Oncocyte Corporation

Q1 2024 Earnings Conference Call

5/15/2024

spk00: your telephone keypad. To withdraw your question, please press star one a second time. I will now turn today's call over to Jeff Ranson, CEO of PCG Advisory. Please go ahead.
spk01: Thank you, Brianna, and thank you to everyone for joining us for today's conference call to discuss Oncocite's first quarter 2024 financial results and recent operating highlights. If you've not seen today's financial results press release, please visit the company's website on the investors page. Before turning the call over to Josh Riggs, Oncocytes President and CEO, 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 facts 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, to 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. Oncocide expressly disclaims any intent or obligation to update these forward-looking statements, except as otherwise may be required under applicable law. I'd like to now turn it over to Josh Riggs.
spk02: Thanks, Jeff, and thank you to everyone for joining today. Building on the strong momentum in 2023, we've kicked off 2024 with impressive strides at Oncocyte. We expect the next 12 to 18 months will be unprecedented for the company as we execute on multiple milestones, driving value creation across all aspects of our business. Today, we're going to talk about the early stages of commercialization, the developing horizon in transplant management, and the potential role that Oncocyte plays, and also opportunities for growth in oncology. Our partnership with Bio-Rad Laboratories is a game changer. Bio-Rat extends our reach, allows us to introduce the Graft-Assure RUO product into prominent academic centers while supporting the development of regulated products like Biotograph Kidney IVD. As part of the agreement, Bio-Rat and Oncocyte will co-market the assay in the U.S. and Germany, with Oncocyte acting as the commercial lead there. Outside these countries, Bio-Rat has been granted the exclusive global distribution and commercial rights. We've already felt the advantage of this scale as our funnel continues to grow and more sites become early beta site adopters. At launch, we expect to ship to sites in Asia, United States, and the EU. Our value proposition in transplant monitoring is simple. We offer an easy-to-use test, a rapid turnaround time, and attractive economics for ourselves, customers, and BioRap. We continue to be pleased and encouraged by the warm welcome we are getting at transplant research centers around the world. They long have been frustrated by the limited access that they have to transplant rejection monitoring technology and their inability to answer vital additional clinical questions. That need opens up a significant market opportunity, including in the United States and Germany, where we have a long history of publishing with top research hospitals. We are excited to support these customers as they bring this technology in-house and continue to push boundaries of what is possible with this type of transplant rejection monitoring testing, which is known as donor-derived cell-free DNA testing or BDCF DNA. Our own research is breaking new ground in transplant. We see an opportunity for Oncocytes technology to improve transplant rejection management through earlier intervention. Currently, within the first five years post-transplantation, approximately 20% of kidney transplant patients will test positive for donor-specific antibodies, or DSAs, which are antibodies that are tied to their donor organ that their immune systems have created. DSA is an important biomarker used to monitor organ health in transplant patients, and those who test positive for DSA face elevated risk of rejection and potential loss of their organs. Our recent randomized interventional kidney study demonstrated that our technology can detect antibody-mediated rate ejection, or AMR, or ABMR, as a common and challenging type of organ rejection in DSA-positive patients 10 months before standard of care methods. In this study, patients were divided into two groups, one who used our test and the other who didn't, and the group that used our test had rejection detected much sooner. And while there are no currently approved therapies for AMR, That research in early detection has supported our inclusion in multiple phase two pharma studies that are seeking to address the disease. A successful pharma study would open up new use cases for our test, like therapeutic efficacy and minimal residual disease testing. Oncocyte is now in position to support both early detection and long-term management of transplant rejection risks. And we want to support this type of research across the board. I believe that as research centers validate and begin to use the Graft Assure RUO, we are going to see an explosion of research and collaboration in the space that will seek to address needs that are clearly unmet today. Things like immunosuppression tapering for liver transplant patients and the early detection of AMR. By partnering with the research community, we expect strong pull through into academic centers around the world. Our goal is to become the research tool of choice for the transplant community over the next 12 to 18 months. Working with Bio-Rad and leveraging their expertise in life sciences gives us a great head start with the research community. Building this relationship with the research community supports our plans to develop and deliver an FDA regulated kit version of our vitagraft assay to the market. To that end, we expect to make an investigational use kit available to support the development of new clinical indications in investigator and pharma-sponsored studies. This specially labeled kit makes working with the FDA much easier coming out of trials. For the past couple of quarters, we've talked about the coming transition in transplant monitoring from centralized labs to local testing. And I don't think this is a controversial point. Doctors want an answer in a day instead of a week, and cash-strapped hospitals would rather capture revenue than send it out. We've seen it happen in multiple diagnostic markets once regulated kits become available and expect that this market will be no different. Ultimately, the transplant market will be dominated by regulated kit products used locally, which is why we started down this path over a year ago. And while incumbent central labs generate hundreds of millions of dollars annually in the transplant market, the market is nowhere near oversaturated, presenting substantial opportunity for growth. Most of that revenue today is derived from the U.S.-focused central lab model. That leaves a big gap in the EU and rest of world markets. And Oncocyt is actively working to disrupt the market and step into that gap. it's worth keeping in mind that the global transplant market with over 150,000 transplants annually and a 9.1% growth rate remains largely unserved or underserved. Improving patient outcomes by increasing the number of successful transplants is an important health priority in many countries. For example, in the U.S., the Center for Medicaid and Medicaid Services, which is known as CMS, recently issued a proposed rule which would increase the incentives for hospitals to provide more kidney transplants and achieve better post-transplant outcomes. This new rule seems likely to drive further adoption of transplant monitoring diagnostic testing. For distributed regulated kits, adoption is about being easy to use, affordable, and quick to generate a result. We'll be working very closely with the clinical team at Bio-Rad to deliver a product that supports the current and emerging needs of the transplant community, one where the demand for a local testing option is growing by the day. In addition to revenue, we have two key measures of success, publications and site activation. With publications, it's how many posters, papers, and studies are being presented using our technology. These will be the leading indicator of adoption and the development of new utilities. Very little happens in the clinic that hasn't been validated many times over in the research lab. And that is why it's so important to lead with a research product and support the research community early on. We look forward to watching the body of literature expand as access to our affordable, easy-to-use test grows. Site activation is critical for long-term success and supporting the eventual transition to IVD. This is a very concentrated market. There are only a couple hundred potential transplant sites in the U.S. and EU where we plan to launch our regulated product. kidney IVD. With each one we bring up, we are picking up meaningful, long-term recurring revenue and market share. Based on population data, we would expect the average U.S. target transplant center to generate recurring kit revenues in the millions. Most markets do not quickly shift to a new product based on a single advantage unless that advantage is overwhelming. But when there are multiple substantial advantages and the switch is to something that customers normally prefer to do anyway, that switch can be quite rapid. In those cases, the inertia of habit and existing practice patterns and the influence of sales forces is neutralized. Now, when people talk about transplant monitoring, they're usually talking about single nucleotide polymorphisms or SNP-based detection where you're looking at specific gene targets in the blood. It is what the market leaders in transplant monitoring use in their tests via next-generation sequencing, and it's what we use in Droplet Digital PCR, which is a cheaper, quicker, and more widely available technology platform. We believe that SNP-based detection methods will continue to dominate mindshare in the transplant monitoring space. Competitively, it feels like we are in a great position with our turnaround time, ease of use, and affordability. and add to that differentiated clinical data and some unique technical capabilities, and we're bringing a lot to the transplant community. It's not unreasonable to imagine 30 to 50 centers or more in both the United States and EU having this as an in-house test, generating recurring revenue above $100 million annually. When we began the kit manufacturing process in 2023, with our prototype lots coming off the production line at the end of last year, with that step behind us, we expect to move rapidly through the final phases of product development, and we'll provide updates as we clear key hurdles in the path to FDA clearance. To bolster these efforts and help scale our operations, in April, BioRad joined current and new shareholders in a $15.8 million private placement valued at market. This investment solidifies Oncocytes Foundation and marks a significant endorsement of our partnership. The FDA's long-awaited final rule for the regulation of lab-developed tests finally was released in early May. We believe that most of our lab-developed tests meet the currently marketed carve-out in this final rule, but it remains to be seen how this clause will go into effect. This is something akin to, but not quite like, the concept of grandfathering. and the four-plus-year phase-in period for the final rule gives us plenty of time to adjust to any changes that might be needed. It is also unclear what legal challenges and further delays this rule may have to survive as it comes into full effect and is an area that we will be watching very closely. That said, we are already fully on the regulated kit pathway for our transplant product and do not expect these rules to meaningfully alter our approach or timelines.
spk03: In fact, these rules may help to shift the focus of our industry towards regulated kits over time.
spk02: Alongside the positive developments we are making in transplant, our oncology portfolio continues to make important progress as well. We anticipate journal publications in 2024 involving both DETERMA-C&I and DETERMA-IO that will support our clinical claims and path to coverage and reimbursement. Our DETERMA-IO test aids physicians in evaluating whether patients are likely to benefit from immunotherapy, while our DETERMA-C&I test tracks patients' responses to cancer therapies. With the U.S. markets for these diagnostics valued at $2 billion and $4 billion respectively, We see significant partnership opportunities as these products continue their development. We expect to follow a commercial path similar to the one we are developing in transplant rejection monitoring, by which a partnership leads the way into a large market opportunity. Our excitement about our strong growth outlook is deeply rooted in fulfilling our core mission at OncoSight, democratizing the diagnostic testing market. We are dedicated to ensuring that everyone, regardless of location or circumstances, has access to fast and reliable testing. This commitment drives our development of user-friendly, rapid diagnostic solutions aimed at leveling the playing field in healthcare and enhancing patient outcomes globally. Looking forward, as the demand for local testing options is on the rise, our innovative solutions, strategic alliances, and targeted commercial strategies position us strongly to seize these opportunities. We're enthusiastic about what lies ahead and remain dedicated to delivering value to our shareholders, customers, and the broader healthcare community.
spk03: Let's shift over to the financials.
spk02: In the first quarter of 2024, although our net revenue saw a decline, it does not reflect the momentum we are building in early commercial efforts for the KIDD products. We increased our research and development expenses by 2% compared to the same period in 2023. This increase is a testament to our commitment to innovation and our focus in developing kitted products. Additionally, our sales and marketing expenses rose by 22%, largely driven by our intensified efforts in sales and commercialization activities. On the flip side, our general administrative expenses decreased by 22%, primarily because of reductions in stock-based compensation and personnel costs, reflecting our ongoing initiatives to streamline operations and enhance financial efficiencies. Our key operational metrics clearly demonstrate our dedication to efficiency and growth while continuing to invest in our future. Our net revenue for the quarter stood at $176,000, a 41% decrease from the same period in 2023, predominantly due to our strategic investments in product development commercialization. We are confident these investments will drive long-term growth and increase shareholder value. On to our cash at hand. Q1 continued to benefit from the cost reductions we undertook in 2023. Cash reserves declined $3.9 million in the quarter, leaving $5.6 million on the balance sheet. This is a 60% improvement in cash earned year over year. As mentioned earlier, our equity financing added $15.8 million in cash to our balance sheet in April. Gap net loss from continuing operations for the first quarter was $9.1 million, or $1.8 $1.13 per share as compared to net income of $6 million or $0.82 per share for the first quarter of 2023. Non-GAAP operating loss as adjusted for the first quarter was $5 million, an increase of $100,000 compared to the same period in 2023. We have provided a reconciliation between our GAAP and non-GAAP operating losses in the financial tables included with our earnings release, which is available at our website at OncoSite.com. We have reflected the operations of Razor as discontinued operations or the Determa RX product for all periods presented in our financial statements. In closing remarks, as we move forward in 2024 and beyond, we're doubling down on our commitment to invest in key focus areas, especially in developing kitted versions of the assays like Vitagraph, Determa IO, and CNI. Oncocyte anticipates several key catalysts in 2024. These include the global launch of graft-assured RUO, the reimbursement of the next generation of our vitagraph kidney lab-developed test, publication of data supporting new claims for vitagraph kidney, and publication of data to support coverage and reimbursement for Determa IO and Determa CNI. Additionally, we expect to make significant progress on vitagraph kidney IVD, aiming for FDA clearance by the end of Q4 2025. Oncocyte is now at the starting line of its most exciting growth phase to date. By delivering our advanced tools to researchers around the world, from leading institutions in the U.S., EU, and Asia, to everyday labs needing straightforward record results with fast turnaround times, we're carving out new pathways for research and patient care. We foresee a boost in sales, marketing, and commercialization activities with our expanding role in the transplant sector alongside our ongoing efforts in oncology. Financially, our disciplined approach is clear, shown by our modest cash burn of $3.9 million in the first quarter. And our capital-light business model should enable us to keep our burn low as we commercialize our tests and build revenue on the way to profitability. Coupled with our strategic moves and the $15.8 million boost from our recent private placement, we're well-positioned for sustained growth and innovation. As we begin our product launch, we also plan to interact more frequently with the investment community over the next few months. If you're an institutional investor or a long-term oriented investor of any type, then please contact us if you'd like to schedule a meeting. I plan to meet with investors in a number of U.S. cities over the next few months. And meanwhile, please take the time to look at the investor relations sections of the OncoSight website at OncoSight.com. On it, you can find our most recent slide deck and a range of other information about our company and business opportunities. We extend our heartfelt thanks to our team, shareholders, and partners for their unwavering belief in our vision and their continued support on this transformative journey. Your trust fuels our commitment to democratize patient care through innovative diagnostics. I'll turn the call back over for the Q&A session.
spk00: Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. To withdraw your question, simply press star 1 again. Our first question comes from Mike Mattson with Needham. Please go ahead.
spk04: Yeah, thanks. So, just in terms of, you know, graph to share researches only, is that Could we start to see any meaningful sales of that this year, or is there really going to be more in 2025?
spk02: Yeah, thanks. I think we'll start shipping those first customers here in Q2. It's going to take them a little while to validate since this is an RUO product. We'll expect to see kind of like the first revenues from those sites probably middle, late Q4, and then building into 2025. Okay, got it.
spk04: And then just your sales and marketing was up, I think you said, 22%. So is that going to continue to go up as you move to commercialize Grafisher? Or should we expect that to sort of level off from here?
spk02: Yeah, I think when we talked a couple of weeks back, we said that we were going to add a couple of headcount there. I think that's still our commitment that we want to put on you know, a handful of folks here in the U.S. and, you know, maybe a person or two in Europe to kind of support product launch and the validation activities that are going to be going on, so the site activation. So we'll pick up a little bit there, and then it'll level off, you know, in the latter part of Q4.
spk03: Okay. Got it. Thank you.
spk00: Our next question comes from Mason Carrico with Stevens. Please go ahead.
spk03: Hey, Josh.
spk05: So in your discussion with transplant centers, I'm just curious what you're hearing in terms of clinicians' willingness to switch away from the current transplant offerings that are on the market and fairly well utilized. I guess once there's a kitted option, I guess how do you think about that transition playing out? Do you think it's on a clinician-by-clinician basis, or could it be more top-down from the transplant center itself?
spk02: Yeah, I mean, so I can, I got two realms of experience to share here, I guess. So we have kind of the interaction that we're having on the lab service side. And, you know, I think what we've learned in the past year, year and a half of interacting with the transplant community is that, you know, if you've seen one transplant center, you've seen one. And even within centers, you have kind of split use. You know, some docs prefer one test, some docs prefer another test. And we haven't seen any kind of like heavy-handed organizational mandates that say you have to use this test or you have to use that test, maybe in a few rare circumstances. And I would say that as the industry builds trust in the assay, you'll start to see more of a shift, but I wouldn't expect it to be kind of, you know, day one, that there's going to be kind of a flip of the switch and all the testing is going to go But I do expect that the motivations to do testing in-house are going to remain relatively constant, which is, you know, there is no way to get a send-out test answer in one day. And that's going to have a lot of power once a regulated product is on market. And presuming that it's reimbursed, it's really hard to imagine that those centers would want to forego that revenue. So I think those are going to be powerful motivators to switch once there's a regulated product out there. I don't know if I've answered your question, Mason, if that gets you where you're trying to go.
spk05: No, that was helpful. Yeah, that was helpful. And then in terms of the conversations you're having with potential beta sites that you'll begin shipping to, I mean, where are you seeing the most interest? Is there some commonality among the centers that are set to be those beta sites and those who aren't? I mean, were these through established relationships or any color on how those opportunities kind of presented themselves?
spk02: Sure. I mean, you know, I think the way we structured the agreement with Bio-Rad, with carving out Germany, probably gives you some hint there. I mean, we've been publishing with those guys, a lot of those research institutions for the past, you know, seven, eight years. So those are really deep relationships. And, you know, we would expect that that's really fertile ground for these product launches. In the U.S. and Asia, I mean, it's been a lot of word of mouth, really, that's driving this. I think, you know, the community is fairly well-networked. It's small, right? I mean, there's only a certain number of centers that do transplants in any volume. And I would say, you know, the centers that are reaching out to us are very – capable. They're research focused. They have questions that they've been wanting to ask for a long time, but their research interests haven't really lined up with the commercial interests of the incumbents. And so they're excited to get their hands on the technology and be able to answer the questions that have been bugging them for a very long time.
spk05: Got it. And then the last one here for me, you touched on it in a previous question, but In terms of the commercial hires, how are those progressing? How do you think about the cadence of those reps being hired, being trained up, and getting out there?
spk02: Yeah, I mean, we've been preparing those JDs, and so we'll get those posted by the end of the quarter. We'll expect to be bringing those folk on in Q3, and so they'll get trained up. We'll be training alongside the Bio-Rad team, and then that way, Once we get into Q4, we've got a really strong team on the field.
spk03: Perfect. All right. Appreciate it. Thank you.
spk00: This will conclude our question and answer session. And with that, we will conclude today's conference call. Thank you all for your participation, and you may now disconnect.
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