Earnings Transcript for OCX - Q2 Fiscal Year 2024

Operator: Thank you for standing by. My name is Rochelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the OncoCyte Second Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Jeff Ramson from PCG Advisory. Please go ahead.

Jeff Ramson : Thank you, Rochelle, and thank you to everyone for joining us for today's conference call to discuss OncoCyte's second quarter 2024 financial results and recent operating highlights. If you've not seen today's shareholder letter, please visit investors.oncocyte.com to read it. Today's prepared remarks build upon the information already shared in this robust letter. Before turning the call over to OncoCyte President and CEO, Josh Riggs, I'd like to go over our safe harbor statement. The company will make projections and forward-looking statements regarding future events. Any statements that are not historical facts are forward-looking statements. These statements are made pursuant to and within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. We encourage you to review the company's SEC filings, including the company's Forms 10-K and 10-Q, which identify risks that may cause future actual results or events to differ materially. OncoCyte expressly disclaims any intent or obligation to update these forward-looking statements, except as otherwise may be required under applicable law. Finally we’ll be taking questions today online from our covering analysts as well as written questions from our investor community. I'd now like to turn the call over to Josh Riggs.

Josh Riggs : Thanks, Jeff. Welcome, and thank you for tuning in. We have on the call with us today our Chief Science Officer, Dr. Ekke Schutz; as well as Chief Financial Officer, Andrea James. It's great to be able to announce the successful commercial launch of GraftAssure with our initial beta customers. We had confidence going into launch, but you never really know until your product is out in the field, and the feedback that we're getting is exceeding our expectations. As we started our pivot last year, we said we were going to do three things

Andrea James : Thank you, Josh. Hi, everyone. It's great to be here. And some of you may know me from Axon or Tesla or the sell side before that. As Josh said, I joined OncoCyte to help build and scale the company. There were four primary factors that drew me to OncoCyte

Jeff Ramson: We do. Rochelle, can you allow the verbal questions?

Operator: Certainly. [Operator Instructions] Your first question is from Mike Matson with Needham. Please ask your question.

Joseph Conway : Hey, everyone. How is it going today? This is Joseph on for Mike.

Josh Riggs : Good Mike. Thanks.

Joseph Conway : Yeah. This is Joseph on for Mike. But just a quick question on VitaGraft, start it out. I saw in the press release that you talked about increasing throughput at the CLIA lab. Just kind of want to get an understanding of where this test stands. I assume volume hasn't set up. Maybe you could dissect that a little bit. Maybe this prep work, what are you kind of aiming for, for volume for this test? And then obviously, liver is still under review at CMS. So if you could give an update there, that would be helpful.

Josh Riggs : Yeah. Thanks for the question. I think what we've done is expanded our capacity in the lab in Nashville. So we're talking about an investment that we're making into that lab infrastructure. It's primarily to support the extra work that's coming at us for the FDA program. So that's just about the amount of samples and the amount of data that we need to generate to support the FDA submission. And so that's really more of a capital spend to support that effort. We've largely pulled back on most of our commercial efforts towards the LDT service product and put all of that energy into working on the site placements where we just kind of had an overwhelming response and you needed to pivot our commercial team more towards activating sites for the RUO product.

Joseph Conway : Okay. Yeah, that makes sense. So I guess maybe just to ask another question on that. As we look at the chart, I guess, you provided for the beta path, in terms of just material revenue before that inflection point, I guess, estimated inflection point around second half 2026, is there anything that we should start baking into our estimates? Or is the next really material driver IVD VitaGraft for Kidney?

Josh Riggs : Yeah. With the low burn, every dollar of revenue feels material to us. But with the RUO product, I mean, it's going to be modest revenue. And it's hard for us to gauge that because this is a new product for the industry. They haven't had anything like this. So we could be pleasantly surprised by the orders, but I think we're going to keep those expectations modest for now until we get confidence that it's going to be much above. I think we do a good job in that graphic kind of highlighting that there's a relatively slow burn of revenue per site for the RUO product. And then as you pointed out, it really kicks up once we have an IVD product out there.

Joseph Conway : Okay. And then maybe just final question, just as we look forward to these next couple of years. In terms of site adoption and cash burn, just kind of wondering how you're level setting that. If you're more looking at just finding the strategic centers and planting relationships there, or if it's going to be a slow buildup of customers there over time?

Josh Riggs : Thanks. I would say 1 advantage that we have in transplant is an exceptional concentration at the top. So transplant is a relatively complicated surgery, and so it tends to aggregate at the higher-end academic centers that's both here in the U.S. and Europe and around the world. And so any 1 of these top 100 centers feels meaningful to us because the top 100 here in the United States do 80% of the transplant volume are better. And so I guess, if I'm going to answer your question, I think when we get to 10 to 15 to 20 sites, we will have picked up a very meaningful percentage of that local market opportunity, and I think that's what we're excited about. So when we look at our funnel today, I mean, 25% of the U.S. transplant volume is represented there. I mean all of these guys feel strategic to us.

Joseph Conway : Okay. Great, yeah. That’s all super helpful. Thank you very much for taking our questions today.

Josh Riggs : Sure.

Operator: Your next question comes from the line of Mark Massaro with BTIG. Your line is open.

Vidyun Bais : Hey, guys. This is Vivian on for Mark. Thanks for taking the question. So as it relates to FDA approval, could you just remind us of any interim milestones, what publications and studies you're expecting to leverage to get there? I think in the press release, the Q-Sub was mentioned. And then I believe FDA clearance in late '25 sort of represents your bull case, but just can you give us a range of the timing of that?

Josh Riggs : Sure. I'll take some of the timing question, and then I'll ask Ekke to talk about the milestones that he has in front of him. We -- I think we're -- I guess we're very hopeful that the FDA will move quickly, and we don't really control that process. But we're going to give ourselves the best chance we have to get through by the end of '25. That may drift into early part of '26 just depending on how quickly the FDA is processing things at that time. But Ekke, if you could just talk a little bit about the key milestones that you have in front of us, the Q-Sub and then what you guys are doing from a product development point of view and where you hope to be kind of going into next year.

Ekke Schutz: All right. Thank you. So our Q-Sub is planned like in 6 to 8 weeks from now. We are right now putting all the material together. I would say we are 50% there. We are going to start, I would say, the revision process next week. So we are all going into that and divide it by all the needs. And it's a pretty formalized process, where you are just presenting your intended use, you're presenting the method or the assay, and you are presenting what kinds of studies like analytical validation, clinical validation you're planning. And then you ask the FDA a question, are you fine with that? Is our analytical validation according to what you are looking for? Is our clinical validation according to what you are looking for? And then we hope to get good answers. We had made actually pretty good experience with the FDA when we did our BPD submission last year. They are very cooperative. And so they are really trying to work with you and not against you, which I really appreciated. So bottom line, there are some time to tell us, okay, this is -- okay, this might be for us. This is all that detail something where we want to have a modification, which at the end of the day helps us for the design and planning of our IVD endeavor. That said, also this IVD route is a very, very formalized way of putting documents and data together. It starts with Phase 1, which is a design selling and inputs. So you are completely put together how your design should look like. And all the input in there like, okay, what are we going to achieve? What is our target? And that's something we want to get finalized by in, actually, six weeks from now. So we want to have that phase done in 6 weeks. And from there, you are getting into the second phase, which is development and design output. So from there, you are developing everything like work packages, what you want to do, how you want to do that, which study and so forth. And then the design output means you are controlling that what you have put into your design document really can be achieved. So that's the second so-called phase gate. And then the third phase is verification and validation. That's where we are going to do an analytical validation and particular validation with the, at that point, locked in final product. And this, we have planned to get accomplished by Q4 '25/Q1 '26. So that's the entire plan. It's a lot of writing documents and just show the FDA that you are -- have thought about everything that needed to be thought about and that you are not just getting some data randomly put together by chance. The entire idea behind that is [Indiscernible] so-called design control. Everything needs to be set from the very beginning, and then you are just working along what you have planned.

Josh Riggs : Thank you, Ekke. Can I just want to make one comment on -- I apologize. But just one quick comment. Yes. One thing that we've been pleasantly surprised with is kind of the warm reception to the IVD program we felt from the community. One of the questions we're asking these sites as we're bringing them up and we're moving them through the funnel is, hey, are you interested in participating in the IVD program? And it's just kind of been overwhelmingly positive. I think these centers want to help us get the samples together. They want to help us with the reproducibility studies. And so it's really feeling like a community effort here to push the IVD process along. So I think we're overwhelmed by the positive support that we're getting from the community. And I think we're -- there's just a general excitement that they're going to have access to this technology and they get to help make it happen.

Operator: There are no further questions from the line at this time. I'd like to ask Jeff to see if we have any questions from the webcast.

Jeff Ramson: Yes, we do have a few, actually. Josh, Andrea, how do you calculate the $1 billion transplant testing market opportunity? And how does OncoCyte plan to capture its $1 billion market opportunity?

Josh Riggs : I mean it's a good question. We put this out, I think, in our investor deck. We've got an estimate of somewhere around 3 million to 3.5 million testing opportunities globally. And that number, obviously, multiplying that by a mix of our RUO product and our IVD product, where we expect to be IVD in the U.S. and Europe and then probably stay RUO Rest of World. That market is growing, at least according to current estimates, about 9% a year. So we see that the $1 billion is a relatively conservative estimate of what the market opportunity is. We're not going to move that up until we have a chance to do more price discovery. And this is just something that's hard to do until you actually have the IVD product out there and know what you're going to get reimbursed. So we're erring on the side of being conservative there. From a market capture point of view, I think we talked about this a good bit, but it's democratization, right? It's giving people access and it's meeting the demand where it is, which right now, the demand is at the local center, and they don't have access to a technology that works for them today.

Andrea James : Do you want to add just a little bit about that $1 billion total addressable market is based on the current clinical indications?

Josh Riggs : Yeah. I mean, I think the most exciting thing for us that's come out of the past two or three months is the work that's being done on like the anti-CD38 drugs, where they're really meeting an unmet clinical need from a pharma point of view. And that just opens up kind of just these significant monitoring opportunities, so therapeutic efficacy monitoring, like is the drug working, and then also recurrence monitoring. And we're seeing a lot of this in oncology right now, and there's just an enormous amount of value creation that's happening in the oncology space just kind of like on that therapeutic efficacy and recurrence monitoring. And we're starting to see that emerge here in transplant. And so we're -- we've got our fingers crossed that these trials will continue to be successful so that patients have an option instead of just losing their organ. And I think that creates -- that's an incredible tailwind for us because we're out in front there. And so I would say that easily expands the market opportunity that's in front of us.

Ekke Schutz: If I may, I would just add to what Josh was sustained to make it really clear. What the new situation that we have created is. I recall a board meeting like perhaps eight months ago, where we were talking how much would you use the test in a high-risk population. And most of the people are saying, why should I? We don't have any therapy. Why do I want to know? And this has dramatically changed. Now we have the first working therapy for chronic active antibody-mediated rejection, and it's not only something where we can show our test is perfect monitoring. It's also a huge, huge relief for patients who are suffering. Because earlier than that, there was no therapeutic option and the organ would ultimately be lost, and now we have a therapeutic option. And our contribution is really to show that people are going into this disease earlier than we can do it with standard of care. And --

Jeff Ramson : I have one other question, Josh. How does OncoCyte envision building recurring revenue streams when most diagnostics currently are performed episodically?

Josh Riggs : Yeah. I would say the transplant is inherently a recurring revenue opportunity because these patients are living with their organs, hopefully, for 10, 12, 15 years or better. And unfortunately, though, there's a high rate of rejection. And so there's just inherently a number of touch points over the life of the patient. We're -- the physician just needs a noninvasive way or a minimally invasive way to check on that organ. We, along with the other players in the space, are kind of meeting that need. And so I think it's just inherent to the product and the industry that we're in.

Jeff Ramson : Got it. Okay. Great. There's no more questions. Rochelle?

Operator: Currently, we don't have any questions from the line. [Operator Instructions].

Andrea James : Thanks, Rochelle. And Jeff, I guess we'll give it maybe like 5 seconds here for a pause, and then maybe Josh will close this out.

Josh Riggs : Okay. Guys, thanks everybody for joining us today. I mean we're obviously excited about where we're at as a company. It feels great to be out in the field with a product, engaging with the research community and just feeling a groundswell of support. So we look forward to updating you guys on our product and capturing these sites across the United States and across Europe. I think we'll have some very exciting things to announce here in the future, and thanks for playing along.

Operator: Thank you. Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.