Earnings Transcript for BIOC - Q4 Fiscal Year 2020

Operator: Good day, and welcome to the Biocept Fourth Quarter Financial Results 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 Jody Cain. Please go ahead, ma'am.

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, Chief Operating Officer and Chief Financial Officer; and Dr. Michael Dugan, Senior Vice President, Chief Medical Officer and Medical Director. 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 anticipates, estimates, believes, could, expects, intends, may, plans, potential, predicts, projects, should, well, would or the negative of those terms. Forward-looking statements involve known and unknown risks and 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 implied by the forward-looking statements. In particular, there is significant uncertainty about the duration, severity 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 the 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, March 29, 2021. 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. I'm looking forward to sharing both our results for 2020 and details about our exciting neuro-oncology strategy in today's call. But first, I want to say that I'm exceptionally proud of our entire Biocept team for their enthusiasm and dedication in supporting the COVID-19 testing needs of our community, while at the same time, advancing our oncology business for a strong post-pandemic future. Since Biocept began offering COVID-19 testing in June 2020, we have received more than 300,000 samples, including about 140,000 samples during the fourth quarter. Even with the relocation of our corporate headquarters and CLIA Laboratory in December, we provided the vast majority of COVID-19 test results to health providers within 48 hours from sample collection. Our team's success in providing COVID-19 testing is reflected in our financial results. For the fourth quarter, revenues reached a record $18.5 million, and we reported our first ever profitable quarter. For the full year of 2020, we generated record revenues of $27.5 million. It's highly gratifying to report that our team achieved these results while continuing to provide excellent service to both our core oncology and COVID-19 customers. The higher revenues in recent quarters has had the added benefit of significantly reducing our cash burn. This allowed us to dedicate more financial resources to our oncology business, in particular our new focus on neuro-oncology as we build for a strong post-COVID era. We have a significant opportunity to serve patients with advanced cancer through our differentiated neuro-oncology testing offerings. Our proprietary cerebrospinal fluid, or CSF assay launched in 2020 is the first liquid biopsy intended to diagnose involvement of cancer in the central nervous system. We identified this opportunity from the findings of a collaborative study with a biopharma company, which we announced in 2016 and presented data in 2018. You may recall, we took a major step with our neuro-oncology offering early last year with the commercial launch and availability of our Target Selector CSF assay, specifically for advanced lung and breast cancer. Later in the year, we presented highly favorable results from pilot studies with this assay at 3 different scientific meetings. This year, we will be expanding our test capability and related clinical studies in the cerebrospinal fluid. Our CSF testing has distinct advantages; and that unlike the current standard of care CSF cytology, our assay provides enhanced sensitivity while also generating quantitative results. In the pilot studies I mentioned, our assay proved to be more informative than CSF cytology alone. In addition, our assay has the added advantages of identifying actionable molecular targets that provide physicians with valuable information for treatment decisions as well as quantitative reporting for monitoring treatment response and disease progression. Our CSF assay addresses a high unmet clinical need as 10% to 30% of adult patients with cancer, depending on the type, will develop brain metastasis. And while this is a niche area currently, it represents a significant market opportunity that we estimate at more than $1 billion annually. We are pursuing a pathway to designate our CSF assay as the standard of care or the gold standard for diagnosing cancer involvement with the central nervous system. Dr. Michael Dugan will discuss our neuro-oncology strategy later in today's call. Turning now to COVID-19. Since last June, we've received more than 300,000 samples for testing in our CLIA Lab with an average payment of between $100 and $120 per sample. I'm proud of our team's ability to accommodate this unprecedented growth in lab testing volume as we now are receiving several thousand samples on some days. The work we have done to scale includes adopting automation technologies throughout our processes, all of which will be helpful to our long-term oncology business in addition to the current high-volume of COVID testing. In regard to our collaboration with the Aegea Biotechnologies, earlier this month after successfully developing a next-generation COVID-19 assay, we announced a supply agreement under which Aegea is providing us with the kits for validation and commercialization in our lab. This next-generation COVID-19 assay was developed using the patented Switch-Blocker technology that is jointly owned by Biocept and Aegea, which is the same technology that is the basis for many of our ultrasensitive oncology assays. Our current COVID-19 RT-PCR testing provides qualitative results only, meaning that sample is either positive or negative. The new codeveloped assay has the advantage of distinguishing various strains of the virus while providing quantitative viral load results. Healthcare providers can use this quantitative assay to monitor viral load over time in order to determine when a patient, a resident, student, or employee can safely return to the general population. This new assay can also be modified to detect new variants of the SARS-CoV-2 virus as they emerge. Many of you have asked about our expectations for COVID-19 testing going forward, particularly as the vaccines roll out. We saw tremendous growth after initiating this testing in June. Our testing volume is currently running at approximately 10,000 to 11,000 samples per week. As we are providing these testing services to skilled nursing centers, colleges, and other organizations with repeat business, our current expectation is for meaningful volume and revenues throughout 2021, noting our expectation could change as the year progresses. And with that, I'll now turn the call over to Tim Kennedy to review our fourth quarter and full year financial results. Tim?

Timothy Kennedy: Thanks, Mike, and good afternoon, everyone. As Mike mentioned, for Q4 2020, we reported record quarterly revenues of $18.5 million. This is a significant increase from $1.8 million in Q4 of 2019 and is primarily due to COVID-19 testing. These revenues included $18.3 million in commercial test revenue, including $17.6 million attributable to COVID-19 testing. In Q4 of 2020, we received 145,129 total accessions, a significant increase from 1,404 total accessions in Q4 of 2019. Commercial volume in Q4 2020 was 144,932. Total cost of revenues were $10 million compared with $2.9 million for the prior year period, primarily due to COVID-19 related collection kits and consumable expenses. R&D expenses for the fourth quarters of 2020 and 2019 were relatively flat at $1.2 million. G&A expenses for Q4 2020 were $3.1 million versus $1.9 million in Q4 2019, with the increase primarily due to headcount additions to handle COVID-related activities as well as consulting expenses. Sales and marketing expenses were $2.2 million compared with $1.5 million in the prior year period as a result of increased sales commissions due to higher revenues. In Q4 2019, we recorded a non-cash deemed dividend of $22,000 for the repricing of adjustable warrants. There was no comparable dividend -- deemed dividend in Q4 of 2020. As Mike stated, we reported our first ever profitable quarter with net income of $1.9 million or $0.14 per share on 13.6 million diluted weighted average shares outstanding. This compares with a net loss for the fourth quarter of 2019 of $5.7 million or $1.97 per share on 2.9 million weighted average shares outstanding. Our weighted average share count reflects the 1-for-10 reverse split implemented in September 2020. Turning to our 2020 full year financial results. Revenues for 2020 were $27.5 million, and this compares with $5.5 million for 2019. Again, with the increase due to COVID-19 testing. Cost of revenues for 2020 were $21.3 million. R&D expenses were $5.2 million, G&A expenses were $10 million, and sales and marketing expenses were $6.4 million. The net loss for 2020 was $17.8 million or $1.50 per share on 11.8 million weighted average shares outstanding. This compared with a net loss for 2019 of $25.3 million or $12.23 per share on 2.1 million weighted average shares outstanding. Cash and cash equivalents as of December 31, 2020, were $14.4 million compared with $9.3 million as of December 31, 2019. In 2020, as a result of robust sales, and anticipated demand for COVID-19 testing, we increased consumable inventory by $1.2 million and grew accounts receivable by $10.6 million. Due to the increase in revenues from COVID-19 testing, we have reduced our burn rate while also investing in our neuro-oncology strategy. We reduced our cash usage in operating activities in 2020 by approximately 14% compared with 2019. Based on historical and planned cash usage, we believe our current cash position and revenue generation will support our business through most of 2021. However, with the uncertainty introduced by COVID-19 on revenues and collections, our cash runway may be shorter. We completed the move to our new headquarters and lab facility in December. This transition was completed with minimal impact to customers. Our new building is designed to meet our commercial, development and administrative needs while reducing rent expense and other facility costs by approximately 20% annually. As a final note, among our near-term goals with our CSF assay is to work with the FDA and Medicare to gain high-value reimbursement for quantitative detection of tumor cells in the CSF. This is in addition to our existing reimbursement for molecular biomarkers used to make treatment decisions which averages about $1,700 per specimen. With that, I'll now turn the call over to Dr. Michael Dugan, to provide an overview of our neuro-oncology strategy. Michael?

Michael Dugan: Thanks, Tim, and thank you to our participating audience. Following Mike's introduction of the topic, we are delighted to discuss our neuro-oncology strategy, and specifically, our expanded efforts to help patients with cancers that involve the brain and spinal cord, together known as the central nervous system, or CNS. Our goal is to establish a new standard of care for the diagnosis of suspected intracranial metastasis using Biocept's quantitative tumor cell assay in cerebrospinal fluid or CSF. We are also working to establish our CSF assay as a new standard of care for monitoring treatment response in patients with cancer involving the central nervous system. This is an area of high unmet medical need as current diagnostic tools are often inadequate for determining tumor involvement and assessing therapy response in a timely manner. These patients do not have time to waste on inaccurate diagnostic tests. Overall survival expectancy with brain metastasis is low, and many of these patients are not recognized early enough for therapeutic intervention. However, the use of newer targeted therapies for lung and breast cancer patients with intracranial metastasis can often extend survival for a year or more, resolving symptoms and substantially improving their quality of life. Similar improvements have been seen in melanoma and some other solid tumors. Survival for several years post-treatment is now possible with these amazing therapeutic advances. As Mike mentioned, the current standard of care for diagnosing central nervous system involvement is microscopic evaluation of the cerebrospinal fluid by a pathologist. This common diagnostic procedure is known as CSF cytology. However, CSF cytology has limited sensitivity for detecting brain metastasis and is imprecise. This method can often show false negative or indeterminate results due to limited cellularity, sometimes forcing oncologists to make repeated lumbar puncture or spinal tap procedures in an attempt to confirm the diagnosis. Additionally, CSF cytology is reported in a qualitative fashion, typically as positive, negative or indeterminate for the presence or absence of cancer cells, with no additional information provided about molecular biomarkers that can be used to help make better therapy choices. As such, CSF cytology has significant limitations as a clinical diagnostic tool and is widely recognized as an imperfect standard of care. Current clinical oncology care guidelines from the National Comprehensive Cancer Network, or NCCN, reflected inadequacy, recommending that CSF cytology be attempted up to 3 times to establish a diagnosis when central nervous system involvement is suspected. Our quantitative tumor cell detection assay in cerebrospinal fluid addresses this unmet need and addresses 3 key questions for physicians, directing the care of patients with suspected intracranial metastasis. Is there tumor? Is there a target for treatment? And is there a trend showing treatment response or treatment failure? Let's consider these 3 clinical indications for use of our assay. First, is there tumor? Data from a pilot study showed that our CSF assay was positive in 78% of lung cancer patients with clinically suspected intracranial metastasis following the -- involving the membranous linings of the brain and spinal cord or leptomeningeal, which are difficult to identify radiologically. In the same patient group, CSF cytology showed a positive rate of only 55% and an indeterminate rate of 15%. With this observed performance, our assay could avoid the need for repeat lumbar punctures that may be necessary to make the diagnosis of cancer involvement with CSF cytology alone. Second, is there a target for treatment? Our CSF assay can identify actionable molecular biomarker targets that inform clinical decisions. As mentioned before, patients with metastatic cancer involving the central nervous system are now living significantly longer due to many advances in treatment, particularly with new targeted therapies, some of which can cross the blood-brain barrier. Timely confirmation of central nervous system involvement and appropriate early treatment selection can lead to significantly better survival and a marked reduction of neurologic symptoms such as headaches, nausea, impaired mobility or vision loss. And the third question to be answered, is there a trend indicating therapy response or failure? As mentioned, conventional methods such as CSF cytology are imprecise and not very sensitive. Radiologic imaging by MRI is similarly limited and impractical to perform frequently, leaving oncologists in the dark about therapy response. In contrast, the quantitative cell count in molecular biomarkers provided by our CSF assay can be used to identify early trends in therapy response. In collaboration with several leading neuro oncologist and other oncologists who are treating these patients, we have observed marked changes in the tumor cell counts, ranging from tens of thousands of cells per CSF sample to extremely few or even no cells in patients treated with targeted therapies. Such responses have been observed over just a few weeks of treatment, informing care decisions long before additional radiologic imaging is performed. We have also observed durable responses to treatment with declining cell counts lasting for several months, even when repeated CSF cytology was not informative. In contrast, increasing cell counts have been observed when treatment is discontinued, demonstrating the potential value of this CSF assay and more quickly identifying disease progression or drug resistance. The current clients of our CSF assay are neuro oncologists, thoracic oncologists and breast oncologists. We are pleased to have already gained substantial interest among these experts. Physicians from nearly two dozen leading academic institutions across the country have ordered our CSF assay many becoming frequent repeat users. Our CSF assay represents a small but growing portion of our current oncology business, and we anticipate continued volume gains throughout 2021, building on our early adopter experience. Among our initiatives this year will be the initiation of a pivotal larger clinical trial involving many leading neuro oncologists and lung and breast oncologists at these institutions. We are working to expand our CSF testing menu to include more tumor types and more biomarkers. Our primary clinical development goal is to establish our CSF assay as a new standard of care for diagnosing and monitoring metastatic cancers involving the central nervous system. With this goal in mind, we have designed clinical studies intended to produce publications that influence national oncology care guidelines by 2023. To help us achieve this goal, we have spoken with dozens of academic oncologists and neuro oncologists and created a steering committee of key opinion leaders from major institutions, including Northwestern University, Stanford University, Penn State University and the St. John's Cancer Institute or former John Wayne Cancer Institute in Santa Monica to help guide our pivotal longitudinal study, the Four C study. We also will be involved in at least 1 major multi institutional neuro-oncology pharma trial and are working to develop other related clinical trials with other academic centers of excellence that establish the use of our test to help assess therapy response and monitor patients post treatment. Our first large-scale study, the Four C registry study is a longitudinal observational trial comparing the performance of our CSF assay with concurrent cytology and imaging in evaluating patients with suspected intracranial metastasis to predict clinical outcomes. The indications will include suspected metastasis in non-small cell lung cancer and breast cancer patients initially, and we anticipate adding patients with other tumor types as we move forward. We expect to enroll 50 to 100 patients in the first year and up to 200 patients over a 2-year span following each patient longitudinally. We are also planning to file for an FDA breakthrough device designation in the next few months. This designation by the Food and Drug Administration, or FDA, provides patients and healthcare providers with timely access to novel medical devices by speeding up their development via improved clinical trial assessment and review. It offers manufacturers the opportunity to interact with the FDA's experts to efficiently address topics of potential clinical trial design concern during the early review phase, and as clinical trial milestones are reached. If granted, this designation will give Biocept a 4-year timeline of Medicare coverage to generate patient data supporting its use and allows for accelerated FDA review of our clinical trial plans and data. This designation also has value in enhancing our ability to partner with pharma companies that are developing oncology drugs for the treatment of brain metastases, and it creates the potential for high-value reimbursement within the next year. With that, I will turn the call back to our CEO, Mike Nall.

Michael Nall: Thanks, Michael. Before opening the call to your questions, I want to review our corporate priorities, which include the following

Operator: [Operator Instructions]

Michael Nall: Thank you, operator. While we're waiting for the first question, I'd like to mention that we'll be holding a Key Opinion Leader Webinar on April 8, beginning at 12

Operator: Your first question will come from Jason McCarthy with Maxim Group.

Michael Okunewitch: This is Michael Okunewitch on for Jason. I don't want to dote on COVID for too long considering it's not really the core focus of the company, but relating to the revenues, have you seen any pullback in testing as we've gone through the first quarter? How has that continued so far in 2021? Has it slowed at all? Has the rate continued? And how do you look at COVID going forward through this year?

Michael Nall: Yes. Michael, well, that's a great question. And I think that's literally the billions of dollar question everyone's asking in our industry, right? But our peak was kind of as we exited last year up to the first of this year, but as we stated just here on the call today, we're being consistent around 10,000 to 11,000 patient specimens per week at this point. And notably, if folks are following the news, we're starting to see a little bit of positivity increase again in certain parts of the country, and whether it's a 1-week only or not, we also are starting to see a little bit of that at Biocept after several weeks of declining positivity numbers. So, this is really a difficult part of the business to predict what it's going to be like going forward. But in the meantime, we have a client base who needs to continue to test with the skilled nursing centers. In addition, as folks will recall if they were [indiscernible] investor conference, I mentioned that we had been selected as one of the 4 labs here in California to service the community college system. So, we continue to get business from that and anticipate that being in demand throughout the year and on into fall as folks really get back to school.

Michael Okunewitch: And then I'd also like to ask something about the CSF liquid biopsy. What kind of information do physicians gain from the CSF cytology? And is there any way right now to get that actionable biomarker data or is there really only Biocept out there?

Michael Nall: That's a great question. Well, first, for the first part of your question, I'm going to ask Dr. Dugan to weigh in, and then I can talk a little bit about the competitive environment. But go ahead, Dr. Dugan, [indiscernible] chance to CSF cytology.

Michael Dugan: Sure. CSF cytology is an established standard of care for making -- for answering a simple question, is there tumor in the CSF? But it has significant limitations in terms -- the cells are not preserved as captured or as collected rather. They're also not labeled with any particular marker, and they're not captured by any particular method other than air drying them on a slide, so they're subject to a lot of degradation, and they are usually few in number, which makes the interpretation somewhat difficult and hence, qualitative, as I explained.

Michael Nall: Yes. So with that quantitative , and when you talk about the biomarkers in competition, remember there's really 3 different questions we're answering. And on questions one and three , Biocept really is the best answer. So, question one is, is there tumor present, and that's the intact cell, the cancer cells, that we can identify with our technology. Question number two is, is there a target? And that's where you're looking for the certain biomarkers. And so, they will have already sent us the CSF, and so it makes sense for us to also profile for the biomarkers. And then number three is, is there a trend? And once again, you're back to looking for the cells, looking for the cells to go up and down. And I’m going to point folks towards our investor deck, and there's an excellent case study that illustrates how helpful that is in our investor deck that's on our website, so as well as the presentations I've done at the three different investor conferences here in the last couple of weeks.

Michael Okunewitch: And then I'd like to see if you can just give us a bit more of a -- a bit more color on the roadmap for you guys to establish your CSF test as the standard of care and to secure reimbursement with that breakthrough device status.

Michael Nall: Sure. Well, once again, I think Dr. Dugan is the best one to talk about our trial strategy, so maybe a little bit about that as well as how the breakthrough device works.

Michael Dugan: Sure. I mean, I kind of went through it, but it's a little bit quick the first time. There are several clinical trials that we have planned. The pivotal trial, our Four C study will establish us against cytology and to some degree against imaging as a current existing standards of care. We anticipate entering into a larger multi institutional pharma trial later this year that will evaluate us, in particular, as a therapy monitoring tool. And then we have many academic centers that are interested in working with us to develop their own investigator initiated studies, which would further elaborate the use of the test in various clinical indications of use. And we will go into more of that in our -- on our key opinion leader webinar on April 8, which I invite you to listen to as Mike invited you listen to, and that will lay out some more of what the clinicians are saying about the tests and how they anticipate using it.

Michael Nall: And when it comes to the breakthrough, we'll be submitting for that later this year. And that's -- we're very thankful that the FDA and CMS have gotten together to expand this program for diagnostic assays. And while I think CMS is now looking for additional comments before re-finalizing their part of the program, the FDA program is there. And so, we're confident that we'll have the necessary data to pursue that, and then once you get awarded a breakthrough, then you automatically are qualifying for CMS reimbursement at the same time, which was the original plan. As I said, CMS has recently put that back out for comment after some feedback on it, but we're looking forward to that being finalized for good and have a great path forward for Biocept in our whole industry.

Operator: [Operator Instructions] And this concludes our question-and-answer session. I would like to turn the conference back over to Michael Nall for any closing remarks. Please go ahead, sir.

Michael Nall: Thank you, operator. And on behalf of our Board of Directors and our hard-working team here at Biocept, I want to thank everyone for participating on today's call and for your interest in our company. We hope you will join our neuro-oncology webinar in April 8, and we look forward to providing an update on our progress during our next conference call coming up soon in May, when we report 2021 first quarter financial results. Thanks, again, everybody, and have a great day.

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