Oncocyte Corporation

Thank you for standing by. My name is JL and I will be your conference operator today. At this time, I would like to welcome everyone to the OncoSite fourth quarter and year end 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. Thank you. I would now like to turn the conference over to Jeff Ramson, PCG Advisory, Inc. You may begin.

Thank you, Operator, and thank you, everyone, for joining us for today's conference call to discuss Oncosight's fourth quarter and full year 2023 financial results and recent operating highlights. If you have not seen today's financial results press releases, please visit the company's website on the Investors page. Before turning the call over to Josh Riggs, Oncosight's President and Chief Executive Officer, I'd 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 the company's SEC filings, including, without limitation, the company's Forms 10-K and 10-Q, which identify specific risk factors that may cause actual results or events to differ materially from those described in these forward-looking statements. Actual outcomes and results may differ materially from what is expressed or implied by these forward-looking statements. OncoSight 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 Josh.

Thanks, Jeff, and welcome, everyone. A year ago, we said that we were going to reduce our burn, package our IP for distribution, and find a partner for commercialization. Including Q1 of 2024, our average burn for the past three quarters has been 3.91 million, compared to 11 million from the same period a year ago. We successfully converted our transplant LDT workflow into an easy-to-use manufactured product called Graft Assure. The first prototypes came out of manufacturing in December of last year. I'm proud to say that the quality and performance of that assay has exceeded our expectations. We expect to receive the first full production lot in Q2 and begin shipping our first sites after QC release. And lastly, yesterday we announced our partnership with BioRad to support the global launch of the GraftShare product. They invested alongside current and new shareholders in a $15.8 million private placement offering to support the accelerated development and commercial efforts. The investment was priced at market value. Having them as an investor and commercial partner provides Oncocyte with the highest level of validation and strong base to build from. As part of the agreement, Bio-Rad and Oncocyte will co-market the assay in the U.S. and Germany, with Oncocyte acting as commercial lead. Outside these countries, Bio-Rad has been granted exclusive global distribution and commercial rights. Having the support of the Bio-Rad team in U.S. and Germany gives us the scale that we need to meet the market opportunities. The market in both countries is highly concentrated at the top academic centers where most transplant surgeries are performed. At around 100 call points, we can effectively commercialize with minimal incremental headcount. Globally, over 157,000 transplants are performed annually with a 9.1% growth rate. Much of this transplant population is going underserved or unserved. it's really challenging to try and meet the global demand with a central lab in the United States. A robust kitted product with this partnership puts that market within reach. Going forward, both companies have committed to joint efforts in developing a regulated product and system designed to facilitate widespread distribution and clinical adoption of the core technology in the United States and beyond. Additionally, BioRat has been granted an option for IBD commercial rights at FDA clearance, subject to meeting specific objectives. Exercising the option would come with a second equity investment into Oncocyte. We look forward to working with their experienced team to bring this needed product to market as quickly as possible. We've discussed the upcoming transition in transplant monitoring from one where central labs dominate to one where local labs are empowered to serve the community. This partnership on IBD development is a key step in that direction. Working together, We believe that we are on an accelerated path to deliver this product to market and look forward to updating on our progress. Prior to that, we are going to offer researchers in labs around the world an opportunity to use our technology through the Graft Assure Kit, an easy-to-use run-up and turnaround test for monitoring and measuring donor-derived cell-free DNA in the blood. We are encouraged by the response and demand for the technology and look forward to supporting our day one sites in the U.S. and rest of world markets. We're going to measure success over the next 12 to 18 months by site activation, looking to build alongside Bio-Rad a significant install base of early adopters that are interested in doing in-house research on their patient populations to push the body of knowledge and literature forward. We couldn't be more excited to put our tools into the hands of these capable researchers and institutions around the world. We continue to make progress on the clinical development of our products. Last year, we achieved reimbursement for biograph kidney. This year, we have an opportunity for claims expansion when the data that was presented at ESOT gets published. It is currently in review. Claims expansion would be an opportunity to build beyond the four cause testing claims that we have today. As a reminder, this data is from a randomized interventional kidney study that showed our technology can pick up ABMR, a common and dangerous type of organ rejection in DSA positive patients 10 months ahead of standard of care. The DSA is a biomarker that is used for monitoring for organ health and transplant patients. Those that become DSA positive are at higher risk for rejection. This study put DSA positive patients into two arms, One used our test and the other didn't. Those that used our test were able to catch rejection much sooner than those that didn't. Approximately 20% of kidney patients will test positive for DSA within the first five years of kidney transplant. Many of them will go on to have rejection and potentially lose their organs. The data showing using our technology gives an opportunity for earlier intervention. Further, and very important, ABMR is notoriously hard to treat, but certain new drugs are in trials to treat DSA-positive ABMR. Assuming positive outcome of these trials, an early diagnosis will become truly crucial. We are watching these Phase II studies very closely, as we believe that they have the opportunity to change the outcomes for the many patients that experience ABMR. And our technology has the potential to be the front-end diagnostics to find these patients in time to make a difference. For DETERMA-C and I, we are waiting on the publication of pancreatic data presented at AACR earlier in 2023 to submit to Moldex under LCD38835. This is the same LCD that multiple companies have received coverage under in the past several months. Reimbursement for these types of assays has reached into the thousands per episode of care. For DETERMA-IO, we continue to make progress Processing samples from the 800-plus patient TNBC study being ran by the Southwest Oncology Group funded by the NIH. Success in this study would represent an opportunity to support the treatment decision post-surgery for these patients by identifying those most likely to benefit from immunotherapy. On our financials, Q4 benefited from the cost reductions we did in the first three quarters of the year. Cash reserves declined $4.4 million in the quarter, leaving $9.4 million on the balance sheet. This is a 58% improvement in cash burned year over year. Our consolidated revenues for the fourth quarter of 2023 were approximately $300,000, and the cost of revenues for the fourth quarter were approximately $400,000, primarily from services and customers. Research and development expense from the fourth quarter increased 85% year over year, from $1.4 million to $2.5 million. driven by our strategic pivot to focus our investment on developing the manufacturable version of our assay. General and administrative expense for the fourth quarter decreased 66% year-over-year from $5.1 million to $1.8 million, reflecting our successful efforts to reduce spending not directly related to product development and commercial activities. Sales and marketing expense for the fourth quarter increased 74% year-over-year from $300,000 to $600,000, where we focused our sales and marketing investments on our early access program and early market access work for the RUO product. Gap net loss from continuing operations of $16 million or $1.99 per share as compared to a net loss of $12 million or $2.08 per share for the fourth quarter of 2022. Non-GAAP operating loss as adjusted for the fourth quarter was $4.2 million, an increase of $1.2 million compared to the same period in 2022. We have provided a reconciliation between our GAAP and non-GAAP operating losses in the financial tables included with our earnings release, which is also available at our website at officesite.com. We have reflected the operations of Razor as discontinued operations for all periods presented in our financial statements. In my closing remarks, I'd like to talk a little bit about why the partnership came together. It has exactly what you would expect. It has a good product, an established commercial channel, and robust demand. But what makes it special and what makes it work is the timing. What we see and ultimately what we think led BioRed to invest is is the chance to take the lead in an opportunity that only comes along once in any given clinical market, where it shifts from one that's centralized to one that's local. It only makes sense that transplant centers would rather have an answer in a day instead of waiting up to a week for results from a lab in another state. And if you add to that a reimbursement rate in the thousands for an easy to use PCR test, you start to build a pretty compelling business case. It happened in HIV testing, respiratory testing, EGFR, among others, and it's about to happen in transplant. And again, it's something that only happens once. After local labs have access to testing, it never goes back to being centralized. Over the next two years, we are going to see this transition take place and believe that we have the right partnership and the right product to position Oncocyte as a leader in that transition. That will mean more research, more patients being tested, and hopefully better outcomes. Our appreciation goes out to the Bio-Rad team and our current and new shareholders who have joined us in supporting this vision. Thank you.

Thank you. The floor is now open for questions. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand to join the queue. If you would like to withdraw your question, simply press star 1 again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset to ensure that your phone is not on mute when asking your question. Again, press the star 1 to join the queue. And your first question comes from the line of Mike Mattson of Needham. Your line is open.

Yeah, thanks for taking my questions. I guess just a few on the Bio-Rad agreement. Can you tell us what their installed base is, you know, US and OUS, if possible, you know, for the machines that could run this test?

They don't publicly disclose their installed base.

Okay. No, that's fine. And then just to be clear to make sure I understand how this is going to work, so initially you'll be working with them. There'll be a research use only version of the test. You'll try to build up some initial customers using that test, and then eventually you'll have FDA cleared and EU cleared versions of the kitted test to have them, you know, sell for their testing systems?

Yeah, that's correct, Mike. And, you know, so we're excited by it. You know, there's There's a really nice overlap between the life science side of BioRat that's calling on the academic centers where the research is being done today and our call point, which happens to be academic centers who have the talented surgeons that can actually perform the transplant surgeries. So there was a really nice overlap in call point that made this make a lot of sense.

Okay, got it. All right. And then is there any kind of minimum volume commitments or anything like that built into the agreement?

There are not.

Okay. All right. And then are you going to continue to offer the transplant tests in the U.S. as a lab-developed test or CLIA wave test in your own facility, or is it going to fully transition over to being kitted?

We will absolutely maintain our service lab in Nashville. It's a wonderful vehicle for us to do clinical development work. It's through that lab that we're able to engage with Moldex to do the claims expansion work like we're doing with the DSA-positive patients. It also gives us a path through the FDA, so we can take our lab through the single-site process and establish a predicate device that we can then use to bridge clinical claims over to our kitted product. And we believe that's a really efficient path through the FDA and look forward to being able to bridge those two things together in the future.

Okay. And then finally, you know, what should we expect for the pricing on the kitted test once you, you know, fully transition over to a clear, you know, version of the product? I don't know if you're willing to disclose that.

Well, I mean, I can tell you how the math usually works. So depending on whatever the reimbursed value is for a test, and so that's whatever your customer can bill to the payers, you're usually capped at about 50% of the reimbursed value for the top end of your pricing. And so if you have a kit that has a national price of, you know, $1,500, then the limit you can really charge to generate the result is about $750. If it's $2,000, it's $1,000. If it's $1,000, it's $500. And that's just kind of the way the math works, and that's the general expectation in the industry. And until we have the national price for the kit, it's really tough to say exactly where we would set the price.

Okay. But then you would – I assume you'd be sharing a portion of that pricing with BIRAD?

That's correct. Okay. All right. Okay. Thank you. Yes, sir. Your next question comes from line of Mason of Stevens. Your line is open. Mason, perhaps your line is on mute. Can you guys hear me? All right. Yep. Hey.

Yeah, so if you don't mind, maybe just a few quick ones here. Could you provide just a bit more detail on kind of how the commercial strategy with BioRad is going to work going forward? I mean, given you're the commercial lead, what type of team do you have in place today or presence do you have? What type of incremental investments need to be made here?

No, thanks. Yeah, we're expecting to add incremental about five headcounts. So four in the U.S. on top of our small team today and then one in Germany. And that goes against, you know, the BioRad, you know, marketing machine that's already in place in the U.S. and Germany. And so we will, you know, if you think of them as kind of filling the funnel and then we're at the bottom end of the funnel closing the accounts is generally how the relationship will work. outside of those two territories. You know, BioRed has the full commercial and distribution lead on that, and so we will bear no incremental costs there.

Got it. Okay. And could you talk a bit about revenue expectations going forward as well as the cash burnout look?

Sure. So the, you know, It is an RUO product, and so it takes time for a lab to bring it up, validate it, and get it running. And so we expect that the day one sites will start converting into revenue customers in Q4, and then the revenue will start to build from there. And so we'll see a little bit of revenue in Q4, more in Q1, and so on and so forth through Q2 next year. The cash burn, we've committed to maintaining a low cash burn. We'll take up a bit here in Q2 with just some manufacturing expense and one-time expense, but I think you can expect to see us try to maintain that below $5 million on a quarterly burn basis average.

Got it. All right. That's helpful. Thanks. Yes, sir. Your next question comes from the line of Bruce Jackson. of the benchmark company. Your line is open.

Hi, good morning, and thank you for taking my question. Getting into the mechanics of how this works with BioRed, and we'll start with the easier scenario with the international markets that are not Germany. So if they sell a test, then how does that get booked to you? Is it going to come in on the income statement as a, uh, as like a, um, a license fee or that hits the, um, either the operating expenses or the non-operating expenses. Tell me how the mechanics of the, just that one piece of it are going to work.

No, good question. It's a manufacturing and supply agreement. So, um, it comes off the end of the manufacturing line and then Bio-Rad is our customer. And so it hits the top line and then you'll see it normal COGS type calculation.

Okay. And then with the United States in particular, so you've got the lab version of the test as well. So are there going to be, like, sort of two revenue streams here? So there's going to be, like, the lab revenue, and then there's also the RUO revenue. So tell me how that piece of it's going to flow.

Yeah, I mean, they'll both show up on the top line. One will just show up as services, and one will show up as products. I don't know if that answers your question, Bruce.

It does. It does. And then last question is on the incremental sales and marketing spend. So is there going to be any shift in the just the 5 million burn rate per quarter? I'm sorry, less than 5 percent, 5 million burn rate per quarter from R&D to sales and marketing errors that, you know, just maybe a little color on the operating expense mix would be helpful. Thank you.

Yeah, sure. I think we are planning on adding about five headcount to our sales and marketing team to support this over the next quarter. And so that will tick up that a little bit. And then we will try to maintain as well as we can that below $5 million quarterly burn. Again, we are going to tick up here in Q2 with just one-time manufacturing expense, obviously some deal costs, but we'll go right back to that low current.

All right, that's it for me. Congratulations on the agreement. Thank you. Appreciate it. There are no further questions at this time. That concludes our Q&A session.

This concludes today's conference call. You may now disconnect.