LPL Financial Q1 2023 Earnings Call Transcript

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May 3, 2023

There are 10 speakers on the call.

Operator

Good afternoon, and welcome to the Opco Health First Quarter 2023 Financial Results Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Yvonne Briggs.

Operator

Please go ahead.

Speaker 1

Thank you, operator. Good afternoon. This is Yvonne Briggs with LHA. Thank you all for joining today's call to discuss Opco Health's I'd like to remind you that any statements made during the call by management other than statements 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 ks for the year ended December 31, 2022, and in subsequently filed SEC reports.

Speaker 1

This conference call contains time sensitive information that is accurate only as of the date of the live broadcast, May 3, 2023. Except as required by law, Opco undertakes no obligation to revise or update any forward looking statements to reflect events or circumstances after the date of this call. Before we begin, let me review the format for today's call. Doctor. Philip Frost, Chairman and Chief Executive Officer, will open the call.

Speaker 1

Doctor. Elias Serhouni, Vice Chairman and President of OpCo, will then provide an overview of OpCo's Pharmaceutical business as well as BioReference Health. After that, Adam Logel, OpCo's CFO, We'll review the company's Q1 financial results, and then we'll open the call to questions. Now I'd like to turn the call over to Doctor. Frost.

Speaker 2

Good afternoon, and thank you for joining us today. In early March, we announced that MODEX Entered into an exclusive worldwide license collaboration agreement with Merck to develop our multivalent nano particle Epstein Barr virus vaccine. The agreement provides validation of MODEX's multi targeting technology by simultaneously engaging 4 key proteins used by EBV to infect cells. This represents a 1st in class strategy To prevent the viral infection, which is a cause of mononucleosis and has also been Implicated as a leading cause of certain malignancies and the development of multiple sclerosis. We're delighted to have entered into this transaction with Merck as we believe they are the ideal partner for the development and future commercialization of our EBV vaccine.

Speaker 2

Elias will detail the terms of the agreement in a few minutes. As for growth hormone, Pfizer continues to drive the sales of angenla or sometri gun, Our once weekly injectable growth hormone product that's expected to ease a patient's burden versus the standard daily injections. Anjengla is now approved in over 40 countries and has been launched in 17, including the major markets of Japan, Germany and the United Kingdom. Pfizer expects to launch in another 15 or more countries during the remainder of this year, covering all priority international markets by year end. We're looking forward to significant sales growth for Ingenla with the new launches and as market penetration continues to grow.

Speaker 2

Adam will provide further detail on OpCo's gross profit share and royalty payments from Pfizer. We look forward to providing updates on Somatrogon's regulatory status in the U. S. With the expectation of a forthcoming Definitive response from the FDA and also commercial progress in international markets. As for our Diagnostic division, we're pleased with the ongoing turnaround by our references experienced as we reduce costs and rightsize the business.

Speaker 2

As a leading national laboratory, BioReference continues to focus on innovation And higher value testing in its specialty segments, including oncology, women's health and urology, as well as seeking to drive growth with Our profitable Ibero American business continues to grow It's currently expanding its veterinary product line from its base in Spain into France and other European markets. With that brief overview, I'll now turn the call over to Elias to provide further discussion and commentary on our Pharmaceutical and Laboratory businesses. Elias?

Speaker 3

Thank you, Doctor. Frost, and good afternoon, everyone. Let me start first with a discussion of our recently announced Exclusive worldwide licensing collaboration agreement with Merck as mentioned by Doctor. Frost. Securing a partner has been our strategy to advance the development of MDX-two thousand two hundred and one, our Epsilon and Bar Virus multivalent nano particle vaccine.

Speaker 3

And EBV infects up to 95% of the global adult population during the lifetime and is associated with about 1% of all Cancer cases worldwide. It also is the leading cause of infectious mononucleosis and recently has been implicated in the development of multiple Despite the prevalence of this virus and its role in causing life threatening diseases, There are currently no FDA approved vaccines or treatments for EBV. Our vaccine leverages MODEC's Innovative Biologics platform to target 4 major EBV proteins. This Multi targeted approach improves upon previous efforts and holds potential to provide a complete protection against disinfection. Under the terms of the agreement, OpCo received an upfront payment of $50,000,000 and It is eligible to receive up to an additional $872,500,000 upon the achievement of pre specified Development and commercial milestones.

Speaker 3

In addition, upon a commercial launch of MDX-two thousand two hundred and one, We're eligible to receive up to double digit royalties on global sales. MODEX and Merck will jointly advance MDX-two thousand two hundred and one up to the filing of an investigational new drug application, after which Merck will be responsible for all clinical and regulatory activities as well as product commercialization. Expenses incurred by OpCo for this program Prior to full taking of responsibility by Merck, we'll be reimbursed to OpCo as well prior to the IND. We are excited about this collaboration as MDX-two thousand two hundred and one not only addresses an important unmet medical need, As Doctor. Frost said, it validates our approach of multi targeting both in vaccines and with multi specific antibodies, which is what MODEX does.

Speaker 3

Along with Merck, we're aligned on advancing this vaccine with the goal of benefiting patients globally. In other parts of the pharmaceutical business, MODEX continues to make progress with other proprietary platforms During the quarter, including mSTAR and Stealth, these technologies have advanced. We've been Following these multi specific technologies to provide flexibility to go beyond 3 targets and up to a total of 6. We believe mSTAR is a plug and play platform that provides a competitive advantage of our other multi specific technologies With 28 patents filed to date, as we progress our therapeutic candidates, we will evaluate which have a partnership with the NIH to provide funding for our Phase 1 tri specific candidate to both prevent and treat HIV. In addition, we're working on next generation candidates targeting HIV, including 2, 3 and 1 tetra specific candidate With increasing potency, we believe there is a significant medical need as there are no vaccines or antibodies that can provide long acting to prevent and treat infection and current HIV therapies despite their great progress still have limitations including drug toxicity Due to lifelong treatment and drug resistance that can impact efficacy of viral suppression.

Speaker 3

In addition to these efforts, we have worked on The COVID multi specific antibody program to address the ongoing post pandemic need to address Genius appearance of various concern around the world even today. It is unclear what the evolution of the pandemic will be, But we do believe that the pandemic will the virus will remain in the human population and will require A set of therapies to, in particular, help patients at risk because of existing conditions or suppressed immune systems. So we have a particular interest in exploring antibody candidates that can treat those patients at risk and can prevent maybe the development of COVID in these vulnerable populations. The advantage of our technology platform is that it is modular, which allows for rational selection of antibodies To optimize potency against current and future strains and prevent the emergence of viral resistance. Our SARS CoV-two multi specific antibodies are currently in late preclinical testing and the development is possibly funded by DARPA.

Speaker 3

In oncology, we have also multi specific, multi functional antibodies focused primarily on hard to treat solid tumors, But also for the treatment of leukemia and lymphoma. We believe the value proposition of multispecific T cell engager antibodies has potential To demonstrate clinical efficacy for solid tumors and B cell malignancies, as the current standard of care does not sustain The remission in a large number of patients. Our oncology programs are in the preclinical stage with a goal of entering the clinic in 2024. Let me refer you to our new website for more information and updates on publications and portfolio evolution, Reachable both@opco.comormodex.com. Let me turn now to RAYALDEE.

Speaker 3

We continue to achieve certain milestones with our international partners. In Germany, RAYALDEE was granted pricing approval, Which triggered the milestone payment of $7,000,000 from our partner Vifor were eligible to receive up to an additional $10,000,000 in regulatory milestones and up to $207,000,000 in milestone payments tied to launch, pricing and sales of RAYALDEE plus tiered double digit royalties. In addition, we received a $2,500,000 milestone payment Related to Nicoya's submission of RAYALDEE's IND application to the Center For Drug Evaluation of China. We're eligible to receive up to an additional $150,000,000 in payments upon the achievement of certain development, regulatory And sales based milestones as well as the tier double low digit royalty on net sales by Nicoya in China. Now, our program in Alzheimer disease, based primarily on the use of molecules that can mobilize Plaques is currently exploring potential strategic partnerships with larger companies given the renewed interest that is now Clearly present, including with the news today of the Eli Lilly results that affecting the abeta protein deficits In Plax is actually potentially very effective and our approach could be complementary to those of the Antibodies used today or to be used in the near future in the patient population.

Speaker 3

So these programs Are of high interest now because they do provide synergy potentially with existing and emerging therapies for Alzheimer's disease. Now I'd like to turn to our Diagnostics segment and discuss BioReference Health, which is the new name for what was previously called BioReference Laboratories. Our focus post COVID remains on reducing costs and returning this division to profitability. We're expanding our Reach initiative into 2023, which to date has been effective to improve efficiencies, enhance productivity and reduce costs. For example, we're starting to realize the economic benefits of shifting out of 13 less productive patient centers to 11 new More productive ones, which are most strategically located.

Speaker 3

In addition, we have increased our sales force primarily On the Specialty Diagnostics and Health Systems vertical and are also entering the pharmaceutical market in which we have not been present in the past. Our higher value specialty testing segments continues to grow as we enhance our portfolio through innovation. These segments include oncology, Women's Health, Urology and Special Ventures. For example, our GenPath Women's Health division was one of the first commercial laboratories to offer Syntax Plus psychology. This is the only approved dual strain, dual strain, triage test for patients who have a high risk HPV results, high risk for the development of cancer.

Speaker 3

The dual stain biomarker test allows healthcare providers to more accurately and quickly assess the risk for cervical precancer and guide their management. As I mentioned, the key growth driver for BioReference to offer new tests like this one from Roche to enhance its innovative portfolio and to provide valuable information for health Providers and their patients, in urology, our expanded commercial team is focusing on marketing and selling Our proprietary 4 ks score test, which is a blood test to evaluate a patient's likelihood of aggressive Prostate cancer and health direct management of these patients. The urology team is also driving new accounts. And more importantly, the recent American Urology Association guidelines have validated the fact that consideration for the use of the 4th case score or like test It's actually warranted in terms of the clinical guidelines they now provide to their urologists. And so we're going to expand our access For this task to other clinical services, hospital services and others, As we are expanding our reach to those clinical services, hospital services, as well as urgent care centers where we want to offer a complete menu of Services.

Speaker 3

As we implement our strategy, we're getting closer to our goal of returning by reference to profitable growth in the Post pandemic environment, hopefully over the next three quarters, which is what we're working towards. I will now turn the call over to our CFO, Adam Logow, to discuss our Q1 financial results. Adam?

Speaker 4

Thank you, Elias. Starting with our Pharmaceutical segment, revenue increased by $62,500,000 for the Q1 of 2023 to $105,200,000 This increase reflects the $50,000,000 upfront payment from Merck, our EBV candidate, and $9,500,000 of milestones related to RAYALDEE from pricing received in Germany and development activities achieved in China. In addition, our International Pharmaceutical business revenue increased approximately 3 point $7,000,000 Total revenue from the comparable period of 2022 was $42,600,000 Costs and expenses were $86,300,000 for the 1st 3 months of 2023 compared to $60,700,000 for the 2022 period. Costs and expenses for 2023 include a $12,500,000 milestone payment to Sanofi related to the EBV program licensed to Merck. Research and development expenses were $31,900,000 inclusive of the Sanofi milestone payment And the remaining $7,000,000 of increase over 2022, dollars 12,300,000 of research and development expense primarily reflects the activities for our MODEX Development Programs.

Speaker 4

The resulting operating income for the quarter ended March 31 was $19,000,000 a $37,100,000 from the operating loss of $18,100,000 from the Q1 of 2022. Amortization expense related to our intangible assets $16,400,000 $14,300,000 respectively for the 2023 2022 quarters. Moving to our Diagnostics segment, We reported revenue for Q1 2023 of $132,400,000 compared to 286 $600,000 from the 2022 period. This decline reflects the lower COVID testing volume as the market has shifted away to rapid at home testing And also the 2022 period included revenue from GeneDx, which we sold in April of 2022. As Ellie has discussed, our focus at BioReference remains in identifying profitable growth verticals and maximizing our operating We've strategically invested in our commercial resources in the higher growth specialty verticals and expect to begin yielding returns on those investments during the second half of twenty twenty three.

Speaker 4

We continue to execute our REIT expense reduction program at BioReference. And as Elias We've also identified a number of near and medium term growth programs that we expect to realize throughout 2023. We expect these initiatives will return bioreferenced to profitable growth. Operating loss for our Diagnostics segment was $40,000,000 for the quarter compared to 40 $43,500,000 from the prior year, which included losses from GeneDx that were offset by COVID. Turning to our consolidated financial results for the Q1.

Speaker 4

We reported an operating loss of $30,600,000 compared to an operating loss of $72,400,000 for the 2022 quarter. Net loss for the Q1 of 2023 was $18,300,000 or $0.02 per share. This compares to a net loss of $55,400,000 or $0.08 per share for the 2022 quarter. Net loss for the Q1 of 2023 benefited from realizing a milestone from GeneDx For the sales levels achieved during 2022 as well as appreciation in GeneDx's stock price as of March 31. As we look at the quarter ahead, we're providing the following financial guidance.

Speaker 4

For our Pharmaceutical segment, we've not assumed the approval of Ingenla by the FDA in our financial forecast. Approval would result in a milestone payment of $90,000,000 We have also not assumed the U. S. Region for Ingenla will be in the gross profit share as the timing of that approval is not certain. During the Q1 of 2023, the European region shifted gross profit share and going forward both the European and Japanese region will share in gross profit for the HGH franchise consisting of Genotropin and Ingenla.

Speaker 4

We also assume a stable FX rate for our ex U. S. Pharmaceutical businesses, We have seen a 10% impact on our business over the last 12 months as a result of those FX impacts. For our Diagnostics segment, We assume COVID testing will remain at current levels and continue to decline throughout 2023, and we have assumed consistent core testing With growth in our higher margin oncology and women's health and urology specialty lines of testing. We continue to carefully manage our investments in new R and D And we will now begin the call with our available cash resources.

Speaker 4

As a result, we expect the following for the Q2 of 2020 Total revenue is between $165,000,000 $175,000,000 with revenue from services between $127,000,000 $35,000,000 revenue from product sales between $32,000,000 $36,000,000 and other revenue between $3,000,000 $6,000,000 We expect Q2 2023 costs and expenses to be between $245,000,000 $255,000,000 including R and D between $24,000,000 $30,000,000 and depreciation and amortization expense of approximately $25,000,000 This concludes our prepared remarks. Thank you all for your attention. And now, operator, let's open the call for questions.

Operator

We will now begin the question and answer session. The first question is from Jeffrey Cohen with Ladenburg Thalmann. Please go ahead.

Speaker 5

Hi, good afternoon and thanks for taking our questions. I guess firstly, could we dig into And I guess 2 items. Firstly, could you walk us through again, I don't think I covered all as far as the sharing of costs into a I define what would you anticipate to be that as far as perhaps cost and timeline? And then Secondly, could you talk about MS a little bit as far as what data is out there thus far? And Has Merck or anyone out there looked into Parkinson's as well?

Speaker 3

Thanks, Jeff. In terms of the cost sharing, there is no real cost sharing. I mean, we have a $50,000,000 upfront. We have a joint steering committee of the program between now and IND that will actually continue beyond IND, But currently, all expenses incurred by Alco are reimbursed by Merck. And the reason is very simple, is because we have advanced Products so much that we are close to IND and we need to really continue that without disruption.

Speaker 3

And so Merck has So, asked us to continue to do this with in collaboration with them and with obviously their approval To go forward and incur expenses such as CMC expenses and others between now and the IND And to be reimbursed by Merck fully for those expenses. And in terms of beyond the IND, It's really in the control of Merck. We may or may not be asked to continue to do certain things. But at this point, I can't comment. So Fundamentally, the cost to us, MODEX until IND is pretty much assumed by Merck all from that time.

Speaker 3

In terms of Amastha, as you know, the landmark study that indicated a very, very strong suspicion, not just The correlation and potential causation of MS in the 10,000,000 army recruits that were followed for many years It's the strongest evidence that we have that beyond cancer, there are other indications. There is also a body of Suggested evidence that lupus, Parkinson's, Alzheimer's disease may also be targeted, but the connection there is not as strong as it is for MS and cancer.

Speaker 5

Okay. That's helpful. And then secondly, I wonder if you could dig into bio reference a little bit as far as some of the commentary. Sounds like you expect to turn our reference around toward profitability by the I guess by the end of this year. And then perhaps could you talk about Any test menu expansion that's going on as far as specific areas and perhaps The effect that may have on gross margins in that area.

Speaker 5

Could you call out, is there any activity on the genomic side as far as testing as well? Thank you for taking the questions.

Speaker 3

Yes. So it's a great question. So when we looked at bio reference, Obviously, the number one priority is to get our costs in line with our revenues as they are. I mean, I don't think you should Manage the turnaround situation by banking on future revenues that haven't materialized, all right. So that's priority number 1, and We are on our way to bring those numbers, revenues and expenses in line with each other.

Speaker 3

The second part is what you would call growth Potential. So we have multiple silos, I mean, not silos, but verticals there. Number 1, I think is 4 ks. We're continuing to develop 4 ks. The second is new test.

Speaker 3

I mentioned SymTech. But for example, we are going to Market a, what do we call a minimal residual disease test in conjunction with our oncology menu. What does that mean? If you talk to oncologists, Jeff, the number one question they have right now with very effective drugs Is the disease gone? Is the disease controlled?

Speaker 3

Can I give my patient A vacation from drugs that are very toxic in many ways? And that can only be done by really looking at cancer DNA in the blood in with multiple techniques to look at whether or not there was any evidence of residual disease or at what level. And then you can actually monitor the patient over time so that whenever there is an increase in the amount of residual disease, you can start treatment again or Change therapy, whatever. So you can imagine that our goal is to provide a full portfolio in the cancer field that serves Primarily liquid tumors, I would say, because that's where we are excellent. We have a very fast turnaround, so we want to push that.

Speaker 3

And in that context, we've been working With large oncology groups, and I think we have some success there. Hopefully, we can report that in the second quarter. In terms of other fields, women's health is obviously a field in evolution. We have an ovarian cancer test that we have Considered and offering and looking at exactly how that will be marketed, we are also thinking that in the health system Relationships, the ability for us to provide management, to provide a comprehensive menu, Including reference testing is another source that we have not maximized. Last but not least, I look at pharma.

Speaker 3

And Pharma, there are 2 angles there that I'm very familiar with and I'm asking that we enter this field. Number 1 Is the exploitation of the enormous amount of data we have and we have already gotten contracts from pharma companies That would like us to identify patients that would be eligible for certain therapies that they market because they have specific mutations in the genome. Others are asking us to identify patients for clinical trials, especially in the underserved population. Others are really looking at us providing diagnostic panels for their clinical trials and so on. So I don't want to really tell you What I expect in terms of revenues there, because I don't know.

Speaker 3

But I think we'll report on that quarter by quarter and you'll be able to see that Indeed, there is not just a equilibration of revenues versus expenses, but also as mentioned By myself and by Adam, we do have areas where we're investing as well as areas where we're cutting costs.

Operator

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

Speaker 6

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

Speaker 7

Well, unfortunately, as said before, our hands are somewhat tied on what we can and can't communicate. But As we somewhat guided to, we certainly expect a definitive decision this year, if not this summer. That's pretty much all we can say at this point. Everybody remains highly optimistic for a Forthcoming approval.

Speaker 6

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

Speaker 3

Commercialization is 100% in the

Speaker 7

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

Speaker 6

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

Speaker 4

Yes. So, Maury, now there's not a lot to share. I know that the team continues to be enthused about the prospects. And As we highlighted, there's a number of countries coming online where they are getting regulatory approvals and launching. But beyond that, I

Speaker 8

Thanks,

Speaker 3

Maury.

Operator

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

Speaker 9

Good afternoon and thanks for taking the questions. I just want to get some sense of in terms of the diagnostic business That's whether the cost savings still ongoing or you pretty much finished that part and more into the Revenue growth directions?

Speaker 3

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

Speaker 9

The next question is that in terms of MRD, the minimum Residual disease testing. My understanding is there's probably a number of, as you said, liquid Pumr's has been the method has been identified, but not all of them. So do you guys continue to explore what's over there or with the new The development of science and others?

Speaker 3

That's a very good point, Jen. We are very confident in liquid tumors. We think we have a good grasp of that. I've looked at the data. I think there is a good sensitivity When you talk about myeloma, leukemias, I mean liquid tumors, we're very confident.

Speaker 3

The problem is more into other types of tumors where you have a solid You're not sure always that the DNA at minimal residual disease will circulate to give you a good result. So we're focusing but expanding very slowly, very carefully. But again, our main revenue in Oncology, if you really look at where we are strong, it's really in the liquid cancer arena.

Speaker 9

Got it. I think the last question is for the agenda for Adam that when you Think that eventually you will record those revenues or profit sharing in a separate line in The P and L or that's something we'll play until next year? And thanks.

Speaker 4

So thanks, Yale. So I would expect that once it becomes individually material, we break it out in some of the disclosures. You would expect that perhaps once we have a U. S. Region in the gross profit share, it will become more significant.

Speaker 4

But it could be later this year or into next year.

Speaker 9

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

Operator

The next question is from Yi Chen with H. C. Wainwright. Please go ahead. Mr.

Operator

Chen, you're on the podium. You can ask your question.

Speaker 8

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

Speaker 3

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

Speaker 8

The Roche Diagnostics Same Tech Plus, Vitality Test?

Speaker 3

Well, I'll tell you, we're at the beginning of the marketing. We're getting good response For the test, it's a sort of a reflection, if you understand, when you have a positive HPV result, you really need to know if it's From the high risk variance, where the EV6 and EV7 are present in those cells. And so that's really what happens. Our experience so far is about for all the suspicious HPV Results about 6% really require a move over to Syntech. All right.

Speaker 3

So I cannot tell you what the numbers are. We just started marketing it.

Speaker 8

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

Speaker 3

OBGYNs generally are ordering that cut. Yes. And they are the ones who make a decision whether the patient needs to Have an immediate procedure or can be followed, followed how fast, how often. If it's a if we have a negative result, they can Wait maybe 2 years, if it's a positive result, they need to decide whether right away or Give us a more extension of a few months before repeating the task. So it's If you look at the total market of these tests for cervical cancer prevention, As I said, it's a low percentage that would be applicable to the patients who have the need for that test.

Speaker 3

5% to 6% is what I'm told, but I cannot guarantee you that. Okay. Thank you.

Operator

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

Speaker 2

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

Operator

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

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