Lippert Heilshorn & Associates

Lippert Heilshorn & Associates

Moderator: Miriam Miller

08-07-18/4:30 p.m. ET

Confirmation # 9243717

Lippert Heilshorn & Associates

Moderator: Miriam Miller

To ask a question, please press star followed by one on your touchtone telephone. As a reminder, this conference is being recorded today, August 7, 2018. I would now like to turn the conference over to Miriam Miller. Please go ahead, ma'am.

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 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, 2017, and its quarterly report on Form 10-Q for the quarter ended June 30, 2018. Importantly, this conference call contains time-sensitive information that is accurate only as of the date of the live call, August 7, 2018.

Except as required by law, OPKO 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, followed by Steve Rubin, OPKO's Executive Vice President, who will provide an update on the company's various business and clinical program.

After that, Adam Logal, OPKO's Chief Financial Officer, will review the company's second quarter financial performance. Dr. Frost will provide closing remarks, and then we'll open up the call to questions. Now let me turn the call over to Dr. Frost.

Our largest commercial unit, BioReference Laboratories, has been the object of a great deal of our attention. Geoff Monk, now the General Manager of BioReference, is now in full control and has made several operational changes to improve efficiency and overall results. He has moved people around and brought in new talent.

Sales are, of course, the life's blood of the business, and Geoff recently brought in (Cindy Jacke) to accelerate sales growth. (Cindy's) previous experience as sales director for the East region of Quest has prepared her well for the challenge.

And of course, (Ben Solomon) continues to be a star at our GeneDx unit from which we expect great things, which he continues to deliver.

RAYALDEE is beginning to look like the commercial success we had thought it would be. Kirk Miller, our new Director of Nephrology Sales, working with Tom Nusbickel, our Nephrology Commercial Director, have made great strides.

After Charles Bishop, developer of RAYALDEE, Dr. (Akhtar Ashfaq), a terrific academic nephrologist working at OPKO, are working together to meet with important nephrology groups around the country to explain how RAYALDEE can be important for them in the management of their stage 3 and 4 chronic disease patients, with considerable success, I might add.

Last time, I mentioned that several clinical trials were ongoing, with patient enrollment proceeding nicely. Well, the pace has accelerated, and we recently announced completed enrollment in our Phase III worldwide pediatric human growth hormone trial, as well as our Phase IIb trial for OPK88003, or oxyntomodulin, weekly injectable medicine in the for Type 2 diabetes and obesity, both sooner than anticipated and both proceeding nicely under the direction of Dr. Jane Hsiao and Dr. Tony Cruz.

As you will recall, I've expressed considerable enthusiasm for the market potential for our oxyntomodulin product, which has also already been shown in a previous 420-patient trial to be safe and effective with respect to blood HbA1c and lipid control, as well as weight loss.

The current trial aims to achieve even greater weight loss by administering the larger doses required for more weight loss while avoiding or minimizing the limitations of nausea and vomiting that may occur with higher doses.

The trial is proceeding as expected. All in all, we're looking forward to the positive events of the remainder of the year. And I now pass you on to Steve Rubin, who will continue with more detail.

Let's start with our clinical diagnostic business, BioReference laboratories, or BRL, which is the countries third largest reference lab. We are pleased to report sequential quarter gains in revenues. As Phil noted, we are very pleased to see good early momentum for BRL under the leadership of Geoff Monk.

From an operations perspective, we remain particularly excited about the potential for BRL's GeneDx subsidiary, which continues to demonstrate growth and innovation in its high complexity and related tests. For the second quarter, GeneDx achieved a 38 percent year-over-year increase in exome-based testing volumes.

As an impressive milestone in June, GeneDx announced that they have performed clinical exome sequencing on more than 100,000 individuals, representing one of the largest cohort sequence exomes by independent clinical laboratories in the world.

The achievement also greatly expands the database of known clinically relevant genetic variance used as tools to help diagnose rare diseases. GeneDx continues to be a BRL standout as we have helped discover and contribute to phenotypic understanding of more than 62 novel disease genes in the last 3 years alone.

In addition to its exome and genome test, GeneDx continues to post growth in its overall product portfolio with year-over-year volume growth of more than 13 percent. During Q2, GeneDx finalized a major overhaul of its clinically driven testing menu and launched 20 new tests and also revised and updated 51 tests.

During the remainder of this year, GeneDx plans to launch an additional 36 test and will revise and update 57 more tests. These tests were selected based on specific clinical need and reimbursement potential.

Moving on, our 4Kscore blood test gives a man with elevated PSA level a personalized prediction of his chance of having or developing an aggressive form of prostate cancer.

During the second quarter, we've processed nearly 20,500 4Kscore tests, representing a 10 percent increase compared with the second quarter of 2017. The retention rate among urologists utilizing the test is also an important metric, with 80 percent of the urologists who have ordered 4Kscore in Q1 2018 continuing to order this test in Q2 2018.

As you know, Novitas released draft noncoverage guidance for the 4Kscore tests in May. While our final coverage determination from Novitas hasn't been issued, I will show an overview of the activities we, with the support of experienced urologists, undertook during the public comment period, which ended on July 30.

On May 31, OPKO made a presentation for -- I'm sorry, made a presentation of key publications with data demonstrating long-term predictability for a man with elevated PSA of prostate cancer metastases and mortality of 15 years or 20 years later.

In addition, eight leading urologists from academia and large neurology practices spoke about the clinical value of the 4Kscore test, in many cases indicating why they couldn't actually care for the patient without the 4Kscore test.

We believe that the messages were well received. We also subsequently met with Novitas' medical directors to address certain concerns and provide further clarity on clinical validity data.

We have followed up with the data, evaluating how the 4Kscore test would perform in a Medicare population. We were also aware that many professional organizations, physicians and patients, submitted written comments directly to Novitas in support of the 4Kscore test.

We appreciate the time everyone took to speak out on behalf of the 4Kscore, which we consider to be an important test in the diagnostic paradigm of prostate cancer. We've been asked about the timing for Novitas to issue their final coverage decision, as we understand that there is no specific deadline for Novitas' decision, but in the meantime, Novitas continues to process Medicare payments for 4Kscore tests.

Turning now to our pharmaceutical business. Let me start with RAYALDEE, the first and only therapy approved by the FDA that both raises 25-hydroxy vitamin D and lowers parathyroid hormone levels in patients with chronic kidney disease with a safety profile similar to placebo.

We are pleased to see Vifor Fresenius receive approval last month to market RAYALDEE in Canada for the treatment of SHPT in adults with stage 3 or 4 CKD and vitamin D insufficiency.

We also expect to announce shortly the initiation of Phase II clinical study to study the safety and efficacy of RAYALDEE as a new treatment for SHPT in adults with vitamin D insufficiency and stage 5 CKD requiring hemodialysis. This trial will be conducted in multiple dialysis centers in the U.S.

From a quarterly performance perspective, the RAYALDEE numbers breakdown as follows, in Q2, the total number of RAYALDEE prescriptions increased approximately 36 percent versus Q1.

Importantly, since the start of the year, we have seen a steady month-to-month increase in the total number prescriptions. Our expanded sales team of 64 representatives had a significant positive impact this quarter, with 49 percent of prescriptions being new to brand and 54 percent of those prescribers new for RAYALDEE.

Since launch, the number of physicians who prescribe RAYALDEE has increased steadily. We had 929 active prescribers in quarter two, 764 in Q1, and 594 in Q4 of last year.

So you can see the sustained momentum here. We ended Q2 with RAYALDEE being available to 83 percent of the overall insurer population and 53 percent of the Medicare population. RAYALDEE is covered by plans representing 90 percent of the commercial population.

Overall, we continue to see progress in adoption, reimbursement, and awareness of RAYALDEE. Our expanded sales team continues to demonstrate improving performance as our market penetration continues to grow.

Regarding our clinical development programs, we remain focused on progressing our portfolio addressing indications with significant, unmet medical needs in (in our large) markets.

And we have a robust pipeline of candidates at various stages of development, which provides attractive opportunities for creating near- and long-term value for our shareholders.

Starting with our work in nephrology, as I just discussed, Vifor Fresenius has received marketing approval for RAYALDEE in Canada in late July. They also remain on track to file a marketing authorization application with the European Medicines Agency later this year as a treatment for SHPT and CKD patients.

As also discussed, we will be initiating a global Phase II trial with a higher strength RAYALDEE in patients with stage 5 CKD and vitamin D insufficiency who require a regular dialysis. We expect to share the cost of the study with our development partners, Vifor Fresenius and Japan Tobacco.

In addition to this Phase II study, we plan to augment our growing presence in the renal market with synergistic products that address other significant, unmet needs. This includes of a single-dose Phase IIa trial that evaluates our NK1 antagonist in dialysis patients for euremic pruritis, or itching.

This is a serious problem for many patients on dialysis. In our metabolic and endocrinology pipeline, we have several late-stage programs underway or nearing initiation that could reach important inflection points this year.

As you know, our long-acting human growth hormone product, Somatrogon, or hGH-CTP, is currently in a global Phase III pivotal trial in growth hormone deficient children. The pediatric indication represents 80 percent of the growth hormone market. This program is partnered with Pfizer for worldwide commercialization.

We recently announced the completion of enrollment in the 225-patient trial in 30 countries. Based on this major milestone, the completion of the trial is now expected to occur in Q3 of 2019. This is a trial comparing single weekly injection of Somatrogon with daily injections of GENOTROPIN.

This study uses a multi-dose disposable pen device intended for commercial launch. We are hopeful that the outcome will support a standard of care dosing change from daily to weekly administration, which will improve the quality of life for children with growth hormone deficiency.

Last summer, we also initiated a pediatric registration study in Japan to assess pharmacokinetics and compare efficacy of weekly Somatrogon to daily GENOTROPIN in 44 pre-pubertal growth hormone deficient subjects. We expect enrollment in Japan study to be completed before the end of this year.

Last November, we began a Phase IIb dose ranging trial from once daily oral selective androgen receptor modulator, or SARM, to treat BPH, or enlarged prostate patients. BPH affects approximately half of all men aged 50 and 90 percent of men over the age of 80.

This 4-month study is expected to enroll 125 patients at 30 sites in the U.S. to identify appropriate doses to reduce prostate size, the primary efficacy endpoint of the study. The study will also assess blood PSA levels, lean body mass, and fat mass at secondary endpoints. Completion of enrollment is expected before Q1 of 2019.

In mid-June, we reported that enrollment in our Phase IIb dose escalation trial for OPK88003, our once-weekly combined glucagon dual agonist to treat Type 2 diabetes and obesity was complete.

This is a study of 110 Type 2 diabetics at 35 clinical sites in the U.S. You may recall that we initiated this trial mid-March, and we are pleased with enrollment completed so quickly, less than 3 months after initiation.

This study is evaluating HbA1c as a primary endpoint in weight loss, blood lipid levels, and safety as secondary endpoints. The data obtained in this trial will be used to support the dose escalation regimen for Phase III studies.

Previously, preclinical and clinical and Phase II data showed that once-weekly dual agonist such as our OPK88003 improved glucose control, caused more weight loss and improved the blood lipid levels compared to GLP-1 products on the market. In our previous Phase II study of 420 diabetic patients, greater weight loss was achieved compared to the approved extended release exenatideand placebo.

These data also showed improvement in the lipid profile and a similar reduction in HbA1c levels compared to the approved once-weekly product. We are happy to report good momentum with our commercial products, and this is (special) efforts of our sales team, particularly related to RAYALDEE.

We applaud the approval of RAYALDEE in Canada and look forward to pursuing additional regulatory approvals for RAYALDEE in conjunction with our partners. We are very pleased to have completed enrollment in our Phase IIb trial evaluating OPK88003, our oxyntomodulin drug for Type 2 diabetes and weight loss, and in our global Phase III study of Somatrogon in children with growth hormone deficiency.

We are enthusiastic about GeneDx' achievement, sequencing the exomes of 100,000 individuals and are proud of the contribution this data may have on the development of new approaches to treat rare diseases.

We have put forth every effort to provide the data that Novitas requires to reach a positive final coverage decision for the 4Kscore test. And at a high level, we're advancing a robust clinical development program that addresses several large markets.

We expect to make meaningful progress with these programs and to achieve several important milestones. And with that overview, let me turn the call over to Adam for a discussion of our second quarter financial performance. Adam?

Overall, our net loss decreased to $6.2 million, or $0.01 a share, on net revenue of $264 million for the second quarter of 2018, compared to a net loss of $17 million, or $0.03 per share, on revenues of $293 million for the comparable period of 2017.

While we are still early in our operational overviews, under our new leadership at BioReference, we've made significant progress in our efforts to improve our operating efficiency.

During the second quarter of 2018, we were able to reduce our costs of revenue as well as selling, general and administrative expenses by 9 percent, or almost $26 million, compared to the second quarter of 2017. Our investments in R&D were $29 million for the second quarter of 2018, compared to $33 million for the 2017 period.

During the second quarter of 2018, operating and net loss benefited from a reduction of contingent consideration expense of $19.7 million related to changes in the assumptions related to the timing of milestone payments due in connection with our acquisitions.

Moving to Diagnostics revenue. On a sequential basis, Revenue increased by approximately $5 million from the first quarter of 2018, resulting from increased volumes in the current period on consistent reimbursement rates.

Revenues in comparison to the prior year second quarter reflect a volume decrease in the clinical lab testing of approximately 1.4 percent, as well as overall reimbursement pressures, including the impact of PAMA. These decreases were partially offset by volume in reimbursement increase is in our genomics testing.

As I mentioned on our call last quarter, revenues and cash flows are benefiting from the revenue cycle management program we initiated last year, and accounts receivables balances and DSO continue to decrease. The improved collection cycle and overall yield on each session has continued to improve throughout 2017 and to the first half of 2018.

We continue to focus our efforts on improving our collection yield, despite challenging market dynamics, particularly in our genomics testing where we are currently focused and have the largest area of opportunity for further improvements.

Regarding our pharmaceutical division's performance, we recognized $4.8 million of revenue related to the sales of RAYALDEE during the quarter, a 36 percent increase on a sequential basis from the first quarter of 2018.

Total pharmaceutical product revenue for the quarter was $28.5 million compared to $29 million for the 2017 period. Revenue related to the transfer of an intellectual property during the second quarter of 2018 was $19.1 million compared to $29.7 million for the 2017 period.

As a reminder, the 2017 period included a $10 million nonrecurring milestone payment related to VARUBI . We closed the quarter with approximately $80 million in cash, cash equivalents, and marketable securities.

Our improving cash flows from BioReference and RAYALDEE led to a 52 percent reduction in cash used in operations when comparing the second quarter to the first quarter of 2018 and reflects a 25 percent reduction in cash used in operations compared to the second quarter of 2017.

We are mindful of our cash balance while we make investments into both our R&D pipeline and commercial activities. Based on our current expectations, RAYALDEE's commercial activities will become cash flow positive on a run-rate basis during the third quarter, resulting in further reductions and cash flow used in operations.

Improving operating margins and associated cash flow are anticipated to continue at BioReference and results are expected to further reduce our overall cash used in operations. Looking forward to the third quarter, we expect revenue from services to be between $200 million and $220 million.

This range reflects reimbursement rates remaining consistent with the first half of 2018, with a slight increase in overall volumes. As a reminder, the comparable period of 2017 have revenue from services of $200.9 million after adjustment for the adoption of ASC 606 earlier this year.

Turning to product revenues, we expect the third quarter to come in between $28 million and $32 million, including revenues from RAYALDEE between $5.7 million and $6.5 million.

While revenues from the transfer of an intellectual property expected to be between $18 million and $23 million, including several nonrecurring milestone payments anticipated related to our RAYALDEE partnerships.

Looking at expenses for the third quarter, we expect costs and expenses to be between $285 million and $305 million, including research and development expense of $33 million to $38 million.

For the full year, we continue to expect our effective tax rate to be in the single digits, and we look forward to providing further details on fourth quarter expectations during our third quarter update in November. With that, I'll turn the call back over to Phil.

If you are using a speakerphone, please pick up your handset before entering your request. One moment please for the first question. And our first question comes from Louise Chen with Cantor.

And what other factors should we think about here in terms of headwinds or tailwinds in that business? And the second question I have was on RAYALDEE. Where do you think sales can grow from here? I know you give some guidance for the third quarter.

What kind of pick up do you expect in the fourth quarter and beyond? And what's going to drive that? Then I have a question on your hGH program, but I'll ask after the first two.

And I think the first -- in this first quarter and second quarter of the year, we've made some pretty significant progress on that front. So I think long term, we should be able to get the operating cash flow and operating margins up into the mid to upper teens on a long-term basis.

Once that's done, I think that will also coincide with the end of the Phase III pediatric study. And at that time, we'll make -- along with our partner, Pfizer, we'll make a decision on how to best move forward with that BLA.

So we need to bioequivalence study that Tony mentioned, is basically just to show the equivalence of drugs supplements and the pen device for adults as well. That's what will be commercialized and so it should pretty -- simple quick study, but it's necessary prior to submission.

We filed our first amendment with them and we're now in the process of gathering the second amendment information from the field. Commercially, we've got the analyzer really pretty much where we've always said it was. Right now, it's a first-generation analyzer. It's about a $2,000 unit.

But there's obviously a commercial flexibility in how we would have that paid for in the course of testing where partial payment for the analyzer is reflected in the cost of the cartridges.

The cost of goods, this is something we're focused on as well. We have plans for automation of the process. Again, pending final approval from FDA for that. So we're gearing up for PSA, but I also want to remind you that there's a great deal of menu expansion capability.

And that expansion happens via a very different regulatory process. First off, it will be the second and third and fourth, et cetera, filings we will do, and these will be done by five, 10k processes, which are quite lower in terms of the bar for clinical trial requirements.

I think the volumes do translate and overall, just into direct dollars. So GeneDx makes up about 17 percent of our overall revenue -- 17 percent to 20 percent of our overall revenue and services.

Or should we think about particularly the revised has to being less impactful in terms of improving margins and potential profitability?

And so you'll see a lot of the work that's being done is either whether there's an unmet need or where there's clearly a test with some tinkering modification that we're confident will have a quicker path reimbursement. So it's clearly focus on -- it's both top line growth and margins for sure.

In BioReference, their gross usually comes almost entirely from expansion of the market. And of course, again, depending upon reimbursement. And in both cases, I would say the teams have been working very hard to develop new approaches to help ensure growth. So we're pretty optimistic about the business.

And then just with regard to the dialysis study, is that going to be the same capsule, just in a significantly greater number of capsules? Or do you complete a optimization or different-sized capsule to accommodate potential dose for dialysis patients?

In regards to the sales force optimization, we will continue to grow the sales force when the opportunity in regards to the physician and the coverage warrants it.

So we're always looking at how can we continue to drive growth and when we can make a case to do that through expansion, the sales force will be doing that. So we'll be continuing look at to do that over time.