Renalytix plc

Good morning, and welcome to Renalik's conference call to review second quarter and first half fiscal year 2022 results conference call. At this time, all participants are in a listen-only mode. We'll be facilitating the question and answer session towards the end of the call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Peter DiNardo of Capcom Partners for a few introductory moments.

Thank you, Norma, and thank you all for participating in today's call. Joining me today for Renalytics are James McCullough, Chief Executive Officer, Tom McLean, President, Fergus Fleming, Chief Technology Officer, and James Sterling, Chief Financial Officer. Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements made during this call that relate to expectations, Predictions of future events, results, or performance are forward-looking statements. Examples of these statements include, without limitation, statements related to Kidney Intel X's ability to lower healthcare costs, improve patient quality of life, and set a long-term standard of care, trends in our market and potential benefits of government policy change, the impact of COVID-19 on our business, our expectations for hiring, product development, strategic partnerships, and collaborations, reimbursement decisions, clinical studies, and regulatory submissions, and our business strategies and future growth. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For description of the risks and uncertainties associated with our business, please refer to the risk factors section of our annual report on Form 20F, and was filed on October 21, 2021, with the Securities and Exchange Commission. All forward-looking statements made on this call are based on management's current estimates and various assumptions. Renalytics disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events, or otherwise. This conference call contains time-sensitive information is accurate only as of the live broadcast today, March 31st, 2022. And with that, I'll turn the call over to James Okola.

James? Thank you, Peter. Good morning and good afternoon. We are pleased to report quarter-over-quarter growth with Kidney Intellect's testing volume within a backdrop of increasing insurance coverage and new health systems coming online. In our New York launch market, Kidney Intellect's utilization has continued to accelerate through the end of March. I am pleased to report we have now provided integrated advanced risk assessment testing for more than 2,600 patients with kidney disease and diabetes. Physician response has been overwhelmingly positive. Over the past six months, Kidney IntellX clinical testing has now been brought online with the Veterans Health Administration through our Albany, New York physician-led payer partnership and at Atrium Health and Wake Forest Baptist Health in the Southeast region of the United States. We now estimate our current Kidney Intel X serviceable insured population at greater than 1 million patients. There are now currently an estimated 180 primary care physician outside of the Veterans Administration health system using Kidney Intel X today, a number we plan to grow significantly through the remainder of the calendar year. The combination of partnered hospital distribution, the Veterans Health Administration launch, and increasing visibility on Broad insurance payment provides the fundamentals necessary to drive kidney and telex volume growth in 2022, 2023, and 2024. Our focus remains delivering on major milestone catalysts, including quarterly revenue growth, expanded insurance payment, including Medicare and Medicare Advantage, strategic partnerships to expand distribution capability, and regulatory approvals. Demand for our recently closed financing was strong, particularly from investors who have known the company for several years. We were fortunate to have multiple terms from several parties from which to choose, and we believe this illustrates investor views on the strengths of the intrinsic value proposition for Renalytics in solving such a large unmet medical need. We expect Ellucian Impact will be limited to high single digits against creating a two-year runway on which to execute our objectives. Particularly if one or more of our ongoing advanced strategic partnerships discussions comes to fruition in calendar 2022, we are increasingly comfortable with the potential for driving fiscal 2023 expectations for top line revenue. We will continue to manage costs diligently and conduct periodic strategic reviews of resource allocation to optimize our growth. As discussed on previous calls, we believe insurance payment remains the single biggest factor for driving kidney and telex adoption. Over the past year, we have consistently demonstrated that we can secure payment for kidney and telex from a diverse set of insurance programs. To date, we have received 22 private insurance coverage contracts and contracted with 31 state Medicaid programs. We have secured a 10-year federal government contract covering among others, a $950 payment for patient testing in the Veterans Health Administration system. Medicare and CMS has also established a national pricing of $950 per reportable result for Kidney IntellX. This successful pace of securing insurance payment and pricing for Kidney IntellX has exceeded what is typical for the first year of launch for a laboratory-developed test. We expect this aggressive pace to continue with our stated goal of achieving greater than 10 million patients under various forms of insurance payment for Kidney IntellX in calendar 2022. Our primary distribution model was founded on partnering with health systems to reach large physician practice groups, particularly primary care physicians. With the addition of the Veterans Health Administration, we expect to meet or exceed our previously stated goal of 20 health centers running Kidney IntellX by the end of calendar 2022. We also expect additional health systems to be brought up online in the June quarter, including recently announced St. Joseph Health in Central New York State. To discuss our commercial progress further, I will now turn over to Tom McLean. Tom. Thank you, James.

Our commercial focus in calendar year 2022 remains on regions where health system partnerships provide a base for adoption of kidney and telex testing. As of the end of the March quarter, we have four regional sales directors and 12 account executives focused on the Veterans Health Administration. We have also added a regional director and three sales executives focused on the New York and Southeast regions. This sales effort is being complemented by a medical education effort that's led by a team of seven medical science liaisons and our partnership with the National Kidney Foundation to offer early stage chronic kidney disease education regionally. Since our last investor call, Renalytics has begun live testing at the Veterans Health Administration. There are an estimated 1 million patients with existing diabetes and kidney disease in the VHA. The VHA encompasses 171 VA centers with ancillary community-based outpatient centers. A critical step to deploy Kidney IntellX across VA centers is vendorization or qualifying renalytics as a testing service provider. We are currently vendorized at 16 centers with a target of 60 centers before the end of calendar year 2022. Driving this success requires an educational effort among physicians within the Veterans Health Administration. This patient population poses a sizable return on that investment over the long term. As testing productivity increases and we further validate our VA deployment model, we will consider adding additional sales and marketing resources to further support deployment and test growth. Turning now to our real-world evidence study program at Mount Sinai Health System. Several metrics are pointing to greater efficiencies driving adoption levels. As an example, time to first kidney and telex order has dropped from 11 to three days since December. Our partnership model with Mount Sinai Health System is also validating our approach to engage primary care physicians. That's through a combination of population health sponsorship and electronic health record integration. That is demonstrating value in four important areas. First, broad physician education and care pathway support. Second, electronic test ordering and reporting. Third, advanced data analytics. And fourth, patient education and support. Turning now to our laboratory testing infrastructure and personnel. We have developed the capacity to scale efficiently as distribution opportunities expand. Earlier this March, we had a successful FDA inspection of our New York City lab. We have now achieved CAP accreditation and ISO certification for both Salt Lake City and New York City laboratories. These are all important to expand testing services and qualify for certain reimbursement. And finally, we've also continued to build a robust set of peer-reviewed published data evidence, which is compelling for driving payer and market adoption. This January, data from a multinational cohort was published in the American Journal of Nephrology, demonstrating the value of kidney IntellX for monitoring patient response to new drug therapy. In February, at the World Congress of Nephrology, we provided results demonstrating kidney IntellX provides robust prognostic information that better predicts a patient's risk for decline in kidney function when compared to current standard diagnostics. We also expect publication of additional clinical utility data in the June quarter and are preparing results from a cost-effectiveness economic model for publication later this year. Turning now to our technology and the basis for product evolution, please let me introduce our Chief Technology Officer, Fergus Fleming. Fergus?

Fergus Fleming Thank you, Tom. I'd like to take this opportunity to update you on some research and development programs aimed at making Kidney Intellect the premier precision diagnostics platform for kidney disease and diabetes. In the past few years, we have seen the emergence of multiple agents shown to slow kidney disease progression and reduce the risk of cardiovascular events. However, even with the application of these new therapies, the risk of these complications of diabetes remains very high. partly due to therapy resistance and suboptimal response to these new therapies. Therefore, at Reanalytics, we are focused on developing precision medicine solutions to the integration of the biology from biomarkers with the patient's own clinical data to enable more effective clinical care and therapeutic management. Firstly, we have a number of biomarker programs with leading centers in the U.S. and Europe. including proprietary patented biomarker technologies from the Johnson Diabetes Center and the University of Michigan. Supporting data for a number of these emerging biomarkers has already been published in leading journals, and we expect additional high-impact publications in the coming months. We have established analytical test capability and are currently evaluating over 30 of the most promising candidates for inclusion in future versions of the Kidney Intellects platforms. the first of which we plan to advance to validation this calendar year. Secondly, through multiple partnerships and collaborations, we have established access to large biobanks and data sets for the purposes of developing and validating precision diagnostic products. This includes access to over 20,000 patient samples from landmark clinical trials, such as the Canvas study, from which we have already published important data. and real-world biobanks exceeding 100,000 patients from leading academic medical centers. Through this network of clinical and scientific research partners and collaborators, we are establishing a leadership position for precision diagnostics in early-stage kidney disease. Finally, we were extremely pleased to report earlier this week that through our real-world evidence framework, we are on target to assemble the most up-to-date and diverse serial collection of over 30,000 biological specimens and data from more than 5,000 unique patients. The Renalytics Accelerating Precision Medicine in Diabetes, which we have named RAPID, is comprised of blood and urine samples and matched de-identified electronic health record data from over 95% of all subjects from these reward evidence studies. all participants who have consented for their samples and data to be used by Renalink for future research and development programs. We are the only company we know of with this scale of aggregated data and samples for analysis. It is only through such biospecimen collections over multiple time points, matched to extensive clinical data, can the full potential of genomics, proteomics, and data science be realized for precision medicine in diabetes and kidney disease. We believe that through RAPID, we are uniquely positioned to expand partnership opportunities in advancing this goal. In conclusion, leveraging all of the above, we are currently evaluating several potential product solutions to add to our portfolio and income streams. Specific programs are underway for the expansion of Kidney Intellect's intended use to target patients from underserved high-risk groups such as those of African ancestry. We are also compiling data to demonstrate the value of repeat testing with Kidney Intellect, which would further help leverage our testing revenue growth. This is just a snapshot of some of our R&D activities, which are complemented by our digital health and data analytics programs, including the recently announced launch of My Intellect portal, which allows easy access for providers to order and receive reports of kidney intellects. We look forward to providing additional updates on both our overall R&D platform and emerging products and solutions in the coming quarters. Now I'd like to hand you over to James Sterling, our Chief Financial Officer, who will provide more details on our financial results.

Good morning, everyone. Today we issued two financial reports. First is our six-month interim report under IFRS Accounting. And the second is our quarterly SEC filing under U.S. GAAP that included three and six-month financials. Both reports are for periods ending December 31, 2021. Those releases include full details, and I will summarize highlights from our GAAP financials now. All figures are in U.S. dollars, which is our reporting currency. For the second quarter, we recorded $845,000 in revenue, which comprised of nearly $700,000 of revenue from kidney and telex testing at Mount Sinai Health System, and over $150,000 of services from AstraZeneca. For the prior year period, we posted $400,000 of revenue, all from pharmaceutical services. We recorded nearly $500,000 of costs attributable to revenue in the second quarter. Our operating expenses were $14.1 million for the quarter as compared to $8.8 million for the prior year period. The increase was primarily driven by higher headcount, higher R&D expense related to studies at Mount Sinai, Wake Forest, and University of Utah, as well as increased consulting and professional fees to support growth. During the six months ended December 31st, our operating expenses totaled $26.2 million compared to $14.2 million for the same period of 2020. Net loss for the second quarter of fiscal 22 was $15.3 million or 21 cents per share, compared to a net loss of $9.1 million or 12 cents per share for the same period a year ago. We ended the quarter with cash of nearly $40 million as of December 31st, compared with $54.3 million at September 30th. The cash balance, of course, is prior to proceeds from the financing announced this morning. We expect gross proceeds of $26.8 million from the financing, which along with current cash gives us a sizable runway to execute our strategy while growing testing volumes and top line revenue. In the second quarter, we made a number of one-time investments pertaining to the recruiting, equipping, training, and deploying of our sales force and associated marketing and other expenses to enable them to be most successful in the field. We're happy with the sales infrastructure we now have in place to pursue the large VA and commercial hospital revenue that is available to us. Much of this included one-time expenses that are not repeating, and indeed our quarterly burn rate is already reduced from the fiscal second quarter, and we plan to exercise continued prudent cash discipline. Operator, we would now like to open the call up for questions.

Thank you. To ask a question, you'll need to press star 1 on your telephone. To withdraw your question, please press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Dan Arias with Stiefel. Your line is now open.

Hi, guys. It's Daniel Masek. I'm for Dan Arias. Thanks for the questions, and thanks for laying out some important milestones and metrics today. That was really helpful. So first on Mount Sinai, I know you guys mentioned the target of the number of tests per week. I'm just wondering kind of where you exited in the quarter versus the goal of 300 per week and where that is now. And then how should we think about that number when we consider other health partnerships that are coming online?

That's a very good question, Dan. We're getting there. And there is clearly an acceleration in testing volumes. Mount Sinai implementation obviously is complex. We have learned a huge amount about what we need to do to effectively integrate into such a large healthcare system, and that's paying dividends in terms of volume growth. And I'd like to point out that, you know, we still maintain that target. Of course, and I hate to refer to this, but it was a factor. We got knocked with Omicron, which came in, and everybody went back into protocol lockdown for December and January and part of February. But we are now seeing very encouraging signs around utility of kidney IntellX, adoption of kidney IntellX, and physician response, which is critically important. Physicians are overwhelmingly positive. They're using, especially at the primary care practice, kidney and telex. Within their practices, we're seeing repeat testing ordering. We're seeing increasing volume build. So we're comfortable with those targets. In terms of how that should be looked at across systems, all the systems are different, of course, but we feel that that is a reasonable target for some of the larger systems. that we're looking at, and this is exclusive of the Veterans Administration Health system, which is its own animal. But certainly, for example, with Wake Forest and Atrium, we are seeing increasing insurance coverage in those regions. It's giving us a head of steam to go out and complete the comprehensive insurance coverage that we really need to drive commercialization. We're seeing a lot of evidence of that in this quarter, including one major insurance coverage determination that we received in the southeast. Unfortunately, we're not allowed to name the party, but it does give us a major leg up to be able to start a broad-scale commercial deployment in the southeast. And Atrium and Wake Forest are situated in what's known as the diabetes belt in the southeast. So certainly we expect activities, commercial activities and study activities to drive the same level of volumes that we are now seeing and experiencing Mount Sinai with the same targets. So I think that's a very good proxy. In other hospital systems like St. Joseph's, which are smaller, they are also part of larger networks. So there's a broader strategic play associated with bringing some of the smaller hospital systems online that collectively add up to larger addressable markets. For the Veterans Health Administration, that is its own category for us. And as we've said, there are approximately a million patients with diabetes and kidney disease in the Veterans Health Administration systems across 171 centers. Tom talked about our progress in terms of getting vendorized in each one of those centers. centers, there's a whole sequence of processes you need to go through, but that's an important one and is a metric for how we are starting now to make kidney and telex access available across the national system. And eventually we expect to hopefully get to 171 centers. But the million diabetic kidney disease patients there is our addressable market. And, of course, we have a 10-year federal government contract, which is specified $950 per reportable result. So that gives us a significant advantage as we go to move forward. I hope I've answered your question.

Yeah, yeah, thanks, James. You mentioned the positive physician response. So you gave that time to first order going from 11 to three days. That sounds positive, but can you just explain that metric to me? I want to make sure I understand it. And then another similar metric you had previously given was the adoption rate. You said I think it was like within Mount Sinai, I think it was like 80% of physicians that ordered kidney and telex ordered again. Can you make sure I'm right with that? And then also, where is that number now? Is that still sounding positive, maybe more positive?

Yeah, and I will let Tom answer that question. Just to say we are monitoring a number of utility metrics. And we've done diagnostic rollouts many times in our careers over the last several decades. And I am very pleased with the physician responses. We've paid a lot of attention to the behavioral dynamics associated with bringing advanced prognosis into an integrated system down to the primary care level. It's a lot of fancy words to say you got to get a simple result, which is in the clinical workflow, doesn't take much time. provides an actionable item for that primary care physician. But, Tom, would you mind running through some of the metrics that you're seeing, all of which suggest that kidney IntellX is working, and it's doing what we thought it would do, and all of the upfront work that we've done around the behavioral economics of deploying kidney IntellX in a large system, that bet is paying off.

Happy to fill in a little bit here, James. So time to first order, similar to what I described at the VHA, kidney Intellix is first in class. So there is an educational effort that is required to make the primary care physician aware of the test and how to utilize the test in their practice. So in the December quarter, we were seeing the time difference between that education of the primary care physician and to getting that first order of the test at 11 days, that's now reduced to three days, which really marks a couple of things. Number one, the education programs, the way that we approach it with the primary care physician, we become much more sophisticated, much more targeted, but also as we see broader adoption in a health system like Mount Sinai, the primary care physicians are much more open to immediately utilizing the test in their practice. So that is an important metric. In terms of one-time orders versus a physician utilizing the test regularly, those metrics continue to be consistent with what we described before. Again, I think as broad system awareness of the value of kidney IntellX has advanced, the commitment to regularly utilize kidney IntellX in how they treat their patients and route them through the care pathway at Mount Sinai that leverages that kidney IntellX information is also remaining as strong. There will always, you'll never get to 100% on that, but when you get into very high percentages like what we had described previously, that's an affirmation that it is a clinical care approach that can be widely adopted. All right, great. That's helpful. And then last one for me. You mentioned this cost-effectiveness economic model. Could you just provide some details on what we might see and on the timing on that? And then also, when might we expect some real-world evidence for Mount Sinai and any update on what metrics we might expect to see if you can provide that at this time? Thanks. On the health economic data itself, you may recall that we published a budget impact analysis a year ago. That analysis is directed to payers, private payers, and it looks at a patient population the way that a payer looks at it to provide the health economic return expectations for an insurance provider. The cost-effectiveness model is really important to us because it looks at the patient population the way that an integrated health system or the Medicare program where a patient gets in Medicare and stays on Medicare or the Veterans Health Administration would look at those patients, and it considers some of the important factors like mortality, patient quality of life, And that is the more typical health economic analysis that is described in the literature but also utilized broadly in publications about health economic benefits. So that is the importance of that study. And again, we're preparing it for publication now and expect that to be published this year. That will help accelerate our commercial efforts within health systems. in structuring value-based care arrangements and within the Veterans Health Administration. In terms of the real-world evidence from Mount Sinai, there are interim data points at 6 to 12 months. We expect to both present and publish data from the Mount Sinai study this calendar year. Great. Thank you, guys.

Thank you. Our next question comes from Anita Duchenne with Berenberg Capital Markets. Your line is open.

Hi, good morning. Thanks for taking my questions. I just have a couple here. I was wondering if, you know, what kind of catalysts we should look forward in 2022 that might sort of help drive adoption of kidney intellect? And also, if you could talk about when you might be confident in providing guidance in this adoption from the second half, perhaps. And also just one more related to the FDA decision. Is that required? I understand that reimbursement is probably more of a driving factor, but just wondering if kidney intellects would remain as an LDT and still be successful. Thank you.

Thanks, Anita. I'll start with your last question, FDA. It is very important to understand, we've said this from the beginning, the number one risk factor is reimbursement. I've experienced this time and time again over my diagnostic career. There are examples of companies that have received FDA and everybody looks around at themselves and says, okay, now what do we do to get paid? And when we started Renalytics, We started it saying there are three things we have to worry about. I mean, there are more, obviously, but the three things we have to worry about are reimbursement, reimbursement, reimbursement. We configured the company. We configured the strategy, a lot of the clinical trial design, all around proving baseline utility and importance of Kidney IntellX ultimately for the ability to get paid. Reimbursement and payment is the one thing that has been so difficult in the diagnostic industry over decades. Uh, the majority of diagnostic tests that are in the market today have not gone through FDA and there are some very big diagnostic testers of companies which have been built major franchises without going through FDA. This is very important. We voluntarily chose to go through FDA because this is a new category of diagnostic test. and we very much believe in achieving regulatory approval. But I want to make it very clear that the number one risk factor by a long shot is how do you get insurance coverage and how do you get payment? Because that is what drives revenue. Ultimately, that's what creates the capital environment for us to finance a large marketing, national marketing, and then eventually an international marketing strategy. And as I've said on the phone today, we have made significant strides in reducing the risk around insurance payment against kidney and telex, and we now have a sizable population that has full insurance availability for kidney and telex testing, which to me is the gateway to building the business. We very much want FDA. We want to go through the process. We have a huge amount of respect for the regulatory process, and we are moving forward, but Again, reimbursement remains the number one driving objective to building a large franchise. And now that I've done that, I can't remember your other two questions, Anita. I'm sorry. Can you repeat those?

Sure. Thanks for the color, James. I was just wondering what kind of key catalysts we should be looking forward to in 2022. Yes.

So we have a number of catalysts, and again, One of the objectives that we wanted to do was remove the financing risk and the uncertainty around the balance sheet with Rinalytics so that we can have 100% focus on making sure we hit a number of major catalysts this year. So these are near-term catalysts, which are going to have significant impact on the growth of the company, obviously starting with expanded insurance coverage, We are now pursuing multiple avenues for Medicare payment. That opens up a very broad population, which would have insurance coverage, and that would have a significant impact on revenue growth and adoption for kidney and telex. We do believe that we are in a position to achieve that in 2022, and obviously that would be one of the highest milestones that I think that we could achieve in this particular population, which is diabetes and kidney disease. so many people are in the Medicare, Medicare Advantage, Medicaid population. So please look forward to more news, continuous news flowing out around the payment front over the next several quarters. Another major catalyst, obviously, is we are growing testing volume, which is critical. Testing volume is now coming from multiple directions, including, for example, the VA medical system, Mount Sinai Health System, some of our other partners, and we do expect that testing volume will continue to accelerate now that we put all the fundamentals in place to do that. Strategic partnering is also taking on a front line for us in 2022. We are in ongoing discussions with a number of different potential major strategic partners who could help us expand distribution nationally, could provide complementary products which are important for physicians to use to help reduce patient suffering in the diabetes and kidney community. And I believe that Kidney IntellX and Renalytics have opened up a very important market access channel through integrated provision of prognosis, diagnosis, and data analytics that are very valuable to larger strategic partners will also want to be in that same space. And everybody wins. The patients win. The physicians win. Obviously, the companies win. The shareholders win if we bring multiple groups together to help expand that market access channel. So there are a number of things which can catalyze growth in the near term. And investors should expect a continuous news flow in 2022.

Thanks, James. That was very helpful.

Thank you. Our next question comes from Yi Chen with HC Wainwright. Your line is open.

Hi. Thank you for taking my questions. My first question is, is the K-Intel X revenue recorded in the quarter directly proportional to the volume of tests conducted in that quarter?

No, it is not. And there's a bit of a disconnect, which is a classical disconnect. It is important for us to build user experience. It is important for us to bring physicians online for testing through multiple avenues, including the real-world evidence program. Not all of the real-world evidence program are necessarily revenue-generating tests. But what's going to happen now is as the volume has increased and the insurance coverage comes in, the revenue will start to catch up, or the paid-for testing will start to catch up to the volume growth. But we expect the volume growth will always be ahead of the reported revenue, and that is the way it works. And I think this is an important point. One component of strategy with achieving comprehensive insurance coverage is demonstrating use, utility, and demand. So That is really the objective. We want to see a lot of testing volume growth. We want to see a lot of reaction from physicians. We want to get a lot of real-world evidence. Data and utility at the end of the day is what's going to win out broad-scale adoption. But you will see testing volumes running ahead of revenue growth, and you will start to see the gap closing as we continue to get more and more insurance coverage, including Medicare.

So what is the current reimbursement collection rate for the tests conducted on a commercial basis?

You're looking for a percentage of paid-for tests versus volume? Yes. I don't have that offhand, and I don't know whether we are prepared to report that this quarter, but that will certainly be a metric that we would like to report out in the 2022 and as we get back actually to Anita's previous question on guidance we've obviously been very shy about providing guidance I think that's been appropriate at this stage of growth but as I said in my introductory remarks we're starting to develop confidence around guidance we're starting to develop confidence around 2023 revenue picture and at some point we expect we will have to provide guidance which will include more and more metrics. I think we're starting to, as we get more confidence, a lot more use of Kidney IntellX, we have more systems online, we're running from thousands of patients tested now, we're starting to be in a position, and we've done that on this call, where we're providing more and more specific utility metrics, volume metrics, that will help us define the true core model in fiscal 23 and fiscal 24. I just want to make sure before we do that that we're providing something that we can meet or exceed, which is important.

Got it. And you mentioned that going from 16 VHA health centers to 60 centers by the end of this year. So how many physicians are available in 60 centers ready to prescribe kidney Intel X tests? And what is the volume we can look forward to?

Yeah, again, we're not going to project volume, but I'll let Tom answer that question because it is important as we start to create a a lot more inroads into the VA system?

VA center size is variable, as you would expect moving from large urban centers into some of the states that are in the Midwest and Rocky Mountain regions. There isn't a rule of thumb as far as number of primary care clinicians per VA center, and I would have to go into our Salesforce application to actually give you an accurate response there. That's something that we can do, but I wouldn't want to just quote something off the top of my head and be incorrect with that.

Okay. And lastly, do you expect quarterly operating expenses to increase in the coming quarters?

No. I think we saw a spike in expenses as we set up the commercial infrastructure. It's not cheap, right? When you start deploying a national sales force, you're moving into different categories of there's just a baseline infrastructure that you have to set up to support that. And that's reflected in the December quarter numbers. We did refer to that, that we feel a lot of these are one-time expenses. But I want to make it abundantly clear we are going to be very prudent in terms of resource allocation going forward. And increasingly, there's going to be management demand to tie resource allocation to revenue generation. It is now time we're hitting a tipping point where if we start to build this business and ultimately I want to be in a position in calendar 2022, where we're actually reducing burn rate quarter over quarter, unless a major opportunity comes in place, which will be a no brainer for all of us to spend additional money. But especially in this market environment, we are not looking to tap the capital markets sequentially to fund a burn rate. We're in a position now with this previous financing where we have plenty of runway to execute on objectives, and I certainly intend to make sure that we maintain that runway. I think that's very important.

Thank you.

Thank you. As a reminder, to ask a question, you'll need to press star 1. Our next question comes from Mark Massario with VTIG. Your line is open.

Hey, guys. Thanks for taking the questions. I wanted to see if you've had any updates with Medicare. And I apologize if I missed this. I joined the call a little bit late. But any update from whether it's Palmetto, Noridian, NGS, or First Coast? And I'm just curious if you've billed Medicare and if you've received any type of payment from them at this time. Tom?

Sure. So we are, we have done the work to prepare a dossier, which shares the background of kidney and telex. And we are going to initiate the first Medicare claims in the second calendar quarter of this year. and we will gauge the payment percentage that we realize with that first regional Medicare administrative contractor during the quarter, and we expect to expand that to the other contractors over the summertime period to understand exactly what that payment percentage is going to be. For others on the call, I know what you're alluding to, Mark, that under new regulations for how CMS oversees the payment performance of these Medicare administrative contractors, often with tests like Kidney Intellects, laboratories secure out of the gate a certain payment percentage. that is significant, and they use that as a basis for continuing to do business with Medicare. And so we will see how we fare with that when we share our results at the end of the next quarter.

Okay, that's helpful. And I guess for the commentary that you plan to meet or exceed 20 health care systems, how many of those are VA hospitals versus maybe systems that you're planning to add that you're not yet contracted with at this time?

Yes, so now I'm prepared to answer that question, Mark, which Dan Arias asked the previous quarter. Okay. The answer is that we don't exactly know what the mix is going to be, but now that we are vendorizing and moving out to the VA health system, we have a number of other systems, IDNs in the pipeline. We've made the comment that we expect to meet or exceed 20 systems by the end of the year. Exactly what the ratio is going to be between VA health care systems and outside IDNs, I don't know. Let's see how that plays out. but what we're trying to do is position ourselves to exceed that number. And with the way that the VA rollout is going, I think the VA will play a measurable percentage of those 20 hospital systems. And I think, you know, when we start to get over 20 centers is the proper word, that is a very meaningful distribution. That means that we can reach a whole lot of patients and, And we can do it in most cases with support of population health departments, clinical medicine. And what we're demonstrating in Mount Sinai is that is a unique model and it works very well starting to drive utility. It also gives us an incredible opportunity to gather data, specifically behavioral data to understand how is advanced prognosis affecting quality of care? How are physicians reacting to advanced prognosis? How can we improve kidney and telex to make the process better, simpler, faster, especially for the primary care physician, so that they can get the care and the understanding around that patient. So 20 systems I'm confident at at the moment. I'd like to exceed it. I think the VA Medical Center will be a significant part of that group, and I think we'll add additional IDNs on top as well. Should be a very good mix in 2022.

Okay, terrific. And maybe just my last question. I know that you're not prepared to initiate guidance today, but on the other hand, we are pretty much done with the March quarter. So you had a nice lift sequentially, Q4, a nice $200,000 lift. But the March quarter would suggest, you know, another million on top of that. I think 1.7 is consensus for March, and I think 9.4 is consensus for fiscal year June. So recognizing that we're pretty much done with March, you know, for the purposes of just not having significant surprises today, Can you just comment about whether or not you think consensus is aligned appropriately, or should we sort of bake in a little bit of wiggle room as you kind of operationalize the business in the early launch and maybe bake in some additional conservatism relative to where the street is?

So I'm not going to take the bait on that, Mark, largely because there are a number of variables involved. which are happening at the moment, which could have a significant impact on how that ultimate year-end number rolls out. But I think that we are making significant progress. And I think that the most important thing is that we're showing a consistent increase in testing volume growth quarter over quarter. And we're getting to the point right now where we're having a lot of confidence in that. More importantly, I think the real question for us is how do we scale this business to the point where we can start to generate significant revenue in fiscal 2023? And as I said in my statement, that is very much a focus. And influences on that are going to be strategic partnering, for example, exactly how quickly rollouts continue in various markets. like the VA medical system. But we're starting to get a handle around how that is looking, and we'll provide more information as we develop confidence.

Okay. Is there any way to get an update on your go-to-market strategy? I think, you know, you've talked about, you know, scaling the personal headcount as well as MSLs, but can you give us an update and, you know, And could you also comment on your funnel of potential new health systems? Tom, do you want to take that?

Sure. So in terms of new health systems, we are committed to pursuing our regional approach. So looking for synergies focused significantly on the New York Northeastern markets and the Southeastern markets of the U.S., we think that that makes really good sense both from a business standpoint, building where we have success and payer coverage, but it also makes commercial sense because it creates a very cost-efficient model in terms of the investment in sales resources as we go forward here and we look at return on investment in the significant way that O.J. described. And did I miss something else there, Mark? I'm sorry.

Oh, yes. The number of salespeople and just how you're planning to add MSL to support the territory reps.

Sure. So our whole sales force plan is that we will invest in that support where everything that we look at in terms of our commercial models indicate that we will have a significant return on that investment within the first 12 months. In terms of the medical science liaison, the physician education support that we need to provide, what we understand clearly with Kidney Intellect is that this is new. We know primary care physicians spend less than 10 hours in their medical education on chronic kidney disease. So we are very committed to having trained professionals, clinical backgrounds who are out in the field and able to first create awareness of the importance of treating early stage kidney disease. It's 95% of the patient population with kidney disease. but also to support them in understanding the new therapeutic approaches, all of the recent developments in what can be done to delay or prevent progression. So as that commercial footprint expands, we expect that that MSL, that medical education footprint, will expand proportionately.

Okay, great. Congrats on the progress as well as the financing.

Thank you. Our next question comes from James Nutquist with Investec. Your line is open.

Hi, everyone. Just a couple of gap-filling questions for me, please. First of all, on the consented rapid biorepository, you may have mentioned this, but just to understand, what patient data goes into this database? Does this scale... with the number of patients tested on a commercial basis, or is it an entirely separate endeavor? I understand that not all records in RAPID are generated from commercial testing, but what I'm curious about is what proportion of commercial tests enter the RAPID database, please, just to understand how it works. And secondly, on EHR integration, again, just so I'm clear, could you just confirm, please, which health systems are currently linked up in this manner, and to what extent? This is determining the pace of the rollout, particularly the VA rollout. And then finally, on the gross margin, assuming scaling in line with realistic expectations, where could we see this going over the next few years? Thank you.

Thank you, Jens. And I'll let Fergus answer your first two questions on gross margin. We have said in the past that we expect, as we continue to scale up, our target is 80% plus gross margins. we see no reason why we can't hit that number based on the cost of goods that we're experiencing through several thousand tests at the moment. So that number is very much firming up. And I'm glad you asked about RAPID because that is such a valuable intrinsic program because at the end of the day it is data, and it is quality data over time that is going to generate results extensive reimbursement. It's going to help with additional regulatory approvals. It's going to provide more utility data to get into guidelines. Data is what drives everything in our business. And Rapid is highly unique. You just don't see such large, longitudinal, comprehensive, quality-controlled biobanks with matching EHR out there. So this will be one of the largest, if not the largest, commercially available biorepository for product development, data analytics, et cetera. But it's a very good question on what goes into it. Fergus, do you want to just talk a little bit more about it?

Yeah, hi, Jens. Just to clarify, so to be included in the biorepository, patients must consent for both their samples, which are collected longitudinally up to three times over the course of a two- to three-year period. So they're consenting for multiple sample collections and for the use of their longitudinal data. So all of the specimens, and we have to be very disciplined, all of the patients included in our rapid repository must have consented and will typically come from our real-world evidence IRB-approved protocols, of which we have three underway and further may emerge in the future years. but a straightforward commercial test does not enable us to use that data in our biorepository because the patient hasn't consented for that purpose. Separately, in relation to health system integrations, you're aware that we've learned a lot from the Mount Sinai integration. We've taken a lot of those learnings and moved that forward into the Wake Forest integration, and we're using a hybrid of the MyIntellX platform and our integration model with Atrium Health down in North Carolina also. And we're at advanced planning stages in three other systems for the full integration model, which involves deploying software to extract the data that we need to execute the kidney intellect test and seamlessly deliver the results. with obviously all of those future pipeline systems looking at using that streamlined model of integration going forward.

Okay, great. That's very clear. Thank you.

Thank you. And again, ladies and gentlemen, to ask your question, you'll need to press star 1. And I'm currently showing no questions at this time. Ladies and gentlemen, thank you for your participation in today's conference. You may now disconnect. Everyone have a wonderful day.