OPKO Health, Inc. (OPK) Q1 2017 Earnings Report, Transcript and Summary

Hello and welcome to the OPKO Health Business Update Conference Call. At this time all participants are in a listen-only mode. Following managements prepared remarks we will hold a Q&A session. [Operator Instructions] As a reminder this conference in being recorded Tuesday, May 9, 2017. I would now like to turn the conference over to Anne Marie Fields. Ma’am, you may being you conference.

Thank you. Good afternoon, this is Anne Marie Fields with LHA. Thank you all for joining today’s call. I’d like to remind you that any statements made during this call 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, 2016 and its subsequent filings with the SEC. Before we begin, let me review the format for today’s call. Steve Rubin, OPKO’s Executive Vice President, will provide an update on the Company’s various businesses and clinical programs; followed by Adam Logal, OPKO’s Chief Financial Officer, for who will review of the Company’s 2017 first quarter financials performance. Dr. Phillip Frost, Chairman and Chief Executive Officer of OPKO, will provide closing remarks and then we will open the call to your questions. Now, I’d like to turn the call over to Steve Rubin. Steve?

This is Dr. Frost. Before Steve Rubin and Adam Logal talk about the Company and this quarter in a more granular way I’d like to give you my view of where we are. We have a large diagnostics laboratory, Bio-Reference in which we are very proud. So much though that we have decided to invest heavily in its future. And we’ve restructured management with a new CEO Dr. Greg Henderson, a new COO of Warren Erdmann. And new genomics division head Dr. Ben Solomon and a new Director of Sales for GeneDx Vicky Laughman all experienced professionals who would be rated among the best by any standard. They joined in an existing team of dedicated leaders. Together they position us to launch forward with new products, greater revenues and more profit. We've been investing in new systems of every sort that will result in better financial data that will give us more information about our customers, our products, our sales team and very important will permit better collection of receivables. For GeneDx this means we'll be able to gather and store and analyze sequencing formation to provide new services for better patient diagnosis more family genetic information and more success with our marketing and sales effort. We're now ready to go to the next level. The 4Kscore test is being marketed and sold through Bio-Reference but our urology team has been busy designing and performing new trials to even further document the unique value of 4K to identify men with serious prostate cancer. These trials will of course result in more publications presentations of medical meetings and more embedded tools for our marketing and sales effort. My goal for the year is to increase sales of our 4Kscore test in a very meaningful way. On the therapeutic side we will be very aggressive of with our efforts to make RAYALDEE the huge commercial success it was meant to be. RAYALDEE is an effective and safe product that will help manage the increasingly large number of patients with chronic kidney disease. The new kidney disease improving global out time comes guidelines soon to be published will be very helpful in that they’ve discouraged the use of our main competitor products. Our partner Vifor is a sophisticated world leader in the field of the neurology medicine and they are moving fast to obtain approval to sell RAYALDEE first in Europe and then in other markets for which we have licensed them. At the same time we are jointly getting ready for clinical trials to prove the value of a different dosage from of RAYALDEE for dialysis patients, another large market. Our agreement with Vifor leaves certain world markets open and we are now pursuing licensing deals for these regions. We are mindful of the commitments made to our shareholders our partners our employees and to our patients. [Audio Gap] Phase 2 trials in children were successfully completed and we recently initiated our Phase 3 pediatric program. In adults as you will hear from Steve our Phase 3 trial results require a bit more analysis before submitting with our partner Pfizer, a BLA to the FDA for product approval. No guarantees but we are confident. The second example is our OPK88003, a selective androgen receptor antagonist, which we are developing to treat benign prostatic hypertrophy, BPH or in large prostate common in men as they get older. In studies of 350 men it decreased body fat while increasing muscle mass. As it’s been shown to significantly decrease prostate size in dogs we’ve plan to begin clinical trials this year to demonstrate and confirm its usefulness to treat BPH. The unique properties of this drug if approved give it potential blockbuster status. Again no guarantees but the need for such a product is great. And we can afford to bring the program to fruition. I’ll say what you already know, we will work hard to deliver on our commitments. But now I’ll turn this over to Steve.

Thank you, Phil. Through the first quarter of 2017 also made important progress. And we are pleased with our U.S. launch of reality to treat secondary hyperparathyroidism or SHPT in patients with Stage 3 or 4 chronic kidney disease or CKD and vitamin D insufficiency. RAYALDEE is the only FDA approved product for this indication. We launched RAYALDEE in the U.S. at the end of November 2016 and have built a solid marketing and sales team of 50 professionals. Dr. Akhtar Ashfaq has recently joined OPKO as Senior Vice President, Clinical Research and Development and Medical Affairs of our Renal Division. Dr. Akhtar Ashfaq was previously with AstraZeneca where he served as Executive Director and Head of the CKD program within Global Medical Affairs. Before that he served as a Medical Director for Amgen. We are pursuing an aggressive marketing and sales effort as we continue to add new payers. Over the first quarter the number of physician prescribers for RAYALDEE is up eight-fold. The soon to be published KDIGO guideline for the treatment of chronic kidney disease, metabolic bone disease is expected to recommend against routine use of vitamin D receptor activators for VDRAs to treat SHPT in Stage 3 and 4 CKD highlight the unproven effectiveness of vitamin D supplementation. As these presently represent the only competitive products RAYALDEE used to be greatly enhanced. Moving forward we plan to leverage our investment in our RAYALDEE sales force and commercial infrastructure we will advance our clinical plans in a number of important programs. First is the final Phase 3 clinical study for Fermagate, a magnesium based calcium free phosphate binder for hyperphosphatemia in CKD patients on dialysis already shown to be safe and effective in treating hyperphosphatemia in Phase 2 and 3 trials. In preparation for the upcoming Phase 3 trial we are completing additional animal studies to confirm Fermagate ability to limit vascular calcification the leading cause of morbidity and mortality in CKD patients. Next is the Phase 2 clinical trial of a higher strength for RAYALDEE for hemodialysis patients between which we plan to adopt in collaboration with our partner Vifor Fresenius. This study should begin as soon as we reach agreement with FDA on trial design, we expect it later this year. In addition the Vifor Fresenius continues to advance its marketing applications for RAYALDEE in Europe, Canada and Mexico as a treatment for SHPT in Stage 3 and 4 CKD patients. We have other important product development programs underway. Let me start with an update on our long-acting human growth hormone product hGH-CTP partner for worldwide commercialization with Pfizer. Late last year we reported top line data for the multinational, multicenter Phase 3 study in 198 adults with hGH deficiency. The primary efficacy endpoint of that study was mean change in trunk fat mass. While we reported that the study did not meet its primary endpoint it did meet the secondary endpoint of IGF1 normalization with 97% hGH-CTP subjects versus only 6% of the placebo subjects achieving IGF1 at normalization. This biochemical marker indicates the activity of human growth hormone in this population. The safety profile of hGH-CTP in our study was consistent with that observed with patients treated with growth hormone injected daily. We continue to validate and conduct QA and QC analysis of the data from the Phase 3 study as part of their routine work to support the forthcoming BLA submission. This is a time consuming process given the large number of study sites and geographic footprint. Frankly more time consuming than we had anticipated. Completion of this work however is imminent. And upon completion we will carry out an official outlier sensitivity analysis of the data. Since the completion of the pivotal phases of Phase 3 adult hGH-CTP in August 2016. And Phase 2 pediatric hGH-CTP in July 2015. A significant number of patients have continued in the open label extension or OLE phases pending drug approval. Patients in the pediatric study are well into the third year of treatment with long-acting hGH-CTP. To-date over 18,000 doses of hGH-CTP have been administered to patients and no serious safety concerns have been reported. Plans to switch from delivery with a syringe to injector pens for the patients in the above mentioned OLE studies are progressing. And we expect all patients will be using the pen devices by early first half of next year. We are confident about the outcome of the adult growth hormone deficiency study and continue to expect to submit a BLA for FDA approval of hGH-CTP in adult by the end of this year. Moving on to our pediatric hGH-CTP program, we continue to enroll subjects in our global pivotal Phase 3 study in 220 pre-pivotal growth hormone deficient children, which is evaluating a single weekly dose of hGH-CTP versus daily injections of currently marketed growth hormone. We plan to begin our pediatric hGH-CTP registrations in Japan in the third quarter of this year. The pediatric segment represents approximately 80% of the market for treatment of hGH deficiency. I note that the primary efficacy endpoints for treating adult growth hormone deficient patients is reduction of trunk fat mass. This endpoint is quite different from the primary endpoint for treating pediatric growth hormone deficient patients, which assesses growth high velocity. Data from our pediatric hGH-CTP Phase 2 study affirmed that single weekly injections of our drug have the potential to replace daily injections of currently marketed growth hormone in pediatric patients. We are satisfied with the progress of these late stage programs, as we move toward commercialization. This is an area with a significant and growing market opportunity and we believe through our partnership with Pfizer, we will be able to take a leadership role in growing and capturing market share. Let me now update you on our long-acting Factor VIIa-CTP for the treatment of bleeding episodes in hemophilia A or B patients with inhibitors to Factor VIII or Factor IX. We are nearing completion of a Phase 2a dose escalation study of intravenously administered Factor VIIa-CTP to determine safety and explore efficacy endpoints in 24 patients in the United States. A Phase 1 study of subcutaneous administration of this drug healthy volunteer is ongoing. We expect to have the safety information by year-end. Manufacturing scale up to produce efficient drug product for the long-term toxicology and upcoming pivotal efficacy of safety studies are progressing as planned. Let me now turn to OPK88004, a once daily orally administered selective androgen receptor modulator or SARM to treatment with BPH. This compound demonstrated a significant decrease in fat mass and increased muscle mass. And a lowering trend at PSA level in the Phase 2 study in 350 male subjects. We plan to initiate a Phase 2b dose range study in the second half of this year to evaluate effects of OPK88004 to reduce prostate size and provide anabolic therapeutic effects in men with benign prostate hypertrophy or BPH, which is in a large prostate. This is a significant opportunity for us. BPH is common to aged men affection over 50 million men in United States. BPH is one of the 10 most common and costly diseases in men older than 50 years of age in the United States. We are continuing to progress our other late stage pipeline products including OPK88003, a once weekly dual GLP1-Glucagon agonist for which we will undertake a Phase 2b dose escalation study to evaluate weight loss and glucose control. Data from a Phase 2 study of 420 subjects with type 2 diabetes showed OPK88004 with significantly superior weight loss compared with a currently approved extended release exenatide and placebo, and also demonstrated a similar reduction of hemoglobin A1c, a recognized marker of sugar metabolism. During the first quarter, we made progress with our AntagoNAT our anti-Natural Antisense Transcripts and an OPKO platform technology in which single strand oligonucleotide molecules are designed to interfere with regulatory gene expression in order to enhance production of endogenous functional proteins. We recently receive U.S. and EU orphan drug designation for AntagoNAT, OPK88001, the treatment of Dravet Syndrome. The majority of Dravet Syndrome patients are reported to have a mutation of the SCN1A gene which results in a severe intractable form of epilepsy that begins at a young age of three to six months old. We are near to filing an IND for Phase 2 study of this drug in the United States. Turning now to our diagnostic and laboratory business. Bio-Reference Laboratories continues to post steady financial progress with the bulk of revenue coming from traditional reference lab testing along with the growth of our 4Kscore tests. We continue to build the foundation for positive reimbursement at 4Kscore test. And last year the American Medical Association granted a CPT one code for 4Kscore effective as of January 1, 2017. The CMS national approved rate for 2017 for 4Kscore is $602. Novitas has been paying and continues to pay for 4Kscore Medicare claims. In addition 4Kscores included in key prostate cancer guidelines such as the 2016 National Comprehensive Cancer Network U.S. and the 2016 European Association of Urology prostate cancer guidelines. To date, we have a number of positive regional corporate decisions with commercial payers with pricing agreements in place. As we previously reported, Novitas Solutions is the Medicare Administrative Contract, or MAC, that matters to 4Kscore as it is responsible for New Jersey where our Bio-Reference lab facility is located. All 4Kscore blood samples are sent to that facility and all test processing takes place there [indiscernible] resides. Over 8,600 prescribers have ordered the 4Kscore test, and over 18,600 test were performed in the first quarter this year, which represents growth of more than 100% from the first three months of 2016. We have successfully completed a second perspective blinded clinical trial involving veteran’s affairs hospitals across the United States. The 366 patient cohort comprised predominantly of African-Americans. Prostate cancer disproportionately affects African-American men with the highest prostate cancer rate in the world. 4Kscore was shown to accurately identify risk of high-grade prostate cancer disease in this cohort. A podium presentation of the results of this study will be presented at the upcoming annual meeting of the American Urological Association in Boston on Tuesday May 16 at 10 A.M. along with several other podium and poster presentations presented at the meeting involving the 4Kscore. Additionally, investigators involved in the U.S. validation study have submitted a manuscript based on analysis of patients in that study who on biopsy were diagnosed with low grade or Gleason 6 cancer, and went on to have a radical prostatectomy. The analysis demonstrated that the 4Kscore was a significant predictor of cancer upgrades in other words from Gleason 6 to Gleason 7 or higher as confirmed upon radical prostatectomy. Moving out of the Claros 1 point-of-care system, our novel system should provide rapid high performance blood test result at the point of care. Claros 1 can run immunoassay tests in the physician’s office or hospital nurses station using a single drop of blood. Negating the need for a full blood draw sent to a centralized reference laboratory. We expect to report precision data for our first test Claros 1 PSA at the American Association of Clinical Chemistry Meeting in late July or early August. We plan to submit a PMA with the FDA in the second half of the year for our Claros 1 PSA test. We plan to utilize Bio-Reference Labs in marketing, sales, and distribution resources for the launch of the Claros 1 PSA test in the United States. We continue to develop other Claros 1 tests and testosterone is next in line for submission. GeneDx our high-value genetic testing unit has been very active. In March, we had a prominent presence at the American College of Medical Genetics and Genomics Annual Meeting, where we presented a 14 poster and four platform presentations about exome sequencing and other genetic testing in a variety of diseases. To further expand our clinical of genomics programme, whole genome sequencing will be offered to clinicians and research programs. Exome sequencing options will soon be offered to healthy individuals who – because of family history, fertility or pregnancy or more general concerns who would like to have more genetic information about themselves. During the first quarter our GenPath, Women's Health subsidiary introduced ClariTest, a non-invasive prenatal test or NIPT initially to be performed alumina on the verified platform. And IP testing has become a valuable addition for prenatal care. We are pleased to offer the most technically advanced NIPT available on the market. We continue to expand our suite of services at GeneDx, as a leader in innovative genetic testing. As part of its comprehensive test been in growth, GeneDx will be offering pharmacogenetic testing, which examines genetic changes that affect how people process certain prescription medicines. GeneDx’s menu also now includes rapid whole exome sequencing for critically ill patients where results will immediately impact management as well as prenatal whole exome sequencing. So in closing, we are pleased with the progress we’ve made for all business segments these past three months. In particular, our growing revenues are providing increasing cash flow that helps fund our commercial efforts and product development. Our objectives moving forward remain consistent, continue to increase revenue from our diagnostics business, increase contributions from new products, step-up the utilization of the 4Kscore test, expand our GeneDx business, and advance our development programs towards commercialization. Throughout the balance of the year, we expect to achieve a number of important clinical milestones. These include data readout for the sensitivity outlier analysis at a Phase 3 adult hGH-CTP clinical trial and BLA submission. Initiation of the Phase 2 study a reality for the treatment of dialysis patients; submission of a PMA filing for kallikreins-1 PSA point-of-care test, and a 510-K filing for Claros 1 point-of-care testosterone test. Initiation of Phase 2b study of our OPK88004, a once daily oral selective androgen receptor modulator or SARM in patients with BPH enlarged prostate. Initiation of a Phase 2b study of our OPK88003, are once weekly dual GLP1-Glucagon agonist to evaluate weight loss and glucose control. Obtain data from the Phase 2a study of Factor VIIa-CTP IV formulation and from the Phase 1 study of Factor VIIa subcutaneous formulation. Initiation of Phase 2a clinical study of our NK-1 inhibitor for itching in dialysis patients, and initiation of a Phase 2a study of OPK88001 for the treatment of Dravet Syndrome. We look forward to keeping you apprised of our progress about all these programs. Let me turn the call over to Adam for a discussion of our first quarter 2017 financial performance. Adam?

Thank you, Steve, and good afternoon, everyone. The first three months of 2017 included number of important business activities that had an impact on our overall financial results. Revenue increased to $296 million from $291 million for the comparable period of 2016. There were several factors that impacted revenue during the first three months of 2017, which we expect to continue throughout the year. Our revenue cycle management program is in full swing of our reference and we've seen overall improvements in our main clinical lab operations, particularly during March, a trend we continue to – we saw continue into April and expect to see throughout the year. We anticipate the improvements to result in an increased profitability in our diagnostic segment with increasing pace during the second half of the year. The improvements in our clinical lab have been partially offset by pricing headwinds we face within our genomics testing. As we expected, overall patient counts continue to grow in the first quarter and we expect the growth to accelerate in the Q2 and throughout the rest of the year. As Steve reviewed, the RAYALDEE launch is underway and we have secured insurance formulary access for RAYALDEE in excess of 60% of all potential patients covered, and continue to see prescription trends improving month-over-month. During the next several quarters, we are focused on increasing our insurance formulary access particularly for Medicare Part D plans. And anticipation of the improved formulary access, we have begun the process to expand our commercial reach with additional field representatives. We expect to begin selectively hiring in territories where insurance formulary access is the greatest along with physicians and territories that would benefit from having sales representatives call more frequently. Turning to costs and expenses, during the first three months of 2017, costs and expenses increased over the comparable period of 2016, principally related to our introduction of RAYALDEE of approximately $13.5 million. We continue to invest in our pharmaceutical and diagnostics research and development programs and had approximately $26 million of R&D expense during the quarter, compared to approximately $28 million for the 2016 period. Net loss for the three-month period ending March 2017 was $31 million, compared to a loss of $12 million in the comparable period of 2016. The 2016 period included the non-recurring deferred tax benefit of $20.5 million principally related to an income tax rate change in Israel. Our balance sheet remains at a strong position to continue the development of our R&D programs as well as to support our commercialization efforts for RAYALDEE. In March 31, 2017 we had a $131 million in cash and cash equivalents, on our balance sheet with an additional $100 million in availability under our credit facilities. With that, I’d like to turn the call back to Phil. Phil?

I want to thank you all for participating and we look forward to talking again at the end of the next quarter. With that, I will open the floor for questions. Thank you.

[Operator Instructions] And your first question comes from Kevin DeGeeter with Ladenburg.

Hey, good afternoon, guys. Thank you for taking my questions. Just a few for me; can you comment with regard to the potential expansion of the reality sales force? And just put some harder numbers on that. How many sales folks do you hope to add in the coming months?

Yes. So, I think we think about the right size for the sales force on a full basis, it would go up to 70. I think we're 30 – we launched with 35 and really in order for us to get to that 70 number we need to get our insurance at formulary access into the mid 70s to low 80s range and start to see prescription trends to go up. So I think it's going to be a bill throughout the year, Kevin.

Okay, thanks for that. And with regard to BLA filing for human growth hormone for the adult patient population, can you just elaborate on two points. First, in what form might we see the results from the – give more detailed outlier analysis. And then just be – you did reiterate plans to your file BLA your for that indication in 2017, given the mix top line results, what gives you incremental confidence, so that's the right step forward at this time?

Well, it would require that the modular analysis that we're undertaking to show that with the outlier analysis we would actually meet the primary endpoint. So that's what we're confident that data will show. We'll make that announcement once that – once the analysis is complete, and then assuming that it shows what I just said and what we believe it will, then we would have the confidence to submit the BLA with the modified analysis to FDA.

I think your point is that, in order to get to that point, we have to go through all kinds of hoops that include validating all of the data that was obtained during the study. And then once that all the data is validated and we can do the analysis. And that’s what we’re confident about that when all that is behind us that it will turn out the way we wanted to. And we’ll be able to go forward with that.

Okay. That’s very helpful. And then maybe just one more for me then I’ll get back in the queue. With regard to 4Kscore and Medicare reimbursement can you provide us an updated timeline or set of metrics just how to think about a potential coverage decision, local coverage decision from Novitas and final clarity on that question.

The important point here is that Novitas has been paying and continues to pay at the rate that what was indicated by the CMA and so we’re now getting over $600 and that’s schedule to go up to $750 in 2018. And we have every reason to believe that they will continue to pay. So for us there – actually issuing a positive LCD, we would like that to happen and toward that end we’re doing a lot of additional clinical trials that will cooperate with them and with the other [indiscernible] as well in getting them to think very favorably about the test. But in the meantime the important point for us and for the – from a financial point of view is that they continue to pay and with that basis we’re not going to embark on a very rigorous marketing program and attempt to dramatically increase the utilization of 4K and the revenues from the test.

Terrific. Thank you for taking my questions.

[Operator Instructions] And your next question comes from Yale Jen from Laidlaw.

Good afternoon and thanks for taking the questions. Maybe just kind of going little bit on Kevin’s earlier question, which in terms of the 4Kscore promotions how much effort the Bio-Reference reps currently at sort of non-urology reps and starting to promote the sales of that. And how would you measure the performance at this point and what do you anticipate over the next 12 months for them. A –SteveRubin: So currently we have 200 of the sales people at Bio-Reference trained detailed of 4Kscore. So our – as you heard Dr. Frost speaking, I think we’re at the point now with we’re comfortable enough with reimbursement on the Medicare side and service efficient on the commercial side to put in more focused marketing effort and dollars behind it. So we are working on the plan to utilize more of the Bio-Reference sales people and perhaps use some other marketing techniques incentives to really push the 4Kscore forward. So we are continuing to show growth, I think with a little more muscle efforts and applying some more sales people, we expect to have more significant incremental growth in the future.

Okay, great that’s helpful. And just one more question for me. Which is [Audio Gap] quarter conference earnings call you start to have a better sort of feeling toward it or it’s too early to suggest?

Most of your question, were cut-off could you please repeat, I’m sorry, we still continue to obviously to have these technical difficulties.

Okay, not a problem. For RAYALDEE do you anticipate you will be able start talking a little bit more about this script trends would that be – if you can put a little bit timeframe on that, would that be in the second – later part of the second half of this year or you have a different thoughts.

So, Yale I think as we’ve mentioned earlier this year the first half of the year is really focused on building out that insurance formulary access clearly we want to continue to see positive trends and positive growth in the scripts, but we don't think that you will have a significant build in scripts kind of a day-over-day or week-over-week until we take down some of those barriers on the insurance formulary access. Little bit over 60% we’re a little ahead of where we expect it to be – but we still face challenges as it relates to having doctors be willing to go through some of the medical exception process they have to go through. Particularly on the Medicare Part D, while we're getting a lot of our Medicare Part D scripts filled today we think will – we'll be able to accelerate it once we get those insurance formularies on board.

Okay, great. Thanks a lot and…

When a doctor writes a script and then the patient complains that the insurance doesn't pay for it. It discourages the doctor from writing future scripts. So you have to get the payers to pay in order to complete the cycle of – rightly having the script ready prescription bills. And so we’re emphasizing that point of the cycle on the one hand, on the other hand we’re appreciating that they’re more getting on sales [Audio Gap]

Hello.

Yale were you able to hear our response.

It was cut off. I heard in terms of the chicken and egg situation and after that it was cut off from that. I guess you want to pave the field before they will start to taking script. I guess that's one of things and you guys wanted to maybe do a little more marketing being able to get more awareness I get that, that's what I get but there's only some details I probably have missed it. Okay, great. Thanks a lot, I appreciate, maybe we can talk offline a little bit more later on.

Yes, yes. We do that for sure. It is unfortunate that we seem to continue to have these difficulties with our conference calls.

Are there questions.

There are no further questions, at this time. Dr. Frost, I'll turn it back to you for closing remarks.

There are no further closing remarks. So we will thank you once again.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.