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Edited Transcript of OCX earnings conference call or presentation 14-Nov-19 9:30pm GMT

Q3 2019 OncoCyte Corp Earnings Call

ALAMEDA Dec 9, 2019 (Thomson StreetEvents) -- Edited Transcript of OncoCyte Corp earnings conference call or presentation Thursday, November 14, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mitchell S. Levine

OncoCyte Corporation - CFO

* Padma Sundar

OncoCyte Corporation - SVP of Marketing & Market Access

* Ronald A. Andrews

OncoCyte Corporation - CEO, President & Director

* Tony T. Kalajian

OncoCyte Corporation - SVP & CAO

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Conference Call Participants

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* Bruce David Jackson

The Benchmark Company, LLC, Research Division - Senior Healthcare Technology Research Analyst

* Keay Thomas Nakae

Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Therapeutics, Devices and Diagnostics

* Paul Richard Knight

Janney Montgomery Scott LLC, Research Division - MD, Head of Healthcare Research & Senior Equity Research Analyst

* Thomas Flaten

Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst

* William Robert Quirk

Piper Jaffray Companies, Research Division - MD and Senior Research Analyst

* Robert A. Yedid

LifeSci Advisors, LLC - MD

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Presentation

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Operator [1]

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Greetings and welcome to the OncoCyte Corporation Third Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Bob Yedid of LifeSci Advisors. Thank you, Mr. Yedid. You may begin.

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Robert A. Yedid, LifeSci Advisors, LLC - MD [2]

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Thank you, Alexi, and thank you, everyone, for joining today's conference call to discuss OncoCyte's third quarter 2019 financial results and recent operating highlights. If you have not seen today's financial results press release, please visit OncoCyte's website at www.oncocyte.com.

Before turning the call over to Ronnie Andrews, OncoCyte's President and Chief Executive Officer, I would like to remind you that during this call, the company will make projections and forward-looking statements regarding future events. Any statements that are not historical fact, including, but not limited to, statements that contain words such as will, believes, plans, anticipates, expects, estimates and similar expressions 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 the specific risk factors that may cause actual results or events to differ materially from those described in these forward-looking statements.

These factors may include, without limitation, risks inherent in the development and/or commercialization of potential diagnostics tests, uncertainty in the results of clinical trials or regulatory approvals, the capacity of OncoCyte's third-party supply blood sample analytical system to provide consistent and precise analytic results on a commercial scale, the need to obtain third-party reimbursement for patients, use of any diagnostic test that the company commercializes, our need and ability to obtain future capital and the maintenance of intellectual property rights. Therefore, cash flow outcomes and results may differ materially from what is expressed or implied by these forward-looking statements. OncoCyte expressly disclaims any intent or obligation to update these forward-looking statements, except as otherwise may be required under applicable law.

With those prepared remarks, it's my pleasure to turn the call over to Ronnie Andrews, CEO. Ronnie?

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Ronald A. Andrews, OncoCyte Corporation - CEO, President & Director [3]

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Thanks, Bob, and welcome, everyone, to our conference call today to discuss our third quarter 2019 financial results. Joining me today are Al Parker, our Chief Operating Officer; Mitch Levine, our Chief Financial Officer; Padma Sundar, our Senior Vice President, Marketing and Market Access; and Tony Kalajian, our Chief Accounting Officer.

In July, I stepped into the CEO role at OncoCyte with a vision to provide actionable answers to the many critical and underserved decision points faced by clinicians and patients across the lung cancer care continuum.

Every day, we are motivated by the fact that lung cancer remains the leading cause of cancer death in the U.S., even despite advances in screening and new treatments. The team and I recognize that there are a number of underserved decision points that prevent patients from getting the care they need at the earliest stage when it may be most beneficial. And I'm pleased to say this quarter, we made significant progress in providing new solutions for patients and doctors and realizing our vision for OncoCyte.

I'd like to start off by recapping an exciting accomplishment for the quarter. Our transaction with Razor Genomics and acquiring the commercial rights to the lung cancer treatment stratification test.

Let me share with you why we're so excited about this. Today, there are over 40,000 patients that will be diagnosed with early-stage non-small cell lung cancer in the U.S. this year, meaning they'll receive a stage 1 or 2 diagnosis. We expect this number will increase in the coming years due to the ongoing improvements in screening programs.

Treatment for these patients generally consist of complete surgical resection and patients are often considered cured without additional treatments such as chemotherapy. However, there's a huge problem with today's approach to managing these patients. Despite being considered early age or curable -- early stage or curable, under the current treatment protocol, 30% to 50% of these early-stage patients will die within 5 years post-resection.

It turns out that while significant portion of these patients will do well with surgery alone, there's a subset that would benefit greatly from standard chemotherapy. The problem is prior to our Razor test, there was no accurate way to stratify patients into those who would likely benefit from chemotherapy and those who would not. Stratifying early-stage non-small cell lung cancer patients has a number of potential benefits.

First and foremost, identifying patients likely to benefit from early postoperative chemo can improve survival and patient outcomes.

Second, stratification may also avoid overtreating patients by giving cytotoxic chemotherapy with all of its problematic side effects to patients who do not require treatment beyond surgery.

And finally, stratification will reduce the overall cost and morbidity by preventing recurrences and expensive late-stage treatment that accompanies it. Our acquisition of the rights to commercialize the Razor Genomics test positions us to provide a test that solves this problem. So what is this treatment stratification test?

Similar to DetermaVu, our treatment stratification test looks at an RNA signature panel for 14 specific genes and then analyze by a proprietary algorithm that provides actionable results to patient -- physicians.

Once we saw the peer-reviewed publications highlighting the power of this test to improve patient outcomes, we believe it complemented our strategic vision and knew it should become part of the OncoCyte portfolio. I'd like to take a little bit of time now and highlight the important details for you. Our new treatment stratification test utilizes gene expression analysis directly from a patient's tumor to stratify these early-stage non-small cell patients into high, intermediate and low-risk of occurrence.

And here's where the blinded prospective data from the recently published trials gets really exciting. High-risk patients identified by the test that received standard of care chemotherapy had a 5-year survival rate of 92% as compared to 49% in high-risk patients that did not receive chemotherapy. Simply put, this is a significant increase in survival for these patients. In fact, study results for the stratification tests show that it outperforms current National Comprehensive Cancer Network, or NCCN, guidelines in identifying patients likely to recur and benefit from chemotherapy.

Speaking of studies, this treatment stratification test has been extensively validated and published with independent global studies in over 1,500 patients in 7 publications, including prestigious journals such as Lancet and JAMA.

So beyond the immense value this test brings to patients and doctors, our acquisition of the rights to the test is a game-changer for OncoCyte. It rapidly propels us to a commercial-stage company. Importantly, the test is both commercial and reimbursement-ready and we were incredibly excited by the recent Centers of Medicare & Medicaid Services, CMS, proposed positive coverage decision for the test, which may ultimately provide reimbursement coverage for approximately 70% of the anticipated non-small cell lung cancer market.

As a reminder, for those not familiar with the CMS process, there are a number of important steps that must be completed before submitting for CMS review, all of which have now been accomplished with our treatment stratification test. CMS review requires robust documentation of test reproducibility, peer-reviewed publications and a clinical utility study. CMS' proposed positive coverage decision speaks to the strength of our data and clinical utility in the patients we serve.

While CMS coverage is important for broad reimbursement, it is important to note that typically, we see many private payers following CMS decisions, particularly as this stratification test is a precision medicine approach with demonstrated ability to improve patient outcomes and the health care economics. We expect the final local coverage determination and subsequent pricing in the first half of 2020, and in the meantime, are rapidly ramping up activities for a commercial launch.

Another important point to make is that we have a true first-mover advantage in this space. Today, there is no other test for this critical decision point available for physicians' use. And we believe there is a significant reimbursement pricing precedent in the market today with tests having similar endpoints in other areas of cancer currently receiving reimbursements in the range of $3,000 to $4,000 per test, despite what we believe to be a less robust set of validation studies.

Our commercialization marketing plan will be highly targeted, with initial focus on 10 geographic regions that represent high-risk populations of targeted patients. We believe this efficient and targeted approach will allow for significant revenue potential with a small but effective initial commercial investment.

I'll speak more on our successful team-building efforts a little later in the call.

So beyond our commercialization efforts, we're also in the planning stages to initiate a prospective randomized clinical trial with the goal of how our test incorporated in the national and international treatment guidelines.

Having our test -- our treatment stratification test incorporated into treatment guidelines further strengthens our first-mover position and also creates a significant barrier to entry for other tests. We also plan to seek participation from immunotherapy companies in our trials, allowing us to evaluate the relative impact of chemotherapy alone versus chemotherapy in combination with immune therapy agents broadening the potential impact and reach of our test.

We're incredibly excited about our potential to improve decision-making for early non-small cell lung cancer patients. Our test brings significant value to patients, doctors and payers, importantly, also to our shareholders. It allows us to rapidly launch to a commercial-stage company and that -- and our test is now reimbursement-ready as we prepare for a commercial launch.

We look forward to providing exciting updates on our progress in commercialization, marketing and of course our trials in the coming months.

Next, I'd like to transition some important updates for DetermaVu. Our liquid biopsy test that has the potential to clarify that lung patient's lung nodules are benign, which may enable them to avoid risky, invasive long biopsies.

DetermaVu is what originally attracted me to OncoCyte, and I continue to be highly enthusiastic about our proprietary immune system interrogation approach that harnesses the immune system's response to the presence of cancer as an exquisitely sensitive early biomarker.

We are convinced that this approach has the potential to be a powerful clinical decision tool that addresses a very clear unmet need with a clear value proposition. So where does DetermaVu development stand?

On our last call, we provided an update for our time line for the DetermaVu CLIA validation study, which had a shift from our original expectations.

As a reminder, the CLIA validation study will assay approximately 120 blood samples previously tested as part of our R&D Validation Study to demonstrate equivalent test performance when conducted in the company's CLIA validated laboratory with CLIA staff and it includes protocols to confirm accuracy, reproducibility and precision of DetermaVu in a real-world clinical CLIA lab setting.

If you remember from our August call, I shared that the CLIA validation delay was in part due to issues transitioning from an R&D environment to a clinical one. And in particular, the implementation of research-use only, or RUO, reagents in a clinical setting.

Our entire team worked incredibly hard to understand the issue and in late July and early August, identified that we were encountering issues with lot-to-lot variability from our extraction reagent vendor.

We have worked to overcome these issues, establishing incoming QC protocols to ensure no future impact on test reproducibility while also working closely with our vendor to gain early notice of any changes to their reagents.

In Q3, we received several lots from our vendor and chose the 2 highest quality lots to move forward with. I also shared that we completed a comprehensive review of all workflow components, including our vendors, automation, and quantitative analytical methods. While this was painstaking work, it was critical to ensure that we can deliver the reproducibility essential for patient care.

So where do we stand with the time lines? Most importantly, today, I'm very pleased to share that we remain on track for CLIA validation within our restated time line of 6 to 9 months, which we established at our August Q2 earnings call. But to ensure there's no confusion, this means we remain on target for completion of CLIA validation by the end of Q1 2020, which is actually within the 6-month time frame from August. It is important to note that while we cannot, at this time, commit the final performance claims, the preliminary data we have seen from the validation of the 2 lots of extraction reagents run on previously analyzed samples give us renewed confidence.

We remain deeply committed to rapidly advancing DetermaVu and are committed to providing additional information regarding CLIA validation as it becomes available. With renewed confidence in our ability to meet our CLIA validation study time line, we anticipate beginning the final clinical validation phase in late Q1 or early Q2 of 2020.

To ensure our new investors understand the process, once we are CLIA validated, we will then begin the clinical validation phase to finalize performance, which will be what we published for CMS dossier submission. In our clinical validation, our goal is to deliver solid statistical power to our test and gain subsequent publications.

To do this, we will test approximately 440 blinded prospectively collected patient blood samples to serve as the final confirmation of DetermaVu in our clinical lab setting. To expedite this final phase before commercial availability, we already have acquired all of the samples in-house and can move deliberately to complete clin val within 90 days from initiating this important final phase of our CLIA readiness.

Our ultimate goal is of course to secure broad reimbursement. And so we are working to assemble our robust package just as what was successfully submitted for our treatment stratification test.

Before we move on, I hope it's very clear to everyone today that we are incredibly focused on delivering DetermaVu to market and are doing everything we can to expedite the process without compromising quality or our compliance requirements under CLIA LDT guidelines. While we've accomplished a significant amount this quarter in expanding the breadth of our reach on the lung cancer continued care, DetermaVu is where we started, and we're committed to commercializing our competitive test for this important decision point.

Also earlier this month, we announced an exciting collaboration with the GO2 Foundation for lung cancer, our GO2 Foundation, committing strategic support to the world's leading organization dedicated to saving, extending and improving the lives of those vulnerable, at risk and diagnosed with lung cancer.

We believe this collaboration will be incredibly valued for OncoCyte with the potential to benefit from the commercialization, clinical and research activities.

As we advance our collaboration, we plan to focus on several key initiatives, including partnerships with clinical trial networks as well as activities that increase access to molecular testing for the early diagnosis and management of lung cancer.

We're absolutely delighted to be collaborating with the GO2 Foundation, and believe that working together with Co-Founder and Board Chair, Bonnie Addario, we will be able to advance our shared goals to increase personalized care through greater access to molecular test for early diagnosis and therapy selection while also expanding efforts for life-saving research.

While we believe our work with the GO2 Foundation will facilitate our market access activities, we're also equally enthusiastic about the impact of this collaboration on our clinical trial and research efforts.

At OncoCyte, we have been focused on rapidly building up an extensive network of trial sites to facilitate the execution of our clinical trials for both DetermaVu and our treatment stratification test.

We want to establish ourselves as a leader in the space. And in fact, have been focused on increased presence among the medical and academic communities with extensive KOL outreach and presentations at relevant medical meetings.

This quarter, we were pleased to present at a number of key meetings, including a podium presentation at the Cleveland Clinic's Early Lung Cancer Detection Symposium. We also presented data at the Annual CHEST Meeting in New Orleans, highlighting the immune response for Nodule Evaluation or our IRENE cohort, the patient cohort that was used to develop our proprietary liquid biopsy test.

Important to note, in our industry, the strength of any molecular diagnostic product stems from the quality of the sample cohort that is used to build and validate the product. The IRENE cohort, in the consortium of over 60 clinical sites that supported it, has substantial power to drive product development and future trials. The IRENE cohort is unique and unsurpassed.

It is a cross-sectional cohort of U.S. early lung cancer patients with now over 3,000 subjects enrolled from 31 states in Puerto Rico, with 75% of the patients coming from community care centers, 15% from VA care centers and only 10% from academic care centers.

Having a large and diverse study population affords OncoCyte the specific opportunity to evaluate product performance in small subgroups of patients without sacrificing statistical power. An often underappreciated attribute of IRENE cohort is added mirrors to real world. The (inaudible) patients are treated in community setting and IRENE's patient population reflects this.

A large real-world cohort reduces the risk of a product performing well in a small academic cohort of a few hundred samples but not being able to perform adequately in the real world. This is something we see very often in the molecular diagnostic development.

To this point, we've been unable to identify any published cohorts for early-stage lung cancer to reflect the breadth and depth of IRENE for the U.S. lung cancer population. The clinical data and practice patterns observed across many different physicians from 60-plus clinical sites provide value insight to and understanding of the distinct patient management differences that exist across sites and settings. This knowledge not only contributes to DetermaVu, but the impact of these insights will guide future products and may attract pharma trial interest.

At pragmatic level, the IRENE study collected in multiple sample types, serum, blood, plasma to allow for the interrogation of a wide variety of targets, including cell-free DNA, circulating tumor DNA, RNA, DNA, methylation, proteins and antibodies. These samples have been consistently processed and safely stored as a lung cancer biobank.

We believe our lung cancer biobank will enable us to accelerate future product development time lines as now we have high-quality samples reflective of real-world of U.S. early-stage lung cancer patients.

Excitingly, we also have the capability to market the cohort to potential platform development partners as well as large pharma companies to rapidly develop molecular signatures against real patients at scale.

In summary, the IRENE cohort provides OncoCyte with a valuable asset, unmatched in our industry for internal research and external partnerships that it can effectively power a product development, future clinical studies due to its depth, breadth and real-world focus.

In Q3, we're also pleased to attend the Managed Care Conference AMCP Nexus, presenting results from physician survey, showing the limited use today of current guidelines and risk models for lung nodule management in the community setting, ultimately leading to overuse of risky and expensive invasive biopsies.

These results highlight the real need for a simple, liquid biopsy like DetermaVu to guide doctors and patients' clinical decision-making.

Taken together, in Q3, we've made great strides in establishing OncoCyte as a true leader in the early lung cancer diagnostic space. We've done an incredible amount of hard work to advance our 2 molecular diagnostic tests technically while also ramping up activities on the commercialization and marketing fronts in preparation for launch.

At the same time, we invested in our clinical operation and ramped up activities within the lung cancer community, ensuring the advancement of important research and new solutions for patients.

My first 100 days at the helm of OncoCyte have been incredibly exciting. But this is just the beginning. Our team is aggressively and seriously evaluating opportunities on several underserved decision points on the lung cancer continuum of care, and we've identified a number of potential high-priority partnerships that we believe could complement our current offerings to bring incredible value to patients, doctors, payers and, of course, our shareholders.

I look forward to providing timely updates on our progress as we move with deliberate speed and focus to realize our bold and compelling vision. We reached an important phase of execution on both the development and commercial fronts, and I'm confident we have the technologies and the skill sets within our team that we need to deliver.

At this point, I'd like to turn the call over to Mitch Levine for a review of the financials. Mitch?

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Mitchell S. Levine, OncoCyte Corporation - CFO [4]

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Thanks, Ronnie. As of September 30, 2019, we had cash, cash equivalents and marketable securities of $19.8 million as compared to $8.4 million at December 31, 2018. Tuesday evening, we strengthened our balance sheet with an additional $8.6 million equity raised, priced at market with strategic long-term investors, led by Pura Vida Investments, a fundamentally driven health care-focused registered investment adviser, and included participation from our largest investor, Broadwood Partners.

Last month, we refinanced our existing loan with Silicon Valley Bank, receiving $2.5 million in net proceeds while paying off our principal balance of the prior loan and extending the maturity date of the new loan to 2022, plus we may qualify for an additional $2 million on our Silicon Valley Bank facility if we meet certain conditions with the bank at market rates.

For the third quarter ended September 30, 2019, we incurred a net loss of $5.2 million or $0.10 per share as compared to $3.0 million or $0.07 per share for the 3 months ended September 30, 2018.

Our operating expenses for the 3 months ended September 30, 2019, were $5.3 million, as reported, and $4.4 million on an as-adjusted basis as compared to $3.0 million, as reported, or $2.6 million on an as-adjusted basis for the same period in 2018.

We have provided a reconciliation between GAAP and non-GAAP operating expenses in the financial tables included with our earnings release, which we believe is helpful in understanding our ongoing operating expenses.

Research and development expenses for the current quarter were $1.6 million as compared to $1.5 million for the same period in 2018, relatively unchanged. General and administrative expenses for the third quarter of 2019 were $3.0 million as compared to $1.3 million for the same period in 2018, an increase of $1.7 million.

This increase is primarily attributable to investment banking and related expenses, personnel expenses, including noncash stock-based compensation, principally due to additional equity grants and new hires, and legal, accounting, audit and related service expenses.

As we transition from Lineage Cell Therapeutics, formerly BioTime, shared services and build our own administrative human resource, finance and accounting functions and teams, we expect our expenses in this category will continue to increase.

Sales and marketing expenses for the 3 months ended September 30, 2019, was just over $600,000 as compared to about $200,000 for the same period in 2018 as we increased our sales and marketing efforts with key hires and ramp-up activities.

We expect sales and marketing expenses will increase as we continue to build a sales and marketing team at the appropriate time for our planned commercialization of our treatment stratification test and DetermaVu, as discussed earlier by Ronnie.

Cash used in operations was around $4.9 million for this quarter as compared to approximately $2.5 million during the third quarter in 2018. It's important to note here that we spent about $1.5 million during the quarter that we believe were nonrecurring expenditures, such as management transition payments, investment banking and advisory fees and business development, legal fees and consulting expenses we paid for assessing strategic opportunities.

That concludes my remarks considering our financial highlights. Back to you, Ronnie.

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Ronald A. Andrews, OncoCyte Corporation - CEO, President & Director [5]

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Thank you. We'd like to now open up the call for questions. So operator, if you can tee those up, and we're ready to answer those.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Paul Knight with Janney Montgomery Scott.

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Paul Richard Knight, Janney Montgomery Scott LLC, Research Division - MD, Head of Healthcare Research & Senior Equity Research Analyst [2]

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Ronnie, on your -- so you're expecting the CLIA validation basically into Q1, Clinical Validation Study thereafter. And you think what, when are you -- you would need to be published, do you not, for CMS evaluation as well, and when do you expect that publication, midyear 2020?

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Ronald A. Andrews, OncoCyte Corporation - CEO, President & Director [3]

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Yes. So that's a great question, Paul. I want to make sure and this is a really important thing to clarify for shareholders. CLIA val will end, clin val will begin. We will try to expedite that, as I mentioned, as soon as we have the clin val data unblinded. And our data scientists work through it, and we have the final performance characteristics. We already have the manuscript prepared, we will plug in those data. And then from there, we will begin to recruit various journals -- peer-reviewed journals for publication.

Padma is here. Padma, would you like to add a little color as to what typically happens in the timing of that? We're shooting for the summer of 2020.

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Padma Sundar, OncoCyte Corporation - SVP of Marketing & Market Access [4]

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Yes. That's exactly right. So we are already working with key opinion leaders and have a draft manuscript prepared, and we've already identified a certain kind of peer-reviewed publications that have a fast review time. So as soon as we have the final numbers, it's a question of plugging those in and getting those accepted in the next 3 to 6 months following that data becoming available.

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Ronald A. Andrews, OncoCyte Corporation - CEO, President & Director [5]

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And so Paul, the next question is, well, when do you go to CMS? And we would go to CMS as soon as we know we have a publication accepted by a Journal, we would go ahead and schedule for review with CMS, correct?

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Padma Sundar, OncoCyte Corporation - SVP of Marketing & Market Access [6]

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That's correct. So we -- CMS, as you know, gives you an opportunity to have a pre-submission meeting. So the plan is, we already obviously have a good relationship with them because of the Razor Genomics test, so we have access to them. And the idea is as soon as we have the specifications defined, we would go to CMS, have a pre-sub meeting, and we'd have a clear kind of path defined for CMS coverage. So that's the plan for interacting with them.

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Ronald A. Andrews, OncoCyte Corporation - CEO, President & Director [7]

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Right. So Paul, our plan for communication is obviously to get to CLIA val. We'll have a call right after that. I think that will be the end of year call, and then that should be about the same time. And then we'll continue to try to refine our time lines as we get along. But I think the good news today is that we remain on track for the time line that we committed to in August.

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Paul Richard Knight, Janney Montgomery Scott LLC, Research Division - MD, Head of Healthcare Research & Senior Equity Research Analyst [8]

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Meaning you would then hope for CMS approval second half of 2020 and commercialization really could happen second half as well.

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Ronald A. Andrews, OncoCyte Corporation - CEO, President & Director [9]

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Actually, what we would hope to do, I mean, the earliest we could get a meeting with CMS would be in the fall of 2020. And then they would typically have about a 90-day review period. We would hear on our coverage decision near the holidays. And then from there, we would begin to ramp-up our commercial activities for Q1 or Q2 of 2021, assuming we get the positive cover. I'm looking at Padma, she's nodding. Okay. Yes?

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Padma Sundar, OncoCyte Corporation - SVP of Marketing & Market Access [10]

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We feel confident because, as you know, that's kind of the path that's similar liquid biopsy companies in the space have demonstrated, so we feel confident about the time line and the path.

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Ronald A. Andrews, OncoCyte Corporation - CEO, President & Director [11]

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Right.

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Paul Richard Knight, Janney Montgomery Scott LLC, Research Division - MD, Head of Healthcare Research & Senior Equity Research Analyst [12]

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What -- in terms of headcount on your commercial sales force, where are we now? And where do you want to be at the end of, let's say, midyear 2020?

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Ronald A. Andrews, OncoCyte Corporation - CEO, President & Director [13]

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Yes. So Padma will add some color commentary to this. But the goal right now, Paul, is we've identified that the regions that we believe are the highest sort of -- our lowest bar for entry and highest potential for return on that invested capital of a sales rep. We're going to -- we're in the process. We actually have commitment from a sales leader already, and so we're moving forward with that.

And then we have a -- we already have a collection of potential sales rep resumes. We've already reached out to a number of those. We're in the process of starting those interviews. Padma...

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Padma Sundar, OncoCyte Corporation - SVP of Marketing & Market Access [14]

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That's correct.

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Ronald A. Andrews, OncoCyte Corporation - CEO, President & Director [15]

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What do you think will -- early Q1, we'll have them hired and...

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Padma Sundar, OncoCyte Corporation - SVP of Marketing & Market Access [16]

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Early Q1. We should have at least the first batch in the top priority states be hired by Q1.

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Ronald A. Andrews, OncoCyte Corporation - CEO, President & Director [17]

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So Paul, our goal is to obviously to time, and it's impossible to time CMS' final pricing, but we expect that we'll get final pricing on the Razor Genomics test sometime in that time frame. And so our reps will be coming in, in early January, be trained and be ready to -- if not already out promoting the test in these key targeted areas. And we'll go ahead and begin to bill for these tests once we get the final coverage decision, and we'll have the right to approve those billings and then go back and submit them once we get the final coverage decision. We won't be able to recognize any of that revenue. I'm looking at Tony here. He's looking at me. We won't be able to recognize that revenue till we collect the cash for it. But we will begin the sales process as soon as these folks are hired, and we get a final coverage decision.

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Operator [18]

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Your next question comes from Bill Quirk with Piper Jaffray.

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William Robert Quirk, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [19]

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A couple of questions on the Razor transaction. I guess first off, what should we be thinking about in terms of the run rate for the associated spend with that? And ultimately, what I'm trying to get to here guys is how should we think about the -- presumably initial kind of net loss, I'm assuming you're going to be counting for that with the equity method, and thus, probably should be tucked in below the line, correct?

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Ronald A. Andrews, OncoCyte Corporation - CEO, President & Director [20]

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So -- go ahead. Yes, I'm going to let Tony Kalajian as that's more of an accounting question, and I'll be way over my skis. So Tony?

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Tony T. Kalajian, OncoCyte Corporation - SVP & CAO [21]

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Yes. So I think you asked about the equity method accounting, we will record the 25% of our losses or earnings of Razor into our income statement below the line. You're actually right, it's even below other operating expenses. And with regard to run rate, Razor has to spend $4 million of the clinical trial expenses before OncoCyte will kick in a dime for it. And we don't expect that to be until at least after 12 months.

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Ronald A. Andrews, OncoCyte Corporation - CEO, President & Director [22]

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So the operating impact, Bill, because we wrote the contract that way so that they would be incented to come alongside us and work equally as hard on the trial, the randomized trial. So those expenses, we believe the first 12 months or maybe even a little longer depending on how fast they recruit, that those expenses will be covered by their side. So we will only have to incur the commercial expenses and then the subsequent milestone accruals.

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Tony T. Kalajian, OncoCyte Corporation - SVP & CAO [23]

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Correct.

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William Robert Quirk, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [24]

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Right. Okay. And then I guess that's where I was going, I was largely thinking about the commercial side of the expenditures versus the R&D side of it.

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Ronald A. Andrews, OncoCyte Corporation - CEO, President & Director [25]

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Yes. Sure. So the commercial side, we will be -- if you want to look at Razor as a stand-alone P&L, which we will always try to do because we believe, and as Tony and I know, I'd like to track return on invested capital. So we make an acquisition, we want to look at the 3- and 5-year returns as we look back and make sure we're meeting the goals and what we perform it out. But the idea here is to hire 6 reps. We will then -- and a lot of the -- we have Padma onboard now. We have a Director of Marketing onboard. We have a Director of Medical Affairs onboard. So we're prepared to do the medical education and the marketing will be a lean mean marketing team for quite a while. So the real adds will be on the sales side, and those adds will be, as I said, about 6 people, plus a leader. So if you can model that out, we'll have about 7 pure commercial folks in play beginning -- by the beginning of February. And we don't expect to add any more until we reach, and I think you and I had chat about this, but just for everyone's edification, the idea is that in my previous world at Clarient, we had a very efficient way of building our sales force. We would build an overwhelming force a region. We would get to $2 million to $3 million in run rate. And then from that point, we would hire an adjacent sales rep to that region. And there's a lot of reasons for that, but I'm happy to go into if you're interested. But just from experience, that creates the regional momentum that we need. A lot of these tests are by-mouth references by physicians in the community. And so we want to build up specific high incident rate communities. And then from there, expand around that.

And so we will begin to hire the second wave of reps when we see the revenue support that.

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William Robert Quirk, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [26]

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Okay. Understood. And then just one last one for me, and it's a bit of a nuanced question. You talked about 10 territories initially. Just remind us, Ronnie, kind of what percent of the market opportunity is that? I think you talked on the deal call, about 11 states representing about 50% of the opportunity. So maybe you could just kind of parse that down for us?

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Ronald A. Andrews, OncoCyte Corporation - CEO, President & Director [27]

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Yes. We refined it even further. And so we have about 10 geographic areas that represent well over 50% of the lung cancer rates in the United States. And that's the areas that we're going to launch our dedicated sales team in to begin with. And we believe that 6 reps, we can -- some of these are -- like in Florida, you have some intensity around the Miami area as well as Orlando, Tampa. So you can -- with 1 rep, you can cover a couple of those geographic areas that are high incident rates. And so the idea is to get 6 and try to cover those 10 areas with 6 people out of the gate. And then as I said, as we ramp those revenues up, we'll begin to come alongside them and split those territories.

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Operator [28]

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Your next question comes from Thomas Flaten with Lake Street Capital Markets.

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Thomas Flaten, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [29]

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Just a follow-up on some of the prior questions. Could you give us a sense for revenue expectations for 2020 from the Razor test?

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Ronald A. Andrews, OncoCyte Corporation - CEO, President & Director [30]

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Right now, we -- what we want to do is we want to obviously quickly get out and see what our CMS value is going to be, it's hard to give you reagent -- I'm sorry, revenue until we know what our reimbursement is going to be. But in terms of the market uptake, we have conservatively, just for planning purposes, adopted a market uptake in each individual market. So that each rep -- if you imagine each rep in -- at full -- I'd say at full capacity for our territories be somewhere between $3.5 million to $4 million per rep. We believe it takes about 18 months for a rep to get to that full, well, a critical math, if you will, a full ramp.

So if you can imagine the first 60 to 90 days are trying to figure out where everybody is and then the rest of it, then you start to see momentum build. That's how we've ramped it. So we don't -- we aren't going to publish that. We'll get -- we'll definitely report on it as it starts to happen and unfold. But that's how we saw it in my Clarient years, it took about 18 months for a rep to get to 100% of that number. And so they were not quite 50% of that number by 9 months in. It took -- ramped heavily in the second half of that 18 months. So I don't know if that helps you at all, but that's how we're looking at. And as soon as we have a final coverage decision in the pricing, we'll be able to give you a little better guidance. And I'm sure that we'll probably think about some revenue guidance for next year for the year once we know those numbers.

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Thomas Flaten, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [31]

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No, that's very helpful. And on the deal call, you had talked about doing a bit of soft launch in the fourth quarter. Can you talk about what efforts have been directed in that -- towards that effort?

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Ronald A. Andrews, OncoCyte Corporation - CEO, President & Director [32]

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Sure. We've been -- yes, we've been nonstop on the road. I mean Padma and I and the marketing team been to a lot of meetings. We've been meeting with the numerous thoracic surgeons. We've had several meetings with potential early adopter sites. And so Padma, you want to -- I mean without -- we can't really mention names because it's still confidential, and we have to keep it that way. But you want to give a little update about where you think we are and how we're doing there?

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Padma Sundar, OncoCyte Corporation - SVP of Marketing & Market Access [33]

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Yes. So we have been actively -- there's been a lot of interest in getting what we call early access to the test as soon as possible. So in our target states, we have identified 3 key sites that do want to participate in that program. And as soon as we are able to press release that, our goal is to do that and then launch -- and launch the test to those customers first.

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Ronald A. Andrews, OncoCyte Corporation - CEO, President & Director [34]

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Yes. The thing holding us up is not the accounts, to be honest. I think we've been pretty transparent. We acquired Razor and their lab, and we are actually moving our current lab into their lab space. And so some of this is just -- we've done a great job. The team's worked hard, really 24/7. It's a lot, it is manual work, if you can imagine moving equipment and moving -- and getting things ready and preparing workflows, et cetera.

But that is pretty much behind us now. And so now we'll be able to begin to take on some of the early access. And you'll definitely see us announce that as we close those deals and as we begin to take in samples.

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Thomas Flaten, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [35]

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Great. And then just one final one for me. With respect to closing the complete acquisition. So for the remaining 75% of the shares, do you have a sense of at what point in the year we might see that coming because it will eat up a fair bit of cash?

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Ronald A. Andrews, OncoCyte Corporation - CEO, President & Director [36]

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Yes. We expect it won't be till at least 12 months from the signing of the deal, so fourth quarter of next year. I'm looking at Tony and Mitch. And so if that's the case, I mean we'll -- by then, we should have, we hope, a nice revenue ramp. And so as you know, this test is a PCR test, it's not next-gen sequencing, which means we have some nice gross margins on it. So our goal is to really get the revenue going and then take a deep breath and see where we are in terms of forecasting the forward-looking 12 revenues at the point where we'd have to come out-of-pocket for cash.

But I think right now, we're expecting that they will not be able to recruit and achieve those milestones until at least 12 months and it might be as far as 15 months. So somewhere in that time frame.

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Operator [37]

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Your next question comes from Bruce Jackson with The Benchmark Company.

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Bruce David Jackson, The Benchmark Company, LLC, Research Division - Senior Healthcare Technology Research Analyst [38]

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A very thorough job on the commentary. Just one question on the prospective study for the Razor test. Where are you in terms of setting up the parameters of the study, are you like just still recruiting partners, have you given any thought to how big this study is going to be or when that might start?

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Ronald A. Andrews, OncoCyte Corporation - CEO, President & Director [39]

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We have. We -- the original plan was to collect 750 patients across -- it's an international study, across multiple sites in the U.S. and ex-U. S.

Obviously, bringing on Kim Dickinson, Dr. Dickinson, I think I introduced last time, last call. She has incredible experience both in running LabCorp clinical trial group as well as its couple of divisions at Roche. And so she has a great handle on how we're going to go forward and do this. We have recruited already and signed on our CRO for the study. And so I feel like we're in really good shape to move forward and begin to take in samples, but I don't expect that will happen until into the new year.

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Operator [40]

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Your next question comes from Keay Nakae with Chardan Capital Markets.

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Keay Thomas Nakae, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Therapeutics, Devices and Diagnostics [41]

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Maybe switching to DetermaVu with respect to the reagent issue. It sounds like you're confident that the watch you have is sufficient to conclude the CLIA validation study. How do you stand in terms of supply to complete the Clinical Validation Study? And maybe beyond that, how successful are your efforts with the vendor to tighten up the quality on the products they are spending in?

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Ronald A. Andrews, OncoCyte Corporation - CEO, President & Director [42]

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Yes. That's a great question, and I had that in the script, and it was getting so long, we took it out. So I'm glad you asked it. We spent the better part of August and even into early September working with the vendor, got several lots. We ad nauseam, ran testing on lots till we found the 2 best ones. We gave -- then gave them or they gave us the actual composition of those lots. We've had them build 18 months work of inventory for those lots and we've now sequestered that. So we now have, based on our projected plans of use, about 18 months of those 2 lots. So we feel like we're in really good shape. Within that 18-month period, once we get up and going, we will clearly move over to an automated sample, our DNA extraction process -- I'm sorry, RNA extraction process. And as we do that, when we automate it, we will transition over to whoever manufactures the piece of automation that we use. So we think we are really well covered right now to meet all the needs we'll have going forward.

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Operator [43]

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There are no further questions at this time. I would now like to turn the floor back to Mr. Ronnie Andrews for closing comments.

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Ronald A. Andrews, OncoCyte Corporation - CEO, President & Director [44]

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Thank you. Thanks, everybody, for joining us today. And again, I hope that the details we shared are at the level of transparency you're expecting as shareholders, and this is what we committed to when I got here. We want to make sure we live up to that. I believe we've made great progress during the quarter. We've made great progress on DetermaVu despite the speed bump we had in June and July, and the team has worked extremely hard, I couldn't be more proud of them, in getting us back on track and really having us poised to move forward with that. I'm very excited about the Razor test and the potential ahead for that test, and we look forward to the commercial launch of that test in Q1.

And we just hope you as shareholders are as enthusiastic as we are. And I can tell you, the response from the physician community, especially around the Razor test so far, has been extremely exciting. And so we're just excited of where we are and excited to move forward as we head into -- finish Q4 and head into 2020. We'll continue to drive each other, do everything in our power to deliver for the physicians and the patients we serve, and for you guys, the shareholders, who put your trust in us.

So thank you, guys, for your support, and I'd like to thank our employees. This is a small group. They give it their all every day, and I couldn't be more proud of them. So thank you, and we look forward to future opportunities to share good news with you.

Take care, everybody.

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Operator [45]

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This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation.