OncoCyte Corp

NASDAQ:OCX

Earnings Call Transcript 2023-Q1

[Operator]

Good day. And welcome to the OncoCyte First Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions]

Please note, this event is being recorded. I would now like to turn the conference over to Ms. Stephanie Prince of PCG Advisory. Please go ahead, ma’am.

[Stephanie Prince, PCG Advisory, IR]

Thank you, Chuck. And thank you to everyone joining us for today’s conference call to discuss OncoCyte’s first quarter 2023 financial results and recent operating highlights. If you have not seen today’s press release -- financial results press release, please visit the company’s website on the Investor page.

Before turning the call over to Josh Riggs, the company’s President and CEO, I would like to remind you that during this conference call the company will make projections and forward-looking statements regarding future events. Any statements that are not historical 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-Qs, 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 by law.

With that, I will turn the call over to Josh Riggs. Josh?

[Josh Riggs, President and CEO]

Thanks, Stephanie. And welcome everyone to our conference call to discuss our first quarter 2023 highlights. For today’s call, we will review the progress we have made improving our cost structure and pivoting to a high margin scalable product business. OncoCyte has been faster path to market and lightweight infrastructure.

Before we go there, I would like to try to provide a little extra context on our shift in strategy. While many other diagnostic companies are pursuing the more typical service lab business model. They have also historically generated substantially large losses and continue to consume significant capital.

OncoCyte’s kitted product commercial models should allow us to scale our revenue with relatively little capital, while we generate higher profit margins that are sustainable over the long-term.

As a company, we continue to face adverse market conditions, reining in costs and focusing investment in Q1 was critical. We consolidated our lab operations, pared down our product portfolio and right-size the company, eliminating over $20 million in annual operating expense. Going forward, we will continue to focus on managing spend down and driving towards a capital efficient model.

These efforts in the shift in strategy allowed us to complete a $13.86 million equity raise. That was at market continued to warrant coverage and was composed of topholders and insiders. We appreciate that continued commitment to the company and meeting the needs of patients.

Now on to our product portfolio. On our last call we talked about DetermaIO RUO was a kitted product. We are happy to announce that we are completed with the first phase of development and are now optimizing the assay to prepare for manufacturing.

DetermaIO continues to build its case is the best in class measure of the tumor microenvironment. We believe that this was evident in the recent peer reviewed publication of the results of a study applying DetermaIO to samples collected from the randomized Phase II AtezoTRIBE clinical trial in metastatic colorectal cancer.

The results were published in Clinical Cancer Research and showed the utility of DetermaIO in potentially identifying more responders to ICI therapy than current standard-of-care biomarkers. Additionally, we presented four abstracts exploring the tumor microenvironment and its potential implications for therapeutic response at the Annual Meeting of the American Association for Cancer Research.

Also at AACR data was presented highlighting exciting study results applying DetermaCNI, our blood based tests to metastatic pancreatic cancer that indicate our tests can identify patients not responding to therapy.

DetermaCNI is a blood-only solution for efficacy monitoring, which we believe will make it an attractive alternative for researchers that don’t have access to or need to conserve precious tissue, since no upfront tumor typing is required.

Our VitaGraft assays for transplant management continue to work their way through CMS as we pursue reimbursement. The kitted version of the transplant test is through Phase I of development and is on pace into manufacturing in the next three months.

We are looking forward to an expected early access launch date later this year, making our technology available to research labs here in the U.S. and abroad. Revenue is expected to begin in the first half of 2024.

Gaining reimbursement for our portfolio and bringing our test to market to generate revenue growth is essential. We believe our optimized product strategy will attract revenue generating external partnership and licensing opportunities and our reduce burn ensures our current resources were -- will carry us well into the first half of 2024.

At this point, I would like to turn the call over to Anish John to review our financials.

[Anish John, Chief Financial Officer]

Hi, everybody, and thanks for joining our call. Before we begin our formal review of the financials, I’d like to start by saying that OncoCyte overall has seen a significant year-over-year operating expense decline across all categories of spend in Q1 of 2023. This largely reflects management’s successful efforts to optimize the portfolio and definitively reduce our operating expenses.

With that, our consolidated preliminary revenues for the first quarter of 2023 were approximately $0.7 million, representing a decrease of 50% year-over-year. Excluding DetermaRx revenue, the continuing operations revenue related to pharma services was $0.3 million for the three months ended March 31, 2023.

Cost of revenues for the first quarter were approximately $0.8 million, primarily from the cost of diagnostic tests and testing services we performed for our DetermaRx and pharma services customers.

Research and development expense decreased 45% year-over-year from $5.1 million to $2.8 million, primarily due to the decrease in CLIA laboratory expenses and focused product development spend in the three months ended March 31 2023.

General and administrative expense decreased 34% year-over-year from $5.7 million to $3.7 million, reflecting management’s efforts to control spending not directly related to product development or commercial activities throughout 2022 and into 2023.

Sales and marketing expense decreased 63% year-over-year from $3.2 million to $1.2 million, mainly attributable to the decrease in product development and commercialization efforts of DetermaRx and due to the sale of Razor Genomics during the first quarter of 2023.

Now I’d like to turn to our GAAP and non-GAAP analysis. Non-GAAP operating loss as adjusted for the first quarter was $7.8 million, a decrease of $3.5 million as compared to the same period in 2022. GAAP operating income as reported for the first quarter was $2.9 million, a change of $12.8 million, compared to a loss of $9.9 million for the first quarter of 2022.

For the first quarter, we reported a GAAP net income of $3 million or $0.02 a share, as compared to a net loss of $10.3 million or $0.11 per share for the first quarter of 2022. We have provided a reconciliation between these GAAP and non-GAAP operating losses in the financial tables included within our earnings release.

Turning out of the balance sheet. As of March 31, 2023, we had cash, cash equivalents and marketable securities of $12.4 million. Net cash used in operating activities was $9.6 million for Q1 2023 and represents a 27% reduction versus prior year and includes non-recurring expenses related to the exit of the Razor business.

We anticipate continued improvement in quarterly operating cash burn levels in the back half of 2023 and are now revising our guidance to below $5 million in quarterly average burn versus the $6 million quarterly average burn in the back half of 2023 that we guided to you previously.

Lastly, I wanted to share that I will be resigning from my position of CFO of OncoCyte effective June 15, 2023. It’s been a privilege to serve OncoCyte during this period of significant transition, particularly over the last few quarters.

From an operational finance perspective, we had taken a difficult but needed steps to successfully right-size the organization, optimize our product portfolio and deliver on our commitment to reduce our burn rate. I am confident that these efforts have put us in the best position to bring our key products to market on behalf of our shareholders and patients.

I know we are well positioned to realize the key value milestones ahead and I want to take a moment to thank my colleagues here at OncoCyte, our Board of Directors and our shareholders for the privilege of serving as OncoCyte’s CFO.

That concludes my review of our financial highlights and I will return the call to the Operator for your questions.

[Operator]

[Operator Instructions] And the first question will come from Mike Matson with Needham. Please go ahead.

[Joseph Conway, Needham]

Hey, Josh. Hey, Anish.

[Josh Riggs, President and CEO]

Hi.

[Joseph Conway, Needham]

Just wanted to -- oh, sorry, this is Joseph on for Mike, by the way.

[Josh Riggs, President and CEO]

Hi, Joe.

[Anish John, Chief Financial Officer]

Hi, Joe.

[Joseph Conway, Needham]

Hey. So just wanted to maybe get an update on the milestone calendar maybe. Maybe what you guys expect to these like the first shoes to drop? We are obviously expecting a reimbursement decision for DetermaIO and in VitaGraft in the future, but you as well have the RUO product kind of lined up. So maybe if you could frame timeline a little bit, whether it be, first to reimbursement decision or maybe the first to contribute materially to revenue?

[Josh Riggs, President and CEO]

Yeah. I would say the transplant products are about six months ahead of DetermaIO in the reimbursement process. So our expectation would be that they would be the first shoes to drop. IO is a sort of a unique product from the point of view of MolDX. So they are going to take a little bit more time with that as they review it. So, yeah, I think, it’s kind of one of those things. Any quarter now, we are hoping that we get aligned with MolDX and we are able to announce reimbursement.

[Joseph Conway, Needham]

Okay. Great. And I guess maybe on IO and VitaGraft. I know for IO you have an EAP ongoing at around seven sites or so, if you could confirm that. But could you maybe talk about both those programs? How large is the VitaGraft EAP? What’s been the feedback from those and the reorder rates, but yeah, maybe just some color on both of those?

[Josh Riggs, President and CEO]

Yeah. I think the early access program is a wonderful learning tool for us and I think we -- it allows us -- without the pressure of having to stick specifically to a claim, we can ask open-ended questions with our collaborative researchers at multiple academic institutions and sort of large oncology networks.

And they are really exploring the utility of DetermaIO and its sort of reliable nature in identifying patients that are going to respond to immunotherapy and they -- and we find that we are able to move towards IRBs and ask new questions with the product. So I think there’s been robust interest around DetermaIO in that program and the site enrollment continues to grow there.

And the same with the transplant test, there -- we talked about it on the last call that there are several unanswered questions today in transplant management, and having an early access program, giving access to these researchers to the technology has opened up a lot of interest in the community to ask new questions alongside the ones that they need to answer for day-to-day patient management.

[Joseph Conway, Needham]

Okay. Okay. Great. Thank you very much. Maybe just one more on DetermaIO. So I assume it’s six months or so away from any potential reimbursement decision. But maybe as we get closer to that and maybe what you have been talking about in the EAP program, while the test seems to outperform traditional methods PD-L1 or TMB. We have obviously seen that the accuracy has improved with combining those assays. So will you expect to or are you currently kind of marketing the test in that way in the sense that look to use this test to combine with other diagnostic methods? Thanks.

[Josh Riggs, President and CEO]

No. It’s a really insightful question. I think the biomarkers that exist today have done an amazing job of attracting CDX claims and improving their utility. I don’t imagine that they are ever going to go away. I think DetermaIO will be used in the context of that really complicated clinical decision point and clinical environment.

[Joseph Conway, Needham]

Okay. Great. Thank you very much.

[Operator]

The next question will come from Mason Carrico with Stephens. Please go ahead.

[Mason Carrico, Stephens]

Hey, guys. Maybe just could you provide some color around those early conversations or the interest from potential customers for the DetermaIO product overall demand, any incremental color you can give there?

[Josh Riggs, President and CEO]

Yeah. I would say our best data is in the greater than 50% PD-L1 expressers in non-small cell lung cancer. This is a population where you are trying to make a decision on do I add chemo, o I not add chemo and I think we provide unique information in that setting alongside multiple other clinical indications that we published on.

But I would say there’s been a high degree of interest in non-small cell lung cancer and then also in triple-negative breast, where the SWOG study, where we are going to do well over 800 patients looking at adjuvant pembrolizumab or Keytruda. It’s -- doctors are seeing the value of having a test that they can rely on to identify who’s actually going to respond to the anti-PD-L1 therapy.

[Mason Carrico, Stephens]

Got it. That’s helpful. And then thinking about your cash runway could and you have provided some color on this. But could you just help us think about what are the key items that are baked into the current budget and what do you view as kind of the key risks that could arise that could potentially shorten the cash runway?

[Josh Riggs, President and CEO]

Yeah. I think we have brought the cash runway down primarily with the expectation that revenue wasn’t going to start until the first half of next year. And so I think we see as -- we see ourselves in kind of a development stage at this point and so the cash flows or cash burn should be relatively predictable. But there -- I mean, I guess, there’s always the unknown unknowns out there, but there’s nothing that I can foresee at this point that would sort of lumpiness into that. Anish?

[Anish John, Chief Financial Officer]

No. And I think, organically, I mean, obviously, we are coming off of two risks in 2022, which were sort of an operationally organically seeing savings as a result of these -- a direct result of these efforts and so I’d confirm what Josh is saying in terms of we are starting to see or get an operating rhythm where the expenses are very predictable at this point.

[Mason Carrico, Stephens]

Got it. That’s helpful. That’s it for me. Thanks.

[Josh Riggs, President and CEO]

Thank you.

[Anish John, Chief Financial Officer]

Thank you.

[Operator]

The next question will come from Mark Massaro with BTIG. Please go ahead.

[Vidyun Bais, BTIG]

Hey, guys. This is Vidyun on for Mark. Thanks for taking the questions. So a few other companies in our space are reporting broad-based pressures on transplant volumes across all organ types. So can you just give us a sense about how you are thinking about the space, I think liver is a relatively underpenetrated indication, but I just wanted to get your updated views there on what you are seeing? Thanks.

[Josh Riggs, President and CEO]

Yeah. I think the recent CMS clarification on what’s billable, what’s not billable, probably, clip the topline in the industry. But I also think it speaks for the reason on why you want to create an RUO version of the product, so that you can open up new indications for the technology and begin to grow the top line again.

[Vidyun Bais, BTIG]

Okay. Understood. Thanks. And then I guess on the potential kitting partnership, just how are those conversations progressing and any timing you can share on when we might expect to hear an update there? Thanks.

[Josh Riggs, President and CEO]

Yeah. I mean, I’d say, those conversations are ongoing. We were talking to manufacturers and we are also talking to distribution partners. I think the imperative for us is to have a product on market by the end of the year and I think as we get into Q3, we will have a lot of clarity on what that commercial strategy will look like.

[Vidyun Bais, BTIG]

Okay. Perfect. And maybe just one last one for me, on the step down in cash burn, just how you are thinking about rep expansion or other investments just to help facilitate commercialization of kitted products? Thanks.

[Josh Riggs, President and CEO]

No. Good question. I think we are committed to maintaining a capital-light infrastructure here at OncoCyte and our primary mode of commercialization will be through partnership or distribution.

[Vidyun Bais, BTIG]

Okay. Awesome. That’s it for me. Thanks for taking the questions.

[Josh Riggs, President and CEO]

Thanks, Vidyun.

[Operator]

The next question will come from David Westenberg with Piper. Please go ahead.

[Tyler Anderson, Piper]

Hi, everyone. This is Tyler on for David. Thank you for taking my question. So just zooming into IO, can you describe the early access customers that you have been talking to and what kind of feedback you have gotten from them as well as if you have had any discussions for presales?

[Josh Riggs, President and CEO]

Yeah. I love the question, because we have got a really good mix in our EAP. So there’s kind of the broad based networks of oncologists that are kind of very well known in the Southeast and then there’s the academic institutions.

So I think we are getting feedback from a lot of different clinical experiences and sort of the utility of the test in those environments. And I would say, generally, the demand is strong for a reliable test that they can use to help manage their patients.

[Tyler Anderson, Piper]

Okay. And what is the manufacturing ramp-up in Q3 looked like as far as like a volume cadence going forward into Q4, if you have any insight on that? And then do you expect to see any increase in sales and marketing expense, considering you are going to distribution route or is that going to remain suppressed for quite some time?

[Josh Riggs, President and CEO]

I would expect costs to remain suppressed. But then as far as manufacturing ramp up, I wouldn’t expect anything significant this year and it’s really tough to project 2024 at this point, just ahead of us even getting into manufacturing. I think we will be able to update what that looks like in future calls.

[Tyler Anderson, Piper]

Perfect. Thank you, guys.

[Josh Riggs, President and CEO]

Thank you.

[Operator]

[Operator Instructions] Our next question will come from Bruce Jackson with The Benchmark Company. Please go ahead.

[Bruce Jackson, The Benchmark Company]

Good morning and thank you for taking my questions. I just wanted to get a little more specificity around the timelines for the reimbursement. So would VitaGraft be roughly third quarter potentially?

[Josh Riggs, President and CEO]

Yeah. I mean I don’t want to put words in MolDX’s mouth, but we would -- that’s in striking distance for us. I mean we have been working with them for going on a year now and so we are hopeful that we are at the end of the road with them, but we could have more work to do.

[Bruce Jackson, The Benchmark Company]

Okay. And then DetermaIO would be roughly six months after that, again, potentially, because we don’t know exactly what MolDX is going to do?

[Josh Riggs, President and CEO]

Exactly. You have got that right.

[Bruce Jackson, The Benchmark Company]

Okay. Perfect. And then any update on DetermaCNI in terms of the development?

[Josh Riggs, President and CEO]

Only the publication that was at AACR in pancreatic cancer, where it’s a unique use case for DetermaCNI, where there’s really two first-line therapy decisions and when one is not working, you flip to the other.

And so having an early notification that the therapy is not serving the patient is potentially beneficial in management of patients and we demonstrated that we are a good early warning system for when the therapy is not working. So I think that’s for us very encouraging in a very problematic cancer and then we are going to do additional clinical development that we will be able to update on later in the year.

[Bruce Jackson, The Benchmark Company]

Okay. Great. Thank you very much.

[Josh Riggs, President and CEO]

Thank you.

[Anish John, Chief Financial Officer]

Thank you.

[Operator]

This concludes our question-and-answer session, as well as our conference call for today. Thank you for attending today’s presentation. You may now disconnect.