My name is Maury Raycroft. I'm one of the biotech analysts at Jefferies. I'd like to welcome the OPKO management team today. We've got our guests, Elias Zerhouni, President, Adam Logal, CFO, and Gary Nabel, the Chief Innovation Officer. Thanks so much for joining us today.
Thank you.
We're gonna do a fireside chat format, so maybe, for those who are new to this story, if you want to give a 1-minute intro to OPKO.
Yes. Can you hear me okay? So OPKO is a company that has evolved over time into multiple verticals, and obviously, the company was created as specialty pharmaceuticals. It has a branch that is international in nature, and that is quite active, growing, and profitable. It has also entered the diagnostics fields through a cancer diagnosis, the 4K test, also a very successful test with a good profile, and has acquired a clinical laboratory in 2016, which is the diagnostics branch of the company. That one we can talk about, you know, its past, present, and future. And then, in 2022, the company expanded by acquiring our company.
Gary and I were founders of a company called ModeX Therapeutics, which specializes in multispecific antibodies with multifunctionalities, as well as multispecific vaccines. In the meantime, the company has really moved forward in terms of clarifying its strategies for both the diagnostics part, the pharma part, and the biotech part, which is, I think, is going- what we're gonna talk about today. The company is a diversified company, sometimes complex for people to understand, and I'd love to share with you what we are doing about this in terms of the future of the company. So I stop right here.
Great. Yeah, I think that's a great intro, and I'd like to focus on the diagnostics business first. You recently had an update where you sold select diagnostic assets to Labcorp for $237.5 million. Can you talk about how that deal came about, what was sold, and what remains part of OPKO?
Right.
Are you providing any more granularity on what the... when the deal will close?
Right. So quickly, as you know, diagnostic laboratory business went through an enormous wave through COVID, and so did BioReference Laboratories. They grew by leaps and bounds over between 2020 and 2022, and obviously, we grew the infrastructure as well, and the cost basis as well. And then all of a sudden, there was a big collapse of the market because testing was no longer necessary, and so you had to readapt. So there are phases II I want to share with you, and I'll let Adam speak to it as well. One was the readaptation after the cliff, if you will, that occurred post-COVID, and so we had grown to 8,000 people in the thing, and we covered the country. We had multiple contracts with major Major League Football, for example, and so on.
So we had to really downsize that, which we did in phase I and went down to about 4,000. And then the phase II was, let's look at the total cost structure. What we realized is that the company is very strong in its, you know, original place, the regional North, you know, New York, New Jersey. But as you went out, the data started to show us that it was really hard at the scale we were at to sustain a national organization that covered the entire 50 states. And so we quickly realized that we needed to do some restructuring, so we worked on that.
Obviously, you know, the FTC is not friendly to major mergers and acquisitions these days, and because we're so strong in New York, New Jersey, and we're the third lab there in size, and the FTC really doesn't want to have less than three competitors. So everything we would do would be looked at, you know, negatively by the FTC. So we said, "Let's look at where our costs are, where our revenues are, and where our EBITDA is negative." The most part was, in fact, outside of New York, New Jersey, and for us, it was really difficult to sustain because we don't have full-service labs. We have a lab in California, a lab in Texas, a lab in Florida.
So then we made a decision to, actually, divest the, "outside of New Jersey area," business, except for oncology and for urology. So that's what led to it, and I'm happy to see say that, we're working very effectively with Labcorp. It gives you a, an idea of the revenue multiple, of the value of BioReference. And, and then the third point is what I let Adam talk about, is how do we get to breakeven and profitability once we do this restructuring, which is pretty much a big part of the, of, of the strategy?
Yeah, I'll just quickly run through. So it was a competitive process, and we outlined the assets that we wanted to divest, to Elias's point, in order to focus on the future and the profitability of BioReference going forward. You know, a key component of the profitability of the business is this divestiture that we're working hard to get closed as quickly as possible. We're thinking towards the end of the third to early fourth quarter to get that transaction closed. And in that divestiture, coupled with some consolidation of our facilities, as well as rationalizing some of our testing menu to get to a point where we can profitably service all of our accounts that we have retained, so...
Got it. That's helpful, and wondering how you're measuring progress for the remaining diagnostic assets in 2024 versus prior years. And talk about the steps involved with getting BioReference to EBITDA positive by year-end 2024, and when do you anticipate that the entire diagnostic business can become profitable?
So we would expect to be run rate positive cash flow by the end of 2024, with breakeven coming mid-2024. So we're virtually in the throes of executing the closing of the transaction with Labcorp, which will allow us to do the restructurings that I just mentioned. And into 2025, we should be EBITDA and cash flow positive.
Got it. Okay, and what's the potential for another deal, similar to Labcorp, where select assets are sold? Or is it more likely that the entire BioReference business would be sold off? And, what part of the conversation related to the Labcorp deal related to, revisiting the rest of BioReference, after the remaining business of OPKO reached profitability? I guess, could Labcorp come back once you achieve that profitability?
Yeah, I think the key for us is getting that business to profitability, 'cause it expands the optionality of the business. We're gonna continue to look at our test menu and the strategic ways we're gonna continue to focus on profitability and how we can grow the business profitably going forward. And there's always the potential for other M&A transactions. And I think we're gonna do everything we can to extract the most value out of the business that we can.
Got it. Okay, and, Elias, you mentioned the 4Kscore test. Maybe talk about key products and product segments for BioReference, and provide a status update on 4Kscore. And for these products, are there metrics you can share here to compare progress versus-
Yeah, I mean, 4Kscore's doing well. It could do better, but it's doing well. It's profitable. It's one of the better, best gross margin product we have. And, and so, 4Kscore is actually growing 10%, I think, this year. So it's not, it's not a, a static, business. It has potential because we haven't really expanded it overseas. We have some requests for that. And, obviously, in this collaboration with LabCorp, we hope to extend its marketing reach, as we... As an extension of the transaction we just did, right? So I'm very optimistic about that. In terms of other products, as you know, our oncology offering is one of the best in the business, best turnaround time, especially in liquid tumors, and that has attracted a lot of attention, a lot of interest.
So, for example, we signed a 90-oncologist practice in Virginia this year called Virginia Oncology Associates. It's one of the largest in the country. It's one of the top three, four at U.S. Oncology, and we are really being attractive that way, you know, in terms of those services. We've even, you know, enhanced our ability to do, for example, genetic testing for cancers, and then we also are able to measure now in certain diseases, the minimal residual disease, which is essential for managing oncology. The oncology business is not easy because of reimbursements, and we're happy to hear that we have argued for better reimbursements, especially for genomic testing, and then Medicare just did that. So I think the oncology business in itself is a vertical that we're good at.
We have a great lab in New Jersey that is dedicated to oncology, called GenPath. It's 32 onco-pathologists, which are high-margin businesses, you know, in FISH flow and in situ hybridization, chemistry, and all of that is doing well. The problem is scale, and can we grow scale ourselves or with others or in another configuration? That's what we're really working on right now. So oncology is a great business. I mean, women's health, we pretty much divested the majority of our women's health when we did the transaction with Labcorp. So we're gonna focus in New Jersey and New York for that and have not as much exposure to that.
Now, in urology, we're gonna try to continue the 4K test, the expansion, as I said, through collaborations. So that's for BioReference.
Got it. Okay.
Yeah.
Maybe one more question related to just what's the status of your growing specialty pharma products, ex U.S., and is this an area where you can add to growth, or do you view these products as more stable producers over time?
It's a good question.
Yeah, it's been a stable business for us for years now, and we've got a great management team that's growing that business. It's been growing, you know, 8%-10% year-over-year and generates, you know, 15%-20% EBITDA margins. It's a business we're gonna continue to opportunistically look at expansion. If there's good deals to do, we'll expand it. Otherwise, we'll continue to operate it and grow organically as it has over the last decade or so.
Got it. One of the key value drivers in our model for OPKO is the NGENLA opportunity, which is partnered with Pfizer. We've been tracking NGENLA prescriptions, which should suggest that weekly growth hormone sales are gaining traction. Based on your pre-launch projections, is the current rate of uptake faster or slower versus your expectations? Are you doing channel checks with doctors independently of Pfizer or only relying on Pfizer for information?
Yeah, so we do independent analysis of the way the product's been growing and the way the market's been evolving. Pfizer is leading all the commercialization efforts, so ours are informational only. However, we do see where NGENLA has been in the market for the longest periods of time, Japan being a good example, as we've seen good, strong growth, consistent, month-over-month, quarter-over-quarter, and now year-over-year. We expect that to continue on a global basis. Pfizer's got approval in over 50 countries. They've launched in over 25. So we think that on a global launch basis, Pfizer's gonna compete very strongly. Obviously, they're in the early days of the U.S. launch. We've seen a good conversion of the dailies converting into long-actings. We've seen some daily products exit the market.
The overall conversion rates that we expected early on, when we did our transaction with Pfizer a number of years ago, are pretty consistent today.
Got it. Okay, and, can you talk about the incentive structure for Pfizer to switch patients from their daily Genotropin drug to Ngenla? And although OPKO should benefit either way, what are the nuances involved with timing and market share as it relates to the profit share between you and Pfizer?
Yeah, so, so the profit share to us is important because as the long-acting becomes a majority of the franchise, our gross profit share increases significantly from, from where it stands today. Pfizer's incentive is they want to retain market share broadly across the franchise. They know that the conversions are happening, as we just discussed, quickly going from the, the dailies to the long-actings, and we think in order for Pfizer to maintain their market share, they've got to, they've got to encourage that, those conversions from their own daily product into the long-acting product. And, and we've seen that in the markets that they've been the longest launched in.
Got it.
This is a point of, just data point. Since the launch in August, the conversion from daily to is 25%. So it's, it's really fast, and I've seen products like this in, in, the insulin business, for example, where we introduced a long-acting insulin. I mean, it took longer to transfer than what we're seeing here.
That's in the United States, right?
Yeah.
25% since August.
I think so. I think it's the U.S. data, yeah.
And, so let's shift gears to the rest of your pipeline and and BD as well. And so, per your oxyntomodulin asset, there's a lot of interest in obesity right now, and you're currently working with Entera Bio on a new formulation without the Pegylation modification to allow for higher dosing and efficacy. Can you talk about the development plan and and timelines for for this drug in obesity, and will you move the second-gen asset into the clinic for proof of concept data or out-license it-
Yeah
... prior to that?
So we have good data because we, we've changed the molecule, and at least in preclinical environment, it's performing as well or better than some of the existing ones, right? However, the Entera relationship is to really use that to do an oral form. So it's really an oral play. It's not an equivalent play to what you see today with the injectables. In terms of the injectable formulation, you know, we think that it's really a busy field right now. There's a frenzy going on. It's very hard to compete if you don't have lots of capital to spend, so we are in discussions with strategics that may be interested. There's an enormous amount of interest, and so that's our strategy. We're not gonna spend a ton of money on that program unless we get a strategic capital source.
Okay. Would you move it into the clinic for some testing, or?
We will give... No, what we're gonna do is we're gonna push it to the IND stage.
Got it.
All right? And then once you start to get into phase I, and because of the competitive situation, where you're fighting giants like Lilly and Novo, I mean, unless you have something very special in terms of the results that's differentiating, then yes, you could, but we're not there yet.
Understood. Understood, and this program was also partnered with LeaderMed, the first-gen program. Is that still advancing in China into a phase III study, or is it on pause? Just wondering what the update is there.
They are continuing to advance the program. They've updated the manufacturing process to bring the cost of goods down, and they are marching towards moving into the clinic.
Got it.
You have to understand, the initial molecule went through phase II-
Right
... with a whole lot of safety data. So for a market like China that doesn't have that same configuration, it makes sense for them to say, "Well, we have the product. We're entering phase III. Why not?" Right?
Right.
So that's why I don't think they're... I think they're gonna try to make use of the product.
Got it.
They, they also have Factor VII-
Right
... which is something that we also licensed to them.
Got it. Let's talk about ModeX. When you brought in these new assets from ModeX, I guess, what's the plan to start recruiting and dosing the first patient with your multispecific antibody, MDX-2001, in the phase I a study, which is in metastatic solid tumors? And when do you anticipate that you could show safety tolerability and initial data from this?
Yeah, the... So as you know, the trial, we got the green light from the FDA to proceed into trials, and we expect to enroll the first patient within the next couple of weeks. The process going forward is this is gonna be a dose escalation because it's a immunotherapy. We start at a very low dose, and then we'll escalate to a range where we expect to see biologic effects. I think it will probably take about six months to get to that point. Up to that point, we'll enroll patients pretty much in a way that's agnostic to the tumor type. Once we hit the therapeutic dose, we'll down select to a favorable tumor type. Lung cancer is high on that list, but we'll see what happens with the data.
Got it.
I think you-
And-
You'll get... I mean, I think you'll get a quicker readout on safety and tolerability than you will on efficacy.
Oh, absolutely.
That's really the point.
Yeah.
So your question is twofold: safety, short-term safety, midterm safety. We'll get those results relatively quickly, within six months, I would say. Now, efficacy, which tumors, how much, which ones do you down select to a phase Ib, that's going to be probably, you know, first quarter of 2025.
Got it. And based on preclinical data, are you projecting when you could hit those therapeutically relevant doses, and what are expectations on safety? I don't know how much you can say on that.
You know, every product's different. I think looking at comparable biologics, we're seeing that probably maybe 0.5mg-1 mg per kg doses are the range where you would begin to expect to see efficacy. You know, we have to just go through the standard testing process. I don't think we can read too much into it at this point.
Got it. Okay, and wondering for the 2003 asset, what are the gating factors there for submitting an IND for this IO-based asset, and how do you think about this drug strategically?
Yeah, we're excited about that drug. It's a, it's, again, a tetra-specific antibody, two arms direct to the lymphoma antigens, two arms to T cells. You know, probably the most effective drug on the market right now that does a similar thing is glofitamab. But the difference between what we have and what glofitamab does is that glofitamab only targets a single molecule on the surface of the tumor, and what we're seeing is that there is resistance that's arising because the antigen down modulates. Our molecule has a second specificity, so if you become resistant to the first, we have the second one backing it up. And in terms of moving it forward, we're still debating now, again, whether to do that with a partner.
I think that we're looking at potentially some companies that are already involved in that field, and if that all works out, then that would be the preferred way to go. If not, we'll consider bringing it on its own.
Got it. Okay, and wondering what the status is of the Merck collaboration for your nanoparticle EBV vaccine 2201.
Yeah, that work's going very well. We have a great relationship with Merck. As you know, we'd had the upfront licensing fee, and then we had a collaboration where Merck has been generous enough to fund the actual progression of that molecule into the clinic. If all goes well, we expect to be in patients by the end of this year. And so far, the work's gone smoothly, and we're looking forward to filing the IND probably late summer.
Got it, and is there anything more you could say about achieving milestones from this program?
Well, again, it's an interesting development program because the first indication that we're gonna go after is infectious mono, and that's because it provides very clear endpoints, virologic endpoints. So again, as with all clinical development, we'll start with phase I. We'll do all comers, both EBV positive and EBV negative. And we have a pretty trim trial design that would allow us to advance to phase II quickly. What we're most excited about with EBV, though, is not infectious mono, it's the cancer prevention. There are over 200,000 malignancies that are caused by EBV each year, so our goal is really to get to the infectious mono indication as quickly as possible so that we can get on to oncology.
Interestingly, because we have these virologic readouts, we can use information from the infectious mono trial to help us with the design and the approval of the cancer indication. We're also very excited about working with Merck because this is in their wheelhouse. They developed HPV as a cancer prevention vaccine. They're very committed to it. We're very committed to it. We're really very excited about the next step.
In near-term milestones, we've achieved the CMC milestones. There, that was quite a success because it's a new model for a vaccine, and Merck was very surprised that we would get high yields. So that was 1, and then we worked on the adjuvants that they wanted, and that was two, and then the big milestone is IND. So first patient in, we will touch a, get a milestone from them. The total number of milestones, total amount is $870 million over the life of the product, and then with the royalties behind that. So we've achieved all the preclinical milestones. We gotta get to the first IND.
We're ahead of schedule, actually, so...
Mm.
Are you saying with the first milestone payment would be for the IND for dosing that first patient?
First, first-
First patient in.
Yeah.
Got it.
First patient in.
Okay, we're pretty much out of time, so in closing, a lot of moving parts at OPKO, so if you can maybe highlight the cash position and key events ahead, over the next 12 months.
It's-
where investors should be focused.
It's, I think you've followed us now for a while, so you know that we're very consistent, very strategic. We definitely need to get the diagnostics business solved, the issue of the losses there. We think we'll get there at the end of the year. Remember what the value of that business is. I mean, you know, $100 million of revenue, we got $237 million, so it's 2.3x , something like that, and then our total business, $550. So imputed value of just that, if you transacted it, is actually greater than our capital market cap right now. But our strategy is two folds.
Either we monetize that at that value, or we run it with an EBITDA that's in the 10%-15% range out of that remaining $400 million. And then if we do what we just said, trying to, you know, getting to the Labcorp deal, that would reduce our... I mean, Labcorp's taking all the headcount with them, so that will reduce our headcount around 2,000, maybe less than 2,000. And then you know, if you're in this business, you'll know that that will be break-even profitable, right? So that's priority number one. Number two is, you know, Entera, we need to really work on new indications, the pediatric and the adult, because that gives us $100 million worth of milestones, but it expands the market by quite a bit. And then last but not least is ModeX.
I mean, ModeX, we are really getting non-dilutive financing. You forget to mention that we got $59 million from BARDA to develop a platform that could be applicable to much more than what we're doing, you know, COVID, which is 30 million people are immuno-depressed, but you have HIV, you have flu. And they are interested in our technology because it's unique, and it's really, there's nothing like it. And our COVID antibody that we developed last year is actually active against, you know, variants that are emerging today. So we are very optimistic, and they are promising us, I mean, the contract is $169 million, non-dilutive. Fifty-nine, if we get those milestones, they will extend that to 169.
So ModeX has been able to self-fund in some ways, waiting for the company to have more revenues from Entera, more revenues from the, you know, South American, European operations, more either revenue or monetization of the clinical diagnostic business. So I, I really think that we're, we're, the sum of the parts is much greater than what the market is giving us credit for. That's my message.