May 8, 2018
Executives
Miriam Miller - IR Philip Frost - Chairman & CEO Steven Rubin - EVP, Administration & Director Adam Logal - SVP & CFO
Analysts
Brandon Couillard - Jefferies Yale Jen - Laidlaw & Company Kevin DeGeeter - Ladenburg Thalmann & Co.
Operator
Welcome to the OPKO Health Inc. Business Update Conference Call.
[Operator Instructions]. As a reminder, this conference is being recorded, May 8, 2018.
I would now like to turn the conference over to our host, Ms. Miriam Miller.
Ma'am, please go ahead.
Miriam Miller
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 other than statements of historical fact will be considered forward-looking and as such will be subject to risks and uncertainties that could materially affect the company's expected results.
Those forward-looking statements include, without limitation, the various risks described in the company's annual report on Form 10-K for the year ended December 31, 2017, and its quarterly report on Form 10-Q for the quarter ended March 31, 2018. Before we begin, let me review the format for today's call.
Dr. Philip Frost, Chairman and Chief Executive Officer, will open the call; followed by Steven Rubin, OPKO's Executive Vice President, who will provide an update on the call the company's various businesses and clinical program.
After that, Adam Logal, OPKO's Chief Financial Officer, will review the company's first quarter financial performance. Dr.
Frost will provide closing remarks, and then we'll open the call to questions. Now let me turn the call over to Dr.
Frost.
Philip Frost
Thank you for participating in OPKO's first quarter call. If I had to characterize the quarter, I'd say good progress on all fronts.
First, we're, of course, really pleased to have Geoff Monk onboard as the general manager of Bio-Reference, our largest commercial unit. His terrific operational and general business skills reflect his long experience working at large health care companies, most recently Quest, and for OPKO, he's just what the doctor ordered.
He'll play an important role in building Bio-Reference. The direct-to-consumer TV ads for 4Kscore that some of you may have seen appear to have had a positive effect, and we're pursuing a highly disciplined approach to expanding this effort as part of a larger program to accelerate the growth of 4K sales.
We've created a new men's health urology task force, which will, of course, also sell Bio-Reference's other urology-related tests. The pace of RAYALDEE market penetration appears to be accelerating.
Our new Director of sales for RAYALDEE, Kirk Miller, is working hard with huge enthusiasm; and Dr. Charles Bishop, our Director of OPKO renal; and Dr.
Akhtar Ashfaq, an OPKO nephrologist with an extensive industry experience have been complementing the efforts of our marketing and sales team by regularly meeting with nephrology units at large medical centers across the country where they have been extremely well received. Not surprising, we have ongoing studies to further document the benefits of RAYALDEE in the management of chronic kidney disease patients.
These are designed to demonstrate the unique physiologic advantages of RAYALDEE. During the quarter, we initiated a Phase IIb trial of our oxyntomodulin product, a once-a-week injectable medicine to treat Type 2 diabetes and obesity.
You'll recall my enthusiasm during previous calls for this product, which has already been shown to be safe and effective in a 420-patient trial. If all goes as expected, this will prove to be an important OPKO asset.
Clinical trials of many of our pipeline medicines are underway. Patient enrollment is proceeding nicely.
We'll keep you posted. All in all, we're looking forward to a year of positive events.
I'll now pass you on to Steve Rubin.
Steven Rubin
Thank you, Phil. Good afternoon, everyone, and thank you for joining us today.
I'll discuss our strategies for continued commercial and clinical progress and overall progress toward our long-term growth and business goals. Let's start with our laboratory diagnostic business, Bio-Reference Laboratories, which is the country's third largest reference lab.
As you may know from our announced results, while it is difficult to make a direct comparison versus Q4 given the various accounting adjustments, we are pleased to report improvements in revenues, revenues from services and net income. And we believe 2018 will continue to reflect improvements across all aspects of our laboratory services.
As Phil mentioned, we recently announced an important hire in bringing on Geoff Monk as our new General Manager for Bio-Reference. Mr.
Monk breaks to Bio-Reference more than 20 years of executive operational, business strategy and technical experience. Previously, Mr.
Monk served as Vice President, Operations East at Quest Diagnostics, where he led a diverse end-to-end service business for one of Quest's largest regions. Prior to that, Mr.
Monk was Managing Director for the entire New York/New Jersey business unit at Quest Diagnostics. Earlier in his career, Mr.
Monk was Vice President of Operations and Vice President of global engineering services at Schering-Plough, and Head of Engineering for the U.K. site at Glaxo Wellcome.
Mr. Monk's enviable track record of operational excellence and deep and highly relevant understanding of operations and business strategy in this industry will be important in allowing us to capitalize fully on the opportunities in this dynamic marketplace.
We remain excited about the potential for BRL, including its GeneDx subsidiary, which continues to demonstrate growth and innovation in its high complexity exome and related tests. For the first quarter, GeneDx achieved a 56% year-over-year increase in exome-based testing volumes.
GeneDx continues to be a BRL standout as we have helped discover and contribute to the phenotypic understanding of more than 58 novel disease genes in the last three years alone. In addition to its exome and genome test, GeneDx continues to post growth in its overall portfolio of tests with over 13% year-over-year volume growth for its total menu.
During Q1, GeneDx finalized its overhaul of all of its pheno-based test and will roll out new series of tests across multiple clinical area starting later this month. New and updated testing products will offer testing for people with pulmonary, renal, skeletal, gastrointestinal and other conditions.
Moving on. Our 4Kscore blood test gives a man with elevated PSA levels a personalized prediction of his chance of having or developing an aggressive form of prostate cancer.
During the first quarter, we performed almost 21,000 4Kscores tests, representing a 13% increase compared with the first quarter of 2017. Recall that new Medicare payment schedules went into effect on January 1, 2018, with a 26% increase in 4Kscore reimbursement to $760 per test.
We continue to support direct-to-consumer outreach to drive adoption of 4Kscore. Prostate cancer is the most common cancer in men and is projected to account for over 160,000 new cases and over 29,000 deaths this year.
Again, as Phil emphasized, we're implementing a new dedicated men's health urology division to market and sell the 4Kscore tests, along with our complete suite of urology laboratory services and inherited cancer urology panels. We expect to have a significant presence on the 2018 American Urological Association conference later this month.
Five abstracts regarding studies further demonstrating the unique utility of the 4Kscore in the management of prostate cancer will be presented. Additionally, ASCO and BAUS, or the British Association of Urological Surgeons, presentations in June will present the ability of the 4Kscore to predict adverse pathology at radical prostatectomy.
In mid-March, results of that landmark study were published in the journal of European Urology, showing that the 4Kscores test is a strong predictor of prostate cancer mortality. That study of some 11,500 men showed that healthy men with an elevated PSA and a low 4Kscore test result can be safely monitored rather than undergo prostate biopsy.
This is important because while PSA screening does reduce prostate cancer deaths, it can also lead to overdiagnosis and overtreatment of indolent prostate cancer that is not life-threatening. Last November, we filed a PMA for our Claros 1 immunoassay analyzer and total PSA test.
This is the first test on our proprietary diagnostic platform that can provide a quantitative blood test result in 10 minutes in the physician's office with only a fingertip's drop of whole blood. We remain on track but we hope we'll be approved by the FDA this year.
As I mentioned, Claros 1 is a new platform, and we are developing additional tests to interface with other products and programs and expect to submit a 510(k) using the Claros platform to measure testosterone later this year. Turning now to our pharmaceutical business.
Let me start by discussing RAYALDEE, the first and only therapy approved by the FDA that both raises 25-hydroxy vitamin D and lowers parathyroid hormone levels in patients with chronic kidney disease with a safety profile of similar to placebo. In the first quarter of 2018, total RAYALDEE prescriptions increased approximately 730% compared to the comparable quarter in 2017 and 38% versus Q4 2017.
Since the start of the year, we have seen a steady week-to-week increase in the total number of prescriptions. The number of new patients taking RAYALDEE increased 58% in Q1 versus Q4, and this represents a nice acceleration compared with the 24% increase in last year's Q4 versus Q3.
The newly added members of our expanded sales team, now at 60, contributed nearly half of the growth of new patients and new prescribers in this quarter. We are continuing to build sales momentum, and we anticipate steady increases in total prescription in future quarters.
We have also increased the total number of health care providers who prescribe RAYALDEE. We have 763 active prescribers in Q1, an increase of 29% from the prior quarter.
We ended Q1 with access to RAYALDEE being available for 83% of commercial lives, 53% of Medicare lives and 79% of all covered lives. We continue to work to expand coverage and increase access for this important medicine.
Overall, we continue to see progress in adoption, reimbursement and awareness of RAYALDEE. Our expanded sales team has already demonstrated a positive impact on sales, and our market penetration continues to grow.
Regarding our clinical programs, many of which Phil already touched on, our strategy is to build a diversified portfolio addressing several indications with significant unmet medical needs in large markets. We have a robust pipeline of product candidates at varying stages of development, which provides attractive opportunities for creating both near and long-term value for our shareholders.
In the renal space, as previously reported, Vifor Fresenius, one of our global partners, has filed a new drug submission with Health Canada for RAYALDEE and remains on track to file a Market Authorisation Application with European Medicines Agency in the second half of this year as a treatment for SHPT and CKD patients. We look forward to announcing additional international regulatory developments with this drug.
We are also advancing our plans to initiate a global Phase II trial with a higher strength RAYALDEE in patients with Stage 5 CKD and vitamin D insufficiency who require regular dialysis. We have finalized the regulatory strategy and the trial design with Vifor Fresenius and JT Torii and remain on track to initiate subject screening in July.
We expect to share the cost of this study with our development partners. Turning to our metabolic and endocrinology pipeline.
We have a number of late-stage programs underway or nearing initiation that should reach important inflection points this year. One of our most advanced programs in clinical development is our long-acting once-weekly human growth hormone product hGH-CTP or Somatrogon to treat growth hormone deficiency.
The hGH-CTP program is currently in Phase III trials globally and partnered with Pfizer for worldwide commercialization. There was good enrollment momentum in both our global and Japanese pediatric Phase III hGH-CTP studies in growth hormone-deficient children.
Importantly, these studies use the pen device and formulation that will be launched commercially upon approval. We continue to expect enrollment in both trials to be completed before the end of this year.
Regarding the adult Phase III study, as you know, we completed a post hoc sensitivity analysis to evaluate the influence of statistical outliers on the primary endpoint results using preplanned analysis protocol. We submitted a request for a meeting with FDA regarding the analysis of the efficacy of safety data and any additional work required for a potential BLA submission.
We expect a response from the FDA shortly. Our once-daily oral selective androgen receptor modulator, or SARM, is under development for benign prostate hypertrophy, also known as BPH or enlarged prostate.
BPH affects half of all men aged 51 to 60 and 90% of men over the age of 80. This drug is expected to reduce the symptoms of BPH by reducing prostate size and, on the basis of data from a previous trial of 350 men, increase muscle mass and bone strength and decrease body fat.
Last November, we commenced our Phase IIb dose-ranging study with our SARM to treat BPH. Our oxyntomodulin medicine is a once-weekly GLP1-glucagon dual agonist for the treatment of Type 2 diabetes and obesity.
Preclinical and previous clinical Phase II data in 420 diabetic patients show that our once-weekly dual agonist improves glucose control, induces weight loss and improves the lipid profile compared with GLP1 therapies currently on the market. Based on these data, in late March, we announced the initiation of a Phase IIb dose escalation trial to refine the dosing regimen in preparation for Phase III trials.
The objective of this trial is to establish a dosing regimen that further improves weight loss and lipid profile and, at the same time, reduces nausea associated with this class of drugs. In closing, we are happy to report good momentum with our commercial products and the successful efforts of our sales team, particularly related to RAYALDEE.
The publication and presentation of additional data in support of 4Kscore as an important diagnostic tool further supports our market penetration efforts, and the appointment of a General Manager for BRL helps ensure a strong leadership there. Our clinical programs had advanced, and we are particularly excited about the initiation of the Phase IIb trials evaluated on SARM for BPH and our oxyntomodulin for Type 2 diabetes and weight loss.
At a high-level, we are advancing a robust clinical development program that addresses several large markets. We expect to make meaningful progress with these programs and to achieve a number of important milestones.
With that overview, let me turn the call over to Adam for a discussion of our first quarter financial performance. Adam?
Adam Logal
Thank you, Steve. As Steve and Dr.
Frost mentioned, our financial results met our expectations and were in line with guidance we provided during our call in March. Recall that effective with the first quarter of 2018, we began reporting revenue from services, net of bad debt expense, under the accounting rules that went into effect on January 1.
Total revenue from service was $211.3 million for the quarter. As a comparison, 2017 revenues from services recast under the new accounting standards were $228.5 million for the first quarter of 2017, $233.9 million for the second quarter of 2017, 209 - or $200.9 million for the third quarter of 2017 and $119.4 million for the fourth quarter, including nonrecurring adjustments of 70.3 - $73.3 million.
The decrease in revenues for the first quarter of 2018 compared to 2017 reflect volume decrease at the clinical lab of approximately 3% as well as overall reimbursement pressures as a result of PAMA, partially offset by double-digit volume increases in our genomics testing. In addition, overall reimbursement for the 4Kscore test increased by approximately 26%, in line with the approved PAMA pricing.
During 2017, we had made significant investments in our revenue cycle management program, including a new billing system as well as our related billing workflows. We began to see the benefits of that work during the second half of 2017, and the first quarter of 2018 clearly show those efforts.
Our accounts receivable balances and resulting DSO have decreased and are now in line with the largest clinical labs. The net results of the improvements reflect an improved collection cycle and overall yield on each session has improved significantly compared to the first quarter of 2017 meaning we are collecting more cash on each patient requisition.
Regarding pharmaceutical's performance. We recognized $3.7 million of revenue related to sales of RAYALDEE during the quarter.
The comparable period of 2017 did not include revenue from RAYALDEE during the launch phase while we developed our estimates for our gross to net revenue calculations based on our actual experience with the product. Total pharmaceutical product revenue for the quarter was $27.9 million compared to $22.2 million for the 2017 period.
Revenue related to the transfer of an intellectual property during the first quarter of 2018 was $15.7 million compared to $15.6 million during the 2017 period. Moving to operating expenses.
We continue to make significant investments in our pharmaceutical and diagnostics pipeline, which resulted at an R&D expense of $32.9 million, an increase of approximately $6 million from $26.6 million in the comparable period of 2017. During the first quarter of 2018, we also invested $7.3 million in the RAYALDEE commercial organization.
Overall, operating expenses were $297.5 million for the three months ended March 2018 compared to $311.6 million for the comparable period of 2017, a decrease of $14 million despite our increased investment in R&D and the RAYALDEE commercial organization. As I noted in our call in March, we will no longer record an income tax benefit for any losses recorded in the U.S.
and, as a result, we have recorded a $2.4 million income tax provision during the quarter for income tax expense in our international jurisdictions as compared to the 2017 period where we recorded a tax benefit of $6.2 million related to U.S. losses.
Overall, total revenue for the quarter ended March 31, 2018, was $254.9 million, and our net loss was $43.1 million or $0.08 a share compared to 2017's $266.4 million of revenue and $34.5 million net loss or $0.06 a share. We closed the quarter with approximately $100 million in cash and cash equivalents on our balance sheet, and we continue to be mindful of our cash balance and investments into both our R&D pipeline and commercial activities to align with the anticipated improving cash flows from both Bio-Reference and RAYALDEE.
Both remain important drivers to our achieving near-term cash flow breakeven from operations. Looking forward to the second quarter.
We expect revenues from services to be between $205 million and $225 million and product revenues to be between $25 million and $30 million, including RAYALDEE revenues between $4 million and $5 million, and revenue from the transfer of intellectual property to be between $15 million and $20 million. Looking at expenses.
We expect operating expenses to be in line with the first quarter of 2018 at $295 million to $310 million, including research and development expense of $35 million to $40 million. For the full year, we expect our effective tax rate to be in the single digits.
And with that, I'll turn the call back to Phil.
Philip Frost
Thank you. We'll open the floor to questions, if there are any.
Operator
[Operator Instructions]. And your first question comes from the line of Louise Chen of Cantor Fitzgerald.
Unidentified Analyst
This is [indiscernible] in for Louise. So my question is regarding the Claros 1 platform.
I was wondering how you're thinking about adding additional tests by leveraging other liquid sample compatibilities, such as spinal cord fluid or urine and which infectious diseases or women's health and what other diagnostics are you thinking of going into first and what are you most interested in going forward with that?
Philip Frost
So right now, we're focusing on blood and immunoassay diagnostic tests. And so as I've mentioned, the next test out will be testosterone.
So the idea there is the two most common diagnostics that a man has when visiting a urologist are both measures of PSA and testosterone, so it makes sense to have those together. And after that, we're still working on a vitamin D, which would really support RAYALDEE prescriptions, and then perhaps a woman's panel generated mostly of hormones.
But at this point, we're refocusing on basically blood-based immunoassay tests.
Operator
And your next question comes from the line of Brandon Couillard from Jefferies.
Brandon Couillard
Perhaps maybe, Steve, with respect to the new 4Kscore or men's - let's call it men's health team that you referenced, what exactly is different about this group relative to the commercial teams that have been supporting 4Kscore within Bio-Reference, the Bio-Reference sales organization so far?
Steven Rubin
So the Bio-Reference sales group that had many items in the bag to sell, so we're using - we train a portion of our Bio-Reference team, and they sold among other items, oncology products and the like. And I think our experience is it takes maybe a little more effort, specialized effort and detail to really to maximize penetration 4Kscore.
So this will be purely urology focused. So it will be visiting just urologists who'll be focusing on our 4Kscore as well as other suite of urology based products that we do sell.
We have a genetic pan that comes out of GeneDx and other products out of Bio-Reference but this will be a purely urology focused team, so they will visit just urologists and sell just urology focused diagnostics.
Brandon Couillard
And then with respect to the DTC advertising pilots that you ran in New York and Florida, any metrics you can share with us as to the incremental demand that you may have seen in those markets from those ads and perhaps parameters as far as how you expect to expand that effort later this year?
Steven Rubin
So what we can say it is the direct contacts - and looking at Florida now because that one's still running, and hits on our website actually increased by fourfold what they were prior to the TV ad. So we're going to - I think what we've learned is they do have an impact and will probably roll them out in larger scale.
We also are going to really have a combined effort with direct to digital advertising as well. And digital is a little easier to trace all the way through because you - obviously, you follow the click-through to our website and obviously referral to physicians.
But we're pretty pleased with the response. And really the best way to measure it is either phone calls into the - our 800 line or impact - increased impacts on our website, and we've seen both.
Brandon Couillard
You also had a number of new studies out for the 4Kscore tests, expanding the evidence package a little bit here. Are those sufficient, do you think, to go back to Palmetto or Novitas to reconsider coverage?
And any update you can share with us as far as your dialogue with commercial payers or any new private payer wins?
Steven Rubin
So that's a good question, and the answer is clearly yes. Any additional result and studies are certainly useful.
We do, obviously, keep Novitas consistently appraised. Both of them want to see the published studies, and we've submitted packages in Novitas, and we are considering a fuller package to Palmetto as well.
So to answer your question, in summary, is yes, we think it will be very helpful.
Operator
Your next question comes from the line of Yale Jen of Laidlaw & Company.
Yale Jen
First, just a housekeeping question that the first quarter's SG&A number seems to be lower than prior almost four quarters. Is this going to be something annualized going forward?
Or this is just a slight abnormality for the expenses?
Adam Logal
Yes, so if you're just comparing against historical financial, Yale, you'll see that there was a reduction related to the bad debt expense that moved up to the net revenue line. But we would expect operating expenses overall to be in line with the first quarter and within the range that I gave in my guidance.
Yale Jen
Okay, great, that's helpful. And also just again congrats, you have a new president for BR - Bio-Reference.
So what might be his objective overall in the new leadership here as well as what need to be implemented and what way is he sort of measuring his milestone or achievements, let's say, for the next 12 months?
Steven Rubin
So as you probably noticed from his - from Geoff's resume, he's very operational focused. And one of our key metrics here other than obviously growing, continuing to grow the sales, is to improve our operations and certainly lower our cost in the diagnostics and laboratory environment.
As everyone knows, there's consistent pricing pressure and - which demands increased efficiency. So I think Geoff's first focus is - will be helping us kind of increase that efficiency and lower our cost for performing services.
But his overall - what we'll be testing overall, because he's in charge of overall operations, is, of course, performance of an overall basis. So it's a combination of continuing growth on the commercial side and, at the same time, increasing our efficiency and margins.
Yale Jen
Okay, great. Maybe throwing in the last question here, which is for the both the BPH as well as the diabetes, the pipeline drugs.
What might be the time for releasing the Phase II data? Do you guys have any sort of rough estimate at this point?
Steven Rubin
It's a little bit too early because we're in the middle of enrollment now. I think enrollment is going well but it's a little too early for me to speculate when we'll have those results out, Yale.
Operator
[Operator Instructions]. Your next question comes from the line of Kevin DeGeeter from Ladenburg.
Kevin DeGeeter
Maybe a few on RAYALDEE. Can you just comment with regard to your thought process on the ramp-up of the additional sales reps for RAYALDEE or whether or not you think your incremental ads will be appropriate given the current uptake of revenue adoption for the product?
Adam Logal
Yes, we're continuing to look at opportunity in territories and we'll opportunistically bring on board people who we think we can make an impact in the territory. So right now, I think we're at a good place fully penetrating the addressable market that we have today.
But as we move forward, we'll be looking to increase.
Kevin DeGeeter
Okay. And then going back to Bio-Reference.
In terms of consolidation within the industry, we have continued to see some incremental consolidation, particularly with regard to the ability to provide support services for pharma. Is that an area that you think there's an opportunity to grow the Bio-Reference footprint, whether it be through internal initiatives or in bolt-on acquisitions?
Philip Frost
This is Phil. The industry, as has been indicated, is evolving to the point where it's less and less interesting to get new business by converting individual physicians from one laboratory to yours.
And more important, to deal with whole new approaches to getting business, and ideally, that would be with larger groups of either IPAs or ACOs, so that you can accomplish a lot more with, in fact, a smaller sales force. So what does it take to achieve that?
It takes having something novel that your competition doesn't necessarily have. And what we've been working with just beginning now is to work with an affiliated software group that has developed a way of helping the physician and physician groups practice better medicine, on the one hand, by managing their patients better, having better outcomes for the patients and, at the same time, reducing cost, which is extremely important to the payers, of course.
We've had, so far, very good luck with acquiring new business. And I think that, as time goes on, the results - we're hopeful at least that the results of Bio-Reference will reflect that type of approach.
Operator
There are no further questions at this time. Dr.
Frost, please proceed with your closing remarks.
Philip Frost
I just want to thank everybody for participating in the call. We look forward to next time.
Operator
Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.
Thank you for your participation.