OPKO Health, Inc. (OPK) Q1 2016 Earnings Report, Transcript and Summary

Welcome to the OPKO Health Conference Call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks we will hold a question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded today, May 09, 2016. I would now like to turn the call over to Anne Marie Fields. Please go ahead Ma'am.

Thank you. Good afternoon, this is Anne Marie Fields with LHA. Thank you all for joining today’s call. 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, 2015 and its subsequent filings with the SEC. Before we begin, let me review the format for today’s call. Dr. Phillip Frost, Chairman and Chief Executive Officer of OPKO will provide brief opening remarks, followed by Steven Rubin, OPKOs Executive Vice President who will provide an update on the Company’s various businesses and clinical program followed by Adam Logal, Chief Financial Officer who will provide an overview of the Company’s financial performance during the first quarter of 2016. We will then open the call for questions after which Dr. Frost will conclude the call with his closing remarks. Now, I’d like to turn the call to Dr. Phillip Frost. Dr. Frost?

Yes, good afternoon. First of all I’d like to thank you all for participating and I will just say that today’s announcement about our new agreement with a tremendous group, that is the Vifor Fresenius joint venture to market our reality product outside the United States and certain places and also to develop with us another dosage form which will be useful for dialysis patients is really very satisfying because it’s a result of a lot of discussion and negotiating and we are pleased because this is a group that are truly expert in doing with patients with kidney diseases, probably one of the premier groups in these particular disease area, so we are very satisfied. And again, for me it’s one of the great pleasures to get to know the different experts in certain areas. In that regard, I’ll mention, that’s it’s been an absolute pleasure dealing with the Pfizer team who are our partners with the growth hormone project as you know. And as we are sitting here, it would not be surprising to understand that at any point of time we are talking to many groups, and I think all of us here are happy to say that we are blessed by having the opportunity to have these great associations. So without further discussion, I’ll pass you onto Steve who will update you on the events of the quarter.

Thanks, Phil and thank you all for joining us this afternoon. We entered 2016 with strong momentum following the transformative second half of 2015. The first quarter has been highly productive. During today’s call, I will provide an overview of our progress in therapeutics, diagnostics, biologics and certain partnered programs. Before turning the call over to Adam Logal, our CFO for a detailed discussion of our financial performance. Let me begin with an update on RAYALDEE. We announced some exciting news this morning about our new collaboration with Vifor Fresenius for the development and commercialization of RAYALDEE in Europe, Canada and certain other international markets for the treatment of secondary hyperparathyroidism in patients with stage 3 and 4 chronic kidney disease and vitamin D insufficiency. Vifor Fresenius is a leader in chronic kidney disease therapy and we believe they are the ideal partner to bring RAYALDEE to patients across Europe and elsewhere. Under the terms of the agreement, we will also collaborate to develop and commercialize a different dosage form of RAYALDEE for the treatment of secondary hyperparathyroidism in dialysis patients from end stage or stage 5 renal disease and we have granted to Vifor Fresenius an option to acquire rights to the U.S. market for this indication. The financial terms of the deal provide that Vifor Fresenius will make an upfront payment of $50 million plus upto an addition of $232 million of regulatory and sales based milestones as well tiered double-digit royalties or net sale. If Vifor Fresenius exercises the option for the U.S. dialysis market, they will pay OPKO upto an additional $555 million in commercial milestones as well as double-digit royalties or net sales. Turning to the regulatory status of RAYALDEE. As you know in 2015 we submitted the NDA for RAYALDEE to the FDA. On March 29, our PDUFA date, the FDA indicated in a complete response letter that because of deficiencies at our third party contract manufacturer our drug could not yet be approved. It is important to note that the observations were not specific to RAYALDEE manufacturing, and the letter from FDA did not cite any safety, efficacy or labelling issues with regard to RAYALDEE, nor did it request any additional studies to be conducted prior to FDA approval. The third party manufacturer submitted its action plan to remedy the deficiencies as planned on April 15. We subsequently resubmitted our NDA to the FDA and the FDA accepted the resubmission as complete on April 22 and signed a new PDUFA date of October 22, 2016. As our commercial plans for RAYALDEE have always called for a launch in the second half of 2016, we do not believe this and that will delay those plans. In the meantime we are advancing our free launch activities. We are delighted to appoint Jim DeMarco, as Senior Vice President of Pharmaceutical Sales to support the launch of RAYALDEE. Under his supervision, we continue meeting with payers and are developing pricing and reimbursement strategies. We are continuing to build out our senior commercial leadership team and you can expect to hear of other key hirers in the very near future. We have a strong body of clinical evidence showing that RAYALDEE can safely and reliably serum total 25-hydroxyvitamin D in stage 3 and 4 chronic kidney disease patients. Indeed our phase 3 clinical data with RAYALDEE indicated that the level of 25 hydroxyvitamin D required these patients to substantially hire for stage 3 and 4 chronic kidney disease. These data are consistent with recent public presentations and publications that point in the same conclusion. And note that no currently available products that can reliably raise 25 hydroxyvitamin D levels in patients with stage 3 or 4 chronic kidney disease to the levels required for superior control of secondary hyperparathyroidism. The U.S. market opportunity for RAYALDEE exceeds $12 billion and there is also a significant global market opportunity. Consequently, we are very pleased with this co-development and commercialization agreement with Vifor Fresenius. Turning now to our diagnostic segment. Our strong performance in the first quarter continues to validate the rationale for last year’s acquisition of Bio-Reference Labs. Let me begin by highlighting our new President of Bio-Reference Lab, Dr. Greg Henderson. Dr. Henderson joined us on March 15 and brings to us the ideal combination of technical expertise, entrepreneurial and management expertise. We are confident his leadership will accelerate growth of our core traditional and genetic testing services as well as our important new products such as our 4Kscore test for prostate cancer. As you know 4Kscore is the only blood test that actually identifies an individual patients risk for aggressive prostate cancer. We make great strides in several key areas important to the successful marketing of our 4Kscore test. In addition to being included in the recommendations from the U.S. national comprehensive cancer network guidelines for prostate cancer further detection last fall in March the European Association of Urology prostate cancer guidelines panel included 4Kscore in their 2016 EAU guidelines for prostate cancer. The panel concluded that the 4Kscore as a blood test with greater specificity over the PSA test, it’s indicated for use prior to its first prostate biopsy or after a negative biopsy to assist patients and physicians to further define a probability of high grade cancer. Last November, the American Medical Association created a CPT 1 code for 4Kscore which will be published this August to be effective January 1, 2017. In the meantime, we’ve had a number of positive payer meetings and we continue to work with insurers to obtain broad coverage. To support both adoption and reimbursement, the results of a clinical utility study demonstrating the ability of 4Kscore to reduce the number of prostate biopsies performed while increasing the probability of detecting aggressive prostate cancer in men with abnormal PSA levels of digital rectal exam results 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 neurologists across the U.S. and indicated that consideration of results from the 4Kscore test led to almost 65% fewer prostate biopsies being performed among participating patients. This combination of clinical and reimbursement progress continues to support our efforts as we rollout a 4Kscore test with approximately 200 Bio-Reference Labs, sales reps to both urologists and primary care physicians. The results have been dramatic. As we see in approximately double-digit percentage volume growth every month from the time we expanded in the region of 10% sales force to 200% Bio-Reference Labs team. In April alone, we performed over 4,600 4Kscore test. We also made significant progress with GeneDx, our higher margin genetic testing business. Our GeneDx unit had a very strong showing at the recent American College of Medical Genetics and Genomics annual meeting with 11 papers presented covering a range of topics from inherited [ph] cancers to whole Exome sequencing. Over the last several years, GeneDx has also been striving to better understand the genetic causes of autism and intellectual disability through research and its robust Whole Exome Sequencing program. Based on this increased understanding and knowledge, GeneDx was excited to launch Autism/Intellectual Disability Xpanded Panel. This is a dynamic testing panel analyzing approximately 2,000 genes that have been associated with autism, intellectual disability or developmental delay. Regarding our Claros1 point of care system, we continue to progress our plans to commercialise its novel diagnostic system to provide rapid, high performance blood test results at a point of care. With a single drop of blood, Claros1 can run test in a physician’s office or hospital nurses station, avoiding the use of a centralized reference laboratory for these tests. We expect to initiate and complete clinical trials for both PSA and testosterone utilizing the Claros1 system later this year. Upon FDA clearance, we expect to fully leverage Bio-Reference Labs in marketing, sales and distribution resources for the launch of Claros diagnostic test in the U.S. We are also developing test for TSH in vitamin D, but there are many more applications for the technology including infectious disease, cardiology, women's health and companion diagnostics. During the first quarter, we made meaningful progress advancing the development programs for certain of our biologics products, specifically our long-acting forms of Factor VIIa, human growth hormone and Oxyntomodulin. Let me start with our long acting version of coagulation Factor VIIa. In February, we initiated a phase 2a dose escalation study to determine safety and explore efficacy endpoints in patients with a long acting Factor VII CTP in the treatment of bleeding episodes of haemophilia A or B patients with inhibitors that Factor VIII or Factor IX. This study is intended to enrol 24 patients in the United States. Depending upon enrolment rates, we expect to have interim data by year end from this trial. We already have FDA and European orphan drug designations for Factor VIIa-CTP for these indications. Current treatment options with Factor VII require multiple IV infusions to treat bleeding episodes because of short half-life. Also, frequent IV infusions are onerous when used as prophylactic therapy especially for children. MOD-6031 is our long acting subcutaneous oxyntomodulin which is a natural appetite suppressor for the treatment of obesity and Type 2 diabetes. In March, we are pleased to dose the first subject in a phase 1 single dose escalation study evaluating the safety and pharmokinectics of MOD-6031 healthy, overweight or obese subjects. The study is intended to enrol 40 subjects and depending on enrolment rates we expect to have topline data by year end. Pre-clinical animal data showed that our compound reduced food consumption and body weight and led to improvements in glycemic control and lipid profile. Pharmecokinetic study showed extended kinetic profile in comparison to native Oxyntomodulin. We believe, Oxyntomodulin has the potential to be a safe, long-term therapy for obesity and type 2 diabetics, each of which represents a significant market opportunities. More than 380 million people are living with diabetes worldwide of whom approximately 90% of Type 2 diabetes. According to the World's Health Organization, there are more than 500 million severely overweight or obese people in the world. As a final topic of discussion let turn to our partnered products beginning with VARUBI. Our partner Tesaro commercially launched VARUBI in the U.S. last November for the treatment of chemotherapy educed nausea and vomiting. And we understand that the launch has progressed well. In accordance with our agreement, we are eligible to receive milestone payments of up to $30 million upon achievement of certain regulatory and commercial sales milestone, of which $20 million has been received to-date. An additional commercial milestone payments of up to $85 million specified levels of annual net sales are achieve. In addition, there are tier double-digit royalties on net sales in the United States and the European Union. Tesaro remains committed to expanding access to VARUBI for cancer patient suffering CIMV. They submitted in NDA with the FDA for intravenous version of VARUBI in March. Also in March they submitted an application from marketing authorization in Europe for oral VARUBI. During the first quarter we made excellent progress advancing the development program for long-acting human growth hormone products hGH-CPT which is part of worldwide with Pfizer. Enrolment in a global Phase 3 clinical trial in adults was completed in late June. Top line data readout is expected for the end of 2016. These forthcoming data are expected to support registration in the EU and United States. Last month we've reported 18 to 24 months clinical data from our ongoing open label extension study of a Phase 2 pediatric study for hGH-CPT in a podium presentation at the Endocrine Society annual meeting. That study is a continuation of our Phase 2 one year dose finding study which 53 naïve growth hormone deficient children received one of three dose that hGH-CPT once weekly or daily nutropin as impaired Published 12-month data from the Phase 2 study confirm comparable responses to once weekly hGH-CPT and daily nutropin as reflected by the safety efficacy pharmacodynamic profile. Based on a promising Phase 2 pediatric clinical we planned to initiate a global pivotal Phase 3 study in pre [ph]pivotal growth hormone deficient children later in this year. Our agreement with Pfizer its worth of total of $570 million in milestone payments plus royalties which we have so far received $295 million. In conclusion, this year has gotten off to a strong start. We are continuing with our pre-launch plans for RAYALDEE. We have a terrific new default for seniors to expand the commercialization of RAYALDEE beyond the U.S markets and beyond the initial therapeutic indication of Stage 3 and 4 chronic kidney, throughout 2016, we expect to achieve a number of value creating milestones as we continue to increase revenue from Bio-Reference Labs and enhance the commercialization of 4Kscore with over 200 sales people. Advancing the clinical program for Claros, making progress with the multiple clinical programs are underway including reporting data from our Phase 3 trial of our along-acting human growth hormone, and initiating the global Phase 3 pediatric study Before turning the call over to Adam for review of our financial performance, I'd like to note that we will be holding an Analyst Day even in New York City on June 15 again at 4.30 PM. We expect to have key option leaders in molecular diagnostics and chronic kidney disease, as well as our entire management team for review our progress and plans moving forward. We look forward to hosting interesting and informative event. We're going to limit in person attendance to analysts and institutional investors, but the entire event will be webcast both live and archive to encourage everyone else to listen in via the internet. Adam.

Thank you, Steve and good afternoon everyone. During the quarter ended March 31, 2016 we saw a significant improvement for financial performance compared to the 2015 period. Revenue increased to $291 million from $30 million principally driven by revenue from Bio-Reference of approximately $251 million. Operating loss for the quarter was $27.5 million compared to $56.9 million for the 2015 period. Operating loss during 2016 includes approximately $17.2 million related to payments to Bio-Reference executives including $8.9 million of non-cash expense related to the acceleration of their stock option. Impacting the 2015 period was $25.9 million non-recurring charge related to the repayment of a grant in Israel as a result to the Pfizer transaction. The acquisitions of EirGen and Bio-Reference have the most impacts on the comparability of our results between the two periods. Net loss for the three months ended March 31, 2016 decreased to $12.0 million from $117 million for the comparable period of 2015. Net loss in the 2016 period benefited from an income tax rate change in Israel. The 2015 period included the non-cash $53 million charge related to the mark-to-market activity of embedded derivatives of our convertible debt. Our balance sheet remains strong to approximately $175 million in cash and cash equivalents, plus the cash we received is part of the upfront payment from our collaboration agreement for RAYALDEE and the availability under our credit facility. I would now like to turn the call over to Dr. Frost. Phil?

Thank you. Now, we'll open to questions if there are any.

[Operator Instructions] Your first question comes from the line of Dana Flanders from JPMorgan.

Hi. Thanks for the questions and congratulations on the deal. My first question is on the Vifor deal, can you just remind us what is the process to move RAYALDEE forward in these ex-U.S. markets and get approval. Just what are the timelines there? And then how should we be thinking about ex-U.S. market size for RAYALDEE relative to the U.S.? And then, I have a few follow-ups.

Hi, Dan, it's Charlie Bishop. The time line for moving RAYALDEE into approval in Europe is basically submitting an MAA to EMA which our plan in the first half of 2017 that would put us in a position to be approved sometime approximately a year latter with the launch following as soon as possible there after. With regard to the size of the market, our chronic kidney disease is pretty agnostic to cultures and races across the world in the United States. Blacks and Hispanic seem to be mostly affected and that's true across other countries as well. So, you can look at the proportions of populations recognizing that there are some differences in our Country's treat end stage renal disease or chronic kidney disease.

Okay. Thanks. And my next question just on the development in dialysis patients. Is the cost there I guess what 50/50 with your partner and just where are you on the development of that currently?

So, the answer – the cost will be split 50/50 and as far as the progress for developing we are just beginning.

Okay. And then just my last one here and then I'll hop back in the queue. On the 4KScore reimbursement I believe you are expecting a CMS decision soon. Can you just walk us through the different potential outcomes there and can you remind us is this a decision on access and price or does the price negotiations still just come at a later date? Thank you.

Hi. This is David Okrongly. So, we're working right now with the group called MolDX. This is a group run out of Palmetto, and that is going to be used as hopefully a way to get a third party who is use to looking at novel molecular and advanced diagnostic test to allow then our Medicare Administrator know it has to give a local coverage decision and then based on the pricing we're seeing which is quite good from the private insurance companies that are bank to-date use that pricing information to set a price with Novitas. So it's still a couple of steps in the process but we're making great progress on it.

Great. Thank you.

Your next question comes from the line of Brandon Couillard with Jefferies.

Hey, thanks. Good afternoon. Just back on 4Kscore, could you give us a sense of sort of in the context the volume run rate that you gave us for April, what proportion of that is coming from GP community base, I guess the Bio-Reference incremental uptake, any color coming out of the AUA meeting this week?

Approximately half of the tests are coming from the Bio-Reference reflex type of situation in which an elevated PSA automatically gets a 4Kscore down the line, because the precision requesting the PSA has indicated that if it is elevated he would like to have the 4K. We have had tremendous reports back from the meeting out in California. We understand that our booth was swamped for most of the time and that was great not only at the booth, but we had several presentations and private meeting and vendors, they all attracted great audiences. So, we're feeling as though it is on a very track, and this was the first meeting in which Bio-Reference team participated and they certainly added a lot to the picture.

Jumping over to Claros, any -- Steve, any more granularity you can give us on the exact time line or dates when you expect to actually submit the first two I guess tests for that platform?

We're looking to submit those tests, the PSA and testosterone towards the end of this year or early next year, and regulatory approval in 2017.

Okay. And then lastly for Adam, can you give us your operating cash flow figure for the first quarter. Look like the net cash balance decline little bit sequentially. And then any more insight you can give us on in terms of the sequential jump in SG&A, I mean, even excluding the severance related payments to Bio-Reference, so looks like a sizeable sequential uptick. Anything you can help us on there? And then in terms of the outlook for the year you know ballpark numbers in terms of OpEx?

Sure. So with operating cash flow we used about $9.2 million from operations for the quarter, which is a pretty good result for us. As far as the increase in SG&A cost, those are – we mentioned the severance related costs, but there is not anything else individually that stands up Brandon to call out. And I do think from a run rate perspective on the cost of revenue R&D and SG&A lines, I think they are excluding some of those one time cost that we call now those should be pretty run rate to consider – continue to think about.

Super. Thank you.

Your next question comes from the line of Yale Jen with Laidlaw & Company.

Thanks for taking questions. Could you give us a little bit breakdown for the top-line revenue between the Bio-Reference Lab and other aspects?

In my remarks I mentioned that we had about $251 million revenue from Bio-Reference, revenue from our products which consist of our pharmaceuticals we're selling abroad. We're just below $20 million and 19.9 and then revenue from our transfer from intellectual property was approximately $18.6 million.

Okay, great. Thanks. And another question is that in terms going forward, if you want to use the data, RAYALDEE for dialysis patient. How would you see any differences or similarity to that of in terms of the chronic kidney disease patient in terms of any special needs or in terms of [Indiscernible] any other aspects? And thanks for taking the questions.

Hi, Yale this is Charlie.

Hi.

The pre-dialysis patients are more specifically those patients who have CKD stages 3 or 4. They will be treating with RAYALDEE on a daily basis whereas hemodialysis patients will be treated three times per week. Now that being the case, the dose to be delivered to hemodialysis patients will be higher. Also it's known that secondary hyperparathyroidism as it progresses requires usually higher and higher doses to patients to effectively control elevated PTH. So given that stage 5 for hemodialysis patients have more advanced secondary hyperparathyroidism. We expect that the dose will be even higher.

Okay, great. Thanks lot. I appreciate it.

Your next question comes from the line of Kevin DeGeeter with Ladenburg.

Hey, good afternoon guys. Congratulations, really nice quarter. Couple of questions following up I guess with regard to RAYALDEE in potential development in the dialysis setting. Charlie, can you comment on you sort of the target patient population for RAYALDEE in light of the other Vitamin D analogs with approved indications for dialysis some of which will likely be generic by the time RAYALDEE were to enter the dialysis market.

Hi, Kevin, good question. RAYALDEE will be unique as a treatment for dialysis patients in that its an own oral-only drug, and as you will understand Oral-only drugs are excluded from the U.S. dialysis bundle, that would mean that RAYALDEE should stay excluded as we expect from the bundle would be covered by Medicare Part D and not by Medicare Part B as in boy. That's creates an interesting situation where RAYALDEE will not be a cost to dialysis providers rather it would be potential profit center given that it could to dispensed five dialysis centers, pharmacies, should they have pharmacies and that of course is the trend for dialysis centers to have more and more capability from the pharmacy standpoint. I hope that answered your questions.

Yes. That's was really helpful. Thanks. And just maybe two other quick follow-ups from me. Adam, can you give us sort of apples-to-applies comparison of the Broadway for Bio-Reference, I know we gone through this exercise before comparing to the historical -- historically reported Bio-Reference numbers create some accounting issues from [Indiscernible] standpoint?

Yes. I think if you look at the Q4 to Q1 growth rate you'd see that Bio-Reference revenue grew by just below 15% quarter-over-quarter and that's been really driven by a substantial increase in the patient counts particularly at GeneDx, so those are the comparable scale.

Okay, great. And then maybe one last one from me and I'll get back in the queue, maybe this one for Steve, Steve, what's really the gating factor to kicking off the pediatric human growth hormone registration study sometime later this year?

It just device and drug finder [ph] device and as we said, we're going to start our trial with the device, the same device and the same formulation that we commercialized. Pfizer controlling that process and we're obviously supportive of the strategy.

Great. Thanks so much.

[Operator Instructions] Your next question comes from the line of Rohit Vanjani with Oppenheimer.

Hi. Afternoon. Thanks for taking the questions. I had a couple of questions on the RAYALDEE filing. For the Catalent plant Florida have they made any new hires, or they hired any consultants to come in and help with the action plan?

Jane Hsiao, if can respond.

Yes, indeed. They have consultants working with them but most important is they actually a very good quality team from top to the bottom, so very comfortable with their response.

And then when you submitted the action plan, does that mean that all of the corrective actions that doesn't mean that they're all implemented as of this submission, right. It's more of a promise that you'll get those actions implemented by the PDUFA in 10/22/16.?

No, they response them actually addressing the deficiencies, with regard to that they have corrective action plan, by the time they submit this response on April 15, most of the corrective action are in place and some of them already completed and some of them will be completed in the next few weeks that includes implementing new sterner [ph] operating procedures as well as training the employees very, very comprehensive response from their point of view.

Okay. And I’m assuming the FDA would have to come back and re-inspect the plan, has that date already been decided and is that before the PDUFA?

FDA has not decided that if there is a need for re-inspection as of today.

Okay. And just hypothetically if it’s the remediation can’t be implemented quick enough and you have to change, if you have to move to another Catalent side, let’s say in Latin America for Softgels, would you have to resubmit to the FDA in case of plant move, and what will the time line be again hypothetically?

Hypothetically, one has to change the manufacturing side that’s basically far over the development, that would take years to do. And we are very confident that Catalent has very adequately addressed the deficiencies.

As we probably know this facility is still operating, it is a huge facility one of Catalent’s largest that accounts for over 40% of the Softgels in the U.S. is continuing to operate ordinary core. So, the only things held up are new drug approvals, so we are not at this stage where a facility has been shut down.

And then for the partnership with Fresenius, are they responsible -- are you responsible for the manufacturing or are they?

We are.

That’s it from me. I guess, I’ll take up the rest with you offline. Thanks.\

Thank you.

Okay, we thank you all for participating once again and we look forward to being in touch with you next time.

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