OncoCyte Corporation (NASDAQ:OCX) Q4 2022 Earnings Call Transcript

OncoCyte Corporation (NASDAQ:OCX) Q4 2022 Earnings Call Transcript April 3, 2023

Operator: Good day and welcome to the OncoCyte Conference Call to discuss the Fourth Quarter and Year End 2022 Financial Results. Today’s call is being recorded. At this time, I’d like to turn the call over to Caroline Corner, Westwicke Investor Relations. Please go ahead.

Caroline Corner: Thank you everyone for joining us for today’s conference call to discuss OncoCyte’s fourth quarter and year end 2022 financial results and recent operating highlights. If you have not seen today’s financial results press releases, please visit the Investors page on the company’s website. Before turning the call over to Joshua Riggs, OncoCyte’s President and Chief Executive Officer, 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 the forward-looking statements.

These factors may include, without limitation, risks inherent in the development and/or commercialization of potential diagnostic tests, uncertainty in the results of clinical trials or regulatory approvals, the need to obtain third-party reimbursement for patients’ use of any diagnostic test the company commercializes, our need and ability to obtain future capital and maintenance of IP rights, risks inherent in strategic transactions such as failure to realize anticipated benefits, legal, regulatory or political changes in the applicable jurisdictions, accounting and quality controls, greater-than-estimated allocations of resources to develop and commercialize technologies or failure to maintain any laboratory accreditation or certification and uncertainties associated with COVID-19 pandemic and its possible effects on our operations.

Therefore, 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 maybe required under applicable law. I will now turn the call over to Josh Riggs. Josh?

Joshua Riggs: Hello. Thanks, Caroline and welcome everyone to our conference call to discuss our fourth quarter 2022 and year end financial results and operating highlights. Joining me today is Anish John, our Chief Financial Officer. Following our prepared remarks, as always, we will be happy to take your questions. I would like to start the call by expressing my gratitude to the OncoCyte team, our investors, Board and those in the clinical community who continue to support us in our mission in serving patients in groundbreaking science. On March 2, we announced my appointment as President and CEO as well as a Director of OncoCyte. I am honored to serve the team as we go into the next phase of development and commercialization.

We are positioning the company for success in a challenging market environment by focusing on our core products and operational and commercial efficiency. On December 16, we announced our entry into a stock purchase agreement to transfer 70% of our ownership of Razor Genomics and all of the assets and liabilities related to DetermaRx. This transaction, which closed in February 2023, eliminated an estimated $8 million of annual operating expense and $13 million of future milestone and development liabilities while allowing Razor Genomics to maintain continuity of service for DetermaRx patients and clinicians. At the same time, we announced a significant reduction in headcount, further reducing our operating expenses. Today, we announced the pricing of a stock offering of up to $13.86 million from our long-term investors led by Broadwood Partners and with significant participation from our Chairman and other of our top five holders, this vote of confidence comes at a critical time for OncoCyte.

In a challenging market €“ macro market environment, this deal was completed at market with no warrant coverage and allows us to retire a significant portion of our preferred. DetermaIO, DetermaCNI and VitaGraft represent the future of OncoCyte’s product offering. Each have multibillion dollar market opportunities and differentiation from competitive products along with a growing body of literature and demand in the research market. DetermaIO and VitaGraft are being developed commercially through our early access program to drive market development and initial utilization. Development of these products will be continued throughout 2023, with DetermaCNI development to follow in 2024. To be clear, all other development projects have been paused or canceled.

Today, OncoCyte has been primarily focused on a service lab model to deliver clinical and shareholder value. Going forward, we are going to open up access to our breakthrough technology in distributed research-use only, or RUO, product format. This provides a scalable high-margin commercial channel for us, whether it be on our own through commercial partners or distribution relationships. Our service lab in Nashville will continue to engage the clinical community, pursue reimbursement and support care decisions, while our RUO product will enable researchers around the world to innovate, publish and explore new questions. DetermaIO continues to build its case as the best-in-class tool for assessing the tumor microenvironment as it relates to immune therapy use and optimization.

As an update, data in colon cancer has been accepted for publication and will join previous data from non-small cell lung cancer and triple-negative breast cancer, among others. Research in oncology is pushing us towards a real choice in first line therapy, something beyond just anti-PD-L1 and/or chemo. Researchers working in this space need a better tool to assess the state of the tumor microenvironment, a need that an RUO product version of the technology behind DetermaIO can meet. Leveraging our continuous variable reporting, researchers can determine the appropriate cutoff value for their application. Key 2023 milestones will be covered for our LDT, the completion of a SWOG study in triple-negative breast cancer and completed feasibility for our RUO product.

VitaGraft, our transplant product, has best-in-class turnaround time and ease of use, leveraging the natural advantages of digital PCR over an NGS workflow. We continue to have active dialogue with MolDX to support a coverage decision for both kidney and liver. Engaging with the transplant community as a partner has shown us that there are many questions left unanswered by the service labs, delivering DDC and DNA testing today, ours included. Developing and delivering an RUO version of our product opens the door to researchers at pharma, academic centers and biotech to use donor-derived cell-free DNA to answer many unsolved problems like long-term patient management and the value of absolute quantification. We are pleased to announce today that we have completed feasibility and are in the pre-manufacturing optimization phase for our RUO product.

Key 2023 milestones will be coverage for our LDT, strategic or distribution partner announced and RUO product launch. We believe that this approach focusing on scalable, high-margin products and rapid development reduces our time to market and revenue growth. We expect that our differentiated IP will drive commercial opportunities while reduced costs and a shorter path to revenue will benefit OncoCyte shareholders. VitaGraft, DetermaIO and DetermaCNI all have significant upside and our RUO strategy will allow us to scale quickly while maintaining high product margins that positively impact the company’s bottom line and put us on a path to financial sustainability. We are grateful for your continued support. And I would like to now turn the call over to Anish John to review our financials.

Anish?

Anish John: Thank you, Josh. Hi, everybody and thanks for joining our call today. Our consolidated preliminary revenues for the fourth quarter of 2022 were approximately $1.1 million, representing a decrease of 69% year-over-year. Revenues for the full year of 2022 were $5.6 million, representing a decrease of 27% year-over-year. The decrease in revenues from prior year is primarily due to $3 million of milestone payments recognized in 2021 compared to $1 million of milestone payments recognized during 2022 related to the Burning Rock sublicensing agreement. Fourth quarter revenues associated with DetermaRx, were $0.8 million, an increase of 3% year-over-year. For the full year, DetermaRx revenues were $3.6 million, an increase of 47% from the previous year.

Our pharma services business generated $0.3 million in the fourth quarter, a decrease of 44% year-over-year. As we have discussed previously, revenues in pharma services depend on our partner’s ability to enroll patients for trials, which will likely continue to fluctuate from quarter-to-quarter. Cost of revenues for the fourth quarter were approximately $2.4 million, including $1.6 million from the cost of diagnostic test and testing services we performed for our DetermaRx and pharma services customers and $0.8 million in non-cash amortization expenses related to DetermaRx and pharma services-related intangibles. Cost of revenues for the full year was approximately $8.9 million, including $3.7 million in non-cash amortization expenses of the acquired intangibles.

Research and development expense for the fourth quarter of 2022 was $4.3 million as compared to $4.6 million for the same period in 2021. R&D expense for the full year was $19.4 million as compared to $13.6 million in 2021. This increase in R&D expense was related to investment in the build-out of our pipeline of diagnostic tests. General and administrative expense for the fourth quarter was $5.5 million as compared to $4.1 million for the same period in 2021. G&A expense for the full year was approximately $22.5 million which was relatively flat versus the prior year, reflecting management’s efforts to control spending not directly related to product development or commercial activities throughout 2022. Sales and marketing expense for the fourth quarter was $2.8 million as compared to $3.3 million for the same period in 2021.

For the full year, sales and marketing expense was approximately $13.6 million representing an increase of 22% year-over-year. The increase is primarily attributable to the growth of our portfolio and reflects investments in sales and marketing activities to prepare for commercialization of our transplant business and support the continued commercialization efforts of DetermaIO. Now I’d like to turn to our GAAP and non-GAAP analysis. Non-GAAP operating loss as adjusted for the fourth quarter was $8.4 million, an increase of $1 million as compared to the same period in 2021. GAAP operating loss, as reported for the fourth quarter was $44.7 million, an increase of $9 million from the fourth quarter of 2021. Non-GAAP operating loss as adjusted for the full year was $40.7 million, an increase of $7.5 million as compared to the prior year.

GAAP operating loss, as reported for the full year, was $72.3 million, a decrease of $1.9 million from the prior year. For the fourth quarter, we reported a GAAP net loss of $45.3 million or $0.41 a share as compared to $35.9 million or $0.40 a share for the fourth quarter of 2021. For 2022, net loss was approximately $73.4 million or $0.66 per share as compared to $64.1 million or $0.72 per share during 2021. We’ve provided a reconciliation between these GAAP and non-GAAP operating losses in the financial tables included with our earnings release. Turning now to the balance sheet. As of December 31, 2022, we had cash, cash equivalents and marketable securities of $21.9 million. Net cash used in operating activities was $45.6 million for 2022.

Our focus over the last half of €˜22 was to reprioritize our investments in our product portfolio and institute a more sequential approach to product development and test launches. First half quarterly average of $12.3 million decreased to a quarterly average of $10.5 million or a 15% reduction. Net cash used in operating activities was $9.7 million in the fourth quarter of 2022. If you recall, this is ahead of guidance provided in our midyear 2022 earnings call, where we stated our goal of entering the first half of 2023 with a quarterly cash burn rate below $10 million. In December, we announced the reduction of over 40% of our workforce, along with the exit of our DetermaRx business. While these were difficult choices, these represent definitive steps to further reduce our cash burn from 2022 levels as we invest in our focused strategy and product pipeline.

In 2023, we anticipate continued improvement in quarterly operating cash burn levels. With our current plan, we expect that continued cash management efforts will get us below $6 million in quarterly average burn for the second half of 2023. That concludes my review of our financial highlights. And I’ll return the call to the operator for your questions. Thank you.

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Q&A Session

Operator: Thank you. Our first question comes from the line of David Westenberg with Piper Sandler. Please proceed with your question.

Unidentified Analyst: Hello. This is Tyler Anderson on for David Westenberg, I was wondering what’s the timeline for your RUO launch and what is the cadence for that look like as far as growth? And do you have any preorders for that product? And then I got a follow up after if nobody else is on the call for a question?

Joshua Riggs: Yes. No. thanks, Tyler. So the timing for us is €“ the next milestone you’ll see is that we will start manufacturing, and that will be sort of late second half, early first €“ or sorry, late first half, early Q3 when you’ll get that milestone with an on-market product towards the end of the year. The revenue piece on that is just because of the sales cycle for platform placements is likely first half when we will start to see revenue come in for that. All of this can shift depending on the nature of a partnering relationship if that comes in.

Unidentified Analyst: Okay, thank you. I am going to hop back in the queue.

Operator: Thank you. Our next question comes from the line of Mark Massaro with BTIG. Please proceed with your question.

Mark Massaro: Hey, guys. Good morning. And thanks for taking my questions. So certainly, I recognize that DetermaIO, CNI and VitaGraft are now sort of the future of the company. I was curious if you could just maybe zoom in a little bit on the timing of Palmetto MolDX coverage for VitaGraft. I also wanted to confirm that you are planning to launch VitaGraft kidney and then liver. And could you just give us a sense for when you think Palmetto MolDX coverage can come in and when you think those kidney and liver test can roll out?

Joshua Riggs: Yes. Fantastic. So we have €“ kidney and liver are both active in our early access program right now. So we are getting samples flowing to our lab in Nashville. But those are all unbilled at this time as we’re just €“ kind of just in that early access phase. We submitted back in the summer of last year. These conversations can take anywhere from 9 to 12 months. That’s been an active conversation with them. I’d like to say that I could predict what a government agency is going to do, but it’s proven to be a bit challenging. But I would say that we’re hopeful that we’re at the end of the road with those guys here relatively soon.

Mark Massaro: Okay. That makes sense. There were some changes recently to Medicare with respect to organ transplant, which notably were sort of made visible to the share price of the CareDx. I guess have you had a chance to sort of digest some of the changes that were made to that coverage determination? And does it impact at all how you view the opportunity for kitted transplant tests?

Joshua Riggs: It does. We saw the release and the clarification from MolDX. And I think it does take some of the top off the market maybe 15%, 20% off of the $2 billion clinical market there. But I think what an RUO product does is it opens up a whole lot of questions that aren’t answered today. So if you look at the clarification that MolDX put out, it was really specific to for cause testing. And so that was the only thing that’s really been proven to date. By putting other people in the business of answering questions, we believe that, that market can be expanded for long-term patient management, for the ability to look at alcoholic recidivism €“ and xenografts. There is a whole bunch of questions that aren’t answered by LDTs today. So I see that some element of the clinical piece has been shrunk. But I think it’s just because they haven’t had the chance to do the research to validate that routine monitoring as is useful in the clinical environment.