I have managed to resolve this. Thought it might be worth sharing if anyone else encounters similar issue.
It is important that the protected models and the model that references the protected model are created in the “exact” same versions of MATLAB. I was using 9.3.0.948333 (R2017b) Update 9 but the protected model, provided by 3rd party, was created using standard R2017b. Once they moved to Update 9 and regenerated the protected model, I was able to include it in my setup without any issues.
MATLAB R2017b updates – https://uk.mathworks.com/downloads/web_downloads/show_updates?release=R2017b