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Q4 2023 OPKO Health Inc Earnings Call

Participants

Yvonne Briggs; Investor Relations; LHA

Phillip Frost; Independent Director; OPKO Health Inc

Elias Zerhouni; Independent Director; OPKO Health Inc

Adam Logal; Senior Vice President and Chief Financial Officer; OPKO Health Inc

Jeffrey Cohen; Analyst; Ladenburg Thalmann & Co Inc

Maury Raycroft; Analyst; Jefferies

Edward Tenthoff; Analyst; Piper Sandler

Presentation

Operator

Good day, and welcome to the OPKO Health fourth-quarter 2023 financial results conference call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Yvonne Briggs. Please go ahead.

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Yvonne Briggs

Thank you, operator, and good afternoon. This is Yvonne Briggs with LHA. Thank you all for joining today's call to discuss OPKO Health's financial results for the fourth quarter of 2023. 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 SEC filings, including the annual report on Form 10-K for the year ended December 2023, 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, February 27, 2024. 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. Phillip Frost, Chairman and Chief Executive Officer, will open the call. Dr. Elias Zerhouni, Vice Chairman and President, will then provide an overview of OPKO's pharmaceuticals business as well as BioReference Health. After that, Adam Logal, OPKO's CFO, will review the company's fourth-quarter financial results, and then we'll open up the call to questions.
Now I'd like to turn the call over to Dr. Frost.

Phillip Frost

Good afternoon, and thank you for joining us today. 2023 was a year of significant improvement for our pool, and we expect continued progress in 2024 in 2023 and January. Our long-acting growth hormone therapy was approved by the FDA for a sale in the U.S., the largest growth hormone growth hormone market in the world. Pfizer, our global commercial partner has now launched new journals and over 40 markets worldwide. And we're optimistic about Pfizer's ability to convert users to the weekly injection from the daily to further penetrate this growing $5.5 billion market. Boardex made great strides last year, in particular in executing its strategy to secure important collaborations to advance its multi-specific biologics platform into the clinic. These collaborations provide non-dilutive funding to advance our unique pipeline to commercial realization. Specifically, last March, we announced an exclusive worldwide license and collaboration agreement with Merck to develop mode X's nanoparticle vaccine candidate against Epstein-Barr virus we receive a sizable upfront payment and are eligible for milestone and royalty payments. In September, BOTOX was awarded a contract from the Biomedical Advanced Research and Development Authority, known as Varda to develop novel multi-specific antibodies against viruses that cause specific antibodies to treat and prevent COVID-19. And additional funding may be available to develop multi-specific antibodies targeting other viral pathogens such as influenza or?
Yes, we'll provide more detail on those programs.
Sales of Rayaldee, our drug to treat chronic kidney disease, patients with elevated parathyroid hormone and low vitamin D levels grew 13% last year and we're expecting further progress this year. We're gathering data, which indicate that Rayaldee may slow chronic kidney disease progression.
Some of you have been asking about my long-time enthusiasm for our once-weekly oxyntomodulin product to treat type two diabetes and obesity. You'll remember that we had completed a successful Phase two trial achieving significant weight loss lowering of serum cholesterol and triglycerides and lowered A1C levels with the way the Phase three trial when other products appeared which provided greater weight loss, noting the great commercial success of these products, we decided to have a closer look at ours. The polyethylene glycol PEG added to our base peptide to increase its half-life is large and bulky and increase the viscosity of the injection, which limit the maximum dose administered, which is related to the amount of weight loss. We have now found a substitute for PEG, which makes our molecule size similar to those on the market with guarded optimism. We're in early stages of preclinical evaluation of this product.
Switching to our international business, our goal at Uber America, fine tech and urgent are all doing well turning to Bio-Reference Health, our team has worked hard to improve our cost structure and enhance revenue. In addition to our expense reduction efforts by reference has been aiming to drive growth in higher value segments with new tests, larger customers and better insurance reimbursement. We are laser focused on returning this segment to profitability in the near term. And again, LEOs will provide more detail. With that overview, I'll turn it over to Elias.

Elias Zerhouni

Thank you, Phil, and good afternoon, everyone. As Phil mentioned, last year was quite eventful for both of our operating segments. Of CorVel. And again, a lot launches in all major global markets, as mentioned by Phil, is progressing well and we believe this drug is well positioned for significant growth. This next-generation long-acting therapies administered once a week and not daily and assist in easing the burden, especially for the pediatric market and increases medication adherence. Again, loan or annual growth is anticipated to be in excess of 12% as part of our partnership with Pfizer, of course, entitled to an additional $100 million milestone payments associated with approvals for the new adult indication for growth hormone deficiency and additional pediatric indications. These are global registration strategies underway for the adult application and other Petra pediatric indications, which are currently in Phase three clinical trials Phil also mentioned our success last year securing collaborations for Monex therapeutics with Varda and Mark most recently with borrow secured an initial 59 million grant to fund R&D and clinical evaluation for a Phase one study of our multi-specific antibodies against known variants of source code, the two for the treatment as well as prevention of COVID-19, which remains in particular travel especially for immunocompromised patients. Additional funding of up to $109 million based upon the achievement of certain milestones in the first phase may be available from Varda to develop more multi-specific antibodies targeting other viral pathogens such as influenza and as part of the research program, gene-based delivery methods for the multi-specific antibodies will be developed using mRNA or DNA vectors to supplement the body's natural product protein production processes and hopefully provide partner with a platform that can be used very quickly for any emerging player.
In addition, we announced the collaboration with Merck to develop MDX. 2201, which is our Epstein-Barr virus multivalent nanoparticle vaccine. We received a $50 million upfront payment for the license of this vaccine with a potential 872.5 million in development and commercial milestones and scale royalties on global sales ranging from single digit to double digit percentages this program truly Macrovision's Medex nanoparticle based vaccine platform, which enables simultaneous position against several major HBV proteins in this case for major EV proteins. But the platform itself has the potential to, in fact, address multiple antigens against multiple viral viral viral diseases. The market opportunity here is quite large as the Epstein-Barr virus affects up to 95% of the global adult population during their lifetime. Moreover, there are over 260,000 cancer cases annually caused by EBV, along with an association between multiple sclerosis and this virus. We're working with Merck on IND-enabling studies, and we expect Phase one clinical trials to start later this year to round out our Model X pipeline, we have partnered with the NIH to develop an anti-viral multispecific antibody focused on the treatment and prevention of HIV. We've had success with our first generation candidate in a Phase one trial, and we are moving forward with a more potent next-generation Tetra specific antibody versus the previous trispecific one, we believe there is an unmet need for therapies that can provide longer-acting protection treatment for patients who require options beyond small molecule based therapies.
And lastly, our immuno-oncology programs, our focus on hard-to-treat solid tumors as well as liquid tumors such as leukemias and lymphomas, are multi-specific antibody candidate can simultaneously target several tumor antigens and enable better control of the immune system activation. Our Tetra specific laser program to treat solid tumors is expected to enter the clinic. The first half of this year.
Now I'd like to turn to review of our Diagnostics segment. Bio-reference fell to 2020. 23 was a transition year for our diagnostics division as we get closer to turning the corner to profitability. As you know, we implemented our recent initiative to reduce costs, improve efficiency and enhance productivity. For example, we've reduced our headcount by 8% or 252 headcount into 2023. In parallel, we're driving growth in various testing segments, including our higher value specialty segments like oncology, women's health and urology, primarily through our proprietary 4K Score test. The forecast Cortez volume has continued to perform, and we expect these volumes to continue as the test was included in the 2023 American Urology Association and the NCNN. guidelines for early detection of prostate cancer and for follow-up after PSA screening for initial and repeat biopsy risk stratification. In addition, we expect that the recent expansion of insurance coverage will continue to bolster those levels this year.
Genpath continued to launch innovative testing, including an expanded hematologic malignancy panel and introducing several new tests in the market that will sustain growth of the GenPath oncology products.
Other advances have been made over the 2023 years. For example, we have signed over 300 new accounts in Q4 of 2023 with over 40,000 accessions additional accessions. And we've also signed major oncology groups like the Virginia oncology oncology oncology group with 90 oncologists, which is a component of US Oncology that started in November.
So in summary, Bio-Reference has made great progress last year, and we expect to continue to build on these achievements in 2024, we narrowed our operating loss sequentially and through both expense reduction and revenue growth. We continue to feel confident that these efforts will further improve financial metrics and return this segment to profitability in the next few years.
I will now turn the call over to Adam Logal to discuss our fourth quarter financial results. Adam?

Adam Logal

Well, yes, starting with our financial pharmaceutical segment revenue increased to $57.7 million for the fourth quarter of 2023 from 46 million for the comparable period of 2022. Revenue from products, including our international pharmaceutical businesses and Rayaldee increased by 5.1 million, reflecting from improvements in the number of prescriptions and in overall net price. Further, revenue increased as a result of gross profit share payments from Pfizer due to the global launch of Jamelah, resulting in $12.2 million of revenue during the quarter. The fourth quarter revenue includes a catch-up payment for the US at market related to the third quarter of 3.1 million. As I mentioned last quarter, the US launch occurred mid-August and Pfizer was delayed in reporting our gross profit share amounts and as a result that were included in our third quarter results.
Costs and expenses were 73.8 million for the fourth quarter of 2023 compared to 68 million for the 2022 period.
Research and development expenses for the fourth quarter of 23 were $18.7 million compared to 16.6 million for the comparable period of 2022. This increase reflects activities for our modem development programs, partially off set by decreased spending on in Genoa as well as an R&D tax credit for our REO activity. The resulting operating loss for the quarter ended December 31st, 2023 was 16 million, a $6 million improvement from the operating loss of $22 million for the fourth quarter of 2022. Amortization expenses related to intangible assets were 16.4 million and $16.5 million for the 2023 and 2022 fourth quarters, respectively.
Moving to our Diagnostics segment, we reported revenue for Q4 2023 of 124.2 million compared with 139.4 million for the 2022 period. This decline primarily reflects lower COVID testing of 7.1 million, as well as a change to our estimated collections of 8.1 million, partially offset by increased testing volumes.
Cost of expenses increased to 166.4 million for the fourth quarter of 2023 from 162.5 million for the 2022 period. Operating loss for our Diagnostic segment and included a change in estimated collections as well as approximately 4.7 million of nonrecurring costs related to employee severance and retention programs associated with our efforts to return to profitability depreciation and amortization expense were 8.1 and 8.7 million for the 2023 and 2022 periods, respectively.
Turning to our consolidated financial results for the first fourth quarter of 2023, we reported an operating loss of 69.1 million compared to an operating loss of 55.3 million for the 2022 quarter. Net loss for the fourth quarter of 2023 was 66.5 million, or $0.09 per share, which compares with a net loss of 85.2 million or $0.11 per share for the 2022 quarter, reflecting lower noncash mark-to-market losses related to our investment in GDS.
I'd like to briefly comment on our balance sheet and the really recently completed refinancing of our convertible debt. On December 31st, we had two convertible debt issuances that were set to mature in early 2025, our 4.5% notes, which were held by a number of institutions in our 5% notes, which were primarily held by Dr. Frost, Dr. Hsiao and a long-term investor bucket. In consultation with our advisers at JPMorgan, we chose to issue new five year notes, reducing our coupon interest rate to 3.75% and took advantage of the strong demand from institutional investors to raise a total of 230 million. We used the proceeds to buy back the outstanding 4.5% notes and the 55 million shares of our common stock, and we added approximately 25 million in cash to our balance sheet. Our 5% note holders exchanged their principal and accrued interest of approximately $71.1 million into notes with identical financial terms as the 3.75% note holders, this refinancing strengthen our balance sheet, reduce the number of shares outstanding and provided the company with additional cash to fund our ongoing development activities. The offering was oversubscribed and brought in an impressive group of new prominent investors to OpCo during 2024, we anticipate receipt of a receipt receipt of additional non-dilutive cash payments under our existing collaborations with Merck, Varda and other potential transactions as the year progresses.
As we look ahead, we're providing the following financial guidance with the following assumptions for our pharmaceutical segment. There are a number of factors that impact our gross profit share payments from Pfizer including revenue from product sales of Genotropin antigen and general global sales of Genotropin for 2023, as reported by Pfizer were 539 million. Pfizer is not separately reported sales of in Jamelah. However, we have observed consistent prescription growth globally for generalists as reported by IQVIA and Symphony. As such, for the full year, we estimate our gross profit share will be between 40 and 50 million. Although we anticipate that a number of scenarios may impact sales of unit troponin and GEN-1 globally, we assume stable foreign exchange rate for ex U.S. pharmaceutical businesses, which will allow for continued and profitable growth.
R&D expenses for the first quarter of 2024 will reflect higher activities related to our Mode X programs, including CMC and efforts related to the initiation of our fuse first immuno-oncology clinical trial. Those increased activities will be partially funded through our barter agreement and partially offset by lower R&D costs related to the wind-down of our clinical operations for the ongoing open-label pediatric extension study for Jamba, which we expect to substantially complete by the end of the first quarter for our Diagnostics segment. As Elias outlined, we are diligently working to align the business to achieve cash flow breakeven by the middle of 2024 and profitability by the end of the year. This work includes consolidating our geographic footprint and rationalizing our test offerings. As a result, we expect our client mix to improve and cost structure to appropriately support our go-forward strategy. During this transition phase, we expect consistent core testing volumes with a slight increase in the average per patient collection amounts to order up due to our revenue cycle management initiatives, partially offset by volume impact due to several weather events that occurred during the first quarter, although before considering any nonrecurring costs that may result from our restructuring activities, we expect our costs and expenses to decline sequentially by 7 million to approximately 159 million. As a result, we expect the following for the first quarter of 2024, total revenues between 180,000,185 million dollars, revenue from services between 126 and $130 million, revenue from product sales between 36 and $40 million and other revenue between 14 and 18 million, inclusive of the estimated Pfizer gross profit share payments between nine and 11 million. We expect first quarter costs and expenses to be between 235 and $245 million, including R&D expense between 20 and $29 million, dependent on the timing for certain CMC activities for our modem programs and depreciation and amortization expense of 26 million.
That concludes our prepared remarks, and thank you for your attention. Operator, let's open the call for questions.

Question and Answer Session

Operator

(Operator Instructions) Jeffrey Cohen, Ladenburg.

Jeffrey Cohen

Well, good afternoon, everyone, and thanks for taking our questions. I guess first to add and could you just we can't your financials with regard to the the 4.5% and 5% instruments out there. So currently then share count is down toward approximately 701 would be on appropriate cash and debt levels we have on we're estimating pro forma.

Adam Logal

Yes. So we ended ended the year with 95 million in cash. So if you pro forma and the additional 25 million, that would put us right at right at about 120 million in cash on a pro forma basis, the total convertible notes were just over 300 million. So just right at 300 million in principle, you got the share count, right, that the Ocampo.

Jeffrey Cohen

Okay, perfect. Got crude on to one of you discuss a little bit about on the press release with regard to the Alibaba on global platform in China and talk about perhaps some of the products that you're planning on offering, what would we should expect as far centers during 24?

Phillip Frost

The products involved are made by our Irish company and the I'm sorry, by our Spanish company and or primarily nutritional products for animals for which there appears to be a large market in China and it is just beginning. So there's not much else to say about it Okay. And then lastly for us, can you provide any commentary on general and January going to weekly and what you've learned or what Pfizer's learned perhaps, you know, versus what you anticipated as far as costs and transference of patients from one to the other and new patients and how that may look over the coming year?

Adam Logal

I'll start off, Jeff, as though so, you know, I think what we've seen in the markets that are the most mature from from Pfizer where they launched initially, as you know, good steady growth in the conversion is happening broadly. I think with one of the competitors launching a bit earlier in the US market, we've seen that that conversion happen similar to really what we've seen globally. We expect that to continue and accelerate as Pfizer enters the market as well as if Novo eventually enters the market and with their long acting products. So the conversions are happening and we expect those to accelerate over the next 18 to 24 months.

Jeffrey Cohen

Okay. Perfect. And then lastly, on reality test sounds like you're expecting growth and will affect Q4 had some strong lifts identify for us where they may be coming from either demographically or geographically or pricing-wise and what we should expect for that.

Adam Logal

So Charlie, do you want to cut?
Yes, happy to do that. So we're seeing growth for a number of reasons with the reality brand.

Phillip Frost

First is the obvious passing of the adverse effects of the pandemic, which slowed the ability of our sales force to get into clinics and promote the brands.

Adam Logal

And it also slowed the ability of patients to get into the clinics to get prescriptions. That seems to have abated as of the beginning of Q2 of last year. In addition, our sales force is much more adept now at moving the product into areas of business that have low co-pays.

Phillip Frost

This would include the Medicaid sector. This includes the low-income subsidy Medicare Part D patients, and it also includes the commercial patients who have zero co-pay.

Adam Logal

So these are the main drivers of the growth in the business.

Jeffrey Cohen

Okay. Got it. It seems like it's on a nice trajectory, our first cover currently. Okay. I think that does it for us and thanks for taking all the questions.

Operator

Maury Raycroft, Jefferies.

Maury Raycroft

Thanks for taking our questions. Tom, I was wondering if you can talk more about timing and next steps for general label expansions for the adult setting in additional pediatric indications.

Elias Zerhouni

Quickly on the adult indication, basically, we are in the process with Pfizer, obviously to put our application to the FDA. And as I mentioned in my comments, we're in that it was the end of Phase three for the pediatric indication. So timing wise, you know, probably the end of the year, beginning of next year for the adult and probably early next year for the pediatrics, if I could as well.

Adam Logal

Got it. Okay. And then and then for profit share with Pfizer. Just wanted to make sure I heard this correctly that the guidance for 2024 is 40 to 50 million. Is that right? And wondering if there are more details you can provide on the profit share currently and how that will change as a general, it takes more market share from Genotropin and what would a peak profit share percent look like?
Sure. So somewhere, you know, the way the 40 to 50, you're correct, is the full year guide based on the information we know today.
Right?
So Pfizer, Pfizer doesn't separately forecast out in general or or Genotropin sales. So we're using our internal models to calculate what we anticipate the franchise revenues to be globally and then and then we apply the various tables that we have to to come up with our estimated calculation. So we've got some conservatism built into that with some uncertainty on the daily portion for Genotropin and a modest growth rates that we would expect for in general. And so you've got the 40 to 50, right. So in the fourth quarter, if you look if you take out the the third quarter catch-up, we had about $9 million in gross profit share payments. So when you think about that modest growth that we're forecasting in the gross profit share, you can see you can you can see what that math kind of looks like.
Overall, when we look out at peak, when you look at the growth hormone franchise as a whole. So the combination of in general and Genotropin when when the product is at its peak, where we think the peak could be and I think Pfizer has stated what they think the total market potential is for Jamelah and it's a substantial substantial revenue stream. We've estimated an effective royalty rate to be in the mid 20s on that franchise. So at peak, it's a pretty substantial cash flow. And we would expect to see the growth from now until we hit that peak kind of anything.

Maury Raycroft

That's helpful. And maybe last question, just on oxyntomodulin, if you could talk about time lines for the new formulation and what would a clinical development path look like there? And is this something you're going to keep in-house or partner out and does leader. Matt have any rights to this product?

Phillip Frost

I think with respect to both of those questions, it's early we'll get back to you as soon as we have something more definitive to talk about understanding.

Maury Raycroft

Okay. Thanks for taking my questions.

Operator

Edward Tenthoff, Piper Sandler.

Edward Tenthoff

Great. Good evening, everyone. So two quick questions, if I may. Firstly, just at a high level with respect to again love versus schedule, what are the differences that Pfizer is pushing in terms of marketing or is it really just a land grab at this point where they're going to the Genotropin clients and converting them over? And, you know, basically trying to get into as many other accounts as possible.
And then the second question, really for Phil high level as Bio-Reference and the diagnostic business returns to breakeven is the plan here still to keep that as part of OpCo or potentially to monetize that, how you have for some of the other arm diagnostic segment, flash problem on how do you ultimately see that business being pharma and diagnostic going forward? Thanks.

Phillip Frost

Well, for those of you who know me, you realize that first and foremost, we will always know what's in the best interest and the shareholders in terms of creating value. So at a particular point in time, it is one approach is advisable. We'll certainly consider it seriously. I don't want to be more specific than that right now, it's clear that we have an asset on our books that is at the moment losing money, although we're very optimistic about turning that around that has inherent value as an asset. And so we're very mindful of that, be assured.

Adam Logal

Yes, thank you. And then on the competition and sort of, you know, a little bit more on marketing in the long acting or weekly?
Congrats on that.
Yes. So obviously, Pfizer is leading the charge on the commercial efforts. So so where we think that they are going to be very successful is in the near term is where they're alone in the market, right? So when you think about the Japanese market, which is a substantial market in for the growth hormone space where they're by themselves currently, they've they had meaningful market share penetration and continued growth. And there's a number of other countries where they're by themselves. Now they've they've done a great job marketing throughout Europe as well and enforcing or forcing the conversion or suggesting the conversion there as well.
On the US market, it's they've got access commercially to a strong number of plans. We think they're well positioned with their with their teams to go ahead and take substantial share in the U.S. as well as far as how they're going to go about that. I think that's a question for Pfizer to answer.
Okay, great. Thank you, guys.
Next question comes from Nick Chan of H.C. Wainwright & Co. Go ahead.
Your line is open.
Are you needed on your end about a year?
We can hear you now.

Elias Zerhouni

I'll sorry about that so much regarding the storefront O'Malley. Bob, can you talk about the potential market size that is that, of course, the target? And what what is the potential revenue contribution in 2024 can how is the current economic environment? Could affect your market prospects and Jeff, thank you.

Phillip Frost

You know, this is a product line that is very successful sold by our Spanish unit. They manufacture the products, develop the products in and out have done so well, but are beginning to expand into France as a matter of fact, and have every intention to continue to expand geographically, we were approached by a company that has a partnership with Alibaba. And I'm thinking that because of the tremendous interest in pet animals now in China and because such products as we have are successful, that we might be willing to let them distribute them through Alibaba China. And we said why not? And that's where we are now we it's just getting go launch. So it's too early to say much more about the market size for our products sold by Alibaba, we it's a wait-and-see situation, so it's strictly animal health products, right?

Adam Logal

There are no human products offer at this time, Mr. so the so there's a combination of human health and veterinary products that will eventually go on the plant.
Right?
Yes.
Thank you.

Operator

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

Phillip Frost

Where we'd like to certainly thank you for participating in today's search and we hope it will close again, we'll report the first-quarter results. Thank you.

Operator

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