Insight Molecular Diagnostics - Q1 2023
May 11, 2023
Transcript
Operator (participant)
Good day, and welcome to the Oncocyte 1st quarter 2023 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal conference specialist by pressing the Star key followed by zero. After today's presentation, there will be an opportunity to ask questions.
To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. 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 (Managing Director)
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 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 fact or 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 the 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'll turn the call over to Josh Riggs. Josh?
Josh Riggs (President and CEO)
Thanks, Stephanie. Welcome everyone to our conference call to discuss our first quarter 23 highlights. On 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 a faster path to market and lightweight infrastructure.
Before we go there, I would like 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 model 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. Reigning in costs and focusing investment in Q1 was critical.
We've consolidated our lab operations, pared down our product portfolio and right-sized 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 and the shift in strategy allowed us to complete a $13.86 million equity raise that was at market, contained no warrant coverage, and was composed of top holders and insiders.
We appreciate that continued commitment to the company and meeting the needs of patients. Now onto our product portfolio. On our last call, we talked about DetermaIO RUO as a kitted product. We are happy to announce that we are complete with the first phase of development and are now optimizing the assay to prepare for manufacturing. DetermaIO continues to build its case as the best-in-class measure of the tumor microenvironment.
We believe that this is evident in the recent peer-reviewed publication of the results of a study applying Determa IO to samples collected from the randomized Phase two atezolizumab clinical trial in metastatic colorectal cancer. The results were published in Clinical Cancer Research and showed the utility of Determa IO 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 test, to metastatic pancreatic cancer that indicate our test 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 one of development and is on pace to enter 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 tests 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 reduced burn ensures our current resources 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 (CFO)
Hi, everybody, 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. 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 31st, 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 CLeO laboratory expenses and focused product development spend in the three months ended March 31st, 2023.
General 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. 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 a 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 now to the balance sheet. As of March 31st, 2023, we had cash equivalents and marketable securities of $12.4 million.
Net cash used in operating activities was $9.6 million for Q1 2023, 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, 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 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 the 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'm 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're well positioned to realize the key value milestones ahead, I wanna take a moment to thank my colleagues Oncocyte, our board of directors, and our shareholders for the privilege of Oncocyte' CFO. that concludes my review of our financial highlights, I'll return the call to the operator for your questions. Oh, I'm sorry.
Operator (participant)
We will now begin the question-and-answer session. To ask a question, you may press star then 1 on your touch tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we'll pause momentarily to assemble a roster. The first question will come from Mike Matson with Needham. Please go ahead.
Yasin Ebrahim (Analyst)
Hey, Josh. Hey, Mish. Sorry, this is Yasin Ebrahim for Mike, by the way.
Anish John (CFO)
Hey, Yasin.
Yasin Ebrahim (Analyst)
Hey. Just wanted to maybe get a, you know, an update on the milestone calendar. Maybe, maybe what you guys expect to be like the first, you know, shoe to drop. We're obviously expecting a reimbursement decision for DetermaIO and VitaGraft in the future. But you as well have the RUO product kinda lined up. Maybe if you could, you know, frame the timeline a little bit, whether it be, you know, first to reimbursement decision, or maybe the first to contribute materially to revenue.
Anish John (CFO)
Yeah, I would say the transplant products are about six months ahead of DetermaIO in the, in the reimbursement process.
Josh Riggs (President and CEO)
Our expectation would be that they would be the first to choose to drop. You know, IO is a sort of a unique product from the point of view of MolDX, so they're gonna take a little bit more time with that as they review it. Yeah, I think it's it's kind of one of those things that any quarter now, we're hoping that we get aligned with MolDX, and we're able to announce reimbursement.
Yasin Ebrahim (Analyst)
Okay, great. I guess maybe on IO and VitaGraft. I know for IO you have an EAP ongoing at around 7 sites or so, if you could confirm that.
Could you maybe, you know, talk about both those programs? You know, how large is the VitaGraft EAP? You know, what's been the feedback from those and the reorder rates? 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. You know, I think it allows us, you know, without the pressure of, you know, having to stick specifically to a claim, we can ask open-ended questions with our, you know, collaborative researchers at, you know, multiple academic institutions and sort of large oncology networks. You know, they're really exploring the utility of DetermaIO and its sort of reliable nature in identifying patients that are gonna respond to immunotherapy. They, and we find that we're able to, you know, move towards IRBs and ask, you know, new questions with the product. I think there's been robust interest around DetermaIO in that program. You know, the site, you know, enrollment continues to grow there.
The same with the transplant test. You know, there, you know, we talked about it on the last call that, you know, there are several unanswered questions today in transplant management. Having an Early Access Program, you know, 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.
Yasin Ebrahim (Analyst)
Okay. Okay, great. Yeah, thank you very much. Maybe just one more on DetermaIO. I assume it's, you know, it's six months or so away from any potential reimbursement decision, you know, maybe as we get closer to that and maybe, you know, what you've been talking about in the EAP program.
You know, while the test seems to, you know, outperform, you know, traditional methods, you know, PD-L1 or TMB, we've obviously seen that the accuracy has improved with combining those assays. You know, will you expect to, or are you currently kind of marketing the test in that, in that way in the, in the sense that, you know, look to use this test to combine, with other, diagnostic methods? Thanks.
Josh Riggs (President and CEO)
It's a really insightful question. You know, I think, you know, the biomarkers that exist today have done an amazing job of, you know, attracting CDx claims and, you know, proving their utility. I don't imagine that they're ever going to go away. I think Determa IO will be used in the context of that, you know, really complicated clinical decision point and clinical environment.
Yasin Ebrahim (Analyst)
Okay, great. Thank you very much.
Operator (participant)
The next question will come from Mason Carrico with Stephens. Please go ahead.
Mason Carrico (Research Analyst)
Hey, guys. maybe just could you provide some color around those early conversations or the interest from, you know, 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're trying to make a decision on, do I add chemo, do I not add chemo? I think, we provide unique information in that setting, alongside multiple other clinical indications that we published on. 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're gonna do well over 800 patients, looking at adjuvant pembrolizumab or Keytruda.
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 (Research Analyst)
Got it. That's helpful. Then thinking about your cash runway, could. You've 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, you know, we've brought the cash runway down, you know, primarily with the expectation that revenue wasn't going to start until, you know, the first half of next year. I think we see ourselves in kind of a development stage at this point, and so the cash flows or cash burn should be relatively predictable. You know, 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 throw lumpiness into that. Anish?
Anish John (CFO)
No. I think organically, I mean, obviously we are coming off of, you know, two risks in, you know, 2022, which were sort of an operationally, organically seeing, you know, savings as a direct result of these efforts. You know, I'd confirm what Josh is saying in terms of, you know, we're starting to see or get an operating rhythm where the expenses are very predictable at this point.
Bruce Jackson (Senior Analyst)
Got it. That's helpful. That's it for me, guys. Thanks.
Josh Riggs (President and CEO)
Thank you.
Yasin Ebrahim (Analyst)
Thank you.
Operator (participant)
The next question will come from Mark Massaro with BTIG. Please go ahead.
Speaker 7
Hey, guys. This is Vivian on for Mark, thanks for taking the question. A few other companies in our space are reporting broad-based pressures on transplant volumes across all organ types. Can you just give us a sense about how you're thinking about the space? I think liver is a relatively under-penetrated indication, but just wanted to get your updated views there on what you're seeing. Thanks.
Josh Riggs (President and CEO)
Yeah. I think the, you know, the recent CMS clarification on what's billable, what's not billable, probably clipped the top line in the industry. I also think it speaks for the reason on why you wanna create a, 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.
Speaker 7
Okay. Understood. Thanks. I guess on a 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. you know, we're talking to manufacturers and we're also talking to distribution partners. you know, I think the imperative for us is to have a product on market by the end of the year. I think as we get into, you know, Q3, we'll have a lot of clarity on what that commercial strategy will look like.
Speaker 7
Okay, perfect. Maybe just one last one from me. On the step down in cash burn, just how you're thinking about rep expansion or other investments just to help facilitate commercialization of guided products? Thanks.
Josh Riggs (President and CEO)
No, good question. I think, you know, we're committed to maintaining a capital light infrastructure, here at Oncocyte. You know, our primary, you know, mode of commercialization will be through partnership or distribution.
Speaker 7
Okay, awesome. That's it from me. Thanks for taking the question.
Josh Riggs (President and CEO)
Thanks, Vivian.
Operator (participant)
The next question will come from David Westenberg with Piper. Please go ahead.
Speaker 8
Hi, everyone. This is Tyler on for David. Thank you for taking my question. Just zooming into IO, can you describe the early access customers that you've been talking to and what kind of feedback you've gotten from them, as well as if you've had any discussions for pre-sales?
Josh Riggs (President and CEO)
I love the question, 'cause we've got a really good mix in our EAP, you know. There's kind of the broad-based, you know, networks of oncologists that are kind of very well known in the southeast. There's, you know, the academic institutions. I think we're getting feedback from a lot of a different clinical experiences and sort of the utility of the test in those environments. I would say, you know, generally the demand is strong for a reliable test that they can use to help manage the patients.
Speaker 8
Okay. What does the manufacturing ramp up in Q3 look like as far as, like, a volume cadence going forward into Q4? If you have any insight onto that. Then do you expect to see any increase in sales and marketing expense considering you're going the distribution route, or is that gonna remain suppressed for quite some time?
Josh Riggs (President and CEO)
I would expect costs to remain suppressed. You know, 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. You know, just ahead of us even getting into manufacturing. I think we'll be able to update what that looks like in future calls.
Speaker 8
Perfect. Thank you, guys.
Josh Riggs (President and CEO)
Mm-hmm. Thank you.
Operator (participant)
Again, if you have a question, please press star then one. Our next question will come from Bruce Jackson with The Benchmark Company. Please go ahead.
Bruce Jackson (Senior Analyst)
Good morning. Thank you for taking my questions. I just wanted to get a little more specificity around the timelines for the reimbursement. Would VitaGraft be roughly third quarter, potentially?
Josh Riggs (President and CEO)
Yeah. I mean, you know, I don't wanna put words in MolDX's mouth. You know, that's in striking distance for us. I mean, we've been working with them for, you know, going on a year now. So we're hopeful that we're at the end of the road with them, but, you know, we could have more work to do.
Bruce Jackson (Senior Analyst)
Then, DetermaIO would be roughly six months after that, again, potentially, 'cause we don't know exactly what MolDX is gonna do.
Josh Riggs (President and CEO)
Exactly. You've got that right.
Bruce Jackson (Senior Analyst)
Okay, perfect. Then, any update on DetermaCNI in terms of the development?
Josh Riggs (President and CEO)
You know, 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's not working, you flip to the other. Having an early notification, you know, that the therapy is not serving the patient is potentially beneficial, you know, in management of patients. We demonstrated that we are a good early warning system for when the therapy is not working. I think that's for us very encouraging in a very problematic cancer. You know, then we're gonna do additional clinical development that we'll be able to update on later in the year.
Bruce Jackson (Senior Analyst)
Okay, great. Thank you very much.
Josh Riggs (President and CEO)
Mm-hmm. Thank you, Bruce.
Yasin Ebrahim (Analyst)
Thank you.
Operator (participant)
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.