little longer. So once we get clear waiver for the device and the panel we expect to add more. So the testosterone a little more involved in the development. But the plan is certainly to work on that pretty focused in 2017.

Okay. And then last one for me, I think you said that Rayaldee you are having a back and forth with the FDA right on labeling. You had those conversations within the last month is that correct?

That’s correct.

Okay, great. Thank you.

And there are no further questions Dr. Frost do you have any closing remarks?

I just want to thank everybody for participating.

Okay, thank you.

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