OPKO Health Inc (OPK) 2015 Q3 法說會逐字稿

Welcome to the OPKO Health Third Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we'll hold a Q&A session. (Operator Instructions) As a reminder, this conference is being recorded November 9, 2015.

I would now like to turn the conference over to Anne Marie Fields. Please go ahead, ma'am.

Thank you. Thank you and good afternoon. Before we begin, I'd like to remind you that any statements made during this call, which are historical, will be considered forward-looking and, as such, will be subject to risks and uncertainties, which could materially affect the Company's expected results including without limitation the various risks describing in the Company's annual report on Form 10-K for the year ended December 31, 2014, and its subsequent filings with the SEC.

I'd like to discuss the format for today's call. Dr. Phillip Frost will provide brief opening remarks, followed by Steve Rubin, OPKO's Executive Vice President, who will provide an update on the Company's business operations, followed by Adam Logal, OPKO's Chief Financial Officer, who will review the financial results. And then Dr. Frost will follow with closing remarks, after which they are there to answer any questions you might have.

I would now like to turn the call to Dr. Phillip Frost, Chairman and CEO of OPKO Health. Dr. Frost?

Good afternoon and thank you for joining the OPKO third quarter review conference call. During the quarter we closed on the acquisition of Bio-Reference Laboratories, which is important from a strategic point of view, as it gives us the infrastructure to perform, market, and sell important diagnostic tests on a large scale. This will help us achieve the greatest possible use of the 4Kscore test to diagnose prostate cancer more rapidly.

As you will hear, from a financial perspective, our results will be impacted by this acquisition in a significantly positive way.

On another front, our work with the Pfizer team on a next-generation growth hormone project is progressing as are our other proprietary pharmaceutical projects, all of which have been carefully selected because of their potential commercial importance as well as their novelty and usefulness for physicians and patients.

Our Company is moving forward as planned, and we have every reason to be more than optimistic about our future. I now turn you over to Steve Rubin to provide more detail and then to Adam Logal for a financial summary.

Thank you, Phil, and thank all of you for joining us this afternoon. As Phil highlighted, the third quarter of 2015 was a transformational time for OPKO in our mission to truly become a diversified biotechnology and drug discovery health care company.

Our acquisition of Bio-Reference Laboratories has significantly enhanced our financial position and has given us a leadership position in the diagnostics business, while also providing critical strategic assets we can leverage in both genomics as well as in reaching providers of all kinds. We also made significant progress on our important clinical programs during this quarter.

Starting with our existing initiatives, let me touch upon our progress with Rayaldee for the prevention and treatment of secondary hypoparathyroidism in patients with stage 3 or 4 chronic kidney disease and vitamin D insufficiency. In July the FDA accepted our NDA submission and, as you know, we have a March 29, 2016 PDUFA date. We are initiating certain pre-commercial activities, we're meeting with payors, we're developing reimbursement strategies, and we are preparing for key hires and salesforce buildout as commercialization nears.

There were several data presentations at the recent American Society of Nephrology's Kidney Week in San Diego. The presented data showed that plasma levels of intact parathyroid hormone continue to fall as serum levels of 25 hydroxyvitamin D rose above 30 nanograms per ml, which is a level considered sufficient for CKD patients.

These data suggest that patients with stage 3 or 4 CKD require higher levels of serum 25D than previously thought to control elevated parathyroid hormone. Increased levels of serum 25D are infrequently achieved with currently available therapies, and this will serve to further differentiate us from other agents contemplated in the market.

Our drug, VARUBI, a substance P/neurokinin 1 receptor antagonist for the prevention of chemotherapy-induced nausea and vomiting, is nearly commercialization by our partner, Tesaro. Tesaro's NDA was approved by the FDA in September 2015, and we will receive a $15 million milestone upon US commercial launch and are eligible for an additional $95 million in milestones based on regulatory and commercial sales milestones. In addition, there are tiered double-digit royalties on net sales in the US and Europe.

In addition, we made significant advances with our long-acting human growth hormone product, hGH-CTP, which is partnered worldwide with Pfizer. We completed enrollment of Phase III clinical trial in adults in late June. Our study is on track to complete the 12-month efficacy timepoint by early August 2016. Top-line results are expected by Q4 of 2016, and BLA preparations by Pfizer have been initiated.

We also presented complete efficacy data for all patients participating in our Phase II pediatric hGH-CTP clinical trial at the European Society for Pediatrics Endocrinology in early October. The data confirms similar 12-month height velocity efficacy result and a safety profile as compared to daily growth hormone treatment. Data also demonstrated comparable antibody occurrence similar to daily growth hormone with no neutralized antibodies.

Phase III pediatric study is on schedule to initiate in the middle of next year using a multi-dose disposable easy-to-use pen device with a thin needle and low injection volume. We are also aiming to initiate a bridging pediatric Phase II/III study in Japan in parallel to the global Phase III restudy.

Turning now to progress with some of our other biological products. In late June we had five papers presented at the International Society of Thrombosis and Hemostasis on the preclinical activity of our factor VIIa-CTP, which is a long-acting, next-generation therapy for the treatment of patients with hemophilia. Data showed that factor VII-CTP, compared with commercial factor VII, demonstrated longer half-life, less bleeding, and longer survival.

Our US-based Phase IIa has initiated and is on track for first demand injection later this month. The estimated study duration for this study is approximately one year. We plan to commence a Phase I study using a subcutaneous administration during the second half of 2016.

We are also looking forward to advancing our long-acting subcutaneous oxyntomodulin with a once-weekly treatment of obesity in type 2 diabetes. Preclinical data showed our compound reduced food consumption and body weight and led to improvements in glycemic control and lipid profile.

Pharmacokinetic studies showed an extended biological half-life in comparison to native oxyntomodulin. All the toxicological studies supporting the initiation of a first in human study have been successfully completed. We expect to commence a Phase I study in Q1 of 2016.

During the third quarter, we completed our acquisition of Bio-Reference Laboratories and our current financial results include data from the acquisition beginning on August 21, 2015. I think the strategy behind the acquisition of Bio-Reference warrants some mention.

OPKO's a drug discovery developmental biotechnology company. Since our inception, it's been our mission not only to discover new assets but also to leverage existing ones in ways that will maximize value per shareholders while improving patient care.

The acquisition of Bio-Reference is strategic since it allows us to fully leverage our capabilities while simultaneously addressing the needs of a changing health care landscape. We believe that there are four major trends we need to address in diagnostics today.

Number one, providers, including health systems, hospitals, and physician groups of all nature and size, will be taking on more responsibility for the overall well-being of their patients, and we need to be provider-centric if we are to remain relevant in this scenario.

Genomics will become increasingly important not only as a diagnostic tool but in understanding basic disease processes. The scope of genetic testing offered throughout the Bio-Reference enterprise is impressive.

Three, we need to find ways to promote commercial collaboration in order to leverage our unique position and promote the development of new therapeutics by connecting providers and patients with our genomic capabilities.

And, finally, number four, we view the laboratory of today as a distribution center to introduce new diagnostics to provide us a large-scale basis in cooperation and support from all payors and key opinion leaders in their specific fields. Such is the case with our 4Kscore test, which we believe is truly an important program.

Ultimately, we see the merger of OPKO and Bio-Reference as an opportunity to thrive at the nexus of diagnostics and therapeutics. This may take many forms: working with pharmaceutical companies as a means to connect them to patients and providers toward the development of novel and new therapeutics; allowing providers to maximize the value of their own outpatient laboratory services; or facilitating the needs of providers with regard to enabling their own precision medicine initiatives.

However, nowhere is the synergy of this merger more demonstrable than in marketing the capabilities of our 4Kscore test to identify and differentiate patients in a non-invasive manner to those that may progress to aggressive prostate cancer. There has never been an algorithm-based test that has been better studied than the 4Kscore test.

By combining the new capabilities of 4Kscore with clinical laboratory expertise, the outstanding sales and marketing capability and managed care contracts of Bio-Reference, OPKO has the potential of bringing a disruptive diagnostic to the market, one that is not only cost-effective to the health system but promotes better, more compassionate care to individual patients.

Progress has been made with practitioners as well as with payors, as we seek reimbursement coverage for this important test. Due to multiple peer reviewed clinical studies and support of key opinion leaders in neurology and prostate cancer, 4Kscore has now been included in the National Comprehensive Cancer Network Guidelines.

In July, we filed to present at two of the Pathology Coding Caucus, an advisory group with AMA CPT Editorial Board, and to the AMA CPT Editorial Board itself, an application for category 1 CPT growth for our 4Kscore test.

The PCC Advisory Group recommended the issuance of a category 1 CPT code for our 4Kscore, and we expect a formal response from the AMA CPT Editorial Board any day. The category 1 approval would recognize the 4Kscore as an established diagnostic test that addresses an important unmet medical need.

The NCCN panel determined that the 4Kscore, as a blood test with greater specificity over the PSA test, is indicated for use prior to a first prostate biopsy or after a negative biopsy to assist patients and physicians in further defining the probability of high-grade cancer. This is important, as the identification and selective treatment of aggressive cancers should result in significant decreases in morbidity and mortality or limiting adverse effects on quality of life.

In addition, 4Kscore could help avoid an unnecessary biopsy altogether and the adverse events such as pain, bleeding and infection that could arise from biopsies.

In a recent clinical utility study, 4Kscore has been shown to affect the decision to proceed to a prostate biopsy in up to 85% of cases and, in one study, showed that prostate biopsies could be reduced by 60%. A recent health economic study that we had prepared confirmed that the use of 4Kscore could lead to a greater than 35% savings on the cost of prostate biopsies if properly utilized by payors -- not to mention the benefit of better patient care and less procedural complications.

This is a critical initiative. 4Kscore is only part of our commitment to the continuum of prostate care that could combine successful diagnostics with meaningful therapeutics. As part of this continuum, Claros 1, our point-of-care platform to offer cost-effective and accessible PSA testing, continues to progress as preclinical, analytical, and stability studies are underway and we expect to commence clinical studies in early 2016.

We have also successfully demonstrated feasibility for release and analytical performance for our testosterone assay on the Claros 1 device. Regulatory approval pathways have been discussed and agreed with FDA.

So with the acquisition of Bio-reference Laboratories and the unique assets, as well as the advancement of our existing initiatives and ongoing commercial collaborations, we are extremely positive about our future. Over the final months of this year, we expect to achieve a number of additional value-creating milestones that should position us for continued commercial and clinical progress as we move into 2016.

Thank you, and I'll turn this over to Adam Logal, our CFO, to review the financial highlights for the quarter.

Thank you, Steve, and good afternoon, everyone. During the quarter ended September 30, 2015, as Phil and Steve mentioned, we saw significant improvement of our financial performance compared to the 2014 periods.

Revenue increased to $143 million from $20 million, and net income for the three months ended was $128.2 million compared to a loss of $48.7 million for the comparable period of 2014.

Income for the 2015 period benefited significantly from $93 million of income tax benefit, as we expect to offset Bio-Reference's future taxable income against our historical losses in research and development credits.

Further, during the quarter, we ceased consolidating SciVac's financial results with OPKO's as a result of SciVac's merger with Levon Resources, Limited, resulting in a noncash, nonrecurring $17 million gain.

We also recorded noncash income related to the change in fair value of our derivative instruments of $32.2 million during the 2015 period.

Our operating loss for the quarter decreased by approximately $40 million to $8.2 million compared to the 2014 period. There were several items that resulted in this improvement. Importantly, the activity related to our Pfizer transaction and acquisitions of Bio-Reference and EirGen had the most significant impacts.

Our R&D spending for the 2015 quarter was $1.5 million less than the 2014 period as a result of the timing of certain manufacturing activities for our biologic programs. During the 2014 period, operating income was negatively impacted by $19.5 million of contingent consideration expense incurred in connection with our Rayaldee development program as compared to $1.6 million for the 2015 period. This decrease was partially offset by increased amortization of intangible assets related to our Bio-Reference and EirGen acquisitions, as well as the capitalization of the [Ruby]-related intangible asset upon FDA approval in September 2015.

Turning to the nine months ended September 2015, revenue increased to $215.5 million from $65.6 million for the comparable period of 2014, and net loss decreased to $31.6 million for the 2015 period compared to $118.7 million for the 2014 period. This improvement was principally the result of the $87.2 million income tax benefit as a result of the Bio-Reference acquisition, as well as the positive impacts from our Pfizer transaction and the acquisitions of Bio-Reference and EirGen, partially offset by the OCS payment related to the Pfizer transaction.

As we announced last week, we entered into a $175 million credit facility with JP Morgan Chase, which provides us with an ability to leverage the Bio-Reference balance sheet in a more cost-efficient and covenant-light manner. With this credit facility and our cash position of $212 million, we believe our balance sheet is in a very strong position to fund our ongoing development programs and support the continued ramp-up of the 4Kscore and the commercial launch of Rayaldee.

I would like to turn the call back to Dr. Frost. Phil?

Thank you. I will just now turn the floor open to questions.

(Operator Instructions) Dana Flanders, JP Morgan.

So first can you just talk about the integration of BRL on the salesforce and how that is progressing? Is that progressing kind of in line with expectations? And at what point do you expect that salesforce to be kind of fully ramped on the OPKO products? Two, on the 4Kscore, now that you have the administrative code and are billing full price, can you just update us on the progress you're making with reimbursement? And are there any timelines that you can share where you expect to see improvement there and that translate into a meaningful ramp in sales?

And then, thirdly, and I know you mentioned this in your prepared remarks, but just the latest on the commercial strategy for Rayaldee? How do you see this product being used between stage 3 and 4 patients and the message particularly evolving around secondary hypoparathyroidism and vitamin D insufficiency? I know you mentioned that you think there's a higher serum 25D level in patients. So what's the right level, in your view? And how much education is going to be needed for the physician base? And is that something you are ready to address? Thank you.

This is Steve Rubin. I'll take the first couple and, actually, I have Charlie Bishop next to me. He can help on the Rayaldee one.

Integration is going very well. As you recall, we have a very small salesforce dedicated to our pathology lab as well as 4Kscore primarily focused on urology. BLRI has a very significant salesforce with sales and marketing of almost 400 people, but not necessarily a laser-focused group in neurology.

So they've been working together since shortly after we acquired the Company at the end of August, and the Bio-Reference Lab group has taken over the management of the sales process altogether. So, integration is going very well. Certainly, after we get reimbursement completely settled, we expect to roll it out even to the primary physicians. Right now, it's a combination of primary focus with urologists with some groups in the primary care.

For reimbursement, obviously, getting the -- we're waiting to hear from the level 1 CPT, and that should happen any day, at least it would be published. Once we have that, we expect reimbursement to really ramp up. So the number of physicians that are using the test has grown significantly. So once the reimbursement is in place, which we expect a call within the next six months or so, we should have a lot more visibility into more reimbursement. But we get them -- pretty much every day we'll get a new provider, but the lion's share will come, we believe, after the CPT code is in place, and we can start discussing with Medicare as well.

So call it around a six-month-plus time zone, you should see some more visibility into that.

Just to give a tiny bit more detail there. Our salesforce selling the 4Kscore test mainly to urologists, as Steve said, consisted of eight to 10 people. Initially, Bio-Reference plans to use 100 of their 400 salesmen to promote the test and not only to the urologists but now, as Steve indicated, to the primary care physicians.

And this salesforce has been in a training process over the last several weeks, and that process will continue and probably will be prepared to go to work, en masse, about January 1st. At about the same time, we hope to have a significantly greater number of payors onboard. So that should work out well.

We started the process very slowly with maybe four or five tests a day, and now we're going with only eight or 10 salesmen at a rate of approximately 100 a day in the US. So you can see it's been ramping up very, very nicely. And you need to be, and I have every reason to be optimistic that this will dramatically expand as the reimbursement kicks in and as the salesforce gets to work.

And eventually there's no reason not to use as many as 200, 300, 400 of the salesmen on the test because it certainly is going to become -- we anticipate, at least, a great profit center. I think Charlie Bishop is here to respond to your question about the Rayaldee.

Hi, Dana. You asked about the right level of 25 hydroxy D for a patient with either stage 3 or 4 chronic kidney disease. And we had a presentation at the ASN meeting just last week on this topic, as you undoubtedly know.

The current clinical practice guidelines, which have been issued by the National Kidney Foundation or by the Endocrine Society, state that 25 hydroxy D levels should be at 30 nanograms per ml for this patient population. But our clinical data collected during Phase III trials with Rayaldee indicate that the proper level of 25 hydroxy D for a CKD patient should be higher; in fact, substantially higher. And these data are consistent with recent publications that are pointing to the same conclusion.

When you look at commercial strategy, these data are very important for us because there are no currently available products that can reliably raise 25 hydroxy D levels in the blood of a patient with stage 3 or 4 CKD to the levels that are required for excellent control of secondary hypoparathyroidism.

Brandon Couillard, Jefferies.

Phil, just back on the 4Kscore test, I believe you said a run rate -- a volume run rate currently of about 100 tests a day. Could you give us a sense of how many urologists have now used the test and any statistics you have around reorder rates?

I think the number is just under 2,000 urologists, and I don't have precise information on the reuse rate. If I were to guess, I would say somewhere in the 50% range.

Then just one for Adam. Could you break out the contribution from Bio-Reference in terms of revenues in the period? If you could speak to the core volume growth of the business base line, that would be helpful. And then any clarity or could you discuss the potential impact of the PAMA ruling on the out-year revs for Bio-Reference, the exposure?

So, Brandon, with the out-year revenue on PAMA, I think what I can say to that is Bio-Reference's historical Medicare revenue has been about 16% of their total revenue. It's decreased from 18% to 16%, I think, this year. Maybe they were on the run rate of about 15%. So it's becoming a less important overall piece of the pie. And, as PAMA goes, we're not sure the exact impact. We don't expect a dramatic impact on the overall growth rates of the business.

So for Bio-Reference's revenue for the period, they contributed approximately $102 million for the quarter. That just reflects the post-acquisition revenue.

Just to give you a little more color on the 4K test and your question, I think that the reuse level of the urologists would be very high, almost 100%, but for the fact that there was limited access to reimbursement, and that was an ongoing issue. So we're confident that once the reimbursement issue is taken care of, that it will become a regular part of their practice.

Rohit Vanjani, Oppenheimer.

Steve, I think you said that you're expecting a formal response from the AMA Editorial Board any day. Did you already have that -- you had that meeting on the category 1 application, and that's what you were saying that you were expecting a formal response from that meeting?

We did. We had the meeting, Rohit, and also their own advisory caucus recommended it be adopted. So nothing is for certain, but we feel very confident, and we honestly expected it to be out by Friday. It wasn't out yet, so the very next publication of all the CPT codes, whenever that comes out, which should be nearly any day, we fully expect to be on there.

And so but wouldn't it get published not until 2018? It won't be in 2016, right? It will take a couple of years before it's actually published?

No, it will get published now, but it won't be effective until January 1 of 2017. So even though, as you probably know, you can start -- once a code's there and to recognize by the AMA as a level 1, you use that to start your negotiations with CMS and for Medicare as well as other providers.

We've already been discussed with our providers and try to get to a price. And, in fact, you could start using -- we'll continue to bill under our existing category 3 code, but we'll be able to recapture once we set a price long before that January 2017 date. But that's the true effective date for the code that will be published, we expect, this week.

Okay, and so the commercial payors, they've said that they're waiting for that category 1 labeling? Or do you just kind of know that's the case that they will?

No, no, so we've had a few, if you've seen announcements here and there from a few, and we continue to negotiate, and more will get added every day. Certainly, it is helpful because it's a validation. So the ones we've been in front of -- you know, the factors that have to happen, we need to publish our economic study, which I alluded to, health economics, and shows that it's a win-win.

So if you think if you're a payor, why would you not cover this test? Because your choice is to go to something much more expansive -- your MRI or a biopsy versus our simple blood test. So you kind of ask yourself, why wouldn't you cover this? So those conversations will be accelerating because some people need a formal third party validation, but it's not a gating factor.

Another strategic benefit of the Bio-Reference acquisition was they have a group of nine people whose job it is to deal with reimbursement, whereas we had one.

Yes, that was actually going to be my next question. Have you found having BRLI there and their suite of products, has that helped in the negotiations instead of having just one product to negotiate with, I guess?

Well, it's two things. Remember, they have contracts with almost every provider in the country, and so really it becomes a conversation, add this test to the suite of products. So, yes, an indirect answer, it does help. They've already got their foot in the door with most of the providers.

Okay. And then the last one for me -- are you still seeing double-digit volume growth every month in 4Kscore?

We are.

Kevin DeGeeter, Ladenburg.

Just one or two for me. Charlie, can you comment on the initial profile for the target clinician population for the launch of Rayaldee? And how we should think about segmentation of the market, in general?

Hi, Kevin. We're going to be targeting with our salesforce, nephrologists and endocrinologists that care for patients with stage 3/stage 4 chronic kidney disease. And that breaks down to about 5,000 to 5,500 nephrologists and maybe 1,500 endocrinologists.

And in terms of the initial call them tier A accounts, are those -- can you talk a little bit, just, generally speaking, how we should think about the profile and as we begin to think about the potential year one buildout of revenue?

Yes, good question. Our buildout of the salesforce will be progressive over time, as we get more and more -- Rayaldee on more and more formularies. And we'll initially start out with a salesforce that's about one-third of the ultimate size, and that salesforce will be calling on specifically identified physicians, endocrinologists or nephrologists that are known to be rapid adopters and who also have larger practices. From there, we'll branch out.

Great. And then maybe one more for me. Steve, can you just provide an update on the incremental steps to kick off the Phase III pediatric human growth hormone program?

Most of it is driven around CMC issues. Those are in Pfizer's hands, so I guess even CMC is probably mostly device-related. So we need to -- we have selected -- or Pfizer has selected a device. That device will be, as we mentioned before, we're going to start the Phase III trial using the pen device. So once that is ready, and drug product is ready, we'll commence the trial.

Yale Jen, Laidlaw.

The first one I have is about a drug development. In terms of the Factor VII Phase II study, could you give us a little bit more color in terms of maybe the study design and maybe the timeline for the data release -- top-line data release?

So it will be about a one-year trial. It's a dose-ranging study. We expect to use four doses. Start to finish, we expect it will be about a year long. We'll announce results probably three to six months after that.

So that would be some time into 2017?

Correct. We'll start it --.

Go ahead, I'm sorry.

So we'll actually -- first administration in man, later this month, and then depending how well we do in recruiting, it will be announced to one year -- it will be about a year, we expect.

Okay, great. Thanks, that's helpful. The second one is that we know that Bio-Reference has strong genomic assets, and so I know you guys -- did they recently have a collaboration or a study with Vanderbilt University. But beyond that, are there any efforts try to eventually monetize this asset maybe in what way or manner for that?

Sure, so it's monetized now, to some degree. Just so you know, the genetic screening portion of Bio-Reference Lab is a very expansive and profitable part of their business. And cumulative, you're talking about how did Montage accumulate the data, yes, we expect to enter into more contracts. Stay tuned, some of which will have a revenue component to them to use some of the data that has been collected. But keep in mind, that part of the business, which is high throughput sequence screening, is a very -- it's a very significant portion of the business today.

Okay, my last question is that would you guys be able to provide some guidance in terms of the Bio-Reference -- in terms of about their revenue growth in 2016? Will that be a little bit flat or maybe several percentage points compared to this year? Thanks.

As of now, we're not providing any forward-looking guidance on Bio-Reference's performance. I think previously Bio-Reference had guided on theirs, and we aren't necessarily commenting on that. But I think that should give you a fairly high-level view of the way they see the business. And we don't necessarily see it differently from them.

I think that may be the last question. I'll finish by just mentioning that there is one other project that we have not yet mentioned, and I don't want you to think that we've dropped it. To the contrary. And that's the product oxyntomodulin for weight loss and type 2 diabetes. We are planning now to start our first human trials, which should begin in the very near future.

And as you will recall, this is a product for which I have great hope, because it's a naturally occurring product that we produce in our gut in response to a meal and it goes to the satiety center to make you feel full and to the liver, to the glucagon-1-like receptor to help control sugar metabolism.

So this is potentially a very important product and, for me, personally, it's one that I'm particularly enthusiastic about. So we'll close on that note, and thank you all for participating. And we look forward to being in touch with you at the next meeting.

This concludes today's conference call, you may now disconnect.