Ladies and gentlemen, thank you for standing by and welcome to OPKO Health, Inc. Third Quarter 2020 Financial Results Conference. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions]. I would now hand the conference over to your speaker today, Yvonne Briggs from LHA Investor Relations. Ma'am, please go ahead.

Thank you, operator, and good afternoon. This is Yvonne Briggs with LHA. Thank you all for joining today's call to discuss OPKO Health's financial results for the third quarter of 2020. I'd like to remind you that any statements made during this call by management, other than statements of historical facts, will be considered forward-looking and, as such, will be subject to risks and uncertainties that could materially affect the company's expected results. Those forward-looking statements include, without limitation, the various risks described in the company's SEC filings, including the annual report on Form 10-K for the year ended December 31, 2019, and in subsequently filed SEC reports. Importantly, this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, October 29, 2020. Except as is required by law, OPKO undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. Before we begin, let me review the format of today's call. Dr. Phillip Frost, Chairman and Chief Executive Officer, will open the call; then Steve Rubin, OPKO's Executive Vice President, will provide a business update and pipeline review; and then Dr. Jon Cohen will discuss BioReference Laboratories; after that, Adam Logal, OPKO's CFO, will review the company's second quarter financial results, and then we'll open the call to questions. Now, let me turn the call over to Dr. Frost.

Good afternoon. And thank you for joining the call today. We're pleased to announce OPKO's second consecutive quarter of growth and profitability, again led by the outstanding performance of BioReference Laboratories. Demand for COVID-19 testing has remained strong and the team has focused on providing testing services with efficient turnaround times. Due in part to their outstanding service, BioReference has been the provider of choice for the CDC, numerous states, cities, healthcare organizations, professional sports organizations, schools, retail pharmacy chains, and drive thru testing sites. We're also pleased by recovering trends in BioReference' basic testing business. Although still below pre pandemic levels, we're hopeful that the laboratory will return to pre COVID levels by the end of the year as more people return to physicians or begin to schedule elective medical procedures. In addition, we're seeing progress with BioReference's new business development efforts, which have partially offset declines to remain a driver of growth. On the pharmaceutical side, we continue to make progress. Along with Pfizer, we recently announced positive results from a Phase III crossover study for somatrogon, which demonstrated a significant decrease in the life interference total score after 12 weeks of treatment compared to once-daily Genotropin. We're pleased that Pfizer remains on schedule to make its regulatory submissions for marketing approval of somatrogon in the US, Europe and Japan. As for RAYALDEE, impacted by the pandemic, growth has lagged behind pre COVID expectations. On the international front, however, our partner Vifor has now received marketing approvals of numerous European countries and is in a position to launch commercial activities next year. We initiated our clinical trial for RAYALDEE to treat patients with COVID-19 in an outpatient setting and hope to have top line results during the fourth quarter. There is a strong scientific rationale for RAYALDEE's rolling the anti-infective therapy. And if our trial is successful, we expect it to make an important contribution to dealing with the current pandemic. Before I turn the call over to Steve, I'd like to emphasize that we are always considering the best strategies to maximize shareholder value. All of our directors and management and many of our employees are shareholders of OPKO. It goes without saying that our focus remains on increasing the value of our shares. I'll turn the call over to Steve at this time.

Thank you, Phil. Good afternoon, everyone. And thank you for joining us today. We are pleased with OPKO's advancements across all our business units despite the puts and takes of COVID-19 on the company. As Phil mentioned, BioReference Laboratories continues to be a leading provider of COVID-19 PCR testing services. This heightened visibility in the new customers established during the pandemic have led to additional business relationships for the lab's core services, which we expect will progress well beyond the end of the pandemic. While the laboratory business is experiencing strong growth, our pharmaceutical business continues to advance while contending with the challenges stemming from the pandemic that are impacting so much of the healthcare industry. Earlier this month, in conjunction with Pfizer, we announced positive somatrogon Phase III top line results of a crossover pediatric study. The crossover study evaluated somatrogon administered once weekly to children 3 to under 18 years of age with growth hormone deficiency previously treated with daily growth hormone therapy. The primary outcome demonstrated an improved treatment burden compared to Genotropin injection as measured by the mean overall life interference total score after 12 weeks of treatment. In addition, key secondary endpoints showed an overall benefit in treatment experience with the somatrogon once weekly dosing regimen compared to Genotropin once daily dosing regimen. Pfizer remains on schedule with respect to its regulatory submissions for marketing approval of Somatrogon for children with growth hormone deficiency in the United States, Europe and Japan. We also presented an update at a recent pituitary society workshop entitled Update on somatrogon Development for the Treatment of Growth Hormone Deficiency in Pediatric and Adult Patients, highlighting results from each of the Phase III clinical studies evaluating somatrogon for the treatment of growth hormone deficiency in adult and pediatric patients. That presentation…

Thanks, Steve. Good afternoon, everyone. I'd like to start by discussing our core business, which includes routine clinical testing, our specialty testing services comprising oncology, urology, and women's health, and genetic testing. As the majority of providers are returning to normal, our specimen volume has improved and our base business is now down only high single-digit percentage compared with our pre COVID levels. Although patient visits to providers in some specialty areas continue to lag, we expect these trends to slowly improve over the next six months. Some subcategories of women's health have fully returned to pre COVID levels and 4Kscore orders are on track to be on the same level as pre COVID by the end of the fourth quarter. We've had some significant growth in our oncology franchise beyond pre COVID volumes, with particular growth in our hem path offerings. Also, gen path oncology had exciting news this past quarter, with the launch of OnkoSight Advanced, a next generation sequencing assay that enables revolutionary DNA mutational profiling of tumor samples. This assay provides critical insights for many different cancers and is aligned with the latest National Comprehensive Cancer Network and the World Health Organization guideline recommendations. We have seen very positive response to this offering. Our Strategic Venture Initiatives continues to grow as we continue to build out that team with additional wins of medical groups, hospital reference business, federally qualified health centers, and other large provider organizations. With regards to GeneDx, our volumes have returned to pre COVID levels. We announced an agreement with Pediatrics Medical Group, which is the nation's largest leading provider of maternal fetal and pediatric medical and surgical subspecialty physician services. Under this new agreement, we will offer state-of-the-art next generation genomic sequencing to provide clinical diagnosis in the neonatal intensive care units,…

Thank you, Jon. We are pleased that our third quarter financial results met or exceeded our previously issued financial guidance. I will start with a review of our diagnostic segment. We reported revenue from services of $382.5 million compared to $181.1 million for the 2019 period. The increase in net revenue was driven by the execution of our COVID-19 testing strategy as well as continued improvements on the return of our base business, as Jon mentioned. Combining our routine testing business and our COVID-19 testing business, volumes overall increased almost 130% compared to historical levels. As stay at home orders continued to ease during the summer, we saw a continued sequential quarter return in our routine and genetic testing businesses throughout the quarter. Overall routine clinical and genetic testing improved each sequential month during the quarter. And for the full quarter, we were down a high single digit percentage. As a result of the increase in testing volumes in revenues, the diagnostic segment reported operating income of $46.2 million compared to an operating loss of $16.4 million, an improvement of $62.5 million over the 2019 period. The third quarter of 2020 benefited from a $10 million grant under the CARES Act, which was recorded as other revenue. Overall, costs and expenses increased by $148.9 million compared to 2019 expenses, reflecting the increased cost of revenues of $129 million, primarily due to the increase in overall testing volume. Selling, general and administrative expenses remained well controlled and increased $20.9 million compared to the 2019 period. The increase in costs the increased costs which are impacted by cash collections including sales force compensation and revenue management cycle costs, which are calculated based on cash collections. Moving to our pharmaceutical segment, we reported revenues of $35.5 million for the third quarter of 2020…

[Operator Instructions]. Our first question comes from the line of Maury Raycroft with Jefferies.

Congrats on the progress and the updates. First question is on COVID PCR testing capacity. So, you're still around 70,000 per day. I guess, can you comment on whether you're seeing anything different on the supply chain issues? And if you're seeing any changes – and also on pooling, if that has been effective in 3Q, potentially more difficult to implement than you thought.

Supply chain has absolutely stabilized up till now. There are some occurrences that still pop up here and there. But right now, supply chain has not been an issue that it was several months ago. The issue of pooling, we are pooling. I think you've heard that and we've announced it. We will continue to pool in low incidence areas as we can. We're pooling now on multiple platforms. So, it is having an impact, a positive impact on our capacity.

And then, next question is just, how do you view the recent CMS policy announcement on reimbursement for high throughput testing? And is there anything you can update us on with regard to reimbursement and how that's evolving?

I would say the reimbursement issue relative to 48 hours of Medicare, I think it will have essentially no impact on us. Our turnaround time right now is less than 48 hours for the overwhelming majority of our COVID-19 testing. And then, of course, Medicare is, of course, a smaller percentage of the total number of testing that we're doing. Plus, the Medicare, of course, is only related to third-party billing. So, if you take the percent, it's pretty low. And as I said, I don't predict that we should have any issue at all relative to 48 hours or less.

And then, how do you view your new multiplex COVID-19 plus influenza assay in your current testing paradigm? And can you tell us anything about its implementation, uptake and reimbursement for that?

The rate is somewhere around, I think, $142 or something for flu A/B and COVID. Not sure the exact rate, but it's somewhere around there. We have brought it up on, I would say, several platforms at this point. It's early in the flu season, as you know. I don't think anybody's going to predict what or where that outbreak will occur. But we are fully prepped for, I would say, most incidences of what the flu combination will look like. The advantage of having multiple platforms, as you may know, is that if you run the flu A/B, you cannot pool. I don't predict that that will be an issue for us at all. But it does change the dynamics of moving testing from platform to platform.

And our next question comes from the line of Yale Jen with Laidlaw & Company.

Congrats on the performance this quarter. First question is that, for the RAYALDEE in COVID-19 trials, if it's successful for the first study, what's the subsequent sort of regulatory path you're considering? And how do you position RAYALDEE in the overall for the COVID-19 patients?

This is Charlie. We're conducting, as you know, a Phase II study in COVID-19 patients targeting mild to moderate symptom improvement. And the regulatory path that we hope to follow is, with positive results from this study, we would file an emergency use authorization with the FDA. In parallel with that, of course, FDA will require us to complete the development program. So, we would undertake further studies in communication with the FDA that would be appropriate to finish up the data gathering that would be necessary for SNDA.

And maybe just one more question on the operating margin or the gross margin of the BioReference. If we compare the number of second quarter versus third quarter, the third quarter seems a little bit sort of higher than that. Is that sort of the pace or the level we should anticipate going forward with the increased COVID-19 tests at this moment?

The second quarter had a couple of one-off things in it. The 4K revenue that we got on the Medicare appeal. The third quarter was a cleaner overall quarter from a normality or go-forward basis. So, with the guidance that we gave, it would suggest that the incremental revenue that we earn should be at that higher gross margin going forward.

And our next question comes from the line of Ted Tenthoff with Piper Sandler.

My congrats too on profitability. A question with respect to somatrogon. I'm trying to understand what's taking time for the BLA submission? And do you guys anticipate that there will be a panel for this, especially considering status of the competitor? Or what kind of review should we be anticipating for somatrogon? Thank you.

We are not anticipating a panel. We just expect a standard review. I don't think the competitors would trigger any kind of additional review or analysis. To the contrary, if they're not going to have Advisory Committee, we would expect one either. We wouldn't have expected one in any event, given our drug and the market and the studies we've taken. Timing there, they're right on time. So, as a matter of fact, some of this has been accelerated somewhat. The study we recently announced really gives Pfizer the ability to submit in Europe even earlier than we'd expected as we expect that to be done hopefully early into next quarter. And just the point here is to understand that Pfizer – they don't announce – they're our partner, obviously. They don't announce BLAs or NDAs for that matter until FDA acceptance. And so, when you hear from us, it will have been accepted by FDA.

And our next question comes from the line of Dana Flanders with Guggenheim.

I have a couple of questions that I'll just ask upfront if that's okay. My first one, a question for Jon maybe. Maybe you can just comment from a bigger picture perspective where we are overall relative to testing demand meeting supply. I know there's a lot of supply coming online from you and some of your peers. And I was surprised to see your Q4 Guide with services revenues flattish quarter-over-quarter given the uptick in cases we are seeing. So, are we getting closer to that equilibrium level or are you wanting to be a little bit conservative going into the fourth quarter? My second question, just in light of the shareholder letter that was published this afternoon, maybe you can just comment on if the company is or would evaluate strategic alternatives for any of your business units or product lines to help unlock value if that's something the company is considering? And then my third, last question just on OpEx. I was surprised to see SG&A&A tick up this quarter. Was there anything one time there? And can you help us think about that SG&A line into Q4 and 2021? Thanks.

I'll answer the second question first. What you need to know is that, philosophically, we have always considered our shareholders' interests first and foremost. What that means to us is that we consider any and all options that might result in more value for our shareholders. Now you can read into that whatever you want, but I think that really tells the complete story.

Maybe I'll go next on the OpEx questions and then Jon can jump in on the testing environment in general. So, on OpEx, Dana, no, there was an uptick in the actual dollar spent. Almost all of those are tied to the increased sales activity, whether it be the RCM costs. As you know, we outsourced that. We pay on a percentage of cash collection. So, as cash gets collected, we have more expense. I think you would probably recognize that, despite the dollar increases, the percentage of revenue increases are dramatically lower. So, you would see that we're not building infrastructure to support the level of sales increase. When we had a more than doubling of revenue, a $20 million increase in SG&A costs, I think, you would agree is pretty efficient. And then, as we guide forward, it just continues along. There's not any one-time items that we're expecting to come out of operating expenses. And in fact, we're doing everything we can to manage those non-sales – or tied to sales expense line items as tightly as we can. Jon, maybe you want to take the testing question?

It's an interesting question. Observations are as follows. I do believe that there is a lot more testing online available throughout the country in general compared to several months ago. Now, we've also, as you can tell, build capacity which we could say at some point stabilized out to some volume. But, however, the next phase of the testing is, we're in the middle of – not relative to what the country is doing, relative to the disease, but in terms of the need for more testing, at least from our observation, has significantly significantly increased over the last couple of weeks. And I say that in the context of – there are many industries and entities that were, I would say, sitting on the sidelines, waiting to see what was going to happen with the pandemic. I would example that, for instance, is colleges and universities. Many colleges, universities, public schools, as you know, did not make a decision relative to the fall semester. Many of them decided to sit it out and go virtual. I think what you are seeing now is as they get ready for the semester that's starting in January, many of them have made the decision that they need to address what their testing strategy is going to be. That is very similar to large other entities and large number of employers that have not up to now brought their workforce back. So, our observations is there is going to be an increasing demand as we move into the next phase of that. So, that's A. B is as the pandemic has moved across the country and you see what's going on in the news, there are multiple states – and although they have access to testing – are reaching their capacity limits within their states. I know this because we've been in touch with several of them who have reached out recently as they may need more testing as this thing continues to flare, particularly in the Midwest. So, in general, I would say that there's more to come. I think there was a stabilization. There are a lot more people out there testing. But I think, in general, there's more to come. And that's just our observations.

And our next question comes from the line of Yale Jen with Laidlaw & Company.

This is regarding somatrogon, which is that if the drug gets approved in the next year, do you anticipate Pfizer doing line extensions clinical studies into other neighboring indications? And if that's the case, OPKO will share the cost or it will be the cost for the Pfizer to take?

There's two parts to that, Yale. So, we expect and we always said that Pfizer would submit for the adult – at least certainly consider submitting for the adult upon approval of the pediatric. Now, as you know, we have conducted that study with a modified statistical analysis and has spoken to FDA about submission along with the data from the pediatric. In fact, we just recently made a presentation which includes, in the adults study, which I mentioned in my remarks, which is on our website. As for other indication, we are obligated with Pfizer to proceed with one more pediatric indication and we would split the cost there. So, there will be at least [indiscernible] that we will do sharing the cost with Pfizer.

Thank you. And that does complete our Q&A session for today's conference. And I would like to turn the conference back over to Dr. Phillip Frost for any closing remarks.

Thank you all for your participation and for your very good questions. We look forward to getting back together with you early next year when we report on our fourth quarter and full year. In the meantime, stay safe, stay healthy. And thank you once again.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.