Welcome to the OPKO Health Third Quarter Business Update Conference Call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks, we’ll hold a Q&A session. [Operator Instructions] As a reminder, this conference is being recorded November 8, 2017. I would now like to turn the call over to Anne Marie Fields with LHA Investor Relations. Please go ahead, ma’am.

Thank you, Victoria. Good afternoon. This is Anne Marie Fields with LHA Investor Relations. 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, 2016 and its subsequent quarterly filings with the SEC. Before we begin, let me review the format for today’s call. Dr. Phillip Frost, Chairman and Chief Executive Officer of OPKO will open the call, followed by Steve Rubin, OPKO’s Executive Vice President who will provide an update on the company’s various businesses and clinical programs. After that Adam Logal, OPKO’s Chief Financial Officer will review the company’s 2017 third quarter financial performance. Dr. Frost will then provide his closing remarks and we’ll then take your questions. Now, let me turn the call over to Dr. Frost.

Thank you, all, for joining us today. As you just heard, Steve Rubin will open the discussion, followed by Adam Logal, and then I’ll make a few comments. Steve?

Thanks, Phil. Good afternoon, everyone, and thank you for joining us on today’s call. Throughout the third quarter, we continue to make meaningful progress on a number of our key business objectives. Those include building momentum in the commercial launch of RAYALDEE, increasing utilization of the 4Kscore test and further expanding its promotion, and advancing our clinical development programs towards commercialization. On this call, I’ll discuss our progress across diagnostics, pharmaceuticals and our clinical development programs. Let me begin with a review of our diagnostics business BioReference Laboratories, which is the country’s third largest reference lab. While impacting BioReference’s revenue growth in recent quarters, we continue to make investments in systems efficiencies, cost reductions and new leadership that we expect will translate into revenue and profit growth as we move into 2018. As Adam will elaborate, we are seeing trends, which lead us to expect our efforts of BioReference and GeneDx will result in improved revenues and operating margins for the remainder of this year and into 2018. Throughout the quarter and recent weeks, CRL, GeneDx subsidiary continued to demonstrate its leadership to active engagement with the clinical and scientific community in all aspects of genetic and genomic testing. Among other areas, GeneDx has seen continued ongoing growth in its high-complexity exome and related test with a 29% year-over-year increase in exome testing volumes. We were especially pleased to exhibit team GeneDx’s leadership in genetic and genomic testing with more than 40 poster and platform presentations at two prestigious industry conferences last month. We expect advances in GeneDx’s product lines and gene sequencing panels to add meaningfully to our diagnostics platform. While we face some pricing headwinds with GeneDx year-to-date, we see evidence that those have leveled off and moving forward we expect to see improved performance for this unit,…

Thank you, Steve, and good afternoon, everyone. Revenues for the quarter ended September 30, 2017 totaled $264 million and our net loss was $46 million, reflecting our ongoing investments in research and development of our pharmaceutical pipeline of $32.3 million along with an $8.5 million investment in our commercial launch activities for RAYALDEE. The comparable period saw total revenues of $298 million and a net loss of $15 million. During the third of 2017, revenues fell short of our expectations, principally at Bio-Reference as a result of lower than expected realization of revenue items from the early days of our system implementation, which occurred in October of 2016. Further, we did not achieve the patient growth we had anticipated for the quarter, and we now anticipate revenues for the full-year to be similar to the 2016 overall levels. We are encouraged by progress that has been made at our higher-margin GeneDx business, which continues to see patient growth, and importantly, revenues for this portion of Bio-Reference reached the highest revenue levels since Q3 2016, a trend we expect to continue. Our commercial team led by our new Head of Sales, Vicky Laughman, remains focused on returning Bio-Reference to accelerated growth in our patient base. Our revenue cycle management team continues to make progress in collecting more cash on each requisition. Further, we have brought in our efforts on improving the profitability of our diagnostic operations through the initiation of lean team focused on process reengineering after the success we saw within our billing organization. While additional investments will be required to achieve industry-leading results, we believe our 2017 activities have positioned us to achieve operating margins in line with the industry during 2018. Shifting gears to RAYALDEE. We have not recognized revenue from RAYALDEE in our financial statements. But we…

Thank you. And I’d like to highlight two of my favorite subjects that Steve has already talked about. First is the SARM, a selective androgen receptor modulator with possible indications other than BPH, such as urinary incontinence and our oxyntomodulin molecule to treat type 2 diabetes and obesity. Both were part of Transition Therapeutics, which we acquired over a year ago. The SARM has already been studied in more than 300 men and found to have the following effects: an increased muscle mass and strength; a decreased body fat; it lowered the PSA; in preclinical studies and drugs, it decreased prostate size by 60% in three months and 80% in six months. This was the model used to test the prostate shrinking effects of the 5alpha-reductase inhibitors Finasteride and dutasteride. Now on the market to treat BPH. But they cause royalty symptoms since they prevent the formation of the active form of testosterone. So we have some level of confidence that our SARM will be effective in our trials, which should begin within next few weeks. This, as Steve indicated, is a four-month Phase 2b trial in a 126 men, which will be completed in one year. For the Phase 3 trial, we are considering also studying a combination of CIALIS in our SARM. Since BPH have and should improve with our SARM as the prostate shrinks, we don’t expect benefits to be noticed immediately. But CIALIS is already approved in small daily doses to treat BPH. And since it works by relaxing muscle a different mechanism from the SARM, its benefits are noted quickly. The combination should have a great combination of attributes without the disadvantages products now on the market. Remember, as Steve indicated, approximately 50 million men have symptoms of BPH in the U.S. alone. Our next…

[Operator Instructions] Your first question comes from the line of Louise Chen with Cantor.

Hi, thanks for taking my questions. I had a few here. So I’ll just go one at a time. So one of the things that we’ve been getting incoming questions on is the services revenue this quarter. And you had given some color that I think, that you said that it should equal the 2016 number for the full-year. I just wanted to make sure that that was – I understood that correctly and get back? Okay, go ahead.

Yes, that’s right, Louise. So the patient expansion that we expected has not necessarily come through. And we continue to struggle to overcome some of the pricing declines that we saw earlier this year.

Okay. And then in terms of RAYALDEE, I know that you have reported revenues yet. But is there any color that you can give outside of the increase in prescriptions regarding the revenues, if people can just get a sense of kind of where the sales are trending towards?

Yes. So, Louise, we’ve got – we’ve shipped about $7 million, or just below $7 million of product into the trade. So, I think, that’s a reasonable approximation for year-to-date sales. I think, as we continue into see how the expanded sales force continues to increase prescription trends, I think, those are the best indications. And with 66% quarter-over-quarter increases in trends without the sales force, we would expect that that’s going to accelerate in the fourth quarter and beyond.

Okay. And then on your Claros 1 PSA test, you talked about $625 million market opportunity and you gave some color behind it. But just curious if you could provide a little bit more assumptions, or how you think about the assumptions to get to that $625 million stock?

Well, it’s based upon the reimbursement price for PSA and the total number of tests that are done. Most of the PSA testing that’s done is under our intended use for the product that we’ve now submitted, which is for detection. So it’s a large market opportunity. We’re not going to get 100% of that market opportunity, but we do address the lion share of it with the intended use.

And then the last question I had was on the 4Kscore TV ad that you’re about to start. When do you think we’ll see a pickup in the sales of that product based on your start time for the ad campaign? And then also, how much is that going to cost you and how long will that run for?

It’s going to run for three months starting November 21, and it’s primarily in a Northeast. It’s not going to cost us a great deal. It’s certainly not in the millions. It’s in the low hundreds of thousands. But we have no idea of what to anticipate from it. It’s sort of a test. And we will be monitoring the results very carefully. If it works, of course, we’ll make the investment.

Thank you very much.

Your next question comes from the line of Brandon Couillard with Jefferies

Good afternoon. This is Christian in for Brandon. Thanks for the questions. First off, at Bio-Reference, can you quantify any impact hurricanes may have had during the 3Q period?

Yes. So, thanks. It was a modest impact about a 1% overall.

Great. And staying on Bio-Reference, do you have any updated thoughts in terms of the potential impact of PAMA legislation looking towards the future?

Yes. I mean, we’ve expected for – throughout the year, about a 1% to 2% impact on overall Bio-Reference revenue from PAMA. I think, based on the draft rates that we saw, we stay firmly in that 1% to 2% range. Obviously, as the rates get finalized, we’ll provide a better or more clarity later this year at our year-end call.

Understood. And then one last one for Adam just given cash burn, it looks like it trended slightly above $30 million in 3Q. Do you have any other additional commentary you’d share in terms of your outlook for the balance sheet, perhaps how that figure stacked up relative to your initial view, or any other color you might add there?

Sure, yes. So Bio-Reference is going to be an important contributor to our overall cash flow and cash position. And we certainly feel that Bio-Reference will return to its higher operating margins and cash flow from operations that we experienced last year. We made fairly significant investments in the business this year, both from a technology and process reengineering as it related to our billing operations. So we fell short of our expectations, at least, for the first nine months on cash from operations from Bio-Reference. We think that that’s going to be an improving situation in the fourth quarter into 2018 to provide us the cash flow that we need to continue to fund our operations. And certainly, RAYALDEE is going to play an important part of that to continue to grow from RAYALDEE to get from being an investment into the cash flow neutral to positive in the 2018 time period.

Your next question comes from the line of Kevin DeGeeter with Ladenburg.

Hey, good afternoon, guys. Thanks for taking my questions. I just want to follow-up actually on Adam’s last comments with regard to RAYALDEE potentially being a cash flow neutral to generating some cash. If you sort of think about a 70% or so in your sales force, what type of revenue range that sort of imply to get that component of the franchise to cash flow break-even? And how do you think about the puts and takes of continuing more aggressive RAYALDEE, perhaps to gain deeper share versus getting the franchise to cash flow perhaps a bit sooner?

So Kevin, the commercial organization is cost – going to cost between $8 million and $10 million per quarter. So that’s kind of the – where RAYALDEE revenue needs to reach to become break-even. So obviously, as – we don’t expect that $8 million to $10 million per quarter to increase. So as revenue continues to catch up to that spend, we’ll start to see positive trends. Obviously, we’re encouraged by where the scripts came out in the third quarter, as compared to the second quarter, and believe that trend will continue in the October numbers, as IMS has reported, continue to give us that confidence.

Okay, great. And then just sort of building on the other portion of your observation on how to get the business positive cash flow, specifically, Bio-Reference, appreciate you’ve made significant investments in the business this year. But I think one of the things that might be helpful for some investors is your perspective on what happened over the last, call it, three or four quarters that resulted in some deceleration of growth and why you have a high-level of confidence that you have your arms around it and with the investments that have been made, we should expect a return to more appropriate, normalized not just growth, but in cash flow?

Yes. So we have – we’ve been spending a lot of time of making sure that we’re getting the most out of each requisition that comes through the door from a cash respective, as well as right-sizing the overall organization of one going from having a higher growth rate than what we’ve seen over the last 12 or 18 months to a more stable organization, I think, we’re going to continue to focus on cash flow. We’re going to look to make investments in technology, where it makes sense to reduce the overall footprint that Bio-Reference has to have, but continue to be able to provide the high-level service that our clients have wanted. We did make a change in our sales leadership during the third quarter to help reinvigorate the sales team. And Vicky had been leading our GeneDx business since February of this year and we feel confident about what that – how that business has continued to grow and that she’ll be able to broaden that out and grow the clinical business on a broader basis.

And then maybe just one more for me, then I’ll get back into the queue and that pertains to human growth hormones, specifically on the adult side. Steve, when do you hope to be able to meet with FDA to have discussion? Is that a 2017 event, or perhaps in 2018? And then just as a related point, can you just remind us as to the potential or the opportunity for some of the bridging work to the pen device to sort of fit into that discussion and perhaps expand the amount of patient data that will be available for FDA to consider in a more sort of intermediate term for timeframe?

So Kevin, we’re asking for a date. So depending – the FDA will get back to us on what the meeting date will be. It’s hard for me to tell sitting here in November if we’re going to have that meeting this year or early next year. And as we have said before, we will meet with the FDA, show them the data, including the modified analysis get an indication from them. We expect on whether they believe that is adequate for submission of a BLA as is. If – we – one way or another, we have to do another study using the commercial product, which is the pen device. And so the thought process would be, if it’s – if the BLA is deemed – if the data we have is submission – is sufficient to submit a BLA, we would submit it and then do a bridging study. If they require more data then we would just power the study using the pen devices in adults, such as is adequate with the existing data to submit the BLA. So that -- we’ll get that decision following a discussion with the FDA whether we can have that meeting this year or early next, we’ll find out.

All right. That’s really helpful. Thanks, guys.

Your next question comes from line of Eric Joseph from JPMorgan.

Hey, guys, thanks for taking my questions. Just a few from me. I guess, first, with 4Kscore. You highlighted the television DTC campaign here beginning near-term. I’m just wondering kind of overall, whether there’s any plan to kind of expand DTC beyond TV ads, whether you’re thinking about any digital – the incorporation of any digital footprint here in that campaign?

The answer is yes. So that will be part, as Phil mentioned, this is kind of the first test. But we certainly are going to do kind of digital directed advertising using the Internet and I guess, directing based upon search criteria. So that’s certainly part of it. And it will expand the ad campaign nationally assuming that the investment pays off as we expect it to do from the initial response of these ads. So the short answer is absolutely, we expect, expand the DTC campaign.

Got it. And on RAYALDEE, I guess with the expanding prescriber base that you’ve seen over the course of the year, do you have a sense of the level of repeat prescribers that you are currently seeing? And what kind of feedback you are – interested to know what kind of feedback you are getting from physicians from their patients?

Yes. So we’ve had about 600 repeat prescribers and the feedback has been very positive from them. They’ve been able to see the clinical result they’re looking for. And there are – some of them are beginning to dose escalate the patients as well.

Got it, got it. And on 04 in BPH, I guess, you are starting the Phase 2 with data hopefully in the second-half of 2018. I know you’re just getting started here. But maybe you can kind of just orient us on what would be viewed as a clinically meaningful differentiation from placebo and what the trial is adequately powered to detect? Thanks.

Well, the – what we are doing is a 125-patient trial, it’s Phase 2. And there’s two doses that are being examined in the study, and it’s a 4.5-month enrollment period, and it’s about a 4-month treatment period. So we do expect to have data in the second-half. The key endpoints to move forward into a Phase 3 is going to be the reduction in prostate volume. And similar to the products on the market, we would expect somewhere between a 14% and 20% prostate size decrease to be competitive and more than that, it’s obviously to be a better product. The secondly is the PSA level. They’re expected to decrease somewhere between 30% to 40%. And at 30% decrease would be sufficient also to move forward. We’re looking at other endpoints as well, which have to do with the anabolic effects, such as the increase in muscle mass, increase in function, decrease in lipids, for example, decrease in fat mass. Those are key endpoints for that patient population, and we’re also looking at some quality of life endpoints as well. So we’re trying to get a broad array of second endpoints – secondary endpoints that we can then include also in the Phase 3 trial. We do think that we’ll enroll quickly. Most of the sites that we have onboard believe that they have a long line of patients, because there’s a need for this area. And so I don’t think, we’ll have a problem to have data by the end of the year.

Joseph, let me give you a little perspective on a broad – a little more than we’ve discussed before. One of the reasons I like it so much and of course, there are no guarantees. There’s a lot of work to be done to bring this product to market and a lot of time to be spent also. But one of the things I really like about it is that because of all the – of its unique features in addition to helping with the symptoms of the BPH, it will be a very easy product to market. First of all, we start with the urologists, it’s a small group and we won’t need such as a big sales force, and they will be – I anticipate a huge demand for it. I would guess that every man above a certain age will be interested in taking this product, at least every man I’ve spoken to about it said where, when can I get it and or can I participate in the trial at least. So that, I’ll repeat, no guarantees. But if this thing works, all bets are off, and we’re going to be very pleased.

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

Good afternoon, and thanks for taking the questions. I have a few short ones. The first one is that you estimate that the revenue from the service this year’s equivalent to last year’s, so my backup envelope estimate is roughly maybe $270 million for the quarter, which seems to be the highest amount of all four quarters of this year’s. Just curious what have you – what give you guys the confidence that that is something that can be achieved?

Yes. So, I think, we’re – when we look at our trailing 12 months numbers in compared to last year, I think, we’re in line and feel like the demand of the business is going to be there for the fourth quarter. Certainly, it’s not going to be something that’s easily achievable, but something we believe we can.

Okay, great. That’s helpful. And then for the Claros PSA test, you guys mentioned there’s two sort of studies need to be done. And could you give us a little bit timeline in terms of when that may be completed and then when you guys will be able to get possibly sort of a decision by the FDA time?

Yes. I-Eh, this is Dave. We did complete those studies already. So they’re in the PMA that was submitted to the FDA on Monday. And we expect, in about six months, we’re going to have approval for our first essay on the Claros and the total PSA.

Okay, great. And then last question is that the for RAYALDEE, I understand that the trend is very positive right now. Just a little bit thoughts in terms of – what do you guys see sort of hurdles are to a more rapid ramp up? Would that be just not be sufficient headcounts there, or some – any other push backs that you need time or for other sort of methods to overcome, in fact?

Yes. So I mean, I think the reach and frequency are probably where the two things will be the launch down. And as we’ve talked about in the past, those were things that when we were lining up insurance coverage, we understood we would fall short on. So with our expanded sales force, they’re going to be able to reach a higher number of prescribers and see those prescribers more frequently. So those are the main hurdles. The continuing additional market awareness of the program and things like that will obviously help. Tom, I don’t know if you have anything further.

I think we’re, as Adam said, addressing the major hurdles in regards to reach frequency, increasing awareness and then also improving the access position and the physicians comfort with being able to get the drug and for patients that have low cap copays. So education and reach and frequency.

Okay, great. That’s very helpful and thanks a lot.

Your next question comes from the line of Mike Petusky with Barrington Research.

Hi, guys. There – I had to be off the call briefly, I may have missed this. Did you guys give a percentage in terms of payer coverage for RAYALDEE at this point, I know you’ve given that in the past?

Hey, Mike, this is Adam. So we haven’t – we didn’t give any updated number. The number is consistent with before, it’s still in the 68% range. We don’t see a meaningful change to that number until January 1. So we have secured some additional formulary access that won’t be effective until January 1, so the number on that side hasn’t changed.

All right. And then just kind of saying with RAYALDEE, for the $6.7 million, do you expect to recognize all of that in the fourth quarter, or some of them in the fourth quarter?

It will be some portion fairly. It will be – it should be fairly close to that number, but some portion of it.

Okay, all right. And then I guess, jumping over to Bio-Reference, did you guys disclose the segment margins in that business in the quarter?

Yes. We would see the margins in the segment [indiscernible].

If you have that handy, I don’t know, I’ve done like three calls here.

Sorry, so it is negative this quarter, Mike.

Okay. All right. And then I guess, kind of following up on the previous question, so in 2016, your weakest Bio-Reference quarter by quite a bit was the fourth quarter. And it just seems like I guess, what I’m asking is, when you’re saying, the reps will approximate 2016, I mean, would being short of by $30 million approximating your view on $1 billion business, or essentially, it just seems like a real stretch the idea that you’re going to do $265 million or $270 million in that business when last year’s fourth quarter [Multiple Speakers]

Yes. So for the fourth quarter, yes. So the fourth quarter of last year was a particularly weak quarter as it related to reimbursement at GeneDx. We think it will be more in line with the earlier quarters of this year.

Okay. So you genuinely think, hey, we’re going to roughly match revenue from 2016 not like missed by $20 million or $30 million?

That’s right.

Okay. All right. And then just a last question on the 4KScore direct-to-consumer. Have you guys brought in anybody that maybe had a connection to Cologuard DTC campaign or anybody with kind of a track record to sort of help you guys in terms of how you frame up this type of issue for DTC campaign?

We had actually. One of our marketing people we recently hired he used to work for years with exact signs as a matter of fact, so…

Okay, all right. Okay, very good. Thanks, guys. I appreciate it.

Sure.

You have a follow-up from Brandon Couillard with Jefferies.

Thanks. It’s Brandon. Adam, curious if you could share with us the actual 4KScore volumes in the third quarter.

Yes, sure.

And the size of the user base and maybe between urology and primary care?

Sure. So we did 19,000 tests during the quarter. Don’t have the user base. Steve, I don’t know, if you’ve got the user base.

I don’t, not here. We can get that for you as we don’t have it here with us right now.

But we have seen a continued growth principally in the urology market on the score.

All right. Thank you.

Sure.

There are no further questions at this time. Dr. Frost, please proceed with your presentation or any closing remarks.

No, I just want to thank, everyone, for participating.

Thank you.

Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation, and ask that you please disconnect your lines.