Fireside chat today. I joined the company less than two months ago, and so, we thought I will maybe ask the questions of Josh Riggs, our CEO here, that I had before I joined the company, and you guys can kind of follow along that way. Investors.oncocyte.com, we've got a Q2 shareholder letter out, we've got an all-new investor deck, and you can also look at the transcript from the Q2 call. Okay, so just to get started, hi, Josh!
Hey, how you doing?
Your CFO is running your fireside chat. Alex, you can weigh in at any time if you have questions as well, and if you guys have questions, please do send them in. Okay, so first, what does Oncocyte do?
Oh, well, yeah, it's a good question. We make tests that are used at kind of like critical decision points, both the oncology space and in transplant monitoring. So we develop the tests in our lab, and then, you know, once they're mature, we send those off to manufacturing and, you know, prepare them for distribution.
Okay. So one of the first questions I had when I was looking at the company is, you know, it's a $40 million market cap, very small, basically pre-revenue on your first product. Why is this a public company?
You know, it was a long story, I think, for Oncocyte to get to where we are today. I mean, it spun out of a therapeutic company back in 2016 with a diagnostic product that was meant to help early-stage lung cancer patients. You know, through the trials and tribulations of developing a product and getting it to market, we've changed our stripes a couple of times. You know, we've wound up to where we are now, which is much more of a product-focused company. You know, it's focused on, you know, democratizing our technology as far as we can.
Okay. Now tell us about yourself and how you came to the CEO position?
Yeah, so, I was consulting for the company before I came in. And so this was under, you know, previous management, and then I joined about four years ago, in a business development capacity. And, you know, so worked on several of the acquisitions that the company made, kind of building out its IP portfolio. And, you know, along the way, I got really attracted to the transplant product that we had acquired out of Germany.
Stepped into a general manager role in that capacity and, you know, when the company was, you know, transitioning on CEOs, the board reached out to me and asked if I wanted to, you know, take the helm of the company, and that was back in December of 2022, kind of, and started the transition for us, you know, from a lab company into a product company.
Tell us a little bit about that pivot and what it took and what the goals were?
Yeah, you know, I guess, you know, pivoting is never easy. So we were a lab business, and we were focused on, you know, serving the clinical community day in and day out. And, you know, that was kind of the first to a product-based business away from a... We were going to partner our way into channels instead of trying to build our own commercial channels. And, you know, that process took, you know, well over a year, you know, to complete. And I'd say for the past four quarters, you know, our average burn has been, you know, less than $5 million. And I think if you look at the same period a year prior, I mean, you're probably averaging more like 10.
You know, we shipped our first, you know, products back in June, and so we're very proud of that, to our beta customers. And then we announced a partnership with Bio-Rad and also investment from Bio-Rad, kind of around the April fundraise. And so I would say we made three core promises, which was get the burn down, create a product, and find a partner. And, you know, that's what, you know, our investors invested in last year. And then when we came back in April of this year, we had met all three of those promises, and so, you know, they voted again, with, you know, with another, you know, funding round that came in, you know, at market, no warrant coverage.
Which is, I think, for us is a strong sign of success, at least in maturing the product and getting us forward because, you know, it's hard when you're 95% off of your peak valuation, you know, to still protect value. And I think we've done a really good job of that, by largely delivering on what we said we were going to do.
Yeah, I love that. I was also impressed with the way this company... You've made some promises, and you delivered on all of them, and consequently, we have very supportive existing shareholders, and I find that very, very encouraging. And part of the reason why we're doing this conference is because we would love to welcome new shareholders into our growth story as well. Let's double-click on specifically the product we began shipping in June.
Mm-hmm.
What is that product? What does it do?
Yeah, it's a wonderful technology, and it's so what it does exactly is measure donor-derived cell-free DNA in the blood. What that means is that for transplant patients, the number one thing that doctors are worried about, for the most part, is that your immune system is going to start attacking the grafted organ. And when it does that, it starts to damage the graft. That puts DNA into the blood, you know, as those cells, you know, die, and our technology is able to pick up on that signal. So we're able to identify the DNA that's coming from the grafted organ from the DNA that's naturally in the bloodstream... and that's useful. So when a doctor's deciding, you know, "Hey, should I biopsy my patient? Should I increase immunosuppression?
You know, should I take another intervention?" You know, having a sense for, you know, whether or not the graft itself is being damaged at that time, or there's something else going on with that patient, is a critical piece of information. And this is a really well-established biomarker. It's a really well-established technology generally. You know, so this is very routine testing today, so something like 90%-95% of, you know, transplant surgeons, at least kidney transplant surgeons, use this type of testing on a routine basis to help manage their patients. And, you know, and so that's really good for us. It means that the market understands the technology, that it actually adds value in the clinical moment, and that's what we're hoping to do, is enable that testing at a local level.
If you looked at the transplant space today, you would see two major competitors that are really out there, way out in front of everybody else. You know, their two labs are based in California, and combined, they're probably doing something like $500 million a year in revenue on this type of testing. What we want to do is change who's getting that revenue. So by putting our technology in a box, getting it through the FDA, we'll be able to put the transplant centers themselves in business. They'll be able to generate that revenue and support their local community, instead of sending it out to a lab in California.
It's going to enable better turnaround time, better patient management, and, you know, and I think, you know, create an opportunity to explore new indications, you know, for these transplant patients. So we're excited about it. You know, the FDA process isn't a quick one, but, you know, it's one that we're moving as quickly as we possibly can on. And I think as a first step, we wanted to get an RUO version, so a research version of the product out, and that's what we started shipping just in the past 8 weeks.
Great, and can you just I want to make sure we make the regulatory point really clear. This is what we're shipping. This is GraftAssure. Our Research Use Only kit. It's a very low bill of materials. The materials inside are not that expensive to manufacture. But can you explain just quickly, what's the, like, what do you mean when you say RUO? Like, why does that matter?
Yeah. So Research Use Only, or RUO, is a category of product, at least under sort of the US regulatory scheme, that lets labs and researchers get access to a technology before it's gone through the FDA, and it lets them ask new questions. It lets them, you know, study their patients locally, and that's been a challenge. Because this whole market is kind of walled off by IP, you know, if your clinical question or your research question didn't line up with the commercial interests of, you know, the established players, the research didn't get done.
and so I think we found, you know, that many of these transplant centers are excited by the opportunity to ask their own questions, to, you know, manage their patients or, you know, study their patients in a new way, and that's what we're going to enable. It's not a huge revenue generator. It's an opportunity to engage with the community in a mutually productive way, to get them energized, to get them interacting with our technology on a day-to-day basis, get familiar with the workflow. But then, once the IVD product comes out, we have this wonderful installed base of, you know, labs that are comfortable with the technology, the process, and they convert to, you know, these kind of routine, high-value, recurring revenue customers. And, you know, I think one thing we haven't talked about is what these tests get reimbursed.
And, you know, that one's. You know, not only is it high value from a clinical point of view, it's high value from a revenue point of view. You know, when we went through, you know, CMS with our lab version of this test, we got over $2,000 reimbursement for first contact. You know, similar tests are reimbursed, you know, well into the $2,000 range. And, you know, for a test that costs, you know, relatively modest dollars to manufacture, there's a substantial amount of margin to share, you know, with all players in the ecosystem. And I think that's what attracted, you know, Bio-Rad at this stage, to kind of support us in our early commercial effort.
One of the things that I found really compelling about the Oncocyte story is that it's IP that drives the reimbursement rates.
Mm.
And so we have this IP and this molecular diagnostic technology. Why do we... how did we get so lucky to have all of this great IP that can command all this value in the market?
Yeah. No, I mean, so we got transplant by accident almost. So, when we were buying Chronix Biomedical out of Germany, we were really focused on their blood monitoring for oncology product, and the transplant came along for a ride. And it was about 3 weeks after we bought it, MolDX issued what's called a local coverage decision that pointed to our publications a couple of times. And then, about 4 months after that, the US Patent Office chimed in and issued our patents. And so we wound up with a fully baked baby at that point, and, you know, we had to make a decision on what to do with the product.
So I think we were very fortunate to get this IP as a part of an acquisition that was primarily focused in oncology. And what it's enabled is, you know, this, this opening of the market that you know, is really, really been hemmed in by the, the major competitors who've, you know, built up an IP estate on the Illumina system, so NGS sequencing, very complicated technology. And, you know, we were sitting here with something that's, you know, based off of PCR, very established technology, very easy to use. Like, if you've come up as a molecular student, you've studied on PCR, you learned how to use PCR in the lab. And so we're finding that labs are very, very comfortable with this type of technology, and it's, it's differentiating for us in a couple of ways.
Primarily, I think on ease of use and turnaround time are the most important. Like, you know, we're if you're running one sample, you can get a result in as little as four hours with our technology, where, you know, if you're trying to do that with an NGS system, you're looking at next day. It's probably, like, a 30-hour workflow, and you're going to need a PhD most likely to help you interpret the results where, you know, a standard lab tech can really kind of run our PCR product.
I love this. And I think I'll be able to do one more, and then we'll see if, Alex, if you have any or we're getting any from, from the audience. We talked about the Research Use Only product is the land strategy, and once we get FDA approval for an IVD product, that's our expand. So land the transplant centers with the research product-
Mm.
Then we get to expand on revenue when we get the IVD approval. How should investors think about our success in that future revenue stream? And I noticed, you know, we reported in the shareholder letter in Q2, the percentage of transplant centers in our funnel. Like, why does that matter? Like, how do investors measure us on our success before we have meaningful revenue?
Oh, it's a great question. And, you know, our internal metric, I mean, as you're well aware now, is, you know, how many of these centers we're turning on in over the next, you know, 12-18 months. Because, you know, it's a significant investment for any one of these centers to bring up a workflow. And, you know, so they're training their staff, they're doing a lot of analytical validation studies. They're proving that the technology works for them. And so they become your evangelists, and they become your day one users for the IVD product.
You know, and we put this in the shareholder letter, and, you know, we're, you know, we're thinking indication for use, which is, you know, for kidney transplant patients, should be generating somewhere between, you know, high hundreds of thousands, all the way up to $2 million in annual recurring revenue to us, and that's at exceptionally high margins. So I think that becomes very exciting because we believe that every center we bring up today revenue. So it's, you know, it combines a little bit of what we're doing in Germany.
You know, maybe just scaling the volume and the population, but for you guys, the quality of revenue is recurring based on, you know, sort of the nature of a transplant-
Sure
... and how it might be rejected at any time.
Well, it's a very insightful point. I think roughly one in five kidney transplant patients is going to experience what's called antibody-mediated rejection. And so, it's something that's always top of mind for any nephrologist or any transplant surgeon who's managing their patient. And so with this technology, you've got multiple touch points with the patient over the life of their transplant. And so, it is something that, you know, you don't want to say it's like the Jelly of the Month Club, it's the gift that keeps on giving. But, it certainly is. You know, like, we're there for the patient, we're there for the physician, through the lifetime of that transplanted organ. And, you know, we're happy to continue to build on that indication and find new use cases for managing those patients long term.
Great. And maybe we'll do one from the audience, and then, Andrea, I'll hand it back to you. Question around, like, unit economics, right?
Mm-hmm.
So we've talked a little bit how, you know, things take longer with the status quo. They're less convenient for the ordering provider, they're more expensive to interpret. You know, if they're using your test, you know, how does that change the unit economics for you and, you know, your ability to capture and participate in that value?
Yeah. So we expect that the ability to charge in this space, so pricing power, is largely limited by what your customer, your end user, can get reimbursed. And so if this test, you know, is reimbursed at, you know, $1,500, for an example, we don't have the reimbursement for the IVD product yet, you know, that's something to be settled in the future, that you can charge up to about $750. So roughly 50% of the reimbursed value is kind of the cap. Will be some level below that because we'll be sharing in some of those economics with Bio-Rad. But you get this idea that you can price somewhere in the mid hundreds for an IVD product. You know, and this, the cost to manufacture is nowhere near that.
I mean, this is very... I don't want to say old technology, but, I mean, this is very established technology, very routine. Not necessarily off the shelf, but the unit economics for us are favorable. But then also the unit economics for our users are favorable as well. So they've got, you know, substantial margin there to help offset the cost of bringing up the new instrumentation and also training folks on that workflow.
... Love it. I think these questions from the audience are amazing, and we should just take them. We're not afraid of hard questions. Ask them! So what type of lab does a transplant center need to run this test? Is it moderately complex?
It is a moderate complexity test. So it's not gonna be CLIA waived any point in the near future. And what we're being directed to most often is the HLA lab, and so this is the lab that's attached to the transplant center that does the precursor testing, so they're matching the donor and the recipient based off of their immune types. I can't really explain the science there. I'm not a scientist, but that's where we're finding the most interest is in that HLA lab, and there's about 134 of those in the United States.
Okay. The next question is about the balance sheet, and definitely, and I acknowledged this in the Q2 call as well, I came in with wide-open eyes. Just some things to think through. This is a company with options. Not literally, but we have a lot of options in front of us. The April capital raise that we did, we did a PIPE, and, you know, it was done at market, no warrants, very streamlined, and so now we have this great streamlined capital structure. We have just common stock, no debt, we've settled the preferred, and so we're in a great spot as we hit an inflection point. We are looking at non-dilutive options as well as other types of options. The other thing that the team has done really well is gotten the burn down.
As a matter of fact, I mean, I would... I wish, I mean, if we were in a different position. So I'd say I feel good about where we're sitting, and I feel really great about our access to capital, and we do have support from existing shareholders, but we are always looking to add shareholders as well. Okay, we'll keep going. Oh, how many internal reps do you have to sell the products, and are there any plans? And I would also talk about the market concentration there too, Josh.
Mm-hmm. Yeah, so we have a team of four, at least on the commercial front end in the United States right now, and so that's kind of a split between key clinical and technical. And then we're augmented by the Bio-Rad team, and so they are, you know, co-marketing with us in the United States. They're also co-marketing with us in Germany, so we get the advantage of their scale and reach. We are considering incremental hires there just to manage the kind of influx that we've had into our funnel. But, you know, right now it's a relatively small team, and we're committed to, you know, partnering our way into these channels just because, you know, building out a commercial channel can be incredibly expensive, and it's not always value creating.
I think, you know, there is a unique advantage that transplant offers, and, you know, Andrea hit this point, is that, you know, there's really only about 100 call points in the United States that, you know, do 80% of the transplant volume. You have similar concentration in Europe as well. Because transplant is a relatively complicated surgery, it tends to aggregate at, you know, these higher-end academic centers, and that gives us, you know, some unique advantage when we go to the marketplace that we don't have to knock on a lot of doors to get meaningful volume. I think on average, every center that we pick up is about 1% of the market, and so, that gives us, you know, the ability to go out with a really small team and a focused effort.
Are there milestones associated with the Bio-Rad agreement?
There is a phase II. So right now we're in the RUO phase. The phase II is, is what we call the IVD option. So once we're through the FDA, you know, Bio-Rad and us can sit down at the table and negotiate for the IVD rights, which would trigger a second equity investment from Bio-Rad at that point, so dollar high single-digit millions. That would again be at market, at that time. And so that's additional incremental capital that we have access to, once we, once we hit, hit that milestone. But in between here and there, there's no real, real milestones between that.
What level of revenue required to break even? I'd like to take that, if that's all right.
Sure.
Yeah.
Go ahead.
So we'll just give you, I won't give you a number, but we'll give you, give you the pieces to think through the numbers. So, you know, Josh talked about our cash burn. You would think about the core run rate cash burn is about $5 million, but we would like to go beyond that and greenlight some additional investment to go faster. And so we did talk about the back, back half in each quarter being roughly equal to Q2 cash burn, was about $6 million, give or take. And so the revenue that we'll get to, the revenue that we'll get will have software-like gross margins. We haven't put a gross margin figure out there, but it's a very, very nice gross margin profile. And so we can sell the kit for hundreds of dollars, and it costs us tens of dollars to make it.
And so those are the pieces, so you can try to do some math on that, but I guess those pieces will get you there. Okay. Can you talk about the markets for transplants in the U.S.? Is this number growing, and will there be any impact from GLP-1s?
I'm not sure what a GLPT is. You maybe have to look that one up for me. But you know, the market itself is growing at about 3% a year in the United States, just in the terms of total number of transplants that are done. Ex-US, it's growing at about 9%, a little bit over 9%, so roughly three times the rate of growth that we see here, and we think that's largely because the rest of world is catching up to the US, who are a little bit out ahead here. You know, we see the market, you see the global market is about 10% penetrated. US market is roughly 25%-30% penetrated today in terms of, you know, total, you know, testing being done.
That equates to roughly 1 million testing opportunities a year across the United States, another 1 million in the EU, and then, you know, some additional for rest of world.
... Yeah, well, the, yeah, the GLP-1s is a type of therapy. I think, probably even more so than that in terms of what impacts our market, would be some regulatory changes where the U.S. government sounds like we want to incentivize more kidney transplants to help. So I'm wondering, Josh, and sorry, I'm always, like, leading the witness here, but Josh, you're just such an expert, and you can answer these questions better than me. Maybe talk through some of those regulatory changes, and there is a macro favorability here-
Sure
... that is worth mentioning. Go ahead.
Yeah, so NOTA passed, this was, this came out of the Biden... and the Transplant Access Act, I think, something like that, and which is, which is going to push transplant centers to use more marginal or sort of, say, I don't want to say the word risky, but we'll just, organs, and, and that in itself increases risk and sort of demand for testing to, to manage that risk, which is an area that, you know, we, along with the other competitors in the space, are, you know, uniquely positioned to serve.
My guess was that it also related to GLP weight loss drugs, meaning if you're, you know, decreasing the amount of obesity and potentially then chronic care, kidney transplant, that sort of... Yeah.
Yeah. You know, it would be wonderful because there are so many people that are on these transplant waiting list, you know, hoping for a chance at an organ. That would just be a wonderful benefit for the community at large. And I think you can see, like, we had a recent New England Journal publication that talked about a new class of drugs that I think specifically supports the kidney community. And this is going after antibody-mediated rejection, and you can find a link to this on our website.
But, you know, we were part of a phase II study that showed, like, 80% response rate to this drug in the treatment arm and 20% in the non-treatment arm, which is just a phenomenal separation, that, you know, AMR has been a thorn in the side of kidney transplant surgeons for 60 years. And, you know, so we've got our fingers crossed. I think the academics, academicians, you know, have their fingers crossed on this one as well, because we need a new tool to help manage AMR, and we've shown that in this study and in additional studies, that we're able to identify a response to this drug, and that you are also potentially able to identify when the AMR is recurring.
So there's a new clinical indication in this for us, which would require even more intense monitoring of these patients while they're on therapy. So again, it's just increasing that recurring revenue opportunity for us.
Great. Well, this has been, you know, really wonderful. Thank you for sharing the Oncocyte story with us, Josh and Andrea. And-
I just want to say thank you to Sidoti. I mean, this has been a wonderful conference for us, and we appreciate the opportunity to, you know, connect with, with the investors. This has been a great experience.
Thank you. It's been great to have you, and thank you as well, everybody listening. Take care.
Cheers.