Oncocyte Corporation

Good day, and welcome to the Oncocite conference call to discuss the second quarter 2022 financial results. Today's call is being recorded. At this time, I would like to turn the call over to Caroline Corner with Twig Investor Relations.

Please go ahead.

Thank you, Operator, and thank you, everyone, for joining us on today's conference call to discuss Oncocite's second quarter 2022 financial results. If you have not seen today's financial results press releases, please visit the company's website on the Investors page. Joining me on today's call are Ronnie Andrews, President and Chief Executive Officer, and Anish John, Chief Financial Officer. I would like to remind you that during this conference call, the company will make projections and forward-looking statements regarding future events. Any statements that are not historical fact are forward-looking statements. We encourage you to review this company's SEC filings, including, without limitation, the company's Forms 10-K and 10-Qs, which identify the specific risk factors that may cause actual results or events to differ materially from those described in these forward-looking statements. These factors may include, without limitation, risks inherent in the development and or the commercialization of potential diagnostic tests, uncertainty in the results of clinical trials or regulatory approvals, the capacity of Oncocyte's third-party supply blood sample analytics system to provide consistent and precise analytic results on a commercial scale, the need to obtain third-party reimbursements for patients' use of any diagnostic tests the company commercializes, our need and ability to obtain future capital, the maintenance of IP rights, risks inherent in the strategic transaction, such as failure to realize anticipated benefits, legal, regulatory, or political changes in the applicable jurisdictions, accounting and quality controls, greater than estimated allocations of resources to develop and commercialize technologies, or failure to maintain any laboratory accreditation or certification, and uncertainties associated with the COVID-19 pandemic and its possible effects on our operations. Therefore, actual outcomes and results may differ materially from what is expressed or implied by these forward-looking statements. Oncocite expressly disclaims any intent or obligation to update these forward-looking statements, except as otherwise may be required under applicable law. With that, I'll turn the call over to Ronnie.

Thanks, Caroline, and welcome, everyone. Today, I'll begin by reviewing recent decisions and actions we're taking to reduce our operating expenses and cash burn, enabling us to weather the current market conditions while still delivering on the important product launches that will deliver significant shareholder value. Beginning in Q1, our leadership team began working on a reprioritization of our product investments to identify ways to reduce our cash burn, while preserving the important short-term value-creating programs. That reprioritization was completed in Q2 and allowed us to right-size the resources required to deliver on the new priorities as we enter the second half of 2022. The resulting savings are expected to reduce our headcount carrying costs by more than $4.5 million when annualized. When combined with the operating savings from the reprioritization process, reduced hand count, and the imminent modernization of some of our assets through licensing and strategic activities, we anticipate being able to reduce our annual operating costs by over $12 million over the next year and have improved line of sight to how our cash will last into 2024, but still allowing us to deliver on Vitagraph, Determa IO, and Determa CNI product launches. In order to allow us to divide and conquer with a lean organization, I'm happy to announce that Guy Sapolsky has been promoted to president and COO, and Anish John has been promoted to the role of CFO from his previous role as interim. These moves will allow me to focus on corporate business development and best relations while they operate the company day to day. Both promotions are well-deserved, and I look forward to working with this core team to deliver Oncocyte through the current market storm and emerge as a leaner, focused company delivering products that fulfill our mission. I'd like to start today's progress update discussing our compelling revenue opportunity in transplant rejection monitoring. For those who have been following the story since our acquisition of Chronix Biomedical, you'll also notice that we've rebranded the test from Therasure to Vitagraph, branding we believe is more reflective of the intended use in transplant. As you likely recall, last fall we set out to complete the technical transfer of the test from our German R&D team into our CLIA lab in Nashville and then validate our laboratory test for liver patients with an ambitious goal for the end of the first half of 22. I'm very proud of the focused effort by our CLIA lab team and the transplant R&D team in Germany for the combined effort to deliver on this important milestone ahead of schedule in early April. This expedited effort also allowed us to complete the clinical validation required to submit our dossier to CMS for a liver reimbursement, which we accomplished in late April. We then followed that submission with our kidney dossier in late June. With our liver test now clinically validated, we have entered our early adopter program phase of launch and have already signed on one of the largest liver transplant centers in the U.S. who will begin sending our first samples later this month. The responses from key opinion leaders have been resoundingly positive. Since today there's no routine molecular monitoring test in use to monitor for rejection of a transplanted liver, we're encouraged by the KOF interest and believe our tests will become very important to the liver transplant community. Our vast experience in polymerase chain reaction, or PCR, has allowed us to develop a streamlined workflow delivering an incredibly efficient digital PCR application that allows us to consistently process and report patient monitoring results within one to two days when we launch the product. We have now confirmed with numerous KOLs and liver that our turnaround time is indeed expected to deliver the fastest donor-derived cell-free DNA monitoring results in the industry. This, of course, is something we set as a goal in our test workflow redesign and a product attribute that we believe will differentiate Oncocyte from the competition. We've also made progress on the IVD process for creating a kit to democratize the transplant market and will soon begin development of a kitted version of the monitoring test across liver, kidney, and ultimately heart. We're fortunate to have several instrument systems that work with our assay and are working with the best platforms through feasibility to ensure we have the best results and cost position for our democratization efforts. For strategic reasons, we will not be speaking specifically about our potential instrument partners platform performance until we're ready to publish and announce the data. But we are on track for completion of feasibility and trial initiation by early 2023. There are several milestones to watch for our liver program coming in the next few months as we commercialize our vitagraph products. First, we'll continue to onboard KOLs from the liver transplant community as part of our early adopter program. Second, we expect reimbursement decisions from CMS this fall. Third, we expect to initiate a full market launch of vitagraph liver and kidney in Q4 once reimbursed. And finally, fourth, we plan to complete platform feasibility for the IBD kit product by end of year and site enrollment for the clinical trial so that we can commence that trial in early 2023. Now let's turn next to our flagship oncology program, DetermaIO. To remind you, this is our gene expression test to help physicians assess tumor microenvironments to determine which patients are suitable candidates for immune oncology therapies. Our early adopter program continues to underscore to us the need for this test across a slate of cancers. Previously, we've shared the valuable insights as to the importance of DETERMA-IO tests in early-stage triple negative breast cancer and late-stage non-small cell lung cancer. We now have solid data from various meetings, including results from the NeoTrip randomized trial in TMBC that was presented at ESMO last fall. Then, in second quarter, at the AACR meeting, we presented data supporting its use in metastatic bladder cancer, our third tumor type, and now have had our peer-reviewed paper accepted for publication. We see this as a major milestone and feel well-positioned as we prepare DETERMA-IO for CMS submission for reimbursement this fall. Adding to our growing data sets, in June, at the American Society of Clinical Oncology, or ASCO meeting, we released results from the Gono Clinical Trials Group, where DETERMA-IO was tested as a biomarker on the Atizo tribe study. As a reminder, Atizotribe is a randomized clinical trial on metastatic colorectal cancer where patients receive placebo or the standard of care plus the roast drug Atizo. If you hadn't had a chance to review the data and the subsequent comments to the Atizotribe principal investigator, I encourage you to do so. The key takeaway is that DetermaIO found a new patient population in metastatic colorectal cancer that no other biomarker found. And today, these patients are not eligible for immune therapy. DetermaIO is expected to expand the market for ICI use in metastatic colorectal cancer and may allow for enrollment of a whole new population of patients into a life-saving treatment protocol. Also at ASCO, we released data on the TermaIO and metastatic triple negative breast cancer, or TMBC, using the Merck drug, Keytruda. The data presented at ASCO confirmed all the previous dataset findings. The TermaIO has demonstrated superior accuracy to predict response to immune checkpoint inhibitor therapy and is agnostic to which branded immune checkpoint inhibitor a physician uses. Finally, at ASCO, we released new data in gastric cancer, the third leading cause of cancer death outside of the U.S. We feel that this indication is important now that we have solidified our platform and channel partner for rest of world markets and are already working on the kitted version of DETERMA-IO. DETERMA-IO has now been validated in over 1,100 patients in six tumor types and across all four major immune therapies. Our early adopter program continues to provide valuable use cases for CMS submission and market launch, and our volumes have continued to double each quarter during our limited launch. EAP clinicians are reordering the test for multiple use cases across multiple tumor types, and we remain incredibly enthusiastic about the future of Determa IO. In Q2, we also began refining the priorities for our kit strategy with our platform partners. We made a decision to focus these relationships on short-term ROI projects that require less investment but still have significant market impact. The two product efforts we've settled on are a kitted version of DETERMA-IO for submission for regulatory approval in the EU and ultimately here in the U.S., and our Vitagraph digital PCR transplant monitoring test for liver and kidney for U.S. FDA submission. We've already initiated the work to move both projects forward to keep us on track to meet the aggressive timelines we've set for our IBD development team. We look forward to updating you on our progress in this incredibly important strategic effort as we join you in future calls. Despite the ongoing macroenvironment challenges in the second quarter, we continue to make solid commercial progress with the TermaRx, our lung cancer stratification tests. Since its launch mid-2020, the TermRx has now touched well over 1,100 patients' lives. These patients had stage 1 tumors and without our test information, may have gone untreated and statistically, half of them may not be with us now. Recently, we were introduced to one of the first patients to utilize the test when it was first developed and in use prior to our acquisition. Jamie was only 34 years old when diagnosed with early stage non-small cell lung cancer. Jamie told us her greatest fear at the time was not being able to be there for her kids, not being able to be there for their milestones and seeing them grow up, and not being able to grow old with her husband and see her grandkids someday. Her surgeon ran to Term Rx to see if she was high risk for recurring tumor. When it came back positive, she said she didn't hesitate to opt for the single round of chemo. Today, Jeremy remains cancer-free after 10 plus years, enjoying life with her family, celebrating anniversaries and graduations, and is a fantastic advocate for Determa Rx. She believes every early stage lung cancer patient deserves to know that they're high risk for recurring metastatic disease. It's stories like hers that inspires our team to continue on our mission. I encourage you to watch Jamie's story on our website. DetermineRx is now the standard of care in large lung cancer surgical programs like Florida Oncology and others, and continues to gain momentum in its usage. I'm pleased to report that in second quarter, DetermineRx sample volumes were 66% above prior year, driving us towards our stated goal of doubling 2021 volumes and revenues here in 2022. We're also able to expand our pool of onboarded physicians, which now stands at 549 practitioners, which is up 16% year over year. In sum, we're really pleased with the traction our small but extremely effective sales team has secured. And, of course, we're thrilled that Oncocyte is positively impacting treatment plans and outcomes for lung cancer patients. In closing, I want to reemphasize, when you combine the cost reduction activities I mentioned earlier with the anticipated attractive gross margins of Vitagraph and Determa IO revenue streams in 2023, you can start to understand our confidence and our ability to bring Oncocyte through the challenging market environment leaner and stronger. Some key revenue-based milestones to keep an eye on for the next six months include the anticipated receipt of reimbursement for Vitagraph and the subsequent full market launch of our test, expected submission of Determa IO and TX for reimbursement, and planned monetization of assets through strategic licensing of our tissue-based assays. I'm grateful for your support as we advance our products through the various development cycles to deliver on our mission. At this point, I'd like to turn the call over to Anish John to review our financials. Anish?

Thanks, Ronnie, and hello, everyone. Our consolidated revenues for the second quarter of 2022 were approximately $2.1 million, up $0.7 million quarter over quarter, and a slight increase as compared to the same period a year ago. Second quarter revenues associated with the term of RX were $0.8 million, down $0.2 million sequentially, and up $0.2 million year-over-year. We received $1 million in licensing-related revenues in the second quarter from the final Burning Rock milestone payment. Our pharma services business generated $0.2 million in the second quarter, a decrease of $0.1 million quarter-over-quarter, and an increase of $0.1 million year-over-year. As we have discussed previously, revenues in pharma services depend on our partners' ability to enroll patients for trials which continue to face headwinds and will likely continue to fluctuate from quarter to quarter. We do have a pipeline of work from our diagnostic development partners, QIAGEN and Thermo Fisher, which we believe will grow and be more predictable in future quarters. Cost of revenues for the second quarter were approximately $2.4 million, including $1.4 million from the cost of diagnostic tests and testing services we perform for our Determa Rx and Pharma Services customers, providing revenue deliverables under our license agreements, and $1 million in non-cash amortization expenses of Determa Rx and Pharma Services related intangibles. Research and development expense for the second quarter of 2022 was $5.6 million, an increase of approximately $3 million from the same period a year ago. The increase in R&D expense was related to site startup costs for our PODMA trial for DETERMA-RX and headcount as we prepared to begin the IVD development in order to kit DETERMA-IO and vitagraft liver and kidney to fulfill our platform partnerships. We also continued R&D activity to support ongoing clinical trials to gain statistical power to our current DETERMA-IO datasets to ensure success as we submit to CMS for reimbursement. Additionally, we completed the CLIA validation for our new Vitagraph product offering in preparation for the Q3 launch of our new transplant business. Sales and marketing expense for the first quarter of 2022 was $3.5 million, an increase of $0.9 million year-over-year, primarily attributable to an increase in headcount and continued ramp in sales and marketing activities to prepare for commercialization of our transplant business, as well as support the commercialization efforts of Determa IO and Determa RX. General and administrative expense for the second quarter of 2022 was $5.5 million, a decrease of $2.4 million for the same period in 2021, primarily due to one-time acquisition-related costs of Chronix Biomedical in the same period of the prior year. Excluding this one time prior year cost, general and administrative expenses were maintained year over year, inclusive of increases in stock base and cash compensation for our new hires and a standard cost of living increase for many employees. Non-GAAP operating loss as adjusted for the second quarter of 2022 was 11.2 million, an increase of 3.4 million as compared to the same period a year ago. GAAP operating loss, as reported for the second quarter of 2022, was 8.6 million, a decrease of 1.3 million quarter over quarter, and a decrease of 5 million as compared to the same period a year ago. We've provided a reconciliation between these GAAP and non-GAAP operating losses in the financial tables included with our earnings release. For second quarter of 2022, we reported a gap net loss of 8.3 million or 7 cents per share as compared to 10.3 million or 11 cents per share, a decrease of 2 million quarter of a quarter and 10 and a half million, an increase of 2.2 million as compared to the same period a year ago. Turning now to the balance sheet, As of June 30th, we had cash, cash equivalents, restricted cash, and marketable securities of $47.1 million. Early in the second quarter, we raised $32.8 million in net proceeds from an underwritten offering of common stock priced at market. We received the first of two $5 million tranches of preferred stock offering proceeds in the second quarter, with the final tranche expected in the fourth quarter of this year. Additionally, we are currently reviewing several options for non-diluted forms of capital, including capital lease lines and licensing tests in ex-US markets, as well as commercial partnerships and the monetization of certain assets. We feel confident that our current balance sheet combined with these non-dilutive opportunities provide us with sufficient cash to take the company into 2024. Over the first half of 2022, we have proactively prepared for continued market headwinds and reprioritized our investments in our product portfolio by focusing on shorter-term revenue opportunities and instituting a more sequential approach to product development and test launches. Specifically, we plan to reduce the number of clinical trials we invest in over the next 18 to 24 months and rely on the data collected to date to support the submission for reimbursement and any subsequent product launches. We also plan to reevaluate timing of several capital-intensive investments, including the planned Salesforce expansion to launch Determa TX and Determa IO. The expense reductions combined with the anticipated revenue growth once our tests receive reimbursement is expected to have an immediate impact on reducing our cash burn. Since the end of the first quarter, we have right-sized our organization to match the more focused priorities and have taken a definitive step to reduce our headcount carrying costs by over $4.5 million on an annualized basis. In Q3, we expect to incur a severance charge of approximately $2 million as a result of these actions. Net cash used in operations for the quarter was $11.3 million. Net cash used in operations decreased sequentially due to focused efforts to control hiring and optimize our use of cash, primarily by reducing clinical trial spend and marketing investment beyond the $1 million milestone payment from the Burning Rock Licensing Agreement. In summary, management has taken numerous actions in the first half of 2022 to focus investments and reduce our cash burn without impacting the long-term potential enterprise value of Oncocyte. In future quarters, we expect to benefit from the anticipated wind-down of several studies and trials, the right-sizing of the organization to better match the new prioritization and revenue growth from our high-margin major product launches planned for the coming quarters. We remain confident that the combination of these activities will allow us to enter the first half of 2023 with a quarterly cash burn rate below 10 million, and we expect the burn to decline below 8 million by the second half of 2023. We are committed to weathering the current market headwinds with a well-constructed plan that we believe will position us to deliver on critical product launches over the next six to eight quarters. That concludes my remarks concerning our financial highlights. Operator, please open the call for questions.

Thank you.

At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star and then one on your telephone keypad. The confirmation turn will indicate your line is in the question queue. You may press star and then two if you would like to remove your question from the queue. or what disciplines using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

One moment, please, while we poll for questions. Our first question is from David Westenberg of Papi Sandler.

Please go ahead.

Hi. Thank you for taking the questions here. I really liked all the color here on the transplant, you know, the incremental, you know, submit, this, this, this, all the way to commercialization. So can you just give me some color on what, or maybe rank order, what's under your control versus kind of what's out of your control? And, you know, I'm just trying to think about, you know, what could go wrong in terms of the things that are outside of your control. And then, you know, sticking with that liver and kidney thing, You know, you submit it at two different time frames. Do you expect to receive reimbursement at the same time, or is that going to be laddered the way you reimburse?

Great questions, and thanks for those. Let me start with the last one first. I think it'll be easier. We knew that liver today does not have any tests covered to date, and even though the LCD was written as a somewhat of a blanket LCD for kidney and heart, and those are established pricing at about $2,700 to $2,800. We knew that liver had not been through that process, and so we wanted to bring liver through early so that we could submit liver and go ahead and get the first round of questions which we have already received and have already begun response to. So we received those questions last week. We are answering those questions this week, and we expect to have the return of those questions back to CMS next week. We expect kidney, you know, we always get some questions, so we expect kidney as well. We'll have some follow-up questions, but we don't expect them to be as intense. intensely centered around clinical utility, which is where the liver questions were mostly centered. And so it's important that we have our KOLs who've been very kind and gracious and very excited about what we're doing in liver. They'll be part of our response on the utility, but we don't expect kidney to have as many of those types of questions. And so we submitted them, you know, liver first and the kidney, hoping that we end up somewhere in the September, October timeframe getting responses for both. But you ask what's in and out of our control. And what's in our control right now is we've redone the workflow. It is, you know, I've been doing PCR for, a long time since we incubated it in water baths and i'm really excited about our team what they put together this is a really really solid workflow uh our clear lab workflow uh in the lab is well less than a day and so it's the logistical parts around that that push it over a day uh so we're excited we can control that what we can control is the outreach we've had to the current high-value targeted liver centers which has been response has been very solid there we can control obviously ourselves launch of this and how we how we actually execute on the test performance what we can't control as you've already mentioned is the timing for CMS and Under the blanket LCDs, you guys are well aware of this, but just for everyone on the call, under a blanket LCD, typically, there is a timeframe of 60 to 90 days when you get the review and you get your questions and you get an answer. But given, you know, how backed up Palmetto is and just given the current environment, we did see those questions for liver come in within the timeframe they committed. So we're hoping that we're on those timeframes, but we can't, obviously, we can't predict those timeframes. So hopefully that's a good, thorough answer, David, but that's what we're focused on is execution. And we just hope that when, you know, CMS can respond as soon as they claim they want to. Okay.

Yep. And then maybe let's go back to the liver because, you know, in that answer is implied it's on different timelines. So after submission, I mean, it's not the 60 to 90 days. It's whatever the, I don't know, it's not Palmetto. Yeah, I think it's 50 days.

Yeah, you get 60 days. They typically answer you for the first round in 60 days, and you have a chance to respond, and then they have another 60 days from that point. And so, you know, we got their answers. We're very happy that they got them to us at the timing they did for liver. We're answering our questions this week. They'll get them back next week. And so somewhere 60 days from next week, we hope to hear back from them, if not sooner.

Got it. Okay. I appreciate it. And then, you know, you touched on some changing of roles here. I believe you said you're going to be kind of backing away from everyday operations. I just want to confirm that I heard that correctly. And can you maybe take another layer back in terms of what that means other than just kind of investor relations and biz dev kind of outlook? Can you talk kind of a little bit more about your day-to-day?

Absolutely, Dave. I don't want anyone to get the impression I'm not going to be very active. I am very active. But, you know, we're at a point where we have an incredible operating professional, Gisa Paulson. She, you know, came with all the experience she had from her Roche to Nintec and Exact Sciences years. And it just really is, she's been here since the fall, and we're at a point where from project management, program management, internal operation, lab oversight and all that, she can take on a lot of what I was doing that frees me to do more corporate development work, more time with investors, and certainly more time with strategy and some things that are important. It gives me more time to be in the field. I'm personally going to oversee the transplant launch and program since I have so much product launch experience. And, you know, I'm old and I've been doing this a long time. I've launched a lot of products in the PCR world. So I'm going to be very active with that. And so having Geese will step in to sort of manage the, you know, CLO, she was already doing most of the operations, but she'll take on a little bit more now. And then I'll get to go do more focus on growth of the company and revenue, you know, revenue growth. execution around revenue generating opportunities. And Anish, obviously, we're very excited. He stepped into the interim role for a couple months, and he loved what he was doing, and we loved having him. So he is now going to step in and be full-time CFO, which we're all very grateful for. He has incredible background in operating finance, which is what we need as a company right now.

Got it. All right. I appreciate it. Just because I'm giving that I'm first, I don't want to take any of the questions. I think my next one is going to be really, really short because it's probably me just mishearing something. Did I hear on the term, it's a little bit delayed because you need more patience? I don't know if I heard that correctly in the prepared remarks or not. Maybe I misheard that. Can you just clarify that?

Yeah, let me clarify. DETERMA-IO is on track to submit this fall. We have it powered and we believe in three tumor types. We are waiting on the acceptance of these data in a peer-reviewed publication. That's the last criteria. that we have to check, the box you have to check before we can submit. Those manuscripts are out. We've actually had one accepted, and so we are hoping to see the other two for non-small cell lung and for triple negative get accepted as well. And once those are all three, bladder, TMBC, and lung accepted, we'll go. So we don't need any more statistical power necessarily. We'll always want more statistics. But we are ready for that, but we are not going to. I think the message that we sent last quarter, and, David, just so you guys, as you think about modeling, we're going to go to market with those three indications. We did have a really superior output in colon at ASCO, and we're following up with lots of different opportunities there. But we will need to get more data under colon before we can submit a paper and then add that to the list.

Got it. I appreciate it. Thank you very much. I'll hop out of queue. Thanks, David. Yeah, appreciate it.

My next question is for Mark Mattson of Needham and Company. Please go ahead.

Yeah, thanks for taking my questions. I got a few on Vitagraph, I guess. So, you know, in terms of when you actually launch it, I guess first it's going to be kind of a CLIA test that you're doing in your own lab and, you know, and you'll eventually have a kitted version. So, you know, do you think there's going to be a kind of a difference in terms of you know, how the sales or the rate at which they ramp for the CLIA offering versus the kitted offering. And, you know, is there going to be kind of limited in the early days when you're doing it yourself and then really take off with the kit? Or do you think you could take off pretty strongly just with, you know, the initial launch?

Yeah, the feedback we've gotten from the market is there is no one using liver. Thanks to a couple of the pioneering companies that have sort of created the market in kidney and heart, we benefit from the overflow, if you will, of people knowing how to use these types of tests now in liver. And so when we did our outreach, we got some very positive feedback from some very high-profile centers saying, And so our goal in the early, you know, right now, the early adopter phase, Mike, is to get as many of those sites onboarded as we can to really play through our logistics, our turnaround time, our lab, and we'd ultimately like to get it to within a day or within 24 hours. But that's going to require overnight shifts and logistics that today we're putting in place, but we haven't tested yet. And so ultimately, we think that once we're ready to go full market, hopefully by October, November, when we get reimbursement, the idea would be that we would open it up to all centers and deliver. And assuming we get kidney, obviously, you know, that's a very competitive market. We'll do our best to go after the kidney market. I think the real opportunity for us, though, honestly, we'll create a nice business as a lab-developed test product, but the participation in economics... that are afforded by democratization to the transplant centers themselves and to pathology labs serving transplant centers are significant. And the turnaround time plus those new economics that they don't receive today, because as a central lab, we get those economics, Sharing those economics, we do expect that, and all our market research says that will be sort of the catalytic event for market growth for our kits. And so we'll see how that goes, but we are planning on going full bore with liver, and we do expect a rapid revenue ramp in 23 into 24 on liver before we get to a kitted product.

Okay, got it. And then... In terms of the, I just had a question on something that Anish said on the cash burn. So I think he said it would be under $10 million a quarter and then fall to under $8 million a quarter. But I didn't get the timing on all that and the reasoning that it's going to decline. Is that because you're going to start to have more revenue or? Apologize.

No, it's fine. It's a combination. I'll let Anish give the commentary. It's actually a combination of reductions in headcount that we made recently, reprioritization of projects, and we defunded some things that we were funding. We're winding down some clinical studies now. I think you guys know this, and I've had conversations with most of the most of our analysts who follow us, you don't just go and plug these studies because these are very high-profile accounts, very high-profile key opinion leaders who want to complete the study and then publish. And the last thing we want to do is we have a very, very solid brand of high science amongst the oncology community today, and the last thing we want to do is ruin that. So we are going to continue the current trials that we have going and studies, Those will bleed off over time as you head into next year. So the combination of that with the reduction in headcount, with some party decisions we've made, We'll reduce it to about a $12 million operating expense reduction. And then from there, you add revenue on top of that. And that revenue, even nominal revenue that we've modeled, takes us under $8 million in burn as you enter the second half of 2023. Anish, any comments on that?

Yeah, and just to confirm the timing also, the under $10 million burn rate per quarter is really in the first half of 2023, just so that's clear to you.

Yeah, got it. Okay.

All right. I mean, we're really trying to give you guys incredible transparency and visibility now. I think it's important given the market environment. We went from 13.3 to 11.3 in operating burn, Q1 to Q2. So that was a nice reduction for us based on a lot of stuff we've done internally. We can't do 15% every quarter getting to 10% because we do have a severance charge from the reduction in headcount this quarter as well as we need to bleed off some of these studies. But we're committed to this. We do believe that we've got a line of sight, and modest revenue gets us really significant impact on burn next year once the infrastructure costs as we establish with the new levels.

Okay, and then... Just one on pharma services. I mean, is that, you know, it's running, I guess it was like 300,000 or something. Is that a focus for the company? I mean, is that something that can grow into something more material or is it just more, you know, you have some drug companies approaching you wanting to use your tests and you're kind of playing along with that, but you're not really out there actively trying to build that business?

As part of our reduction in expenses, we did sort of pull back on the commercial. Those are expensive headcount on the commercial effort there. However, we have long-term relationships, most of us, with certain areas within pharma. And we do have two arrangements, one with Kyogen, one with Thermo. that are long-term contracts to do validation verification, what we call DMV, as well as some development work for them. Those projects will continue. And the good news for us is we don't really have a dedicated pharma services lab team. This is the lab team that is in R&D in Nashville and R&D here, doing things around either DIO or doing things around CNI and transplant in Nashville. And so what we do, though, is when we get a project, those folks can flex and perform the pharma project when they need to and when they have time from their activities that they're working on every day because pharma turnaround time is not as essential as a transplant patient turnaround time. So because we have flexibility there, we're able to get pharma work done with the headcount we already have, and it really doesn't mean we have to increase our headcount to grow our pharma business. We do have a nice pipeline of over $2 million of pharma service contracts. Our biggest problem is pharma isn't enrolling patients as fast as we need them to so that we can complete our studies and we can bill for it. That's the big challenge we're having right now.

Okay, got it. Thank you.

The next question is from Thomas Lutton of Lake Street Capital Markets. Please go ahead.

Apologies. Our next question is actually from Mason Carrico of Citizens. Please go ahead.

Hey, guys. Just wanted to ask a couple on Determa RX here. Great to see the volume growth year over year, but it seems like ASP may have declined sequentially. So I was just hoping to get some color there in terms of what drove the decline and then what your expectations are from an ASP standpoint going forward throughout 2022 and then maybe as we start to get closer to 2023?

Yeah, Mason, thanks for asking that because when you just take the raw numbers and divide it by the revenue, it doesn't show the average AUP because we actually do it by billing class. And some of those samples are unbillable. So let me give everyone the breakdown. In the quarter, about 90% of our volume that was billable was Medicare and Medicare Advantage. Medicare and Medicare Advantage at 90% rendered somewhere around a $3,000 AUP, and about 10% of our samples were commercial samples, meaning they were not Medicare, which means when you blend that AUP in at a much lower AUP, which is somewhere in the $1,800 range, you end up with about a $2,972 per case collectible revenue per from RX. That, that is a very solid number for us. We have been tracking that number over time. It's come up from the high, you know, 1800 ish into the low twos and now over 2.5 and now to two to nine. So we do see that we're getting at our challenges. We have a, we have a billing backlog as you might imagine, because it takes us a little while to get some of the commercial payers to pay us. And that building backlog has, has, increased as we've increased our sample volumes. And so that doesn't show up in our, it doesn't show up because the revenue doesn't match the same period as the samples come in. So hopefully that gives you some clarity about the AUP. Our Medicare, Medicare Advantage samples are consistently coming in around $3,000. And so that is the majority of our revenue push. And so, you know, as you think about modeling, obviously you need to model the commercial payers as well, which is much less, but it's not a high percentage. So the product mix or the payer mix right now is really advantageous for us given we're getting such high AUPs for Medicare and Medicare Advantage.

Got it. Okay. And then, you know, maybe, Maybe just on the large transplant center that you talked about signing on, and sorry if I missed some of this commentary, but any incremental detail you can give around that maybe the level of volumes they're doing in terms of liver transplants and if there's any stipulation about the number of patients that you're going to be able to capture, any qualitative or quantitative color you can give there would be helpful.

Yeah, this account probably does somewhere between 300 and 500 livers a year. Mason, I'm not trying to be coy. It's a hyper-competitive environment, and we'd like to keep these KOLs under wraps for a while just because they've been so gracious to help us out so much. We have a number of these that are interested in joining the early adopter program and being part of the program. So if you think about liver, the utility is going to be different in liver than kidney. You're looking, you can say about, you know, if you say they have 300 a year, let's say they do 300 a year, they do probably 500 total transplants. So 300 of those are, I'm sorry, 500 liver cases, about 300 are total transplants. 300 of those a year, if you get two samples or two tests for every liver patient, that's about 600 tests a year. You can start thinking about $2,000 per reimbursed test. That's what kidney and heart are, 27, 28. You can start to build a case for there's about 70 of these types of centers in the United States now. And so you start to think about liver at, I think, around 8,500 liver cases a year, somewhere in that neighborhood. And so you've got a nice market for liver, but kidney becomes very important to us as well as heart. But obviously we have a nice competitive advantage in liver since we're sort of the first out and we have a very rapid turnaround time.

Got it. Thanks, Ryan. That's helpful.

Thanks, Mason.

Ladies and gentlemen, just a final reminder, if anyone else would like to ask a question, you're welcome to press star, then one.

We will pause a moment to see if we have any further questions.

Ladies and gentlemen, we have reached the end of the question and answer session, and I would like to turn the call back to Ron Andrews for closing remarks. Please go ahead, sir.

Thanks, everyone, and we appreciate your time today. We certainly appreciate the questions, and we're eager to obviously to see many of these milestones unfold over the fall, and we look forward to speaking at numerous conferences through the fall and updating you guys on our progress.

So thanks for your time today.

This concludes today's conference. Thank you for joining us. You may now disconnect your lines.

Thank you, operator.