OPKO Health - Q2 2023
August 3, 2023
Transcript
Operator (participant)
Good day, welcome to the OPKO Health Second Quarter 2023 Financial Results Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing Star then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star then one on your touchtone phone. To withdraw your question, please press Star, then two. Please note this event is being recorded. I would now like to turn the conference over to Yvonne Briggs.
Yvonne Briggs (Investor Relations)
Thank you, operator. 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 second quarter of 2023. I'd like to remind you that any statements made during this call by management, other than statements of historical fact, will be considered forward-looking and as such will be subject to risks and uncertainties that can materially affect the company's expected results. These 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, 2022, and its subsequently filed SEC reports. This conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, August 3, 2023.
Except as 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 for today's call. Dr. Phillip Frost, Chairman and Chief Executive Officer, will open the call. Dr. Elias Zerhouni, Vice Chairman and President of OPKO, will then provide an overview of OPKO's pharmaceutical business as well, as well as BioReference Health. 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, I'd like to turn the call over to Dr. Frost.
Phillip Frost (Chairman and CEO)
Good afternoon, and thank you for joining us today. In June, we were pleased to announce what we had been expecting for more than a year. FDA approval of NGENLA our long-acting, once-weekly human growth hormone analog to treat pediatric patients aged 3 and older. Our global commercial partner, Pfizer, has indicated it expects NGENLA to become available this month for prescribing in the U.S. This approval triggered a $90 million milestone payment from Pfizer and leads to a profit-sharing arrangement that Adam will discuss in more detail. That decision by the FDA adds to NGENLA approvals in over 40 countries, with commercial launches to date in over 18, including the major markets of Japan, Germany, France, Spain, and the United Kingdom. Pfizer expects to launch NGENLA in another 18 or more countries during the remainder of this year, covering all priority international markets by year-end.
With U.S. approval, we expect to see significant ramp-up in sales for NGENLA as market penetration continues to expand globally. With Pfizer's global commercial infrastructure and long-standing experience in this particular market segment, we couldn't have a better partner. On another front, we continue to advance the sophisticated science of our ModeX unit toward clinical trials. ModeX's novel approaches are validated by the exclusive worldwide collaboration with Merck that we announced in March to develop our multivalent nanoparticle Epstein-Barr virus vaccine. Our strategy was to secure a large pharmaceutical partner to develop the EBV vaccine, and we have a great one in Merck. Despite the significant prevalence of this virus and its potential to cause head and neck, stomach, and other cancers, as well as multiple sclerosis, there are currently no FDA-approved vaccines for EBV.
At BioReference Health, we continue to drive cost control efforts in parallel with work to enhance innovation and productivity. We look forward to our diagnostic segment's return to profitability in the near future. Our international operations continue to perform well, with both our Ibero-American and FinTech businesses demonstrating profitability and growth this past quarter. With that brief overview, I'll turn the call over to Elias to provide further discussion and commentary on our pharmaceutical and diagnostic businesses. Elias?
Elias Zerhouni (Vice Chairman and President)
Thank you, Dr. Frost, good afternoon, everyone. As Dr. Frost just mentioned, we were extremely proud to announce the approval of NGENLA in the U.S. This long-acting treatment reduces the burden on children with growth hormone deficiency, with injection frequency going from daily administration to once weekly. Upon the upcoming launch later this month in the U.S., OPKO will be entitled to a profit-sharing arrangement with Pfizer on a worldwide basis, which is based on regional tiered gross profit on both NGENLA and GENOTROPIN, Pfizer's daily human growth hormone. Now, turning to ModeX, as mentioned by Dr. Frost, we are advancing our recently announced collaboration with Merck to develop our Epstein-Barr virus multivalent nanoparticle vaccine. This collaboration is significant in that it addresses an important unmet clinical need but also validates ModeX's innovative multi-targeting technologies.
Our vaccine targets the four major Epstein-Barr virus proteins known to allow the virus to enter human cells. This multi-targeted approach holds potential to provide complete protection against this virus, which affects up to 95% of the global adult population during their lifetime, with over 200,000 cases of related cancers per year and a strong link to multiple sclerosis. We're now jointly working with Merck on IND-enabling studies to enter the clinic as soon as possible. In addition to the EBV vaccine, our antiviral program is focused on other indications, including the treatment and prevention of HIV and COVID-19. We have a partnership with the NIH to develop a trispecific candidate to both prevent and treat HIV, and the NIH is providing funding for this program, which is in phase 1.
In addition, we're working on next-generation candidates that offer up to 10-fold improvements in potency and greater breadth of antiviral activity against the majority of global HIV strains. Current HIV medicines still have limitations, including drug toxicity due to lifelong therapy and drug resistance that can impact the efficacy of viral suppression. Additionally, we're working on a COVID multispecific antibody program to address the emergence of resistant variants on a global basis. We believe the virus will remain in the human population for some time to come and will require novel therapies, especially for at-risk patients who have underlying medical conditions or a suppressed immune system. Since our technology platform is modular, it allows for the rational selection of antibodies to optimize potency against current and future strains and prevent the emergence of viral resistance. This program is partially funded by DARPA, and we are in late-stage preclinical testing.
Recently, we applied for further funding from BARDA to support our COVID-19 multispecific antibody program and platform, as well as for seasonal influenza therapy and prevention. On another side of our programs, our oncology program focuses on hard-to-treat solid tumors, but also on the treatment of leukemia and lymphoma. As you know, many cancer therapies still fail to achieve or maintain a positive response, with a loss of tumor antigen expression as one of the main reasons. Our multispecific antibody candidates are designed to engage and optimize T-cell function while preventing tumor antigen escape. These programs are in the preclinical stage, with plans to enter two programs in the clinic in 2024. Moving now to Rayaldee, our treatment for secondary hyperparathyroidism in adults with stage 3 or 4 chronic kidney disease and low vitamin D levels.
The numbers for the quarter break down as follows: The total prescriptions for Rayaldee in the second quarter of 2023, as reported by IQVIA, were approximately 13,100, representing an increase of 5.8% from approximately 12,385 in the previous quarter. Rayaldee sales are steadily recovering from the impact of pandemic-related challenges in onboarding new patients. Let me go now to our diagnostic segment at BioReference Health, where our focus remains on improving the performance of the company following the major drop in COVID revenues, by driving cost efficiency, by improving revenue cycle management, and achieving volume growth and increasing market access, with an ultimate goal of improving operating margins towards profitability in the upcoming quarters. Through these initiatives, we've been able to further reduce our workforce by 7% in the second quarter, with more than 200 positions eliminated.
In the laboratories, we have realized further cost reductions by better reagents and supplies, pricing and utilization, as well as streamlining management structures and operations. In regard to revenue cycle management, we're improving the actual realization on our billed services by increasing payer coverage and access, enhancing our prior authorization procedures, reducing unbillables, and introducing copay and point-of-care collections, as well as bad debt collections. For example, our market access team has succeeded in negotiating contracts that will result in more covered lives and improved payer reimbursement. For example, we received the status of Preferred Lab Network by UnitedHealthcare for 2023 for the fifth consecutive year. We reached a three-year contract agreement with Humana, which includes reimbursement on the 4Kscore Test, and negotiated a new amendment with Cigna for additional CPT code coverage.
We also reached an agreement with CareSource, which will open up the Ohio, Georgia, Indiana, Kentucky, North Carolina, Arkansas, and West Virginia markets, among others. We have also reorganized our commercial team based on three regions: the Northeast, the Southeast, and the West. This structure will allow us to more effectively address growth opportunities aligned with the local healthcare industry and local market conditions in each region. We continue to focus growth efforts in specialty diagnostics and health systems, with growing pipelines in both, and begun to develop services for pharmaceutical industry clients. In oncology, for example, we've seen volume growth predominantly led by our molecular genomics, OncoCyte and OncoCyte Advanced portfolio, which have been well-received and are growing in volume and scope of services.
In women's health, last quarter, we introduced CINtec PLUS Cytology, which is the only FDA-approved triage test that uses HPV dual biomarker technology to triage women with HPV-positive results, with test orders steadily increasing in the second quarter. We also continue to see strong volume growth off Overa (OVA1plus), a blood test that detects ovarian cancer risk. In women diagnosed with a pelvic mass, we have a planned surgery. Our urology segments remains focused on marketing our proprietary 4Kscore Test, which now is included in the American Urological Association clinical guidelines for urologists. Our expanded health systems commercial team continues to build our hospital and health system business line by increasing our reach in hospital laboratory management, outreach, and reference work, creating meaningful and collaborative solutions that address the challenges many hospitals and health systems are facing currently.
In summary, as we keep a disciplined approach to improve margins performance, we're seeing steady progress on our path back towards profitable growth. I will now turn the call over to Adam Logal to discuss our second quarter financial results. Adam?
Adam Logal (SVP and CFO)
Thank you, Elias. Starting with our pharmaceutical segment, revenue increased to $138.4 million for the second quarter of 2023, from $123.1 million for the comparable period of 2022. This increase reflects the $90 million milestone payment due from Pfizer related to the approval in the U.S. for NGENLA, during the second quarter of 2023, versus $85 million in milestone payments from Pfizer for the approvals of NGENLA in Japan and the European Union during the 2022 quarter, as well as higher gross profit share payments from Pfizer during the quarter. Revenue from Rayaldee and our international pharmaceutical businesses increased by $7.6 million, reflecting improvements in overall prescriptions and net price, as well as gains from currency exchange in Chile and Mexico.
Costs and expenses for our pharmaceutical segment were $74.7 million for the second quarter of 2023, compared to $67.7 million for the 2022 period. Research and development expense for the second quarter of 2023 were $17.5 million, compared with $14.8 million for the 2022 period. This increase reflects activities from our ModeX development programs, partially offset by decreased spending for our NGENLA development activities. The resulting operating income for the quarter ended June 30th, 2023, was $63.6 million, an $8.2 million improvement from operating income of $55.4 million for the second quarter of 2022. Amortization expense related to intangible assets was $16.5 million and $16.7 million, respectively, for the 2023 and 2022 quarters.
Moving to our diagnostic segment, we reported revenue for the second quarter of 2023 of $127 million, compared to $186.8 million for the 2022 period. This decline primarily reflects lower COVID testing volumes. As Elias discussed, our focus at BioReference remains to identify profitable growth verticals and to maximize operating efficiency. We've strategically invested in additional commercial resources in our higher growth specialty verticals and expect to begin yielding returns on those investments during the second half of 2023. We continue to execute our Reach Expense Reduction program at BioReference, and as Elias discussed, we have also identified a number of near and medium-term growth programs that we continue to expect through the balance of the year.
Operating expense for our diagnostic segment was $44.3 million for the quarter, compared to $57.5 million for the prior year. Amortization and depreciation expense included an operating loss, were $8.6 million and $10.2 million, respectively, for the 2023 and 2022 periods. Turning to consolidated financial results for the second quarter, we reported operating income of $7 million, compared with an operating loss of $10.7 million for the 2022 quarter. Net loss for the second quarter of 2023 was $19.6 million, or $0.03 per share. This compares to a net loss of $101.7 million, or $0.14 per share, for the 2022 quarter.
Net loss for both periods was negatively impacted by the mark-to-market losses from GeneDx's stock price declines of $19.9 million and $71.2 million, respectively, for the 2022 and 2023 periods. As we look at the current quarter, we are providing financial guidance with the following assumptions. For our pharmaceutical segment, we have assumed that the U.S. region for NGENLA will be in the gross profit share commencing in September, as Pfizer's U.S. launch is expected to begin in late August. During the first quarter of 2023, the European region shifted to a gross profit share, and going forward, both the European region and Japanese regions will result in gross profit share consisting of GENOTROPIN and NGENLA. For the first six months of 2023, Pfizer reported approximately $222 million of global GENOTROPIN sales.
We assume a stable foreign currency exchange for our ex-U.S. pharmaceutical businesses. We have seen a 10% favorable impact on our businesses over the last 12 months. For costs and expenses related to R&D, we expect to wind down the clinical operations of NGENLA for the pediatric indication as quickly as possible, with final clinical site closure visits occurring now through the first half of 2024. The decreases are expected to be offset by increased R&D activities related to our ModeX development programs that Elias discussed. Regarding the assumptions for our diagnostics segment, we assume COVID testing volumes will remain an insignificant portion of our overall testing volumes.
We have also assumed consistent core testing volumes, with growth in our higher-margin oncology and urology specialty lines, as well as a slight increase in the average per-patient collection amounts due to our revenue cycle management initiatives. As a result, we expect the following for the third quarter of 2023: Total revenue between $165 million and $180 million. This includes revenue from services between $126 million and $135 million, revenue from product sales between $32 million and $36 million, and other revenue between $5 million and $10 million, inclusive of the estimated Pfizer gross profit share.
We expect the Q3 2023 costs and expenses to be between $240 million and $250 million, including R&D expense of $21 million-$24 million and depreciation and amortization expense of approximately $26 million. That concludes our prepared remarks. Thank you all for your attention. Now, operator, let's open the call for questions.
Operator (participant)
We will now begin the question-and-answer session. To ask a question, you may press Star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press Star, then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Maury Raycroft from Jefferies. Please go ahead.
Speaker 10
Hi, this is Kevin on for Maury. Congrats on the quarter and thanks for taking my questions. First question on the NGENLA profit share. I know you mentioned that this would come about likely in September. Do you know when we could get, you know, more details on the agreement there? Then also, you know, your latest thoughts on when we could break out the NGENLA revenue. Thank you.
Adam Logal (SVP and CFO)
Thanks, Kevin, for the question. I, you know, we guided the total revenue coming from the profit share lines to be between $5 million-$10 million for the third quarter, which is pretty conservative, given that, you know, Pfizer's really just gonna start launching in the U.S. region in the next couple of weeks here. As that continues to develop, we'll provide some better purviews into that. I think, you know, from our overall guide, we've, you know, we've talked about, you know, the total potential opportunity is significant. Just in these early days, it's difficult for us to be very specific on how Pfizer's going to launch the product.
Speaker 10
Okay. yeah, thanks, Adam. Just one on the diagnostics business. You mentioned returning to profitability in the near future. Are you guiding more specifically in that regard, in terms of maybe by the end of this year or by early next year? In terms of returning to profitability, are you also guiding to return to growth as well? Thanks.
Adam Logal (SVP and CFO)
Elias, I don't know if you want any, go with any comments, and I can add in as well.
Elias Zerhouni (Vice Chairman and President)
Well, yeah, sure. I mean, our plans are to basically reach break even by the end of the year, beginning of 2024, and then have profitable growth in 2024. The question you asked about growth, as obviously the key to the success here is continuous growth. Yeah, we're not depending just on cost reductions. We're also, as Adam mentioned, we have made investments actually in the commercial realm and in focused new verticals, like the pharmaceutical industry, which I know well, which is a large potential, I believe, and we're working on it, as well as the health systems business line.
Adam Logal (SVP and CFO)
Maybe I'll just add, you know, on our guide here, we guided $126 million-$135 million against the, you know, the second quarter, which reported $127 million. From that perspective, Kevin, we do see, you know, there's some upside here in the near term, and hope to Elias's point, continue to build on that into the future quarters.
Speaker 10
Makes sense. great. Thanks for answering my questions.
Operator (participant)
Our next question comes from Jeffrey Cohen from Ladenburg Thalmann. Please go ahead.
Jeffrey Cohen (Analyst)
Go ahead. Thank you all for taking our questions. Firstly, Adam, could you break out for us service revenue, the cost of service revenue and the cost of product revenue? I actually see your queue just hit momentarily.
Adam Logal (SVP and CFO)
Yeah, the queue is out there. I can, I can break it down for you, Jeff, if you need.
Jeffrey Cohen (Analyst)
It's in the queue, yes?
Adam Logal (SVP and CFO)
Yeah, it's in the queue.
Jeffrey Cohen (Analyst)
Okay, perfect. Could you talk, anyone there, a little bit about the OVA1plus test and perhaps some of the traction or pricing or geographical presence that you're generating thus far?
Elias Zerhouni (Vice Chairman and President)
Yeah, OVA1plus, you know, is growing, quite, quite a bit. Basically in our catchment area at this point, where our sales force is, is present and our women's health presence is strong. I cannot give you specific numbers, but I can certainly follow up with you on that.
Jeffrey Cohen (Analyst)
Okay, that's helpful. Any commentary specific to Rayaldee? I saw 7.7 for the quarter. Any outlook or guidance there on revenues or prescriptions or growth?
Adam Logal (SVP and CFO)
So we didn't get go specific, but it has continued. Elias did call out the year-over-year prescription growth of just below 6%. I think, you know, we're continuing to see that, that build. Consistent with prior years, we see the net reimbursement improve throughout the year for Rayaldee. We should see continued growth sequentially, but we didn't, we didn't call it out any specific guide there.
Elias Zerhouni (Vice Chairman and President)
Just a little clarification. It was 6% quarter on previous quarter, Q2 over Q1.
Adam Logal (SVP and CFO)
Right.
Elias Zerhouni (Vice Chairman and President)
Not previous year. Yeah.
Jeffrey Cohen (Analyst)
Okay, got it. That's helpful. Adam, I see it in the queue, the revenue from services and products broken out. That's helpful.
Adam Logal (SVP and CFO)
Okay.
Jeffrey Cohen (Analyst)
Any commentary on margins? Should we expect with some cost reductions to see margins improve on the service side over the balance of this year, or that's more of a 2024 issue?
Elias Zerhouni (Vice Chairman and President)
We're working on improving the margins this year. I mean, as you know, we've I just mentioned, we've reduced the headcount by 7%. We're looking at multiple areas where margins need to be improved. We have, you know, renegotiations with payers as well and, and pricing review, as well as contribution margins reviews. My expectation is to, you know, narrow the margins, improve the margins to narrow and, and, and get to break even, hopefully at the end of the year, beginning of first quarter or first quarter of 2024.
Jeffrey Cohen (Analyst)
Okay. Then lastly, Adam, okay for us to use on the cash, the $1,081 plus the $90-
Adam Logal (SVP and CFO)
Yep.
Jeffrey Cohen (Analyst)
Expected this month, I think?
Adam Logal (SVP and CFO)
Yeah, that's right.
Jeffrey Cohen (Analyst)
Okay, perfect. That does it for us. Thank you very much for taking the questions.
Adam Logal (SVP and CFO)
Thanks, Jeff.
Elias Zerhouni (Vice Chairman and President)
Thank you, Jeff.
Operator (participant)
Our next question comes from Yi Chen from HC Wainwright. Please go ahead.
Chase Knickerbocker (Analyst)
Hey, this is Chase on behalf of Yi Chen. Congrats on all the progress. My first question is on ModeX. Any color on the type of cancer indications that you would like to target next year in the phase 1?
Elias Zerhouni (Vice Chairman and President)
We have 2 programs that are the most advanced. One is for solid tumors, and it's going to, you know, be, be tested against a basket of solid tumors to try to see where we get the most response. You know, the solid tumors, you know, prostate cancer, gastric cancer, pancreatic cancer, and, you know, non-small cell lung cancer. I can't tell you which one will emerge or which ones will emerge, but that's the, the trust of the program on solid tumors. We have a program on, on liquid tumors, leukemias, and lymphomas, which is a, a parallel program that also will emerge in the clinic, hopefully as early as possible in 2024.
We think by the end of 2024, we'll have 2 programs in, 2 cancer programs in the clinic.
Chase Knickerbocker (Analyst)
Thank you. The other thing on your diagnostics business, I know you mentioned some of the cost-cutting steps in your prepared remarks. I'm sorry if I missed it, but could you highlight some of the other growth initiatives that you have planned for that business unit?
Elias Zerhouni (Vice Chairman and President)
Sure.
Chase Knickerbocker (Analyst)
I know you mentioned a few, but is there any important ones that we need to know?
Elias Zerhouni (Vice Chairman and President)
I mean, basically, we're doing a full review of the business and its mechanisms. In addition to cost reduction, we're also looking at revenue improvements on the business we have. All right? That's the revenue cycle management initiative. That actually is quite promising because it turns out that if you look at the way we were, you know, capturing revenues, we had a quite a significant loss in terms of billables due to incomplete CPT codes, ICD-9, ICD-10 codes, and pre-authorization, which is a common strategy that payers are using. We put countermeasures to that, and it's paying off. In addition, the company never really focused on point-of-care collections like copay. If you look at the number of successions we do, just capturing a few dollars makes a huge difference.
That's, if, if you will, on, on, on rightsizing the, the spend versus collections that we make, okay? The second major thrust is obviously growth. When you look at the growth, we've grown in oncology, we've grown in, in women's health, and we've continued to focus on these specialty services. The one that's emerging, and we'll make some announcements, I hope, over the next few weeks, is large systems that really are facing very difficult margins. We, for example, manage now the Westchester Medical Center Laboratories and capture an increasing share of the outreach business with that. We are essentially increasing the funnel. We increased our sales force in that category from 1 to salespeople before, to 5, 6 today.
We're focusing on the regional approach because, as you probably know, the situation of hospitals and the need for laboratory management, outreach services, reference, is very different from region to region. We are definitely looking at growth in the specialty businesses and the health systems, and that's ongoing. We started a new line of potential revenue, which is the pharmaceutical business, given the fact that we have a laboratory which can do actually biomarker research as well as data that is very valuable to pharmaceutical biotech companies. We're exploring that. Obviously, I cannot quantify it at this point, but it's certainly a promising line based on my knowledge of having been a head of R&D in a major pharma company.
I know that there is a huge need for that, of having a reliable laboratory that supports clinical trials and development as well as research. Those are the multiple lines of activities we're pursuing on a large front, and I would say, so far, so good.
Chase Knickerbocker (Analyst)
Excellent. Thank you, and, congrats again.
Operator (participant)
Our next question comes from Edward Tenthoff from Piper Sandler. Please go ahead.
Edward A. Tenthoff. (Analyst)
Great. Thank you very much. My congratulations on in getting the approval. Very exciting, I know it's been a long, long pass coming, so that's great to see. My question, I say just a real quick housekeeping one. Adam, I missed what you said. I think it was about R&D, maybe 24 to... What was the top end of the guidance?
Adam Logal (SVP and CFO)
Hey, Ted. It's 21 to 24.
Edward A. Tenthoff. (Analyst)
21 to 24. My bad. Awesome. Also just a quick accounting question. I don't believe so from the guidance that you mentioned, the $90 million milestone won't be recognized in the P&L in any way. It's really just gonna go straight to the balance sheet. Is that correct?
Adam Logal (SVP and CFO)
it was in the P&L in Q2, and it's, so we have a receivable recorded for it. We'll get the cash.
Edward A. Tenthoff. (Analyst)
Oh, good. I, I didn't see that yet. Awesome. Great. Very exciting, and looking forward to seeing growth from that product and also great progress from the from the ModeX work. Thank you.
Adam Logal (SVP and CFO)
Thanks, Ted.
Operator (participant)
Our next question comes from Michael Petusky from Barrington Research. Please go ahead.
Michael Patusky (Analyst)
Adam, what, and I may have missed this if you, if you reminded people, earlier, what's the cost takeout so far at BRL to this point?
Adam Logal (SVP and CFO)
Yeah. So far this year, you know, we had set a target of about $40 million, and we're about at the halfway point for that, probably a little bit ahead. Elias, I don't know if you have the specific number, but I know as last week we tracked it, it was just beyond the halfway point there, with more to go throughout the rest of the year.
Elias Zerhouni (Vice Chairman and President)
That is correct. Remember, we took out, $100 million before that.
Michael Patusky (Analyst)
Okay. All right. Given, given that, you know, and I, I just flipped through the, the queue. I mean, it looks like you lost $44 million at the operating line in that business, which was actually sequentially worse than Q1. It, it just feels like you're nowhere close to being, you know, sort of, on track to get to break even in that business by year-end. Can, can, can you sort of bridge? I, I, and I'm hearing the growth programs and the continuing expense reductions, but, like, where, how does that happen? Thanks.
Elias Zerhouni (Vice Chairman and President)
Well, I think that the, you know, maybe Adam could tell you some of the numbers in Q2 have one-time expenses due to reduction in, in people. You know, you have, you know, the WARN Act, you have to have one-time costs accounted at the time you do that. The figure that you're mentioning is a little bit inflated because of these one-time actions that we took to reduce costs, which are costly in themselves. It's a one-time item. If you really correct for that, you'll see that the progress is much greater than that. When you look at the, you know, Q3, Q4, and Q1 2024, 'cause I, I can't tell you where we will land.
We basically have to achieve a $10 million-$12 million gap closing, gap closing between the, the revenue line and the expense line. We think we can reach that. Both from the reduction of costs, which we have clear line of sight of what we need to do, plus increasing capture of revenues of the existing business as we speak. The third is obviously the growth, the profitable growth that we are trying to not only grow, but also refine and, and direct towards higher contribution margins, business lines.
Adam Logal (SVP and CFO)
Yeah, I'll, I'll just add in, Mike, if you don't mind. You know, there's a couple of additional things to think about. Elias talked about some of the revenue cycle management initiatives that are going on at BioReference, and those, those are, of course, drops straight to the bottom line. There, there's not a significant cost takeout associated with those. As we make good progress on those, we've initiated a significant number of the programs in the first half of the year and expect to start to realize the benefits from that as the year continues to progress. The early days, as Elias mentioned, have shown promise. Assuming we continue to, to execute there, that's, that's one area.
You know, the volume growth that we're targeting to, to also bring us in line, is needed. You know as well as I do, that BioReference in any lab business is very, very fixed cost in nature, and you've got to bring volumes in to absorb those fixed costs. You know, the incremental contribution for an additional dollar of revenue is it absorbs, you know, $0.80 or so is absorbed into the fixed cost structure, and only 20% variable cost. Meaningful contributions from the growth initiatives that Elias walked through earlier. Finally, you know, the bene- that we also talked about the non-recurring costs that occurred during the second quarter and really in the first half of the year, as we right-sized the organization.
We're gonna see those benefits as we continue on a monthly basis throughout the remainder of the year.
Michael Patusky (Analyst)
Yeah, Adam, could I just ask you, so on that sort of that one time, non-recurring stuff, I mean, if you were to give yourselves full credit for that, like, is the $44 really something closer to $30 or $35, or like, the loss at the operating line? I mean, what magnitude are we talking about in terms of non-recurring?
Adam Logal (SVP and CFO)
Yeah, during the second quarter, we didn't get the benefits from the non-recurring costs, 'cause they most of them came in late in the second quarter. It's in the magnitude of about $8 million on a gross basis.
Michael Patusky (Analyst)
So that, that takes you down to 36. I guess, let me ask this question: What level of revenue do you have to be at based on what you think you take out in terms of costs and the benefits of revenue cycle management? What level of revenue do you have to be at, at the end of this year, early next year, in that business to sort of be break even? What's the gr-.
Adam Logal (SVP and CFO)
Yeah.
Michael Patusky (Analyst)
What's the top-line growth assumption that gets you there?
Adam Logal (SVP and CFO)
It comes... Again, it's not just volume, Mike. Volume growth has got to come, but the dollars associated with the growth is probably more important to get us to break even. It's going to depend on how successful we are on each of those programs. You know, we would sit back and say, if we can achieve our guidance that we've provided, the top end of our guidance that we provided in this quarter, and continue to see that level of growth, it'll get us to break even, as Elias mentioned, you know, late fourth quarter, early first quarter.
Michael Patusky (Analyst)
Have to be sort of a $600 million annual run rate?
Adam Logal (SVP and CFO)
That's right.
Michael Patusky (Analyst)
Okay. All right. Thank you so much. That's helpful. I really appreciate it. Thanks.
Elias Zerhouni (Vice Chairman and President)
Our next question comes from Yale Jen from Laidlaw & Company. Please go ahead.
Yale Jin (Analyst)
Good afternoon, thanks for taking the questions. I apologize, I came in late, so if some of the question has been answered, I apologize for re-asking that. My first question is in terms of the in NGENLA, in terms of the revenue, going forward, when you guys may be able to start to break it, break it to a separate line in reporting from, from the P&L?
Adam Logal (SVP and CFO)
Yeah. Yale, thanks for the question. Again, we once it becomes material, we're gonna start talking about it. It's in the $5 million-$10 million guide that we had for our other revenue lines, so it's included in there, so you can get the scale. We think, you know, with Pfizer's launch coming in the next couple of weeks, you know, it could be as early as next quarter that we start breaking it out, but at this point, we haven't.
Yale Jin (Analyst)
Okay, great. Maybe just one more question here in terms of ModeX. The collaboration with the Merck for the vaccine, could you give us a little bit update in terms of where things are? Is there any projections as when this might start the human studies? Thanks.
Elias Zerhouni (Vice Chairman and President)
Thank you. With Merck, we're working very well and collaborating, I would say, in a very effective way. As you know, we received an upfront payment, and Merck covers the cost of our current work, which is designed to bring the product to an IND together. There are some unknowns that relate to the choice of adjuvant for the vaccine that we need to test out. Those can be short or can be, you know, 6 months, I don't know. That's the unknown. Clearly, if you look at the natural evolution of such a program, we should be in the clinic by next year, for sure, in my mind.
This is, you know, plus or minus 6 months or plus or minus 3 months, depending on how things are going, but it's going well. That's what we're hoping for, to get into the clinic as soon as we can.
Yale Jin (Analyst)
Okay, great. Well, appreciate it. Again, congrats on the progress and look forward to speaking with you guys soon.
Elias Zerhouni (Vice Chairman and President)
This concludes our question and answer session. I would like to turn the conference back over to Dr. Phillip Frost for any closing remarks.
Phillip Frost (Chairman and CEO)
Well, I'd like to thank you all for attending the conference. We look forward to meeting with you again at the end of next quarter. Thank you all again.
Adam Logal (SVP and CFO)
Thank you.
Elias Zerhouni (Vice Chairman and President)
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.