Opko Health, Inc.

Good afternoon and welcome to the Opco Health first quarter 2023 financial results conference call. All participants will be in listen-only mode. Should you need 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. Please note, this event is being recorded. I would now like to turn the conference over to Yvonne Briggs. Please go ahead.

Yvonne Briggs Thank you, operator. Good afternoon. This is Yvonne Briggs with LHA. Thank you all for joining today's call to discuss Opco Health's financial results for the first quarter of 2023. I'd like to remind you that any statements made during the 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, 2022, and in subsequently filed SEC reports. This conference call contains time-sensitive information that is accurate only as of the date of the live broadcast May 3, 2023. 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 for today's call. Dr. Philip Frost, Chairman and Chief Executive Officer, will open the call. Dr. Elias Zerhouni, Vice Chairman and President of OPCO, will then provide an overview of Opco's pharmaceutical business, as well as BioReference Health. After that, Adam Logel, Opco's CFO, will review the company's first quarter financial results, and then will open the call to questions. Now I'd like to turn the call over to Dr. Frost.

Good afternoon, and thank you for joining us today. In early March, we announced that MODEX, entered into an exclusive worldwide license collaboration agreement with Merck to develop our multivalent nanoparticle Epstein-Barr virus vaccine. The agreement provides validation of MODX's multi-targeting technology by simultaneously engaging four key proteins used by EBV to infect cells. This represents a first-in-class strategy to prevent the viral infection which is a cause of mononucleosis and has also been implicated as the leading cause of certain malignancies and the development of multiple sclerosis. We're delighted to have entered into this transaction with Merck as we believe they are the ideal partner for the development and future commercialization of our EBV vaccine. Elias will detail the terms of the agreement in a few minutes. As for growth hormone, Pfizer continues to drive the sales of Angenla, or Sometragan, a once-weekly injectable growth hormone product that's expected to ease a patient's burden versus the standard daily injections. Angenla is now approved in over 40 countries and has been launched in 17, including the major markets of Japan, Germany, and the United Kingdom. Pfizer expects to launch in another 15 or more countries during the remainder of this year, covering all priority international markets by year-end. We're looking forward to significant sales growth for Ingenla with the new launches and as market penetration continues to grow. Adam will provide further detail on Opco's gross profit share and royalty payments from Pfizer. We look forward to providing updates on Simatragon's regulatory status in the U.S. with the expectation of a forthcoming definitive response from the FDA and also commercial progress in international markets. As for our diagnostic division, we're pleased with the ongoing turnaround bar references experience as we reduce costs and right-size the business. As a leading national laboratory, BioReference continues to focus on innovation and higher value testing in its specialty segments, including oncology, women's health, and urology, as well as seeking to drive growth with additional partnerships or joint venture arrangements. Our profitable Ibero-American business continues to grow, is currently expanding its veterinary product line from its base in Spain into France and other European markets. With that brief overview, I'll now turn the call over to Elias to provide further discussion and commentary on our pharmaceutical and laboratory businesses. Elias?

Thank you, Dr. Frost, and good afternoon, everyone. Let me start first with a discussion of our recently announced exclusive worldwide licensing collaboration agreement with Merck, as mentioned by Dr. Frost. Securing a partner has been our strategy to advance the development of MDX2201, our Epstein-Barr virus multivalent nanoparticle vaccine. And EBV infects up to 95% of the global adult population during their lifetime and is associated with about 1% of all cancer cases worldwide. It also is the leading cause of infectious mononucleosis and recently has been implicated in the development of multiple sclerosis. Despite the prevalence of this virus and its role in causing life-threatening diseases, there are currently no FDA-approved vaccines or treatments for EBV. Our vaccine leverages MoDAC's innovative biological platform to target four major EBV proteins. Multi-targeted approach improves upon previous efforts and holds potential to provide a complete protection against this infection. Under the terms of the agreement, OPCWO received an upfront payment of $15 million and it is eligible to receive up to an additional $872.5 million upon the achievement of pre-specified development and commercial milestones. In addition, Upon a commercial launch of MDX-2201, we're eligible to receive up to double-digit royalties on global sales. MODX and Merck will jointly advance MDX-2201 up to the filing of an investigational new drug application, after which Merck will be responsible for all clinical and regulatory activities, as well as product commercialization. Expenses incurred by UPCO for this program prior to full taking of responsibility by Merck, will be reimbursed to Opco as well prior to the IND. We are excited about this collaboration as MDX2201 not only addresses an important medical need, but as Dr. Frost said, it validates our approach of multi-targeting both in vaccines and with multi-specific antibodies, which is what MODX does. Along with Merck, we're relying on advancing this vaccine with the goal of benefiting patients globally. In other parts of the pharmaceutical business, MODX continues to make progress with other proprietary platforms. During the quarter, including mSTAR and Stealth, these technologies have advanced. We've been following these multi-specific technologies to provide flexibility to go beyond three targets and up to a total of six. We believe mSTAR is a plug-and-play platform that provides a competitive advantage over other multi-specific technologies with 28 patents filed to date. As we progress our therapeutic candidates, we will evaluate which targets we keep in-house and which we seek to partner in order to maximize the value of our pipeline. For example, we have a partnership with the NIH to provide funding for our Phase I tri-specific candidates to both prevent and treat HIV. In addition, we're working on next-generation candidates targeting HIV, including two, three, and one titra-specific candidate with increasing potency. We believe there is a significant medical need as there are no vaccines or antibodies that can provide long-acting protection to prevent and treat infection. And current HIV therapies, despite their great progress, still have limitations, including drug toxicity, due to lifelong treatment and drug resistance that can impact efficacy of viral suppression. In addition to these efforts, we have worked on a COVID multispecific antibody program to address the ongoing post-pandemic need to address the continuous appearance of variants of concern around the world even today. It is unclear what the evolution of the pandemic will be, but we do believe that the pandemic will the virus will remain in the human population and will require a set of therapies to, in particular, help patients at risk because of existing conditions or suppressed immune systems. So we have a particular interest in exploring antibody candidates that can treat those patients at risk and can prevent maybe the development of COVID in these vulnerable populations. The advantage of our technology platform is that it is modular, which allows for rational selection of antibodies to optimize potency against current and future strains and prevent the emergence of viral resistance. SARS-CoV-2's multispecific antibodies are currently in late preclinical testing, and the development is partially funded by DARPA. In oncology, we have also multispecific multifunctional antibodies focused primarily on hard-to-treat solid tumors, but also for the treatment of leukemia and lymphoma. We believe the value proposition of multispecific T-cell-engager antibodies has potential to demonstrate clinical efficacy for solid tumors and B-cell malignancies, as the current standard of care does not sustain a remission in a large number of patients. Oncology programs are in the preclinical stage with a the goal of entering the clinic in 2024. Let me refer you to our new website for more information and updates on publications and portfolio evolution, reachable both at upco.com or modex.com. Let me turn now to Rialdi. We continue to achieve certain milestones with our international partners. In Germany, Rialdi was granted pricing approval which triggered the milestone payment of $7 million from our partner V4. We're eligible to receive up to an additional $10 million in regulatory milestones and up to $207 million in milestone payments tied to launch, pricing, and sales of Rialdi, plus tiered double-digit royalties. In addition, we received a $2.5 million milestone payment related to Nicoya's submission of Rialdi's IND application to the Center for Drug Evaluation of China. We're eligible to receive up to an additional $150 million in payments upon the achievement of certain development regulatory and sales-based milestones, as well as a tiered double low-digit royalty on net sales by Nicoya in China. Now, our program in Alzheimer's disease, based primarily on the use of molecules that can mobilize plaques is currently exploring potential strategic partnerships with larger companies, given the renewed interest that is now clearly present, including with the news today of the Eli Lilly results, that affecting the A-beta protein deposits in plaques is actually potentially very effective, and our approach could be complementary to those of the antibodies used today or to be used in the near future in the patient population. So these programs are of high interest now because they do provide synergy potentially with existing and emerging therapies for Alzheimer's disease. Now, I'd like to turn to our diagnostic segment and discuss bioreference health, which is the new name for what was previously called bioreference laboratories. Our focus post-COVID remains on reducing costs and returning this division to profitability. We're extending our REACH initiative into 2023, which to date has been effective to improve efficiencies, enhance productivity, and reduce costs. For example, we're starting to realize the economic benefits of shifting out of 13 less productive patient centers to 11 new more productive ones, which are most strategically located. In addition, we have increased our sales force primarily on the specialty diagnostics and health systems vertical and are also entering the pharmaceutical market in which we have not been present in the past. Our higher value specialty testing segments continues to grow as we enhance our portfolio to innovation. These segments include oncology, women's health, urology, and special ventures. For example, our GenPath women's health division was one of the first commercial laboratories to offer SYNTECH Plus Phytology. This is the only approved dual-stain pre-age test for patients who have a high-risk HPV result, high risk for the development of cancer. The dual-stain biomarker test allows healthcare providers to more accurately and quickly assess the risk for cervical pre-cancer and guide their management. As I mentioned, a key growth driver by reference is to offer new tests like this one from Roche to enhance its innovative portfolio and to provide valuable information for healthcare providers and their patients. In urology, our expanded commercial team is focusing on marketing and selling our proprietary 4K score test, which is a blood test to evaluate a patient's likelihood of aggressive prostate, cancer, and health direct management of these patients. The urology team is also driving new accounts. And more importantly, the recent American Urology Association guidelines have validated the fact that consideration for the use of a fourth case score or like test is actually warranted in terms of the clinical guidelines they now provide to their urologists. And so we're going to expand our access for these for this task to other clinical services, hospital services, and others as we are expanding our reach to those clinical services, hospital services, as well as urgent care centers where we want to offer a complete menu of services. As we implement our strategy, we're getting closer to our goal of returning by reference to profitable growth in the post-pandemic environment, hopefully over the next three quarters, which is what we're working towards. I will now turn the call over to our CFO, Adam Logo, to discuss our first quarter financial results. Adam?

Thank you, Elias. Starting with our pharmaceutical segment, revenue increased by $62.5 million for the first quarter of 2023 to $105.2 million. This increase reflects the $50 million upfront payment from Merck for EBV Canada and $9.5 million of milestones related to Rialdi from pricing received in Germany and development activities achieved in China. In addition, our international pharmaceutical business revenue increased approximately $3.7 million. Total revenue from the comparable period of 2022 was $42.6 million. Costs and expenses were $86.3 million for the first three months of 2023, compared to $60.7 million for the 2022 period. Costs and expenses for 2023 include a $12.5 million milestone payment to Sanofi related to the EBV program licensed to Merck. Research and development expenses were $31.9 million inclusive of the Sanofi milestone payment, and the remaining $7 million of increase over 2022, $12.3 million of research and development expense, primarily reflects the activities for our MODX development programs. The resulting operating income for the quarter ended March 31st was $19 million, a $37.1 million improvement from the operating loss of $18.1 million from the first quarter of 2022. Amortization expense related to our intangible assets was $16.4 million and $14.3 million, respectively, for the 2023 and 2022 quarters. Moving to our diagnostic segments, We reported revenue for Q1 2023 of $132.4 million compared to $286.6 million from the 2022 period. This decline reflects the lower COVID testing volume as the market has shifted away to rapid at-home testing. And also, the 2022 period included revenue from GNDX, which we sold in April of 2022. As Elias discussed, our focus at BioReference remains In identifying profitable growth verticals and maximizing our operating efficiency, we've strategically invested in our commercial resources in the higher growth specialty verticals and expect to begin yielding returns on those investments during the second half of 2023. We continue to execute our expense reduction program at BioReference, and as Elias discussed, we've also identified a number of near and medium-term growth programs. that we expect to realize throughout 2023. We expect these initiatives will return bioreference to profitable growth. Operating loss for our diagnostic segment was $40 million for the quarter, compared to $43.5 million from the prior year, which included losses from GDX that were offset by COVID. Turning to our consolidated financial results for the first quarter, we reported an operating loss of $30.6 million compared to an operating loss of $72.4 million for the 2022 quarter. Net loss for the first quarter of 2023 was $18.3 million or 2 cents per share. This compares to a net loss of $55.4 million or 8 cents per share for the 2022 quarter. Net loss for the first quarter of 2023 benefited from realizing a milestone from GNDX for the sales levels achieved during 2022 as well as appreciation in GDX's stock price as of March 31st. As we look at the quarter ahead, we're providing the following financial guidance. For our pharmaceutical segment, we've not assumed the approval of NGINLA by the FDA in our financial forecast. Approval would result in a milestone payment of $90 million. We have also not assumed the U.S. region for NGINLA will be in the gross profit share, as the timing of that approval is not certain. During the first quarter of 2023, the European region shifted to a gross profit share. And going forward, both the European and Japanese regions will share in gross profit for the HGH franchise consisting of genotropin and angela. We also assume a stable FX rate for our ex-US pharmaceutical businesses. And we have seen a 10% impact on our business over the last 12 months as a result of those FX impacts. For our diagnostic segment, We assume COVID testing will remain at current levels and continue to decline throughout 2023, and we have assumed consistent core testing volumes with growth in our higher margin oncology and women's health and urology specialty lines of testing. We continue to carefully manage our investments in new R&D programs and commercial initiatives to align with our available cash resources. As a result, we expect the following for the second quarter of 2023. total revenues between $165 million and $175 million, with revenue from services between $127 and $135 million, revenue from product sales between $32 and $36 million, and other revenue between $3 and $6 million. We expect Q2 2023 costs and expenses to be between $245 and $255 million, including R&D expense between $24 and $30 million and depreciation and amortization expense of approximately $25 million. This concludes our prepared remarks. Thank you all for your attention. And now, operator, let's open the call for questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question is from Jeffrey Cohen with Leidenberg-Talman. Please go ahead.

Hi, good afternoon, and thanks for taking our questions. I guess firstly, could we dig into MODX and Merck a little bit? And I guess two items. Firstly, could you walk us through, again, I don't think I caught it all, as far as the sharing of costs into an IND filing. What would you anticipate to be that as far as perhaps cost and timeline? And then secondly, could you talk about MS a little bit as far as what data is out there thus far? Has Merck or anyone out there looked into Parkinson's as well?

Thanks, Jeff. In terms of the cost sharing, there's no real cost sharing. We have a $50 million upfront. We have a joint steering committee of the program between now and IND that will actually continue beyond IND. But currently, all expenses incurred by Elko are reimbursed by Merck. And the reason is very simple, is because we have advanced the products so much that we are close to IND and we need to really continue that without disruption. And so Merck has asked us to continue to do this in collaboration with them and with obviously their approval to go forward and incur expenses such as CMC expenses and others between now and the IND. and to be reimbursed by Merck fully for those expenses. And in terms of beyond the IND, it's really in the control of Merck. We may or may not be asked to continue to do certain things, but at this point, I can't comment. So fundamentally, the cost to us, MODACs until IND, is pretty much assumed by Merck all the time at that time. In terms of MS, as you know, the landmark study that indicated a very, very strong suspicion, not just suspicion, but correlation and potential causation of MS in the 10 million army recruits that were followed for many years is the strongest evidence that we have that beyond cancer, there are other indications. There is also a body of suggested evidence that lupus, Parkinson, Alzheimer's disease may also be targeted, but the connection there is not as strong as it is for MS and cancer.

Okay, that's helpful. And then secondly, I wonder if you could dig into bioreference a little bit as far as some of the commentary. It sounds like you expect to turn bioreference around toward profitability by the, I guess, by the end of this year. And then perhaps could you talk about any test menu expansion that's going on as far as specific areas and perhaps the effect that may have on gross margins in that area. Could you call out, is there any activity on the genomic side as far as testing as well? Thank you for taking the questions.

Yes, it's a great question. So when we looked at, by reference, obviously, the number one priority is to get our costs in line with our revenues, as they are. I mean, I don't think you should manage a turnaround situation by banking on future revenues that haven't materialized, all right? So that's priority number one, and we are on our way to bring those numbers, revenues, and expenses in line with each other. The second part is what you would call growth potential. So we have multiple silos, I mean, not silos, but verticals there, Number one, I think, is 4K. We're continuing to develop 4K. The second is new tests. I mentioned Syntec. But, for example, we are going to market what we call a minimal residual disease test in conjunction with our oncology menu. What does that mean? If you talk to oncologists, Jeff, the number one question they have right now with very effective drugs is, is the disease gone? Is the disease controlled? Can I give my patient a vacation from drugs that are very toxic in many ways? And that can only be done by really looking at cancer DNA in the blood with multiple techniques to look at whether or not there is any evidence of residual disease or at what level. And then you can actually monitor the patient over time so that whenever there is an increase in the amount of residual disease, you can start treatment again or change therapy, whatever. So you can imagine that our goal is to provide a full portfolio in the cancer field that serves primarily liquid tumors, I would say, because that's where we are excellent. We have a very fast turnaround, so we want to push that. And in that context, we have been working now with large oncology groups, and I think we have some success there. Hopefully we can record that in the second quarter. In terms of other fields, women's health is obviously a field in evolution. We have an ovarian cancer test that we have considered and offering and looking at exactly how that will be marketed. We are also thinking that in the health system relationships, the ability for us to provide management, to provide a comprehensive menu, including reference testing, is another source that we have not maximized. Last but not least, I look at pharma. And pharma, there are two angles there that I'm very familiar with, and I'm, you know, asking that we enter this field. Number one is the exploitation of the enormous amount of data we have, and we have already gotten contracts from pharma companies that would like us to identify patients that would be eligible for certain therapies that they market. because they have specific mutations in the genome. Others are asking us to identify patients for clinical trials, especially in the underserved population. Others are really looking at us providing diagnostic panels for their clinical trials and so on. So I don't want to really tell you what I expect in terms of revenues there, because I don't know. But I think we'll report on that quarter by quarter, and you'll be able to see that, indeed, there is not just a equilibration of revenues versus expenses, but also, as mentioned by myself and by Adam, we do have areas where we're investing as well as areas where we're cutting costs.

Got it. That's very helpful. Thanks for taking all our questions.

The next question comes from Mari Raycroft with Jefferies. Please go ahead.

Hi. Thanks for taking my questions. I was wondering if you can provide, if there are any more specifics you can provide on timing for an update related to Pfizer's efforts with FDA for, in general, as approval for pediatric growth hormone. And is there anything else you can say about the nature of the efforts that are ongoing between Pfizer and FDA?

Unfortunately, as before, our hands are somewhat tied on what we can and can't communicate, but as we've somewhat got it to, we certainly expect a definitive decision this year, if not this summer. That's pretty much all we can say at this point. Everybody remains highly optimistic for a forthcoming approval.

That makes sense, and that's helpful. And if, in general, it gets approved this year in the United States, how quickly do you think Pfizer could launch it? And is there anything you could say about launch dynamics and expectations around that, given Pfizer's existing presence with genotropin? I guess, what are your latest thoughts on that?

Commercialization is 100% in the hands of Pfizer. Whether they'll be able to launch this year depends on a lot of things and how much pre-work they've done. So, again, I'm limited in guidance until we get the approval in hand.

Okay. Makes sense. And maybe the last question on the NGEN law that I want to ask is just if you're hearing anything about dynamics in Europe, how the reception has been there, and any metrics you can share on that, if possible.

Yeah, so Maury, now there's not a lot to share. I know that the team continues to be enthused about the prospects, and as we highlighted, there's a number of countries coming online where they're getting regulatory approvals and launching But beyond that, you know, I think we need to have our partner's advisor. Understood.

Okay. I'll stop there and hop back into the queue. Thank you. Thanks, Mark.

The next question is from Yale Jen with Laidlaw and Company. You may go ahead.

Good afternoon, and thanks for taking this question. I just want to get some sense of in terms of the diagnostic business, whether the cost savings still ongoing or you pretty much finish that part and more into the revenue growth directions.

No, we are still working on cost savings, Jen. We are, you know, continuously since basically a year ago going through the entire cost structure and obviously working on it. You'll hear more about that in the subsequent quarters. So we're not just focused on growth. We are still continuing to understand our cost structure and our price per accession, our cost per accession, doing an enormous amount of work on contribution margins, test by test, and understanding the product mix. And that is ongoing, and we are taking action in many areas, actually. to reduce costs, not stopping at this point.

The next question is that in terms of MRD, the Mineral Residual Disease testing, my understanding is there's probably a number of, as you said, liquid tumors has been identified, the method has been identified, but not all of them. Do you guys continue to explore what's over there or with the new, you know, the development of science and others?

That's a very good point. And, you know, we are very confident in liquid tumors. We think we have a good grasp of that. I've looked at the data. I think there is a good sensitivity when you talk about myeloma, leukemias. I mean, liquid tumors, we're very confident. The problem is more into other types of tumors where you have a solid component. You're not sure always that the DNA at minimal residual disease will circulate to give you a good result. So we're focusing, but expending very slowly, very carefully. But again, our main revenue in oncology, if you really look at where we are strong, it's really in the liquid cancer arena.

Okay, maybe the last question.

I'm sorry.

Maybe the last question here. Sorry. Maybe the last question is for the agenda for Adams, that when you think that eventually you will record those revenues or profit sharing in a separate line in the P&L, or that something will wait until next year? And thanks.

Yeah. Yeah. So thanks, Yael. So I would expect that, you know, once it becomes individually material, we'd break it out in some of the disclosures. You know, you would expect that perhaps once we have a U.S. region in the gross profit share, it would become more significant. But it could be later this year or in the next year.

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

The next question is from Yi Chen with HC Wainwright. Please go ahead. Mr. Chen, you're on the podium. You can ask your question.

Sorry. Thank you for taking my questions. Could you give us some additional color on the downstream trial test and what would be its clinical activity and how do you forecast its sales trajectory? Thank you.

I'm sorry, I couldn't hear. Which test are you referring to?

The Roche Diagnostics Sync Tech Plus cytology test.

Well, I tell you, we're at the beginning. Of the marketing, we're getting good response for the test. You know, it's sort of a reflection. If you understand when you have a positive HPV result, you really need to know if it's from the high-risk variants, you know, whether the EV6 and EV7 are present in those cells. And so that's really what happens. Our experience so far is about for all the suspicious HPV results, results, about 6% really require a move over to Syntec. All right, so I cannot tell you what the numbers are. We just started marketing it.

I mean, this test is prescribed by a physician to whoever he or she considers at high risk for HPV infection?

OBGYNs generally.

are ordering that test.

Yeah. And they are the ones who make a decision whether the patient needs to have an immediate procedure or can be followed, followed how often. If we have a negative result, they can wait maybe two years. If it's a positive result, they need to decide right away or give it a more extension for a few months before repeating the test. So it's You know, if you look at the total market of these tests for cervical cancer prevention, as I said, it's a low percentage that would be applicable to the patients who have the need for that test. Five to six percent is what I'm told, but I cannot guarantee you that.

Okay. Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Dr. Philip Frost for any closing remarks.

I'd like to thank everyone for participating in this session, and we look forward to being with you again after the next quarter. Thanks again. Bye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.