OncoCyte Corp

NASDAQ:OCX

Earnings Call Transcript 2023-Q3

[Operator]

Thank you for standing by. My name is Tamika, and I will be your conference operator today. At this time, I would like to welcome everyone to the Oncocyte Third Quarter 2023 Earnings Conference Call. [Operator Instructions]

I will now hand today's call over to Stephanie Prince of PCG Advisory. Please go ahead.

[Stephanie Prince]

Thank you, Tamika, and thank you to everyone joining us for today's conference call to discuss Oncocyte's third quarter 2023 financial results and recent operating highlights. If you have 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, Oncocyte'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-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. Josh?

[Joshua Riggs, executive]

Thanks, Stephanie, and welcome, everyone. In the quarter, we achieved a positive coverage decision from CMS for our proprietary transplant assay, saw a significant new data release and made progress on key manufacturing milestones. We continue to manage our spend down and reached our lowest cash burn, net of financing, in 4 years. We believe our path to revenue is clear with multiple products launching in the first half of 2024. And our plans to layer high-margin products on top of the capital-light infrastructure will set Oncocyte up for rapid value creation.

Innovation usually happens in a centralized way like what we do with our labs in Nashville and Germany, the central labs led us explore technology, find new clinical indications and create new markets in a very controlled way. But what is great for innovation doesn't necessarily serve broad market adoption or meet the needs of clinicians managing patients locally. As clinical markets begin to mature, there is a natural pull to bring testing closer to the patient and the decisions that are being made in the clinic.

We can see this starting in transplant. The demand for local testing options is growing by the day. We expect that billions of annual margin opportunity are going to shift over the next few years to meet this growing demand. Companies that do a job of making testing accessible and easy to use are going to be the natural beneficiaries of this change. We believe that our universal pCR-based workflow is quicker and easier to use than anything built on the back of a next-generation sequencing system.

This shifting demand is why we pivoted our commercial approach from one that is a central lab-driven one to one that is built on scalable kitted products. By 2026, if we've hit all our development milestones, we believe that rapid local testing for transplant recipients will be the norm and patient compliance and access to this organ-saving technology will be at an all-time high.

For early adopters, we are planning to launch a research-use only or RUO version of our technology that we expect will be available in the first half of 2024. This is expected to be followed by a regulated version in the second half of 2025. And both of these products are based on our proprietary technology backed by 10 years of research and development. Going from a lab-developed test to a regulated product is not easy. And the fact that we were able to convert our lab-developed tests or LDT workflow into a globally distributable product speaks to the robustness of the assay and the underlying technology.

While we are building out the manufactured product, we plan to continue to create clinical value through our innovation centers in Nashville and Germany. Recent data from a randomized interventional kidney study shows that our technology can pick up ABMR, a common and dangerous type of organ rejection, in DSA-positive patients 10 months ahead of standard of care. DSA is a biomarker that is used in monitoring for organ health in transplant patients. Those have become DSA positive or at higher risk for rejection.

This study puts DSA-positive patients into 2 arms, 1 that use our test and another that didn't, and what we found is that those that use our tests were able to capture rejection much sooner than those that didn't. And this is big. I mean there's no other company that has reported anything like this level of validation. Approximately 20% of kidney patients will test positive for DSA within the first 5 years of kidney transplant. Many of them will go on to have rejection and potentially lose the organ.

The data shows that using our technology gives an opportunity for earlier intervention. When this data publishes, we anticipate submitting for an expanded claim for routine monitoring of these at-risk patients. If approved, this opens up a significant recurring revenue opportunity. Based on the data and the study design, we will recommend 6 tests within the first year of a patient testing positive for DSA.

As I mentioned earlier, we believe easy-to-use regulated product is the future of the market that's pushing us forwards. Our first step is to submit both of our kidney claims to the FDA under its single site program, bringing us in line with recent guidance. Single site is a process available to labs like ours to gain clearance for their products and usually has the advantage of bringing all your clinical data with it instead of needing to rerun a bunch of studies.

Our kitted product will follow a parallel path known as 510(k) and we'll be able to tap into the great clinical work we are doing in the lab. The ability to combine clinical innovation from our lab with our easy-to-use product is what will set Oncocyte up to be the market leader in global transplant patient management.

As of today, our progress continues to support and draw interest from strategic partners that would like to see this testing in their channel. We are pleased with the progress we are making in these discussions, and expect to be able to update the market as more information becomes available in the near term.

Our oncology products, DetermaIO and DetermaCNI, continue to progress through their development stages. We anticipate that both will largely follow the same path that our transplant test is charting to market. You can expect strong clinical validation, followed by rapid kit development and deployment. For the IO product specifically, progress continues on the 800-plus patient SWOG study in triple-negative breast cancer. And assuming a positive outcome there, we expect that there will be significant strategic interest in the assay.

For CNI, we're still waiting on the publication of the pancreatic data presented at AACR earlier in the year. Once the publishes, we'll be submitting to MolDX under LCD 38835. This is the same LCD in multiple companies that received coverage during the past several months. Reimbursement for these types of assays has reached into the thousands per episode of care. The timing of submission is expected to be in the first half of 2024.

Moving over to the financials. Q3 saw much of the benefit of the cost reductions we did in the first half of the year. Cash burn was $3.6 million in the quarter, leaving $14.2 million of cash, cash equivalents and marketable securities on the balance sheet. This is a 72% improvement in cash burn year-over-year. Our consolidated revenues for the third quarter were approximately $400,000, and cost of revenues for the third quarter were approximately $200,000, primarily from services customers.

Research and development expense for the third quarter increased 48% year-over-year from $1.5 million to $2.2 million, driven by our strategic pivot to focus on investment in developing manufacturable versions of our assays. General and administrative expense for the third quarter decreased 56% year-over-year from $5.7 million to $2.5 million, reflecting our successful efforts to reduce spending.

Sales and marketing expense for the third quarter increased 76% year-over-year from $400,000 to $700,000, and we focused our sales and marketing investments on our early access program and early market access work.

GAAP net loss from continuing operations of $6.5 million or $0.79 per share as compared to a net loss of $1.8 million or $0.31 per share for the third quarter of 2022. We have provided a reconciliation between these GAAP and non-GAAP operating losses in the financial tables included with our earnings release.

Non-GAAP operating loss as adjusted for the third quarter was $4.1 million, an increase of $1.9 million compared to the same period in 2022. A quantitative reconciliation to GAAP net loss from continuing operations can be found in our earnings release, which is available at our website.

We have reflected the operations of Razor as disc ops for all periods presented in our financial statements, and we are maintaining guidance of sub-$5 million in quarterly average burn for the foreseeable future. Thank you.

[Operator]

[Operator Instructions] Your first question is from the line of Mike Matson with Needham.

[Michael Matson, analyst]

I guess I'll start with the VitaGraft test. So it's -- how do you plan on selling those? I guess at this early access program first, and then once you go beyond that, are you going to have to go out hire some salespeople?

[Joshua Riggs, executive]

Yes. No, great question, Mike. We expect that -- we've already started the premarket activity for the kitted product. And we will start taking preorders in the first half of next year with a full market launch towards the end of Q2. So yes, we will be putting on a sales force that will be calling on research labs that are interested in bringing up the RUO version of our product.

[Michael Matson, analyst]

Okay. Got it. And then I didn't really hear much about the cancer side. I mean is there still plans to proceed with any of those tests like DetermaIO?

[Joshua Riggs, executive]

Yes. No, I think we love our oncology content. We're just waiting on data to generate at this time. So we're -- once that data publishes, you'll see much heavier investment on that front. But right now, we're just playing our cash pretty close.

[Michael Matson, analyst]

Yes, understand. Okay. And then finally, you're talking about the market moving to -- away from kind of the lab-developed transplant tests to the kitted tests or local testing. So are you aware of any other companies out there kind of pursuing the same strategy that you guys are, moving to kitted? Or -- I mean, I know that [ your competitors ] are mainly lab-developed tests.

[Joshua Riggs, executive]

Yes. I mean, so you guys would have seen that there was an announcement from One Lambda, they did a partnership with Devyser to bring an NGS kit to market. And so they're -- they've gotten -- they're marketing in both the EU and the U.S. And then Omixon has been also bringing a kit to market here in the U.S. So the -- I mean, the kind of the writing is on the wall for us that the market is eventually going to shift its way.

It feels like kind of like the market environment before HIV testing democratized, before BioFire really brought the infectious disease testing closer to the patient. It's just one of those things that feels natural. That as the clinical market really starts to understand the technology in utility in patients, the demand is to naturally run that in-house. And so we see that there's going to be a shift over the next couple of years as these technologies mature, as products get through the regulatory phases. But yes, there's strong demand out there.

[Operator]

Your next question is from the line of Mason Carrico from Stephens.

[Jacob Johnson, analyst]

This is Jacob on for Mason. Just a quick one from me. On cash burn, it was $3.6 million during the quarter. I think you said you expect that to remain below $5 million quarterly average. And sorry if I'm missed this, but is that going into '24 as well and includes expenses related to commercialization of new products next year?

[Joshua Riggs, executive]

Yes. I would say that it extends into the first half of next year.

[Operator]

[Operator Instructions] Your next question is from the line of Mark Massaro with BTIG.

[Vidyun Bais, analyst]

This is Vivian on for Mark. So you touched on it briefly in the prepared remarks, but just any update on the forming of a kitting partnership, how dialogue there is moving along particularly after securing kidney coverage here?

[Joshua Riggs, executive]

Yes. Thank you for the question. And I would say the conversations took a very positive turn when we got the coverage decision and when this data that was presented at ESOT about 1.5 months ago came out. We feel great about how those conversations are going. It's a competitive process, and we feel that we're going to be able to bring something home for the Oncocyte shareholders that's very positive.

[Operator]

At this time, there are no further audio questions. This does conclude today's call. Thank you for your participation. You may now disconnect your lines.

[Joshua Riggs, executive]

Thank you.