Opko Health, Inc.

Good day and welcome to the OpChair Health 3rd Quarter 2022 Financial Results Conference Call. All participants will be on the list on the menu. Should you need any assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I'll now let you turn the conference over to Ms. Yvonne Briggs. Please go ahead.

Thank you, Operator, and good afternoon. This is Yvonne Briggs with LHA. Thank you all for joining today's call to discuss Opco Health financial results for the third quarter of 2022. 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, 2021, and subsequently filed SEC reports. This conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, today, November 8, 2022. Except as required by law, OPCO 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 of today's call. Dr. Philip Frost, Chairman and Chief Executive Officer, will open the call. Dr. Elias Zahouni, Vice Chairman and President of Opco, will then provide an overview of Opco's pharmaceutical business, as well as bioreference laboratories. After that, Adam Logel, Opco's CFO, will review the company's third quarter financial results, and then we'll open the call to questions. Now I'd like to turn the call over to Dr. Frost.

Good afternoon, and thank you for joining today's call to discuss our third quarter financial results and business progress. Starting with Opco Health's pharmaceutical business, we're pleased with the launches to date of Engendla, or Sumatragon, by our commercial partner, Pfizer. Engendla is our once-weekly injectable growth hormone product that's expected to ease a patient's burden versus the standard daily injections. Pfizer has launched in Japan and other countries, including Germany, Canada, Australia, and Australia, and Genla is now offered through the Pharmaceutical Benefits Scheme, which is Australia's national drug subsidy program. Although it's still very early in the launch of just a few territories, and Genla is starting to experience significant sequential quarter growth, which Adam will review in a moment. Additionally, there are several pricing approvals pending in other European countries, which should occur soon. In the US, I can assure you We're working diligently with Pfizer to resolve the FDA's comments regarding Sometragon's BLA submission. As you know, it's Pfizer's position not to disclose any further information regarding the FDA's comments in the complete response letter, ongoing discussions with the agency, or strategy to advance the regulatory process. Yet, they have publicly stated their commitment to the product in the U.S. market. As soon as we are able, we will provide an update with additional information on the regulatory status of Simetragon in the U.S. We're pleased with the progress of our licensing partners for several of our development stage drug candidates. LeaderMed, our joint venture partner in China, is expected to initiate a Phase III trial of oxyntamodulin for the treatment of obesity and type 2 diabetes early next year. LeaderMed is also planning a clinical trial of our Factor VII CTP, a novel long-acting coagulation factor to treat hemophilia. We look forward to the results from these clinical studies as we plan to leverage the data for regulatory approval in countries outside of China. The MODX team is enthusiastic and motivated to advance the pipeline of the combined company and to leverage the MODX proprietary technology platform focused on multi-specific antibodies. Their unique platform technology represents a significant opportunity to provide better therapy and outcomes for a wide variety of patients, and we continue to advance our discussions with potential partners. We'll keep you updated on our progress. Dr. Elias Zerhouni has immersed himself in all aspects of our business and has spent significant time onsite at bioreference laboratories to provide oversight leadership of the diagnostic operations and strategy. Elias will provide further details on the lab and its performance following his commentary on the pharmaceutical business. With that brief review, I'll now turn the call over to Elias.

Elias? Thank you, Phil, and good afternoon, everyone. It's been a busy and extremely rewarding six months. for me and since MODX was acquired by Opco for all the teams that are involved. As Phil mentioned, I've been focusing my time on all aspects of Opco's business, including our pharmaceutical and diagnostic divisions. Starting with the integration of MODX, the team is very excited to be part of Opco and to leverage and benefit from the knowledge, resources, and platforms within Opco as we advance our multi-specific technologies. As I've discussed on past calls, MODX has two technology platforms. One is focused on developing vaccines utilizing ferritin particles, which is a necessary protein for all cells as it brings iron for their metabolism. Our technology attaches specific antigens to the ferritin protein, which then self-assembles into nanoparticles. in a very scalable and cost-effective manner. Our first application of this technology is to target the Epstein-Barr virus, which is responsible for infectious mononucleosis and its long-term consequences in some patients, such as cancers and multiple sclerosis. We are in the pre-IND stage for that application and in earlier stages for other targets. But as you know, as vaccine trials require significantly larger numbers of subjects to test for efficacy and safety, our development strategy is to pursue collaborations with larger pharma companies to advance drug candidates into the clinic and ultimately bring them to market upon approval. And we're very encouraged with our discussions to date as we seek suitable partners for this promising vaccine technology platform, which, as Phil said, potentially lends itself to multiple applications in infectious diseases. Now, our novel proprietary platforms called STAR and Stealth enable us to design multi-specific, multi-valent antibodies beyond the bi-specific and tri-specific formats currently used by us and others. This provides extraordinary flexibility for our multi-specific technology to go up to a total of six targets simultaneously. We believe that STAR is a plug-and-play platform which optimizes functionality and manufacturing simplicity, typically a challenge for multi-specific technologies. Our STAR technology is focused on infectious diseases and oncology indications. In infectious disease, we include HIV and COVID-19. In oncology, we address both solid and hematologic malignancies. In our pipeline, we have a tri-specific candidate in phase one to treat HIV that receives support from the NIH, actually, and as well as two preclinical multi-specific candidates also targeting HIV. In addition, we have several SARS-CoV-2 multi-specific antibodies in late preclinical stages, partially funded by DARPA, that provide protection against multiple variants of concern all at once. In oncology, we have two specific antibodies focused on hard-to-treat solid tumors and one focused on liquid tumors. These oncology programs are all in the preclinical stage with a goal of entering the clinic in late 2023 or early 2024. Now, I'd like to switch gears and discuss bioreference laboratories. Although we continue to realize additional cost reductions post the COVID expansion that we experienced, those initiatives are moving quite rapidly. The laboratory had another challenging quarter as we transitioned away from COVID testing and focused on strengthening our base business. As discussed in our last conference call, a three-pronged plan was put in place in order to right-size the expense structure and drive growth in our core and specialty testing businesses. So we first focused on decreasing our cost structure through our REACH initiative, which commenced at the beginning of 2022. We were looking to remove $140 million a year in expenses this year and have realized savings of more than $100 million to date. We have reduced our workforce to 3,300 at the end of September from a total of over 4,300 prior to July. It is imperative that we also align our infrastructure and related costs with current testing volumes for COVID being reduced to endemic levels in addition to inflation pressures. We have focused our efforts on operational excellence, including revenue cycle management, to offset these pressures while pursuing efficiencies in virtually every area of our business, including rationalization of our testing platforms and looking at opportunities to use lab automation and machine learning where possible. I think that a highlight of our diagnostic business is our specialty segments, which continue to outperform. These segments include oncology, women's health, urology, and special ventures, all of which have demonstrated promising growth opportunities. We, for example, continue to outperform in the oncology franchise as we're showing strong growth year on year within our genomic sequencing line of testing. We have expanded our relationship with Westchester Medical Center beyond our existing lab management business. In addition, we have a new definitive agreement with the University of Rochester for oncology testing, as well as several other large cancer centers. We continue to expand our best-in-class oncology portfolio with new and emerging diagnostics testing. An example of this is Oncoclone for minimal residual disease in emerging unmet need, which oncologists consider critical to their management of patients, which helps physicians at all times, oncologists, to determine whether diseases reoccurring or not, and adjust therapy accordingly. On the core business side, we've done work to prepare for the emerging respiratory season and launched a new multi-test panel that tests simultaneously for COVID, for flu A, flu B, and RSV, which is well-received and increasingly used. I think we've done a good job of stabilizing volume in women's health with an eye on growth moving forward. An example in women's health is a collaboration with Aspira Women's Health, and BioReference Laboratories and Aspira will co-market and distribute OVA1+, which combines Aspira's FDA-cleared blood tests, OVA1 and Ovira, to detect the risk of ovarian malignancy in women with adnexal masses prior to surgery. Our 4K score test for prostate cancer continues to perform well And the third prong of our right-sizing plan is focused on optimizing our organizational structure to streamline the responsibilities of a leadership team to improve our speed to market with new products and initiatives, and most particularly, improve our agility in decision-making through a much less complex management structure. We're also in active discussions with health systems and value-based care organizations which also represented significant growth opportunities and synergy with our diagnostic platforms. And so I will now turn the call over to our CFO, Adam. Adam?

Thank you, Elias. Starting with our pharmaceutical segment, Pfizer, our partner for our long-acting growth hormone, recently launched Nengenla in a number of countries since earlier this year and continue to expand its launch over the next 18 months, a part of its global regulatory and commercial strategy. We're entitled to gross profit share or royalties depending on the region in which the product is sold. In Japan, we are in the franchise gross profit stage, and in Europe, we are receiving royalties until pricing is approved and Angela is launched in two additional major markets in Europe. If approved in the U.S., the U.S. region will move to gross profit share, but until then, we will continue to receive royalties on sales in that region region's market. Overall, revenues from the pharmaceutical segment for the three months ended were $36.9 million, a decrease of $8.8 million, reflecting foreign currency pressures in our Chilean and European operations, as well as a decrease in reality volumes. In addition, during the 2021 period, included non-recurring upfront payments from Camp 4 and LeaderMed. Total costs and expenses from our pharmaceutical segment in the 2022 period were $65.2 million, including $16.5 million of non-cash and tangible amortization. Research and development activities increased $4.7 million, reflecting a full quarter of development expense from our MODX operations, as well as costs related to our somatrogen development activities, principally around the development of a next-generation device. As a result, operating loss from our pharmaceutical segment was $28.3 million from the third quarter of 2022. The comparable period of 2021 includes a $31.5 million gain, which offset expenses of $48.5 million for net expense of $17 million and income from operations of $28.6 million. Moving to our diagnostic segment, we reported revenue of $142.9 million compared to 340.2 million for the 2021 period. This decline reflects decreased COVID testing levels as the broad testing market has shifted to rapid at-home testing. We continue to execute our REACH program, as Elias mentioned, and during the third quarter alone, reduced our annualized employee costs by $46 million and are targeting further expense reductions across the entirety of the organization. As Elias mentioned again, so far in 2022, we have reduced our expense run rates by over $100 million and continue to see benefits of this program each sequential month of the third quarter of 2022. We have reduced or eliminated spending on our longer-term commercial initiatives, including Scarlet Health and our digital health platforms, while we bring the remainder of our cost structure in line with our expected volume levels. We have identified a number of near and medium-term growth programs, which Elias outlined, we expect those to realize in the first half of 2023, which will help return by our reference to profitable growth. Looking at our base business, our third quarter volumes decreased by about 4%, and as a result, negatively impacted our overall gross and operating margins. We saw strength in certain lines of our testing, as Elias mentioned, with our cancer genomics business, showing growth along with 4K score tests compared to 2021 levels. However, these gains were offset by the evolving physician practice market where we saw client loss due to the consolidation and roll-up of small physician group offices. Operating loss for our diagnostic segment was $49.5 million, which reflects a sequential decrease of approximately $8 million before considering $5 million of non-recurring charges included in the third quarter. The third quarter of 2021 reported operating income of approximately $19.7 million, which benefited from significant COVID-19 testing that occurred last summer. Turning to the consolidated financial results for the third quarter, we reported an operating loss of $87.8 million compared to 2021 operating income of $37.8 million. Net loss for the third quarter includes a $30.6 million non-cash mark-to-market adjustment from the declines of the price of Semaphores common stock, offset by an income tax benefit of $40.3 million, resulting in a net loss of $86.1 million, or 11 cents per share, compared to net income of $28.7 million, or 4 cents per diluted share, for the period which, as I previously mentioned, benefited from COVID testing as well as the sale of our still-finished facility in Ireland. As we look at the remainder of 2022, we have narrowed our ranges, which are with consistent assumptions from prior quarters, to the following. We don't expect a surge in COVID testing. Our base business will continue with our most recent trends, and we have not factored in any changes to the value of our Semaphore common stock. With that, we now expect full-year revenue for 2022 to be between $980 million and $1 billion, including revenue from services of $735 million to $745 million, revenue from products of $135 to $140 million, and other revenue of $103 to $110 million. We expect costs and expenses to be between $1.23 and $1.25 billion, which reflect various assumptions or testing volumes. Operating results include approximately $110 million of non-cash depreciation and amortization expense, as well as expected research and development expense of $75 to $78 million. Thank you, and we'll open up the call for questions. Operator?

At this time, we will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you use a new speakerphone, please take up your hands up before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily for our roster. And our first question comes from Maury Raycroft of Jefferies. Please go ahead.

Hi, this is Kevin Strang on for Maury. Thanks for taking my questions. First question on Ngenma in Europe. Can you talk about how far away you could be from profit sharing there in terms of the last two launches? Could that be by year end? And then also, is there anything that you've learned so far from the Ascendus launch on patient and doctor appetite to switching to the long-acting growth home run?

So I'll talk about the profit share. Thanks for the question. So in Europe, we've projected and guided that we expect that switch to happen in the first quarter of next year. Certainly things could happen sooner, but that is where our current expectations are. As far as the Ascendus launch, so the adoption in the U.S. seems to be going fairly well for them. It's hard to see anywhere beyond that, but we think The switching is going to happen rapidly, and the adoption of the products will happen quickly under the long-acting form.

Great. Thanks. And just one more follow-up on the cost reduction effort. You mentioned $100 million so far this year. Can you just talk about where you are in the context of your final sort of cost reduction goals? And then... Given the COVID-19 testing paradigm, what do you expect your capacity there will be going forward?

We talked about the REACH program. It's going to be a multi-year effort. We haven't finalized our targets for 2023 on what that program is going to go for, but we've set the objective to take out $140 million in costs, and we're well on our way to that already. Elias, I don't know if you wanted to say any words about the REACH program based on your involvement to date.

No, I think you're right. I think we are really aiming to go to 140, and we actually see opportunities to go beyond that related to the flattening of the organization and the ability for us to automate the laboratories and therefore reduce labor expenses. $140 million is the minimum, and I think we can do better than that, but I couldn't tell you until we have the 2023 figured out.

As it relates to COVID capacity, so we continue to have adequate capacity. As you remember, we brought up capacity pretty quickly when it was needed and could flex to it. Right now, we're staffed to our current volumes, which we've talked about have come down dramatically from where they were earlier this year, but but have the ability to scale back up should we need.

But, you know, so far... I think also, if I may, I think also that we were... No, no, we were quite aware that this season will be different than the previous ones, that COVID will be persistent as an endemic virus. Flu A, Flu B, R and YZ, as you know from the projections of CDC, were predicted to be very high. So we developed a new offering a four-in-one test that is actually getting a lot of good reviews and good reception in the medical community and growing very fast in terms of demand because this winter and the beginning of next year are predicted to be quite severe in terms of what people call the tridemic of RSV, flu, and COVID. Just a point.

I was just going to add that With regard to borrow reference, it's a two-pronged approach. One, of course, is cutting costs, but not to neglect, of course, the emphasis on increasing revenues. And in that regard, one point was mentioned that I'll highlight, and that was new ventures. This is an area that we're devoting a lot of attention to with some really good talent applying themselves. And I'm very hopeful that this will pay off in a serious way.

Great. Thank you very much.

Our next question comes from Jeffrey S. Cohn of Landenberg Salmon Company Incorporated.

Please go ahead. Hi, Dr. Frost, Dr. Zahouni, and Adam. How are you?

Doing good, Jeff.

Good, thanks. Hi, Jeff. So just a few questions from our end. I guess... Firstly, if we could go back to in general a little bit, do you have clarity or does Pfizer share the information as far as reimbursement and pricing by some of these territories which they're launching throughout?

So we don't get any specific pricing guidance other than what's publicly available otherwise.

Okay, got it. That's helpful, thanks. Adam, I don't know if it's handy, but is it possible to get cost of service revenue and cost of product revenue at your convenience?

Yeah, we'll get that to you. The queue should be on file any minute now, Jeff.

Super. And then I guess lastly for us, I wanted to hear a little more about some of the initiatives on the BRL side. I saw that you had an interesting arrangement with the Spirit of Women's Health as far as that test went. When Dr. Frostio talked about new ventures, could you give us any more color there as far as is it in licensing of tests or developing your own tests and kind of how you're building that out at your end?

I would say all of the above.

Got it. Okay. And then lastly, any... specific readout or any commentary on 4K from the quarter, from Q3, or any outlooks going forward on 4K?

I think that it's doing very well. It's certainly moving ahead of last year, and again, Elias is doing a good job of identifying initiatives. Jane Schell has been working with the team to bring more payers on board but we're very optimistic that the growth that we're seeing now will continue and perhaps accelerate.

Okay, super. Thanks for taking our questions.

Thanks, Jeff. Our next question comes from Edward Kentoff of Piper Sandler. Please go ahead.

Great. Thank you very much. Appreciate the update. I'm really excited about the new efforts with MODEX. You know, you mentioned with so much going on, maybe you can get into a little bit more detail on partnering opportunities. Are there specific areas like, and I'm sort of making this up, but like oncology where you would either keep or maybe because of the complexity seek partners, or is there a focus more, you know, internally on infectious disease? How will you sort of prioritize programs and ultimately decide what to keep internally and what to ultimately develop externally? Thank you.

Thank you for the question, a very important question. The first thing is that we have received a lot of incoming interest as we presented our portfolio in various venues, and the interest is leading to a strategic consideration on our part, obviously. We do have an infectious disease portfolio that's composed of two segments. There's the vaccine segment where the most advanced vaccine candidate is EBV. And as you know, EBV is quite important in mononucleosis, but also cancer and now multiple sclerosis. So that's a huge market that has attracted a lot of interest. At the same time, we have flu and other prototypes that are being tested. And so we think that in vaccines and viral diseases like HIV and COVID, we have quite a bit of near-term potential for large collaborations as well as potential trials. In terms of oncology, we are really looking at using the multivalent, multispecific approach to test out our ability to actually not look at very – unknown targets, but known targets in unique, novel combinations based on the knowledge that we have. Our preference would be to keep that in-house, not to partner those because we think that the multispecific, multivalent platform has enormous potential, as Dr. Frost mentioned to you. So we're trying to finance, if you will, a little bit through our infectious disease, maybe licensing out and partnering, The ability for us to keep half of the portfolio internal to UPCO. I don't know if that helps you.

Super helpful, Colin. Thank you.

Our next question comes from Miao Chen of Blade Lawn Company. Please go ahead.

Good afternoon, and thanks for taking the questions, sir. The first question is that I remember the last call you mentioned that you may do an R&D day to highlight some of the things in the MODAC. Is that still in the schedule for this year or that will be next year?

Yes, it is still in the schedule. We're still planning it. We do have a few things that we need to finalize in terms of discussions with others that we need to do. So we're aiming for something either December or J.P. Morgan or right around J.P. Morgan. That's where we're trying to do the R&D day. I think things will be a little more mature, and I think people will enjoy it more because it will be more detailed than what we can do today.

Okay, great. That's helpful. Maybe one more question. In the vaccine, as you mentioned, that's the most likely to be a partnering opportunity. But in terms of the stages, development stage to be partnered, are you guys looking for, you know, complete maybe the first earlier stage of clinical development before partnering, or you even contemplate partnering out in much early, even preclinical or early clinical stage?

We have interest for both things. We're going to do what's really important. practical and it depends on the quality of the partners and so we're basically at pre-IND stage we're going we have the manufacturing working on and all of the you know steps you need to have before you go through IND and we're willing to do it alone if we need to if we find a term terms of collaborations that are you know attractive we'll do it the other way so we're not pressed for one choice or the other. We can continue it on our own. We can also partner it. I'm not weathered to one way or the other is what I'm trying to say.

Understood and appreciate that. And maybe the last question is a housekeeping one that as we look at the total other revenues or incomes, it seems structurally not between quarters. So how should we in general think about this FIT number going forward?

Yeah, so it's going to be a bouncy number, Yale, because we've got some lumpy milestone payments that come through in some of our partnering deals as well as just the overall milestones that come through. So the consistency is going to be the growth from our reality and and Pfizer, you know, gross profit and royalty streams. But that and that, we expect to build a good base. And when those individually become material, we'll start to break those out for you guys to work in your model. But otherwise, you know, we'll continue to give guidance on what's included in that number and what's not included. Like early this year, we talked about that we didn't have the milestone payments factored in until we got the approvals. And then we've up their guidance related to those.

Okay, great. That's very helpful, and congrats on all the progress this fall.

Thanks, y'all. At this time, the question and answer session is concluded. I'll now turn the call back over to Mr. Dr. Frost for his remarks.

Well, thank you for your participation and excellent questions. As you can see, there's a lot more detailed work going on in the development of new products. What we hope to do is sometime in the near future, perhaps in the first quarter, have a research day in which we can go into a little bit more detail about some of these projects and give you a chance to meet some of the scientists so that you can get a better feel for what we're dealing with here and to understand why we're so enthusiastic. Having said that, I'll end the session and invite you to join us for the end of the year fourth quarter meeting, which will be forthcoming. Thank you.

The conference is now concluded. Thank you for attending today's presentation.