Bob Yedid - Managing Director LifeSci Advisors William Annett - President and Chief Executive Officer Mitch Levine - Chief Financial Officer Lyndal Hesterberg - Senior Vice President, Research and Development.

Paul Knight - Janney Bruce Jackson - The Benchmark Company Keay Nakae - Chardan.

Greetings and welcome to the OncoCyte Corporation Third Quarter Conference Call. [Operator Instructions] It is now my pleasure to introduce your host Bob Yedid. Please go ahead..

Thank you, Stacy and thank you everyone for joining this afternoon's conference call to discuss OncoCyte's third quarter 2018 financial results and recent operating highlights. If you have not seen today's financial results press releases, please visit OncoCyte's website at www.oncocyte.com.

Before turning the call over to William Annett, OncoCyte's President and Chief Executive Officer, I would like to remind you that during this conference 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-Q, 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 the commercialization of potential diagnostic tests, uncertainty in the results of clinical trials or regulatory approvals, the capacity of OncoCyte's third party supply blood sample analytic 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 the company commercializes, and our need and ability to obtain future capital and maintenance of IP rights.

Therefore, actual 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 that, I'll turn the call over to Bill, President and CEO.

Bill, please go ahead..

Thanks, Bob and welcome, everyone, to our conference call to discuss our third quarter 2018 financial results and operating highlights. Joining me on today's call are; Al Parker, Chief Operating Officer; Mitch Levine, Chief Financial Officer; and Lyndal Hesterberg, PhD, Senior Vice President of Research and Development.

Al, Mitch and Lyndal will be available during the question-and-answer session. For the past year, we've been acutely focused on getting the clinical development program of DetermaVu, our lung cancer diagnostic test back on track after we encountered issues last year with the reagents for the diagnostics testing platform that we have been using.

Today, I'm pleased to say that we've taken a significant step forward with the successful transition to a different platform, an industry standard Next Generation Sequencing or NGS diagnostic testing platform for targeted sequencing.

Our selection of the new NGS platform follows months of rigorous testing during which we evaluated four leading clinical diagnostic testing platforms for with our DetermaVu lung cancer assay.

We anticipate that the use of the widely commercialized diagnostic platform that we've chosen will increase the likelihood that DetermaVu will offer a consistent and robust result necessary for further product development and commercial success.

We've now completed the transition to the new platform, including installation, training and operational qualification. We've also completed incoming quality control testing of our new custom targeted sequencing panel reagents. As anticipated, the new platform is generating consistent and reproducible data among samples tested so far.

We've also observed excellent reproducibility across multiple reagent lots and believe that the precession of our new NGS platform may improve our test performance in a routine clinical testing environment.

In addition, the use of the new NGS platform could allow for decentralized operations beyond OncoCyte's CLIA lab potentially enabling development of a CE marked kit product for distribution in Europe and other markets if OncoCyte's upcoming studies are successful.

With those critical steps now behind us, we have initiated a 700 blood sample study that will develop the proprietary mathematical algorithm that will interpret the results of DetermaVu assays.

You may recall that we previously announced that we had identified and filed patents on about 230 new biomarkers in addition to the Wistar biomarkers that we were using in our original algorithm.

All told, our new and in-licensed biomarkers give us a library of almost 800 biomarkers from which we plan to select the best combination to differentiate between benign and malignant lung nodules.

The optimal combination and weighting of biomarkers in the algorithm will be determined through bioinformatics combined with the latest algorithm strategies that may include AI related methods.

During this important study, the proprietary algorithm will be cross validated through the analysis of multiple clinical subsets of data within the 700 blood study to assess its performance. This next stage of our process should deliver an initial assessment of the accuracy of the DetermaVu algorithm.

As of today, we have run over half of the 700 blood samples that are being used in our algorithm development study. This study will establish the proprietary mathematical algorithm that will be used to interpret the test results for DetermaVu.

Once all 700 samples have been run, we will begin to develop the algorithm and expect to complete it next month.

Once the algorithm development study has been completed, the next step will be an R&D validation study that will analyze approximately 250 blinded, prospectively collected patient samples to confirm test sensitivity and specificity in an R&D setting.

This pivotal study is designed to determine the accuracy of DetermaVu to within about plus or minus eight percentage points, which should provide a strong indication of the tests potential commercial viability.

By about the end of 2018 or early 2019, we anticipate completing this study and we should then be able to confirm with a high degree of certainty, whether we have a commercially viable test poised to address the potential multibillion dollar market for liquid biopsy lung cancer diagnostics.

An extensive market survey of about 250 chest [ph] sessions conducted by an independent firm indicated that in order to prescribe DetermaVu, these specialists will require a minimum of 85% sensitivity and 35% specificity.

If data from our upcoming R&D validation study are similar to what we've seen in the past, then DetermaVu should yield results that significantly exceed these targeted levels of accuracy.

As a remainder, in a study reported in May 2017 at the American Thoracic Society 2017 International Conference, DetermaVu demonstrated sensitivity of 95%, specificity of 73% and Area Under the Curve or AUC of 0.92, meaning that 92% of samples were correctly identified.

Sensitivity and specificity are statistical measures of test performance with sensitivity measuring the percentage of malignant nodules that are identified correctly by the test and specificity measuring the percentage of benign nodules correctly identified.

As we reported in July of this year, a separate 2018 study of DetermaVu on approximately a 155 blood samples resulted in accuracy at least equivalent to the 2017 DetermaVu test results because of the error bar our potential range of results from the small sample set in the 2018 study was wide, these results must now be confirmed in the larger 250 sample R&D validation study.

So in short, we will be able to confirm very soon whether we have a test that is poised to potentially advance the current paradigm in lung cancer diagnosis.

It is worth noting that all clinical samples required for the R&D validation study and all of our other upcoming pre-commercialization studies are currently in house, so we will be able to move quickly into this next phase of development.

In the first half of 2019, we will initiate an analytical validation study to establish performance characteristics of the assay system which will then be validated in our CLIA-certified laboratory.

Assuming that these upcoming studies are successful, we will initiate a clinical validation study, which is the final study prior to making DetermaVu commercially available. We're also targeting completion of this important study in the first half of 2019.

Successful completion will enable us to make DetermaVu commercially available during the second half of next year. This clinical validation study will analyze approximately 300 blinded prospectively collected patient samples for a final confirmation of test sensitivity and specificity in our CLIA lab setting.

This pivotal study is designed to determine the accuracy of DetermaVu to within about plus or minus five percentage points. Again, with over 2000 patient samples in house and available for these development studies, we intend to move very efficiently and seamlessly for moving study to the next. Let's turn now to commercialization and reimbursement.

In terms of our commercialization approach subject to the availability of capital, we plan to launch and promote DetermaVu independently in the US with a relatively small concentrated sales force and commercial team.

We believe that this will be an attractive strategy because there is a relatively small number of chest sessions in the US and a focused commercial team should be able to promote DetermaVu effectively. In addition, our commercial team will include separate teams providing patient support and market access liaison with Medicare and other payers.

Of course the key to success with any diagnostic test is broad payer reimbursement from both Medicare and private payers. To that end, in parallel with our commercialization efforts, we are already planning a clinical utility study that will take place after DetermaVu is launched.

This will be a real world evidence study that is a two arm study that will follow real patients in a clinical setting to determine both clinical outcomes and elucidate the Formico [ph] economic benefits of our test. We want to measure how much the use of DetermaVu improves health outcomes for patients and lowers costs for the healthcares system.

This one to two years study is being designed to give us and the payers the evidence needed to understand these benefits. In the meantime, we have previewed our intended views and clinical development plans with Medical Directors from 10 public and commercial health plans that in the aggregate cover 77 million lives.

All of these plans recognize the large unmet medical need addressed by DetermaVu and subject to their consideration of our final scientific and clinical data view the test favorably.

This together with the strong potential support that we continue to receive during our discussions with physicians gives us confidence that if our studies are successful, DetermaVu will add significant value to all stakeholders, patients, physicians and payers. At this point, let me take a step back for those who maybe new to the story.

DetermaVu is our confirmatory non-invasive liquid biopsy test that we're developing to facilitate clinical decision making in lung cancer diagnosis. DetermaVu is designed for use following a low dose CT scan and before undergoing a tissue biopsy in adverse patients where there is cam shows [ph] evidence of a suspicious lung nodule.

In short, DetermaVu's value proposition is to reduce the number of expensive and risky lung biopsies. Lung cancer is a very large market with equally large unmet medical needs. More Americans die of lung cancer than any type of cancer.

According to the American Cancer Society, last year there were approximately 234,000 new diagnosis and approximately 154,000 deaths from all cases in the US attributed to lung cancer. This is largely due to the fact that lung cancer symptoms often don't emerge until the cancer has reached a more advanced stage, typically stage 4 and metastasized.

In fact, lung cancer is one of the lowest five year survival rates after detection of any cancer type highlighting the importance of early detection. So that's where we see ourselves in the market. As a confirmatory test to help physicians diagnose suspicious nodules and better identify the patients who could truly benefit from biopsy.

Although lung biopsies are an important component of the lung cancer detection paradigm, they are both expensive and pose significant risks to patients. Past studies have concluded that up to 20% of lung biopsies result in serious complications and up to 1% result in death.

In fact, since most lung nodules are benign, more lung biopsies result in complications than in discoveries of malignancies. DetermaVu may enable physicians to significantly reduce the number of unnecessary, invasive and risky biopsies by giving the physician an analysis of whether lung nodules are likely to be malignant or benign.

We believe that the wide spread adoption of DetermaVu could drive a significant reduction in the number of unnecessary biopsies performed in the US every year, with the corresponding reduction in the surgical risks to patients undergoing these invasive procedures.

Given a sense of the impact that DetermaVu could have there are estimated to be between 10 million to 15 million people in the US were at high risk of developing lung cancer and who should have an annual LDCT or Low Dose CT scan.

Between 400,000 and 600,000 of these people who have nodules over 8 millimeters in size and under the current standard of care would likely undergo biopsies. Another 600,000 to 800,000 people have nodules in the 5 millimeter to 8 millimeter range. Today, these people either would have biopsies or further screening.

But if the DetermaVu test is used as an intermediate step prior to biopsy, a negative result would reclassify those patients back to low risk there by eliminating the need for a biopsy.

If our DetermaVu test indicates a positive result then the recommendation to the physician would be continued with the standard of care presumably a biopsy as the appropriate next step to diagnose whether the nodules is malignant.

Not only would DetermaVu benefit many patients by sparing them from an invasive and risky biopsy, but it would also result in significant savings for the healthcare system.

A lung biopsy costs about $15,000 on average including the cost of complications, so DetermaVu provides significant benefits to all key stakeholders in the care continue, improved outcomes for patients and the physicians and cost savings for payers.

There is plenty to like about this innovative test particularly when you consider that the potential total addressable market for confirmatory liquid biopsy lung cancer test is estimated to be up to $4.7 billion in the US alone.

Furthermore, the new NGS platform that we are using could allow for decentralized operations beyond our CLIA lab, potentially paving the way for approval in the EU and other regions such as China.

At this point all of our focus as team has been on advancing DetermaVu toward approval and commercialization in the US, but longer term the opportunity does not stop here. At this point I would like to turn the call over to Mitch Levine for a review of the financials.

Mitch?.

Thanks Bill, and good afternoon to everyone. At September 30 2018, we had $10.8 million of cash and cash equivalents and marketable securities valued at $830,000 for a total of $11.6 million of liquid assets.

This cash balance includes the $3.3 million, net of financing expenses that we raised in July as a result of a successful at-market registered direct offering of units which are comprised of common stock and warrants. This offering was led by management and OncoCyte's Board of Directors and included an institutional investor new to our company.

The financing provides us with additional resources to advance DetermaVu through the remaining development steps that must be completed prior to commercialization.

The participation by management and members of the board reflects our confidence in our new diagnostic testing platform as the backbone of our ongoing DetermaVu development program as well as the company's long-term growth prospects.

For the third quarter of 2018, OncoCyte reported a net loss of $3.0 million or $0.07 per share, compared to a net loss of $6.9 million or $0.22 per share for the third quarter of 2017.

Operating expenses for the third quarter of 2018 were $3.0 million, as reported and $2.6 million on an as adjusted basis, which excludes certain non-cash operating expenses.

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

Cash used in operating activities was $2.5 million for the third quarter of 2018, which compares to cash used in operations of $3.5 million during the third quarter of 2017. The reduced cash used in operations in the current quarter mostly resulting from our staff reductions and executive sabbatical program we implemented last quarter.

For the current third quarter, our average monthly use of cash in operations was about $833,000. During 2017, our average monthly use of cash was about $1.1 million.

Cash, cash equivalents and marketable securities enable us to maintain our core capabilities and complete the development of DetermaVu as we continue to align our operating expenses with our primary goal of completing DetermaVu, essential for creating long-term value for our shareholders.

Research and development expenses for the third quarter of 2018 were $1.5 million compared to $1.8 million for the same period in 2017.

General and administrative expenses for the third quarter were $1.3 million compared to $4.3 million for the comparable period in 2017, which was higher than the prior period principally due to a $3.0 million non-cash expense related to the issuance of warrants to certain shareholders. We did not have any such similar charge for this quarter.

That concludes my remark concerning our financial results and now, I'll turn the call back to Bill..

Thanks Mitch. Before opening the call up to your questions, we thought it would be useful to reiterate the timeline of upcoming development activities. By the end of this year or early 2019, we will report results from our R&D validation study.

Again, this will gauge the test's accuracy to about plus or minus eight percentage points and where there are several additional development steps to complete prior to filling to commercialization. The results of the R&D validation study will indicate whether we likely have a commercially viable test.

This is a very important data and a significant milestone for our company that we expect within the next few months. If it is successful, this will be followed in the first half of 2019 by analytical and CLIA validation studies.

Our path to commercialization concludes with a clinical validation study to confirm product performs claims in an independent blinded data set.

Following commercialization, we plan to conduct a post launch clinical utility study designed to demonstrate improved outcomes at a reduced cost to the healthcare system, a key step in securing payer reimbursement.

We're excited about the progress that we're making in developing DetermaVu and look forward to the completion of the near term studies underway, which should provide visibility into the accuracy of our test by about the end of the year.

If these studies and the studies we plan for the first half of 2019 are successful, we plan to make DetermaVu commercially available in the second half of 2019. That completes our formal remarks. We are now open for questions..

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Paul Knight with Janney. Please go ahead..

Hi, Bill that was a very well prepared commentary and congratulations on the NGS platform.

As you talk to the - I think you're talking about the - when you're talking about the $4.2 billion or $4.7 billion market, I think that's Lung-RADS 3 and 4, is that assuming that all of these patients who're eligible and then kind of really what I'm getting at is what portion of these Lung-RADS 3 and 4 are getting biopsies? So are you thinking the whole market addressable or are you thinking just the biopsy market is addressable?.

Great, thanks Paul. Yeah, that's a great question and it really is fundamental to understanding the market opportunity here. So to look at the total addressable market, what we're talking about is the total potential of all tests if everyone in the categories got screened and had follow-on procedures.

So you're also correct Paul, that we're talking Lung-RADS 3 and 4 and Lung-RADS is a radiological classifications system which is used by radiologists and pulmonologists to classify the risk of lung nodules and basically Lung-RADS 4 includes everyone who has a lung nodule of above 8 millimeters or larger and Lung-RADS 3 is everyone who has lung nodules of about 5 millimeters to 8 millimeters.

So today the standard of care is for people in the Lung-RADS 4 category, the larger nodules, the vast majority of those people are going to go to the biopsy.

In Lung-RADS 3, the 5 millimeters to 8 millimeters nodules, there is a mix depending on the individual physician, some physicians will send people on to biopsies in this category, others will have watch and wait, they will have more frequent screening of low dose CT scans.

And again the numbers are - there's approximately 400,000 to 600,000 people in the US in Lung-RADS 4 with the 8 millimeter and larger and there is another 800,000 or so in Lung-RADS 3, so in total about 1.4 million in Lung-RADS 3 and 4.

In order to get the total addressable market, we basically multiply that number by the assumed pricing of that of the - the test which is in the $3000 to $4000 range. So that's the total addressable market.

When I think, Paul, your question is really about what portions would be getting biopsies? That number of 1.4 million assumes that everybody in the US, they all - 10 million to 15 million Americans at high risk would go and get their annual lung screen and that is certainly the standard of care, that's what is recommended today, but we are in a situation where not all of those people are getting their screens.

There are various campaigns underway that we are trying to get more screen and we do anticipate as to those the rest of the medical industry that that the screens will increase very significantly over the coming years, but that - so that large number is basically aspirational.

We think ultimately that are pretty high percentage of those people will get their screens and nodules will be discovered and then they would be eligible for our test. Hopefully that answers your question..

Yes, very good. And then lastly, what was to this population is Medicare.

It seems like it probably is a big portion and therefore we don't have to go through the arduous process of commercial payer like maybe the other tests?.

Right, a great - another great point. Lung disease or lung cancer or lung nodules tend to be predominantly in an elderly population generally over the age of 55 or 60, so Medicare will be a very high percentage, we believe that it will be in the vicinity probably of 55% to 60% of our revenue perhaps more..

Okay. Thank you..

Our next question comes from Bruce Jackson with The Benchmark Company. Please go ahead..

Hi, congratulations on the progress and continue on the potential market discussion.

What percentage of the people who are eligible to be screened today are actually being screened?.

So, we've been trying to get that information and it is difficult to combine and it is still probably fairly low. We've seen some estimates in the 15% to 20% range currently. We've also seen estimates that say that by the early 2020 has been over in the next four or five years but that percentage could get up into the 60% or more.

What we do know is that talking to key opinion leaders they are saying that the number of screens is increasing very dramatically. Remember that this screening for this population is fairly new, it's only three years ago that it became efficiently part of the standard of care and about just over three years ago that Medicare started paying for.

So there is general consensus in the - among the profession pulmonologist and radiologist and so on that the number of screens is increasing very quickly..

Okay.

And then looking at the Canadian marker, so the original grip of markers they get from the Wistar Institute, those are - I think those are all RNA markers, right, 560 ARNA markers?.

Yes, that's right..

And then you've got the new markers that you recently patented and are those also RNA markers, how would they include other types of targets?.

Yes, those are all mRNA or messenger RNA markers as well. And again these are - what we are seeing is the body's immunological response is what we are trying to capture with these markers..

And then are you testing off of those markers in your 700 sample algorithm development study?.

So, why don't I let Lyndal Hesterberg to answer that question, Lyndal?.

Sure. The quick answer is no, we are not testing all of those markers, we have evaluated in our prior smaller studies that we and disclosed that a number of the markers were are providing much higher value. And so we are training or testing on the 700 sample study, the markers that are demonstrating the most value..

Okay. So it's a subset of the 800 roughly markers that you had before, okay..

Yes, that's correct..

And last question on the algorithm development, are you going to be looking at any physiological markers like nodule size for inclusion and the algorithm?.

So we did say in our press release in July about the 155 patient study that we although limited number of patients 155. We did see results which were equal to or better than it seem in the reported results in 2017 and where the 2017 results did include the module size as a clinical factor.

The 2018 study did not include the clinical data, which is important. However, as we said on our July release, we need to do a much larger sample size than 155 and that's why we are doing the larger studies now.

Lyndal, do you have other thoughts about that?.

No, I think you covered it well there, though..

Hi, well, that's it for me. Thank you very much..

[Operator Instructions] Our next question comes from Keay Nakae with Chardan. Please go ahead..

Hi, maybe a question for Lyndal, but is there anything about the major characteristics of the 700 patient samples in the R&D study that make particularly good robust sample that will help you tease out the performance of the test?.

Yeah, Lyndal?.

Yes, in fact, there is a number of features about the 700 patient sample that I think do make it particularly robust.

To be specific, as you may recall, the clinical sample collections and studies that we've been doing and now over 60 sites around the US were potentially [ph] designed to capture the US demographic of lung cancer patient and the screening patients. So this is in age, gender, ethnicity as well as geographic diversity.

And so we have put together what I believe to be a very representative and also robust sample study for the US testing population and from that certain we had consultants and others independently for me at least in the development team independently select what they thought were the most appropriate samples to include in the training with the full intention of the deem as robust as we possibly can make it..

Okay.

And just a second question, once you have the results, is your plan to simply talk about the kind of the overall performance relative to prior test or how specifically will you be with the performance characteristics knowing that you often like to present that detail at scientific conferences?.

Yeah, good question. We definitely - as you know, often the - some of the specifics are embargoed if you wanted to present at medical conferences and although you can usually say at a high level when you talk about the success or failure.

Lyndal, any thoughts about R&D validation study results and what we can say?.

I thought - no, your point is quite - [ph] I think very accurate. Unfortunately or fortunately [indiscernible] take a look at it, but we do have to be careful and embargo specific information.

I would expect though that we should be able to give general performance levels once we've seen the R&D validation results so that all of us can feel comfortable with the test performance..

So would that include being specific about sensitivity, specificity and AUC?.

I'm not sure about that yet. That isn't something that we have discussed at this point and until we get the actual results. So we'll certainly consider that very carefully when we give the results of that study..

Okay, were good. I mean, I appreciate why you would want to withhold some of that to be able to present at the conference, but obviously yeah, knowing that this is how much better it possibly is in the prior is certainly an important data point as well..

Yes. Yeah, definitely..

Okay, thanks..

Thank you, Keay..

Thanks Keay..

There are no further questions. I would like to turn the floor over to Bill Annett for closing comments..

Alright, well, thank you again everyone for joining our call this afternoon. As I hope you can appreciate based on our prepared remarks today. This is a very exciting time at OncoCyte.

We've moved well past the platform issues that we encountered last year and we're now moving forward with significant momentum in the development of our DetermaVu lung cancer diagnostic test for a potential multibillion dollar market. We look forward to providing you further updates on our next quarterly call..

This concludes today's conference. Thank you for your participation..