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Opko Health (NASDAQ:OPK)
Q2 2019 Earnings Call
Aug 07, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Welcome to the OPKO Health second-quarter 2019 financial results conference call. [Operator instructions] As a reminder, this conference is being recorded today, August 7, 2019. I'd now like to turn the call over to Miriam Miller. Ma'am, please go ahead.

Miriam Miller -- Investor Relations

Thank you, operator. Good afternoon. This is Miriam Miller with LHA. Thank you all for joining today's call.

I'd like to remind you that any statements made during this call by management other than statements of historical facts 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, 2018, and subsequent quarterly reports on Form 10-Q. Importantly, this conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, August 7, 2019. 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; then Adam Logal, OPKO's chief financial officer; and Dr. Jon Cohen, executive chairman of BioReference Laboratories, will provide a business update on pipeline review.

After that, Adam will review the company's second-quarter financial results, and then we'll open the call to questions. Now let me turn the call over to Dr. Frost.

Phillip Frost -- Chairman and Chief Executive Officer

Good afternoon, and thank you all for participating in today's call. And I'm happy to be speaking to you today. And I want to extend my heartfelt thanks for all the good wishes and expressions of support I received over the past couple of weeks. I very much appreciate the outpouring of encouragement from our shareholders.

I also want to assure you that I am feeling quite well and hope to be back to 100% in the near future. Turning now to OPKO. I'm going to provide a brief overview of our Q2 highlights, and then Adam will add a bit more detail. Let me begin with RAYALDEE, which continued to post-sales growth in the second quarter.

Total prescriptions increased 92% in Q2 compared with the prior year. This sales momentum is testimony, both to the benefits of RAYALDEE and to the expertise of our growing sales force. BioReference Laboratories continues to expand its reach, and we were pleased to announce just last week that the lab was chosen by the IPA Association of America as its preferred provider of laboratory services and to assist with data analytics for its members. We also announced that BRL was selected as a provider for diagnostic testing by SOMOS, the largest multicultural physician-led network in New York City.

We also learned during the quarter that BRL and GeneDx were selected for inclusion in the United Healthcare Preferred Lab Network. This was effective July 1 and is a great distinction for us as inclusion was a highly competitive process. Regarding 4Kscore, we were pleased to receive a new proposed local coverage determination from Novitas. Under the new LCD, Medicare would reimburse the test for patients who meet defined coverage criteria.

While this determination is still on draft form, we are optimistic it will become final so that certain Medicare patients will once again have access to the benefits of 4Kscore. We also took steps to secure U.S. regulatory approval for 4Kscore. And on June 20, we submitted a de novo request to the FDA, seeking regulatory clearance.

Based on comments received from the FDA, in July, we withdrew that submission and plan to resubmit the application as a PMA after reformatting to meet the PMA submission guidance. We anticipate the resubmission will occur in the next few weeks. Importantly, we believe we already have all the data we need for the PMA filing requirements without the need for any additional clinical studies. Remember, FDA approval is not required for us to sell 4Kscore.

But we're committed to ensuring that as many men as possible have access to the test and believe that regulatory approval supports this goal. I'm now going to hand the call over to Adam, who'll provide a more detailed overview of all of our programs. Adam?

Adam Logal -- Chief Financial Officer

Thanks, Phil. Good afternoon, everyone, and thank you for joining us today. Steve Rubin was unable to participate in today's call, but will be available for follow-up calls as needed, and will be back on our third-quarter call update as usual. Since speaking with you in May, we have achieved various milestones that demonstrate progress across multiple clinical programs.

Phil has touched on many of them already. RAYALDEE, the only product that raises 25-hydroxyvitamin D levels in the blood, while also lowering parathyroid hormone levels in chronic kidney disease patients, continue to grow in the second quarter. As Phil noted, prescriptions reported by IQVIA increased by 92% in Q2 compared with 2018 levels. Our pharmaceutical pipeline continues to progress with our pivotal global Phase 3 clinical trial for hGH-CTP wrapping up later this month and our open-label Phase 2 trial for RAYALDEE in hemodialysis patients continuing to enroll.

On the diagnostic and laboratory side, we continue to see progress with secured new business opportunities at BRL and, of course, a nice new proposed local coverage determination on our 4Kscore from Novitas. Before I delve into greater detail on the pharmaceutical side of our business, I'm going to turn the call over to Jon Cohen, who'll speak about our growth and opportunities within BRL in GeneDx. Jon?

Jon Cohen -- Executive Chairman of BioReference Laboratories

Thanks, Adam, and good afternoon. I'm happy to report that we continue to make significant progress on our plan to improve operational efficiency, improve access to health plans, aggressively manage and improve our billing operations, decrease costs through multiple specific project management initiatives and increase volume and grow revenue with our focused commercial strategy. We've also begun to make significant changes to improve our leadership and talent in line with our strategic direction. At the same time, we are making significant improvements in the quality of our sales force as they remain focused on organic growth in the broader physician client space by aggressively signing up new accounts as a result of our wins in the ACO and IPA space and leveraging our recent selection to be part of the preferred lab network with UnitedHealthcare and our new in-network status with Humana.

In addition, our sales force are aggressively pursuing leakage opportunities in partnership with our payer partners. In our targeted areas of specific expertise, we have appointed a new leader for women's health and a new leader for cancer services. In urology, our urology sales force continues to expand their product portfolio to our current clients and are poised to expand their reach to an increasing number of urologists as we remain cautiously optimistic about the final limited coverage decision from Novitas, the 4Kscore based on the recently published proposed LCD to cover the test. We have also appointed a new commercial leader for the GeneDx sales force with the goal of restructuring the sales force to provide even more specific areas of commercial expertise to other types of clients for this quickly evolving market.

With regard to GeneDx, we continue to see significant increases in growth as volume this quarter grew 16% compared to the same quarter last year. Institutional, hospital and health system-based ordering was especially strong with a 12% year-over-year accession growth. The institutional growth is a reflection of our relationships with leading children's hospitals and academic centers throughout the country. In addition, we are seeing significant interest in the portfolio of tests offered by GeneDx as several new payer contracts were signed this quarter.

GeneDx has also increased its focus on advanced bioinformatics techniques to provide further test differentiation, as well as improved efficiencies. For example, recent changes in workflows have led to the highest efficiency observed to date with a year-over-year Q2 efficiency increase of 27% for some tests. That 27% gain in throughput is coming from improvements in analytical methods and workflows and not from what lab changes. GeneDx's R&D team continues to launch new revenue-based tests and has readied several rounds of tests for near-term launch, which will open up new testing markets for GeneDx.

In the business development and strategic partnership arena, we have announced several new strategic partnerships, including as mentioned by Phil, our strategic agreement with SOMOS, New York City's largest multicultural physician network of more than 2,500 providers, serving over 700,000 beneficiaries to be its preferred provider of diagnostic testing and to assist with data analytics for its patients. We also announced our strategic relationship with the IPA Association of America that provides services to assist in improving independent physician practices nationwide. They have selected us as their preferred lab for its 667 IPAs, representing over 303,000 physicians in 39 states. As a result of our focus on business development, we have added new partnerships with ACOs, large medical groups, unions, corrections, hospital reference and clinically integrated networks.

Our strategy to significantly upgrade the patient experience is beginning to take roots as we upgrade tools for our patients. We recently launched our portal, allowing patients to see and track their results along with easily paying their bills through the portal. Over 30,000 patients have registered within the first several weeks of launch. Overall, we remain optimistic for further growth in the second half of the year as our broad clinical offerings grow with our increased payer access, our specific areas of expertise in women's health, urology, cancer and genetics, and grow with our focus and new leadership and grow larger books of business with our concentration on strategic partnerships.

So back to you, Adam.

Adam Logal -- Chief Financial Officer

Thank you, Jon. Turning now to our pharmaceutical business, let me start with RAYALDEE. As we announced, another European Marketing Authorization application for RAYALDEE was submitted by Vifor Fresenius. This one covering Switzerland and it was accepted last month for review.

This application like others previously submitted in Europe request approval for RAYALDEE for the treatment of SHPT in adult non-dialysis patients with chronic kidney disease, and vitamin D insufficiency. Approvals for all applications pending in Europe, if granted, are currently expected in the second half of next year. From a commercial performance perspective, the RAYALDEE numbers for the quarter break down as follows. Total prescriptions of RAYALDEE in Q2, as reported by IQVIA, increased 22.8%, with -- compared to Q1 2019 and 92% compared to Q2 2018.

New patient starts increased 25.7% in Q2 versus Q1. Since launch, there have been a total of approximately 11,500 patients on RAYALDEE. We also increased the number of healthcare providers who prescribe RAYALDEE. As of Q2, over 2,100 prescribers have written RAYALDEE, of which 260 were new prescribers during the second quarter.

We ended Q2 with 86% of commercially insured patients having access without prior authorization or other restrictions. We have completed our latest sales force expansion to 75 sales professionals. The newly added representatives are beginning to gain traction in the field and are expected to provide the additional reach and frequency needed to drive markedly increased use of RAYALDEE for the remainder of 2019. We expect to see continued and accelerated growth as a result of the larger, well-trained sales force.

Regarding our clinical development programs, we remain focused on progressing diversified portfolio addressing several indications with significant unmet medical need in large markets. Our work in renal continues to move forward in the clinic. Last September, we initiated a global Phase 2 trial with a higher strength RAYALDEE in patients with Stage 5 CKD and vitamin D insufficiency who require regular dialysis. Cost of this study are being shared with Vifor Fresenius and Japan Tobacco.

The first cohort of approximately 44 patients will be treated for 26 weeks in a randomized, open-label fashion with either RAYALDEE or placebo to identify the appropriate dosing to be studied in the second cohort. Enrollment is progressing well, but slower than we had originally planned. The initial data readout on a limited number of patients for this first cohort is now expected in Q4 2019. Other ongoing and upcoming clinical studies for RAYALDEE, extended-release calcifediol include an ongoing 80-patient, open-label Phase 4 study designed to demonstrate that RAYALDEE is superior to commonly used competitive therapies.

Enrollment is expected to be completed in Q4 2019 and top-line data are anticipated in the first quarter of 2020. A Phase 3 study with RAYALDEE in pediatric patients, a post-marketing requirement with FDA, will start later this year. The final protocol for this study was approved by FDA during the second quarter. Turning to our long-acting human growth hormone product, Somatrogon or hGH-CTP.

As you know, Somatrogon has partnered with Pfizer for worldwide commercialization. We anticipate concluding our pivotal non-inferiority study in growth hormone deficient children at the end of this month and announcing top-line data before year-end. This trial compares a single weekly injection of Somatrogon for 12 months with daily injections of GENOTROPIN and enrollment was complete in August of last year. Of note, over 95% of the patients who are eligible to enter the open-label extension study are continuing into a second year of therapy with Somatrogon as the sole treatment.

We are also continuing efforts to advance new compounds in our rare endocrinology disease pipeline by utilizing our existing platform technologies, the CTP, which is used for Somatrogon in reverse PEGylation to identify the lead candidates where long-acting therapies would offer significant patient benefit. We plan to bring at least three additional product candidates forward as rapidly as possible, with each representing a significant market opportunity. We will keep you appraised of our progress. Overall, we continue to make progress against our stated milestones across both our commercial and development stage programs.

We are seeing significant opportunities as BioReference, including its selection as the preferred diagnostics provider of SOMOS and the preferred laboratory network provider status for UnitedHealthcare. We have advanced multiple products across our diversified portfolio, we continue to see quarter-to-quarter growth for RAYALDEE. Novitas issued a proposed local coverage determination for 4Kscore, and we remain committed to making this test available to every patient that will benefit from its use. We initiated a regulatory pathway for FDA for 4Kscore approval and from a clinical perspective, our Somatrogon program continues on our stated time line, and we are expecting top-line data before year-end.

With that overview, let me turn to a more detail on our second-quarter financial performance. Net revenues were $226.4 million for the second quarter of 2019, compared to $263.7 million for the 2018 period. Revenue from services for the three months ended June 30, 2019, were $178.5 million, compared to $216.1 million for the 2018 period. The decline in net revenue from services reflect the challenges within the payer environment, specifically the compounding impact of the PAMA rate decreases, along with preauthorization requirements and enhanced denial rates on both our clinical laboratory testing, as well as our genomic testing.

We have implemented programs on both our clinical laboratory and genomics line of testing to improve the billing operations. We are working with payers to lessen the burden of ordering physicians to obtain preauthorizations for some testing. Our discussions with payers and status as a preferred laboratory are expected to help further of these ongoing payer discussions. In addition, this is the first full quarter where Medicare reimbursement for the 4Kscore was not received.

Until the draft coverage policy becomes final, we will not record revenue from the 4Kscore from Medicare beneficiaries. Upon finalization of the coverage policy, we will work with Medicare to adjudicate claims from the noncoverage period. Revenue from product sales during the three months ended June 30, 2019, were $28.7 million, consistent with the comparable period of 2018. Revenue from RAYALDEE was $5.6 million for the quarter, compared to $4.8 million for the comparable 2018 period.

Unit growth of RAYALDEE was significantly offset by a decrease in our net price as a result of increased utilization by patients covered by Medicare Part D and increased discounting and utilization of our copay card program. We see a large number of our Medicare Part D patients entering the coverage gap or donut hole. Moving to cost and expenses. We continue to invest in our R&D programs, where we incurred $28.3 million for the second quarter of 2019, compared to $29.2 million for the comparable period of 2018.

Offsetting R&D expense was approximately $5 million of costs reimbursed by our RAYALDEE partners during the quarter. Our biggest R&D spend was attributable to our pediatric trials with our hGH-CTP growth hormone product, which as mentioned, is nearing the end of its pivotal Phase 3 trial. We continue to make improvements in our cost structure within our laboratory business partially offset by declining reimbursement rates. Geoff and his team continue to improve the cost structure.

And overall, we saw a decrease of approximately $10 million in the cost of service revenue and SG&A within that business line compared to the second quarter of 2018. The foundation of improved operating efficiencies that Geoff and his team have established within our laboratory business positions us for profitable growth as our growth initiatives continue to make progress. SG&A expenses overall were consistent with the 2018 period as we saw increased investment within our RAYALDEE sales efforts. There were several other factors impacting net loss against the comparable period of 2018.

During 2018, we recorded a $15.4 million reversal of expense for contingent consideration, compared to a reversal of expense of $3.8 million for the 2019 period, and the mark-to-market of our investment securities resulted in an increase of other expense of $14.5 million compared to the 2018 period. Overall, our net loss during the second quarter of 2019 increased to $59.8 million or $0.10 per share, compared to a net loss of $6.2 million or $0.01 per share for the comparable period of 2018. Looking forward to the third quarter of 2019, we expect revenues from services to be between $168 million and $178 million. This anticipated year-over-year decrease is principally the result of continuing reimbursement pressures with the range reflecting varying volume expectations.

This assumes we'll not obtain a coverage determination on the 4Kscore until after the third quarter concludes. As Jon mentioned, our preferred laboratory status with various health plans are expected to provide a tailwind as we head into 2020 and our expanded access with Humana, our recent announcements with SOMOS and TIPAAA, as well as the finalization of the Medicare coverage decision for 4Kscore provide reason for optimism as we enter the second half of 2019. Turning to product revenues. We expect the third quarter to come in between $28 million and $31 million, including revenues from RAYALDEE between $6.25 million and $6.75 million, while revenues from the transfer of intellectual property expected to be between $19 million and $24 million.

RAYALDEE continues to grow in units. However, revenue lags behind the unit growth as the mix of Medicare patient grows and the associated impact of the donut hole is expected to continue during the third quarter. Looking at anticipated expenses for the third quarter, we expect costs and expenses to be between $270 million and $280 million, including research and development expense of $32 million to $36 million. Based on these ranges, we anticipate our operating loss during the third quarter of 2019 to be between $37 million and $65 million, which includes $25 million of noncash depreciation and amortization.

Our cash position at June 30 was $111 million. We'll continue to invest in our R&D programs throughout 2019 as previously mentioned. However, capital allocation will remain a top priority as we continue throughout 2019. Given the guidance, we anticipated utilizing approximately $30 million to $40 million of cash during the third quarter.

We have expectations for improved cash contributions and financial performance within both our commercial organizations in diagnostics and RAYALDEE during the second half of the year, both of which remain critical for our continued investments in R&D. With that, I'd like to open up the call for questions. Operator?

Questions & Answers:


Operator

[Operator instructions] Your first question comes from the line of Maury Raycroft with Jefferies.

Maury Raycroft -- Jefferies -- Analyst

Good afternoon, and thanks for taking my questions. And welcome back, Phil. Glad that you're OK and back in action. For the first question, I'm asking about the growth hormone program.

I'm just wondering if you can comment on the discontinuation rate in the pediatric Phase 3? And if you can provide a status update on the extended Phase 2 pediatric study. And finally for growth hormone, how should we think about the upcoming Phase 2 readout and next steps.

Adam Logal -- Chief Financial Officer

Maury, it's Adam. So just quickly, I'll try to address the ones that I know the answers to, and may have to circle back on some of the others. So we -- in the prepared remarks, we talked that 95% of the patients who are eligible for the OLE has continued on. So it's a very strong continuation of those patients.

So we're not seeing anything that's unusual from any of the other -- compared to any of the other programs that are out there. Jane is here with me. Jane, is there anything on the Phase 2 readouts that are expected?

Jane Hsiao -- Chief Technical Officer and Vice Chairman -- Analyst

Phase 2 for the pediatric indication?

Adam Logal -- Chief Financial Officer

Yes.

Jane Hsiao -- Chief Technical Officer and Vice Chairman -- Analyst

We continue to do that and that will be part of the PMA submission. It's into the fifth year.

Adam Logal -- Chief Financial Officer

So as it relates -- yeah. So, Maury, in your third question, we expect the top-line readout later this year and with the successful readout, we would have a submission in midyear next year.

Maury Raycroft -- Jefferies -- Analyst

Got it. And as far as the readout goes, any specifics on what type of analyses you're going to have in the phase readout?

Jane Hsiao -- Chief Technical Officer and Vice Chairman -- Analyst

The non-inferiority design.

Maury Raycroft -- Jefferies -- Analyst

OK. So it'll primarily be primary endpoint and additional endpoints.

Adam Logal -- Chief Financial Officer

That's right.

Jane Hsiao -- Chief Technical Officer and Vice Chairman -- Analyst

Yes.

Maury Raycroft -- Jefferies -- Analyst

OK. And then just to clarify for that Phase 2 pediatric study. So you've got patients on there out to five years, I think you said. And is there any status update that you can provide on that study on those patients you're getting?

Jane Hsiao -- Chief Technical Officer and Vice Chairman -- Analyst

Well, patient has been continuing with this treatment. They have switched to the use of pen device over a year ago. So basically, all these patients being treated will continue to use the drug until market approval. So safety data will have to be positive BLA.

Maury Raycroft -- Jefferies -- Analyst

OK. Great. And then for the 4K de novo withdrawal, I'm just wondering if -- since the PMA path is more rigorous route to pursue, we're just wondering if the withdrawals because of advice from FDA that the PMA path was better suited for 4K? Or was there something missing from the de novo submission? Any additional perspective there would be helpful.

Jane Hsiao -- Chief Technical Officer and Vice Chairman -- Analyst

Yeah. Basically, FDA is commenting for the prostate cancer diagnosis. It's a different test already approved by FDA as a PMA route application. So they say, in this case, they wouldn't allow us to do a de novo.

So it's really the basis of it.

Maury Raycroft -- Jefferies -- Analyst

Got it. OK.

Adam Logal -- Chief Financial Officer

Thanks, Maury.

Operator

Your next question comes from the line of I-Eh Jen with Laidlaw & Company.

I-Eh Jen -- Laidlaw and Investment -- Analyst

Good afternoon, and thanks for taking the questions. And Phil, the best wishes for your health. In terms of the 4Kscore filing, what might be the timeline for the FDA's decision?

Adam Logal -- Chief Financial Officer

So again, we expect to submit the PMA later this month the typical review timeline for PMA is somewhere around nine months to a year.

I-Eh Jen -- Laidlaw and Investment -- Analyst

So probably the third quarter of next year?

Adam Logal -- Chief Financial Officer

That's right.

I-Eh Jen -- Laidlaw and Investment -- Analyst

OK. Great. And I've seen that, I mean you provided the third-quarter financial guidance. That's always very helpful and appreciate it.

Just if you can expand a little bit, would that be the third-quarter rough number, will roughly cover the fourth quarter as well? Or you see some more adjustment in all those figures?

Adam Logal -- Chief Financial Officer

Yeah. So we, obviously, feel good and optimistic about the way the second half of the year is going to continue to progress on BioReference. As far as specific numbers go, obviously, we only went out the one quarter, RAYALDEE growth as well. We've seen the script growth continue and really, really accelerate from what we saw the exit rate at last year.

So I think we're continuing to feel optimistic about the growth rates on both lines of business, and we look forward to giving you fourth-quarter guidance later this year.

I-Eh Jen -- Laidlaw and Investment -- Analyst

OK. Sure. And -- OK. Thanks a lot, and appreciate it.

Adam Logal -- Chief Financial Officer

Thanks, I-Eh.

Operator

This is all the time we have today. Please proceed with your presentation or any closing remarks.

Adam Logal -- Chief Financial Officer

OK. We look forward to providing an update again when we speak again on the third-quarter results for -- in November, and thank you all for participating.

Operator

[Operator signoff]

Duration: 35 minutes

Call participants:

Miriam Miller -- Investor Relations

Phillip Frost -- Chairman and Chief Executive Officer

Adam Logal -- Chief Financial Officer

Jon Cohen -- Executive Chairman of BioReference Laboratories

Maury Raycroft -- Jefferies -- Analyst

Jane Hsiao -- Chief Technical Officer and Vice Chairman -- Analyst

I-Eh Jen -- Laidlaw and Investment -- Analyst

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