Q4 2023 OncoCyte Corp Earnings Call

Participants

Jeff Ramson; Investor Relations; PCG Advisory Inc.

Joshua Riggs; President, Chief Executive Officer, Director; OncoCyte Corp

Mike Matson; Analyst; Needham & Company Inc.

Mason Carrico; Analyst; Stephens Inc.

Bruce Jackson; Analyst; The Benchmark Company LLC

Presentation

Operator

Thank you for standing by. My name is Jay, and I will be your conference operator today. At this time, I would like to welcome everyone to the OncoCyte fourth-quarter and year-end 2023 earnings conference call. (Operator instructions)
I would now like to turn the conference over to Jeffrey Ramson, PCG Advisory, Inc. You may begin.

Jeff Ramson

Thank you, operator, and thank you, everyone, for joining us for today's conference call to discuss OncoCyte'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, OncoCyte 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. OncoCyte 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.

Joshua Riggs

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 Bio-Rad to support the global launch of the graft share product they invested alongside current and new shareholders and 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 in 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 US and Germany with OncoCyte acting as commercial deals outside these countries, Bio-Rad has been granted exclusive global 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 opportunity. 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 growing, underserved or unserved. It's really challenging to trying to 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, Bio-Rad has been granted an option for IVD 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. And 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 IVD 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 graph to show kit and easy to use whenever 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 installed 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 BiDil breadth, kidney. This year, we have an opportunity for claims expansion. When the data that was presented at Aesop gets published that is currently in review, claims expansion would be an opportunity to build beyond the forecast 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 a PMR, a common and dangerous type of organ rejection in DSA. positive patients, 10 months ahead of standard of care. Dsa is a biomarker that is used for monitoring for organ health transplant patients, those that become PSA POSITIVE are at higher risk for rejection. This study put DSA positive patients into two arms. One used our test and the other day. Those that used our tests were able to catch rejection much sooner than those that did approximately 20% of kidneys. 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 organ. 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, a PMR assuming positive outcome of these trials and early diagnosis will become truly crucial. We are watching these Phase two studies very closely as we believe that they have the opportunity to change the outcomes for the many patients that experienced a DMR and our technology has the potential to be the front end diagnostic to find these patients in time to make a difference what determines C. and I. We are waiting on the publication of pancreatic data presented at AACR earlier in 2023 to submit to Multex under LCD. three eight eight three five. This is the same LCD that multiple companies have received coverage on during the past several months. Reimbursement for these types of assays has reached into the thousands per episode of care for determine 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 where it would represent an opportunity to support the treatment decision post surgery for these patients by identifying those most likely to benefit for 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 burn 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 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. We focused our sales and marketing investments on our early access program and early market access work for the RUO product.
GAAP net loss from continuing operations of $16 million or $1.99 per share as compared to a net loss of $12 million, or $2.8 per share, for the fourth quarter of 22. 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 oncocyte.com, we have reflected the operations of RaSer 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 has good products. You have 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 by our right to invest is the chance to take the lead in an opportunity that only comes along once in any seven clinical markets where it shifts from one that's centralized to one that's local. It only makes sense. The transplant centers would rather have an answer in a day instead of waiting up to a week for results from a lab at 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 and 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.

Question and Answer Session

Operator

(Operator instructions) Mike Matson, Needham.

Mike Matson

Yes, thanks for taking my questions. I guess just a few on the Bio-Rad agreement. So can you tell us what their installed base is US and OUS, if possible, for the for the machines that can run this test and they don't publicly disclose their installed base.

Joshua Riggs

Okay. No, that's fine. And then just to be just to be clear, make sure I understand how it's going to work. So initially you'll be working with them will be a research use only version that has still trying to build up some initial customers using that test and then potentially you'll have FDA cleared and you cleared versions of the kitted tests and to have them sell for their lab testing systems.
That's correct by. And so we're in we're excited by it either there's there's a really nice overlap between the life science side of Bio-Rad 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 are who have the talented surgeon that can actually perform the transplant surgeries. So there was a really nice overlap in call points that made that make a lot of sense.

Mike Matson

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

Joshua Riggs

They are not.

Mike Matson

Okay. All right. And then are you going to continue to offer the transplant tests in the US as a lab-developed test or clear way of testing your own facility or is it again I fully transitioned over to be to be in kitted.

Joshua Riggs

So we will absolutely maintain our service lab in Nashville. It's a it's a wonderful vehicle for us to do clinical development work it through through that lab that we're able to engage with Multex to get, 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 single site or 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 pass it through the FDA and look forward to being able to bridge those two things together in the future.
Okay.

Mike Matson

And then finally, what should we expect for pricing on the kids had one year? We have fully transitioned over to clear version of the product. I don't know if you're willing to disclose that.

Joshua Riggs

But what I mean, I can tell you how the math usually works is So depending on whatever the reimbursed value is for the test and so that's whatever your customer can build on to the payers, you're usually capped at about 50% of the reimbursed value, pretty per the top end of your pricing. And so if you have a kit that has a national price, it's 1,500, then the limit you can really charge to generate. The result is about 750. If it's 2000, it's 1,000, it's 1,500. 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.

Mike Matson

Okay. But then you would I assume you'd be sharing a portion of that pricing with Bio-Rad?

Joshua Riggs

That's correct.

Mike Matson

Okay. All right. Thank you.

Operator

Mason Carrico, Stephens.

Mason Carrico

Can you guys hear me all right on?

Joshua Riggs

Yes.

Mason Carrico

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 Bio-Rad is going to work going forward? I mean, given your 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? Thanks.

Joshua Riggs

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

Mason Carrico

Got it. Okay. And could you talk a bit about revenue expectations going forward as well as the cash burn outlook, sir?

Joshua Riggs

So the new 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. You will will tick up a bit here in Q2 with just some some manufacturing expense and one-time expense. But and I think you can expect to see us trying to maintain that below $5 million a quarter and on you take below 5 million on a quarterly burn basis average.

Mason Carrico

Got it. That's helpful. Thanks.

Operator

Bruce Jackson, The Benchmark Company.

Bruce Jackson

Hi, good morning and thank you for taking my question and beginning into the PayPay on. So getting into the mechanics of how this works with some Bio-Rad will start this year 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 as like a license fee? Our debt hits the users or the operating expenses or the nonoperating expenses? Tell me how the mechanics of the just one piece of it are going to work?

Joshua Riggs

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

Bruce Jackson

Okay. And then with some 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 on your revenue stream services can be like the land revenue and then there's also the R&D load ship revenue. So does the company how that piece of it is going to flow?

Joshua Riggs

Yes. And we built the boat show up on the top line and one of the sharpest services and will show up as products. I don't know if that answers your question, but how many does it does.

Bruce Jackson

And then on last question is on the on the incremental sales and marketing spend. So is to give me any shifts in the I just did the 5 million burn rate per quarter I'm sorry, less than 5% to $5 million burn rate per quarter and from R&D to sales and marketing, or is it just maybe a little color on the operating expense mix would be helpful. Thank you.

Joshua Riggs

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, you know, we we will be trying to maintain as well as we can that that below $5 million quarterly burn. Again, we are doing a tick-up here in Q2 with just some one-time manufacturing expense. Obviously some deal costs, but we'll go right back to that outlook.

Bruce Jackson

All right. That's it for me. Congratulations on the agreement.

Joshua Riggs

Thank you. Appreciate it.

Operator

There are no further questions at this time. That concludes our Q&A session. This concludes today's conference call. You may now disconnect.