Earnings Transcript for BIOC - Q2 Fiscal Year 2020

Operator: Good day and welcome to the Biocept Second Quarter Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jody Cain, Please go ahead.

Jody Cain: This is Jody Cain with LHA. Thank you for participating in today's conference call. Joining me from Biocept are Michael Nall, President and Chief Executive Officer; Tim Kennedy, Senior Vice President of Operations and Chief Financial Officer; and Cory Dunn, Senior Vice President of Commercial Operations. During this call, management will be making a number of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that are not historical facts and generally can be identified by terms such as anticipate, estimate, believes, could, expect, intend, may, plans, potential, predicts, projects, should, will, would, or the negative of those terms. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from those statements, as well as performance or achievements that are expressed or implied by forward-looking statements. In particular, there is significant uncertainty about the duration and contemplated impact of the COVID-19 pandemic. This means results could change at any time and the contemplated impact of COVID-19 on Biocept’s operations, financial results and outlook is best estimate based on the information for today's discussion. For details about these risks, please see the Company's SEC filings. The content of this call contains time-sensitive information that is accurate only as of today, August 12, 2020. Except as required by law, Biocept disclaims any obligation to publicly update or revise any information to reflect events or circumstances that occur after this call. Now, I'd like to turn the call over to Michael Nall. Mike?

Michael Nall: Thank you, Jody, and good afternoon everyone. Our decision to initiate COVID-19 testing is paying off with overall commercial testing volume up for the quarter 1% from the prior year even with the impact of the pandemic. Commercial volume in our core oncology business was down 16% year-over-year which was significantly better than up to 40% decline we had anticipated in our forecast. We reached a low point in oncology volume early in the second quarter which progressively improved through June. However, with the resurgence of the pandemic physicians reports that patient office visits have not yet returned to pre-COVID levels which is continuing to affect oncology testing volume. Development testing volume was down 29% year-over-year and comprise a smaller percentage of our business than commercial testing and generally are billed at a lower rate. The decline is not surprising as these assays are used mainly by pharma and biotech companies in drug development and clinical trials. During the pandemic many clinical trials came to a halt and some remain on hold today. Volume from COVID testing while modest in Q2 helped to make up some of the decline in our oncology business. COVID-19 testing is billed at a significantly lower rate per sample than either commercial or development oncology assays. So with slightly higher commercial volume revenues for the quarter were down 23% from the prior year due to the impact of lower oncology volume and the lower billing rate for our COVID-19 testing. Revenues for the first half of 2020 were up 7% over the prior year. This increase reflected our strong first quarter performance prior to the full impact of the pandemic. Moving on to COVID-19 testing. We believe this testing is an important part of our business for the immediate future. After validating testing in our high complexity CLIA and BSL-2 safety level laboratory we were challenged along with other labs in securing COVID-19 specimen collection kits. We overcame this hurdle by initially by tapping into our supplier to secure kit components and then assembling them in-house. Volume has increased exponentially in the weeks since we begin distributing COVID-19 specimen collection kits and we have received over 11,000 samples to date. The average reimbursement for this testing is approximately $100 per specimen and with testing volume ramping up we expect COVID-19 testing to have a significant impact on third quarter revenue. To accommodate the robust demand for this testing we have increased staffing and implemented automation to support our ability to process the high levels of COVID-19 samples we are seeing. Importantly, we are processing COVID-19 tests quickly with the vast majority of tests resulted sent to health providers within 48 hours of receiving a sample. We also are making good progress in developing our own COVID-19 specimen collection kits and remain on track for launch later this year. These specimen kits will be used to collect samples from patients who wish to be tested for the viral COVID-19 testing such as Biocept offers. These kits will also be validated on a number of platforms for potential sale to other labs. In addition to COVID-19 testing services we are excited about our agreement with Aegea Biotechnologies to develop an ultra high sensitivity assay to detect the virus at very low copy numbers of viral RNA. The Aegea assay under development will utilize the patented switch blocker technology which has the potential to be applied to infectious diseases such as COVID-19 in addition to molecular diagnostics and oncology as Biocept currently uses. The higher level of sensitivity could potentially detect viral load at much lower levels than conventional PCR-based COVID-19 assays. If successful these tests could have an important differentiating feature such as detecting lower levels of virus in asymptomatic patients who are able to infect others. This COVID-19 assay would also allow for superior specificity in its ability to identify the different strains of the virus. This agreement provides us with new incremental revenue for R&D development services and if an assay is successfully developed Aegea has granted Biocept an option to expand our COVID-19 testing capabilities with this next generation COVID-19 PCR assay with these potential competitive advantages. We strengthened our core oncology business even during this challenging period having announced several significant developments that support this business near-term and for growth post-pandemic. Among these and a contributor to our second quarter results was our newly launched testing to detect and analyze cancer biomarkers, uncirculated tumor cells or CTCs as well as circulating tumor DNA or CT DNA found in cerebral spinal fluid in order to help patients whose cancer has metastasized to the brain and central nervous system. In a relatively short time this offering drove commercial testing volume and expanded our customer base into neuro oncology. We are among the few national CLIA labs that can analyze and identify important alterations in cerebral spinal fluid which helps these patients qualify for therapy that may extend their life. We are also benefiting from an increase in sales of our CEE-Sure blood collection tubes and research-use-only or RUO kits. Revenues for these products more than doubled from the first half of 2019 topping $100,000. We introduced our first combined tissue and liquid biopsy RUO kits in March for EGFR mutation. This RUO kit has been awarded CE-IVD mark allowing us to commercialize it in the European union as well as other geographies that recognize the CE mark. EGFR is among the most frequently evaluated biomarkers for lung cancer. Our second tissue and blood RUO kit this one for the biomarker BRAF was launched in May and we are working toward CE-IVD mark for this kit as well. Mutations in the BRAF gene are an important factor in determining treatment for melanoma, lung and other cancers and are of great interest to researchers and physicians. To be clear our RUO molecular kits and our blood collection tubes are different from the COVID-19 specimen collection kits we are currently developing. RUO kits allow molecular laboratories around the world to utilize our proprietary target selector oncology assays. This business has a higher margin than our services business and expansion in this area is an important strategic objective for us. This pre-COVID-19 uptick is encouraging for future growth. Another key development is our recently announced provider agreement with the nation's second largest integrated health delivery system Highmark Health which is a Blue Cross Blue Shield affiliated organization. The agreement was earned after a positive review by Highmark's vitals program which evaluates new technologies for the clinical utility and health economic benefit. And with that I will now turn the call over to Tim Kennedy to review our financial results. Tim?

Tim Kennedy: Thanks Mike and good afternoon everyone. For Q2, 2020 we reported revenues of $917,000 compared with $1.2 million in Q2, 2019 with a decline attributable to the impact of the COVID-19 pandemic. As mentioned previously commercial oncology volume declined 16% from the prior year. Commercial reimbursement based on historical mix and tests per accession is in the $1,400 range up from the $1,100 range in the prior year period. We continue to launch new assays and improve operational processes leading to increased testing capabilities and physician ordering. In Q2, 2020 we performed 1,399 total accessions compared with 1,340 total accessions in Q2, 2019. Commercial volume in Q2, 2020 was 1,079 comprised of 897 accessions from our core oncology business and 182 COVID-19 tests. Importantly we have now received more than 11,000 COVID-19 specimens to date. This compares with 1,066 accessions from our core oncology business in Q2, 2019. We believe that the decrease in core oncology accessions is due to the impact of COVID-19. Total cost of revenues was $2.5 million compared with $2.7 million for the prior year period. R&D expenses for Q2, 2020 were $1.6 million compared with $1.1 million during Q2 of 2019. The increase was primarily due to the costs associated with the launch of COVID-19 testing, certain laboratory automation projects and ongoing development and validation of liquid biopsy panels. G&A expenses for Q2, 2020 were $1.9 million versus $1.7 million in Q2, 2019 with the increase mainly due to higher insurance costs and higher legal fees primarily related to lease negotiations, wired exercises and other matters. Sales and marketing expenses were $1.3 million down from $1.6 million a year ago with a decrease primarily attributable to lower sales and marketing activities due to pandemic related travel restrictions. Other expense, net for Q2, 2020 was $56,000 compared with $1.9 million in the prior year period which included $1.8 million in warrant inducement expense. Net loss for the second quarter of 2020 was $6.5 million or $0.05 per share on $127 million weighted average shares outstanding. This compares with a net loss for the second quarter of 2019 of $7.8 million or $0.38 per share on 21 million weighted average shares outstanding. Now turning to our year-to-date numbers. Our revenues for the first six months of 2020 increased by approximately 149,000 or 7% to $2.4 million compared with the first six months of 2019 even with the impact of the pandemic. Costs of revenues for the first half of 2020 were $5.5 million. R&D expenses were $2.9 million. Sales and marketing expenses were $2.8 million and G&A expenses were $3.8 million. Cash and cash equivalents were $24.1 million as of June 30, 2020 compared with $9.3 million as of December 31, 2019. In addition to the $2.3 million in net proceeds from the warrant inducement offering during Q1 we received an additional 700,000 from the underwriter exercising its over allotment warrants from the December 2019 underwritten financing transaction. In March 2020 we completed two registered direct offerings raising net proceeds of approximately $14.7 million. In April we raise net proceeds of approximately $9.6 million from a registered direct offering and based on our historical and planned cash usage we believe our current funding will support operations through most of 2021. However, with the uncertainty introduced by COVID-19 on revenue and collections our cash runway may be shorter. And now I'll turn the call over to Cory Dunn to provide an overview of our commercial progress. Cory?

Cory Dunn: Thanks Tim and I'm delighted to be speaking with all of you today. As mentioned by Mike commercial volume gained momentum as the second quarter progressed in lockstep with the lifting of shelter-in-place restrictions. That said commercial testing continues to be dynamic. Given the pandemic resurgences across the country it's understandable that some cancer patients are forgoing and postponing physician office visits. Biocept is pleased to fill a niche for patients and physicians alike particularly during the pandemic with oncology testing through a simple blood sample rather than a more invasive tissue biopsy. As always our, customer service oriented approach is working well to support our business niche. An example is sending a mobile phlebotomist to perform the blood draw at the patient's home allowing patients to continue to shelter-in-place. Furthermore we also benefited by profiling through liquid biopsy testing of individual gene testing rather than more expensive large gene panels during this very cost conscious time. Our introduction of assays performed on cerebral spinal fluid in patients with advanced lung cancer and breast cancers well timed in that this testing during the pandemic provide valuable information for the sickest, most advanced cancer patients. These patients are more likely to see their physicians during the pandemic. The target selector cerebral spinal fluid assays provide results to help identify potential treatment options targeted at tumors that have metastasized to the brain or the spinal fluid where timely treatment is critical. Testing cerebral spinal fluid for biomarkers is key in physicians selecting the best treatment option for the approximately one third of patients diagnosed with breast and lung cancers who may develop brain metastasis. Our sales force is productively working from home using virtual web, off-site meetings and other creative approaches to connect with physicians while in-person meetings are restricted in healthcare facilities. Notably, we've been able to connect with neural oncologists who otherwise would be very difficult to reach. The ability of our sales team to engage with these physicians often in Zoom meetings along with members of our medical staff has been effective. The numbers are still modest but we saw a steady increase throughout the second quarter in the number of cerebrospinal fluid assays processed in the lab and we continue to see this trend. After starting in the last week of quarter two, COVID-19 testing has been growing significantly. The vast majority of customers to date are from California and we now are serving customers in multiple states. Our nimble lab size works to our advantage in being able to quickly deliver COVID-19 specimen collection kits and to provide test results in a timely manner within 48 hours a majority of the time. Our customers are able to securely obtain patient testing results online and to access Biocept personnel throughout the testing process. All f these Biocept services are particularly helpful for skilled nursing facilities to care for their residents and stay compliant with state requirements. So in summary, the commercial team continues to support the execution of our strategic initiative to build our oncology core business during this challenging time while also serving public health efforts with COVID-19 testing. With that I'd like to turn the call back to Mike.

Michael Nall: Thank you, Tim and thank you both for your outstanding leadership during this challenging time. Our foremost concern during the pandemic is the safety and well-being of our employees. We are providing safe working conditions for our lab technicians through social distancing and staggered shifts while delivering the same excellent quality and turnaround time without interruption or delay. Notably, we have maintained our full staff at Biocept with no layoffs or furloughs having implemented work from home policies and strategies designed to emerge from the pandemic in a strong position. Like everyone we are looking forward to a day when the pandemic is under control and returning our business to more normal operations. Our longer term corporate priorities remain unchanged. These include increasing market penetration with a focus on neuro-oncology, urology, breast and lung cancer, growing sales of our target selector molecular assay RUO kits and our CEE-Sure blood collection tubes, increasing market penetration of our target selector NGS lung and breast panels under our collaboration with ThermoFisher and securing Medicare coverage, entering into additional strategic commercial and technology partnerships both global and domestic, signing more agreements with third party health plans including capital plans in expanding our relationship with Blue Cross Blue Shield, publishing clinical case studies and presenting data scientific conferences that further validate our target selector testing, launching additional assays, launching our Biocept developed COVID-19 specimen collection kits and using switch blocker technology to develop the next generation COVID-19 PCR essay in collaboration with Aegea. Importantly, we are positioned to weather the pandemic and for return to growth. We are an established leader in liquid biopsy and our target selector testing provides critical information to assist physicians in determining treatment decisions for their patients diagnosed with cancer. Our assays are based on our differentiated platforms that leverage information from both CTCs and CT DNA both in blood and cerebral spinal fluid. To-date we have tested approximately 25,000 patient samples with our proprietary oncology biomarker assays and over 11,000 COVID-19 samples. We fully expect our test volume will gradually return to more normal levels as the pandemic subsides. We are particularly pleased to have a strong balance sheet which we expect will support operations through most of 2021 and as Tim mentioned with the uncertainty of COVID-19 brings to revenue and collections our cash runway may be shorter and in closing I'd especially like to thank our entire team at Biocept for their hard work and dedication during this challenging period. With that overview we're now ready to take questions operator.

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions]

Michael Nall: While we're waiting for the first question I'd like to mention that Biocept will be presenting at two virtual conferences next month. These include the LD Micro 500 Conference on September 2nd at 10

Operator: Thank you. Our first question will come from Jason McCarthy with Maxim Group. Please go ahead.

Michael Nall: Hey Jason.

Michael Okunewitch: Hey guys thanks for taking the question. This is Michael Okunewitch on the line for Jason.

Michael Nall: Hey Michael.

Michael Okunewitch: So I'd like to see if you can provide a bit more color on the COVID testing. So you mentioned doing 11,000 tests to-date and based on your previous announcement on the third, 4,000 of those were in like the last 9 to 10 days. So doing some back the napkin calculation that's about 3,000 per week. So my question is do you have the supply or the ability to produce the supply to continue this runway throughout Q3?

Michael Nall: Yes. The team has done a great job here and I appreciate you doing your diligence there on the math. Things are growing fast around here and get it in perspective folks should understand if they're newer to the story that as an oncology provider, it's a smaller volume type of testing that you do, in some ways a more comprehensive test not just one thing you're looking for. And so we were doing 20 plus specimens per day and we rapidly ramped now up to well into the upper hundreds and soon to be probably crossing that threshold, even greater in the future. But I will let Tim weigh in on some of our supplies both for our reagents for the kit as well as the capacity we've grown here lately maybe some of our automation issues as well as the collection kits that we have on hand.

Tim Kennedy: Sure. Thanks Mike. So it was a great question. As Mike mentioned in his remarks previously we actually have secured 50,000 collection kits currently while we're still in the process of finalizing the preparation surrounding our in-house collection kit which Mike also mentioned that we'll be releasing later on this year. In addition to that we are in a fortunate situation to be on a standing order with our suppliers associated with the reagents that we require in our CLIA laboratory to actually perform COVID-19 testing. So I would say that those two things combined we've been able to effectively overcome the supply chain challenges that we experienced and I think a variety of other folks have experienced earlier during the pandemic. So I think we're in a very good shape there being able to continue to do COVID-19 testing here at Biocept and what Mike was alluding to also with automation we're also in the process of implementing a variety of different things in our CLIA lab both for ordering of COVID-19 testing more efficiently with our clients but also be able to process those tests in a much more efficient manner as well once they're into our process stream in CLIA. We're doing implementing liquid handlers, what we call decappers to eliminate potential issues with people constantly doing repetitive motion and I think with our clients having the ability to order in a much more efficient process on the front end and also us providing results to them in a more efficient process on the back end has positioned Biocept very well to be able to continue to ramp up our COVID-19 testing volume.

Michael Nall: Thanks Tim.

Michael Okunewitch: All right. Thank you. And then I'd also like to see if you could discuss some of the factors which enable you to provide results within 48 hours because that's pretty impressive. I know that wait times particularly out here in New York have been as much as a week which renders the information basically outdated. So could you comment on that at all?

Michael Nall: Yes. In fact, some of the national labs have been running at two weeks which is really challenging for people that are waiting for those results but this is critical for us. This is a test that's vitally needed by those that are having it and both for their own health but of course society in general. So we're committed to maintaining that turnaround time and the team has been working very hard to make sure that, through automation initiatives, we're putting in there the test gets right into the lab ASAP. We've also increased our staffing here at the lab and we now are seven day a week operation. So tests that arrive on Saturday are going to get run on Saturday night or Sunday morning and results back Sunday night or Monday morning to the referring physicians. So that's critical for us and I think important for any provider. I don't know if folks all saw the article by Bill Gates where he mentioned that he feels test shouldn’t be paid for if they're beyond 72 hours. So as a lab representative that might not be the greatest thing but at the same time I think in this case it's relevant and important to make sure you meet that guidance.

Michael Okunewitch: All right. Thank you and I just have one more on the PCR test that's being developed with Aegea and what are the main differences that are going to be seen with a lower limit of detection test like how much lower of a limit would you expect to see if you can use oncology as a model and then how would you expect this to actually translate into practical results?

Michael Nall: Well, I think the way to look at it is oncology as a model at this point it's premature for us to make any claims about the performance of the test because we're not at that point of the development yet, where we the designs would lead you to expect similar results with what we've seen oncology but to give you an idea standard molecular assays and oncology that are done on PCR would have sensitivities anywhere from one to five, down to 1% to 5% prevalence of the target and our current target selector has, you can go down to 0.03% to 0.05%. So far more sensitive performance with our oncology assays versus standard PCR assays if you will. That would be the goal of the developers here as well as Dr. Arnold who provides much of the designs for the assays and so we'll keep folks abreast with our partners at Aegea along the way as we make progress there.

Michael Okunewitch: All right. Thank you very much and congratulations on the progress.

Michael Nall: Yes. Thank you.

Operator: Our next question comes from Sally Yanchus with Brookline Capital Markets. Please go ahead.

Sally Yanchus: Hi Mike, thanks for doing the call.

Michael Nall: Hi Sally.

Sally Yanchus: Hi. Just wondering when do you, do you have any expectations for when the traditional liquid biopsy physician visits or business is going to be rebound? I mean, I know it varies regionally around the U.S. but I mean when do you have any, do you have any expectation of when that's going to pick up again?

Michael Nall: Well, people are still getting cancer of course and so this is a concern and not amongst us but amongst many of the physicians we serve in the industry as we talk about this is we've made so much progress as a healthcare arena with early detection and getting cancer early which is critical. There is a lot of concern about patients avoiding physicians visits and stuff and are we going to have a problem at hand. I think it's going to dovetail as Cory mentioned earlier with the, I guess pandemic subsiding somewhat where it's kind of spotty now. As we said it started to come back when everybody started going back to work and then once people started to be fearful of this resurgence it started to slow down just a bit. I haven't seen it go down to how it was whenever it was shelter in place and like you said different regions are at different points and it's variable. One region will be in business and then everybody has to slow down again because pandemic came back. So it's kind of hard to predict. Now we're also though gaining new clients in neuro-oncology with the CSF and Cory maybe you can talk a little bit about our ability to get in front of positions with Zoom.

Cory Dunn: Right. So it's been, we have such a nice unique niche with cerebral spinal fluid biomarker testing. We have been able to and especially going after a very small and targeted sector of oncology which is neuro oncology it served us well to be so targeted and specialized during these pandemic times. So we've been able to connect with them remotely more so.

Michael Nall: I think last time I mentioned to folks that we had just started that and we were having good luck so far and that's continued and the only advantage of the oncologist not having quite the patient load as they used to have is that they're more available. Normally they're very difficult to see in case folks don't understand the selling process. There is a shortage of medical oncologists and a surplus shortage of neuro oncologists in America and they're normally scheduled morning, noon and night with patient visits so it's hard to get their time. Well, they've had a lot more time and they've actually gone on Zoom call sometimes for one or two hours with our sales team and our medical staff learning about our testing. So that's been a side benefit, the ability to really get the message across.

Sally Yanchus: Okay. Interesting. Okay. And then do you expect to continue your spent $1.6 million in R&D this quarter - is that like a quarterly run rate that you look going forward or is it going to vary like before the end of this year and into next?

Michael Nall: I'll let Tim address that. I will say that in our R&D expenditure it's not just pure [hard] work like you're thinking of like developing our COVID assay, that's also going to include like the validations of the COVID kits and the tubes and the collection kits everything done in the CLIA lab has to be validated. So that's re-classed over to R&D but Tim can address your question in more detail.

Tim Kennedy: Yes. Actually, I think Mike answered it very well but the second quarter did certainly have a few hundred thousand dollars of COVID-19 validation cost in there. So when you say do I expect it to continue at that level, certainly not for COVID-19 related validations but to the extent that we could as I've said we are constantly and continuing to launch new testing capabilities that where our physicians could order those tests that they deem it necessary for patient care. So from time to time we've always done that with new tests that come out but Q2, I would say was somewhat unique in that there was a lot of heavy lifting to be done with launching the COVID-19 testing.

Sally Yanchus: Got it. Okay. And then what about next year? Do you think you'll continue at the 2020 level or?

Michael Nall: With COVID-19 testing or overall?

Sally Yanchus: Overall R&D, yes.

Michael Nall: Overall R&D, it's hard to say. Keep in mind that every time even on COVID-19 if the Aegea test were to work out we would exercise our option to perform that test we'd have to have a revalidation there. With our own collection kits we'll have to revalidate. So as long as we develop new improvements to this process there is going to be some expenditure but certainly, I think most folks would agree that the revenue that's potential with COVID-19 right now probably justifies that.

Sally Yanchus: Definitely, yes. Okay. Thank you very much. Thanks.

Michael Nall: Yes. Sure.

Operator: This concludes our question-and-answer question. I would like to turn the conference back over to Michael Nall for any closing remarks.

Michael Nall: Well, thank you operator and thank you to everybody for attending today. on behalf of our board of directors and our hard-working team at Biocept we want to thank everybody for participating today and for your interest in our company. We look forward to providing an update on our next conference call when we report believe it or not third quarter financial results and provide an update on our progress in November. Thanks again and have a great day.

Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.