Good day and welcome to the OncoCyte Conference Call to discuss First Quarter 2019 Financial Results and Operating Highlights. Today's call is being recorded. At this time, I would like to turn the call over to Bob Yedid of LifeSci Advisors. Please go ahead..

Thank you, operator and thanks everyone for joining us for this afternoon's conference call to discuss OncoCyte's first quarter 2019 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 facts, 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 to the risk 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, uncertainties 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 the Company commercializes, 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 now turn the call over to Bill Annett.

Bill?.

Thanks, Bob. And welcome everyone to our conference call to discuss our first quarter 2019 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 Ph.D, Chief Scientific Senior Officer.

We will all be available during the question-and-answer session. 2019 has been a transformative year for OncoCyte. We started 2019 with the successful completion of our R&D validation studies DetermaVu, our liquid biopsy lung cancer diagnostic test.

With the subsequent progress we have made towards completing product development, we remain on track for commercial availability of DetermaVu in the second half of this year.

In addition, in mid-February, we completed a successful equity raise of $37 million of net proceeds, strengthening our balance sheet and leaving us well positioned to complete development and commence commercialization of DetermaVu.

We'll also beginning the development of an expanded R&D program to leverage our unique immune system interrogation approach and other cancer indications. Today we'll provide a brief recap of our recent accomplishments and update for the remaining steps on the path towards commercialization and finish with a brief review of our financial.

As a reminder, DetermaVu is our confirmatory non-invasive liquid biopsy test that we are developing to facilitate clinical decision making in lung cancer diagnosis. DetermaVu is designed for use following a low dose CT scan and before determining, whether a tissue biopsy is necessary to patient with a suspicious lung nodule.

In short, DetermaVu value proposition is to reduce the number of expensive, risky lung biopsies of benign nodules. Late last year, we announced our successful transition to the Thermo Fisher Ion Torrent GeneStudio S5 next-generation platform to ensure consistent, robust and reproducible results.

In 2019, we quickly followed with positive results from our R&D validation study. That study demonstrated sensitivity of 90% with a 95% confidence interval of 82% to 95% and specificity of 75% with a 95% confidence interval of 68% to 81%.

The R&D validation study analyzed 250 blinded patient blood samples, utilizing the optimized mRNA biomarkers, and algorithm previously determined by the Company's algorithm developed study.

These study results solidified that DetermaVu is a best in class commercially viable test with the potential to fundamentally change the way lung cancer is diagnosed.

As a reminder, sensitivity and specificity are statistical measures of test performance, with sensitivity measuring the percentage of malignant module that are identified correctly by the test and specificity, measuring the percentage of benign nodules correctly identified.

A 95% confidence interval or CI suggests that there is a 95% chance that final test performance will be within the stated range.

We will be presenting these results as a late breaking poster presentation at the American Thoracic Society 2019 International Conference, one of the largest and most well regarded multidisciplinary medical conferences, which is being held May 17 to May 22 in Dallas.

The abstract entitled, Blinded Prospective Validation Study of a whole blood gene expression classifier for the diagnosis of benign versus malignant pulmonary nodules will be our first form of presentation of these data. And we look forward to sharing these results with the broader scientific and medical community.

Just last month, we announced the successful completion of the analytical validation study DetermaVu, the next key development milestone. Analytical validation established the performance characteristics of the DetermaVu SA system utilizing the Thermo Fisher next generation sequencing platform in OncoCyte’s CLIA Laboratory.

The study is required for analytical validation are established in the clinical observatory standards, institute guidelines and cover testing for limit the quantification, precision, reproducibility and interference substances.

We have now completed all of these studies successfully, and are encouraged to report that the analytical validation data supports the robust performance previously seen in the R&D validation study.

After completion of the analytical validation study, we quickly initiated our CLIA Laboratory validation study, which is one of the remaining two studies necessary prior to commercialization. In the CLIA Laboratory validation study, we are essaying approximately 120 blood samples, previously tested as part of our R&D validation study.

This study aims to demonstrate equivalent test performance when conducted in the Company's CLIA validated laboratory with CLIA Laboratory staff and includes specific protocols to confirm the accuracy, reproducibility and precision of DeterminaVu in a real world clinical CLIA Lab setting. We look forward to reporting results from this study.

Assuming successful completion of the CLIA validation study, we will begin the final remaining steps prior to commercialization clinical validation.

In the clinical validation study, we will analyze about 440 blinded, prospectively collected patient blood samples with the final confirmation of tests, sensitivity and specificity in our CLIA Lab setting. Importantly, we already have all of the patient blood samples that we need in our freezers and can rapidly proceed through this final step.

Between our two blinded studies, the R&D validation and clinical validation study, we will have run about 700 blinded prospectively collected samples.

These studies are intended to reduce the error bar for DetermaVu's sensitivity, specificity performance to about plus or minus 5%, which we believe is the range of accuracy needed for physician confidence and adoption. Let's touch upon this in greater detail later in the call. We remain on track to complete these two remaining studies by mid-2019.

Assuming Successful completion, we plan on making DetermaVu commercially available in the second half of this year. We are proud of our recent progress and are grateful to the entire OncoCyte team for the rapid and efficient execution of the studies required to bring DetermaVu to the market.

While we've been excited by our remarkable progress thus far, we're also equally excited by the significance of these results from a scientific perspective. That's it. I'd now like to provide a brief reminder about DetermaVu's unique approach which harnesses the immune system's exclusive sensitivity to the presence of cancer.

At OncoCyte we believe that our results represent a true scientific breakthrough in the field of liquid biopsy for early cancer diagnosis. Our approach, which we call immune system interrogation, detects gene expression changes in the immune system in response to cancer, all from the simple blood sample.

And we have shown in a blinded study that it can reliably and reproducibly diagnose early stage lung cancer. We believe that our approach was the first to succeed the early stage lung cancer diagnosis.

Other companies are applying alternative methodologies to detect lung cancer, such as direct detection of cell for DNA, tumor DNA or circulating tumor cells in the blood. Well, some tests of this type may be successful in late stage cancer. They remain unsuccessful in early stage cancer.

Likely because at the earliest stages they're just hard enough of these components in the blood for reliable detection and diagnosis. So, instead of trying to directly detect small and very difficult to find traces of cancer, instead, we are detecting an amplified, highly sensitive response to the cancer by the body's immune system.

This unique approach is what has allowed us to succeed where many of our competitors have failed. Our results back this up. All of the samples from our studies are from patients with one nodules no larger than 30 millimeters, which are generally indicative of very early stage cancer.

We're also increasingly excited by the potential of our immune system interrogation approach to be broadly applied across solid tumors, particularly for early stage malignancies.

While we remain focused on rapidly completing the remaining steps for the commercialization of DetermaVu for lung cancer, we are also actively developing our plans to expand our technology more broadly.

We look forward to providing future updates about our plans, next steps for R&D activities, as we determine our next areas of focus, based on both patient need and commercial opportunity for OncoCyte.

Before we move to commercialization and reimbursement, I'd like to provide a brief reminder of how DetermaVu has the potential to address the significant challenges in one cancer diagnostics faced by patients, doctors and peers. Lung cancer remains the leading cause of cancer death, both in the US and worldwide.

Generally because most patients are not diagnosed until they have late stage disease. Detecting lung cancer early will allow for earlier treatment with a better chance of saving or prolonging life. However, it's important to note that current methods of detection rely on low dose CT scans or x-rays, followed by tissue biopsy.

And this is where the main problem lies. Lung biopsies are risky, with high rates of complications, such as collapsed lungs, and intensive care unit states, and in up to 1% of cases, results in death.

In fact, this high complication rate was recently highlighted by a major study published in the Journal of the American Medical Association JAMA, which examined outcomes of over 340,000 patients that underwent lung biopsies and found a complication rate of 24% in Medicare patients and 22% in patients under 65 years old.

This rate of complications is higher than previous estimates and emphasizes that for most patients, the probability of serious complications associated with biopsies is greater than the likelihood of confirming lung cancer. Beyond the risk to patient biopsies are also expensive.

According to a study of Medicare data by an independent Health Economics firm, they have an average cost of nearly $15,000.

This means that increased screening for early detection without DetermaVu would likely also lead to a greater number of patients and in the lung nodules detected and undergoing unnecessary biopsy procedures has considerable risks to the patient and cost of healthcare system. This is why DetermaVu is attractive to physicians and patients.

With a simple blood test it can help clinicians determine which patients are least likely to have a malignancy and should not have a biopsy. This means that DetermaVu has the potential to eliminate unnecessary biopsy, avoiding complications and saving life, while also leading to significant cost savings with the healthcare system.

Where the benefits for patients are clear I would like to spend a little time explaining why DetermaVu is extremely valuable to clinicians. It's important to note that DetermaVu is differentiated from other diagnostics as the reported sensitivity and specificity are achieved without the use of clinical data in the algorithm.

This will have a real-world impact for physician. As to DetermaVu will provide an independent, biological assessment of the risk of cancer incremental to the information from clinical data of lung, such as lung nodule characteristics like size and margins and the patient's smoking and health history which the doctors already have.

This resonates with doctor as it provides a new tool for risk stratification and decision-making beyond available clinical data. I have been asked by investors and the public recently what we think the results of our final clinical validation study would be.

I don’t want to speculate and of course we haven't even begun testing the sample yet, so we can’t know. But I would like to remind everyone about the significance of the 95% confidence interval we announced for the R&D validation study.

The confidence interval suggests that there is a 95% probability that our final result will be within the stated range. As you will recall the confidence interval for sensitivity was 82% to 95% and for specificity 68% to 81%.

So what does this mean for doctors? We previously highlighted that our reported R&D validation, sensitivity and specificity, significantly exceed the parameters we believe are required for a successful commercial product in the lung cancer diagnostic market based on our market survey of chest physicians.

Today I would like to expand on this by highlighting an official policy statement of the American Thoracic Society entitled Evaluating Molecular Biomarkers for the Early Detection of Lung Cancer, when is a biomarker ready for clinical use.

This published policy statement, which comes from a committee of key opinion leaders in lung cancer detection provides guidance for the level of evidence required to support the clinical use of a biomarker for early lung cancer detection. The policy states that for a molecular diagnostic to be clinically useful.

The lower range of sensitivity, would need to be at least 80% and the lower range of specificity would need to be at least 40%.

We're very excited that these numbers will substantiate our prior market research and independently confirm that at the 95% confidence interval the levels of sensitivity and specificity reported for DetermaVu thus far are within the boundaries of clinical usefulness as determined by the American Thoracic Society.

Consequently, we believe that DetermaVu will provide doctors with a highly sensitive and specific test, allowing them to confidently determine which patients will need biopsy. Now to briefly touch upon the commercial opportunities for DetermaVu.

We believe that there is an estimated total addressable market of $2 billion to $4.7 billion in the US alone, depending on the scope of physician utilization, reimbursement rate and market penetration. These figures emphasize the large number of patients with lung nodule that would benefit from DetermaVu.

As a note on the potential scope of utilization of DetermaVu many physicians who follow the Lung-RADS guidelines, biopsy lung nodules 8 millimeters or larger in size because those nodules are statistically more likely to be malignant in the small end of nodules.

But we see an opportunity for DetermaVu in testing patients with nodules in the 5 millimeter to 7 millimeter range as well based on the incidence of physicians now electing to biopsy those nodules.

One of our goals for DetermaVu is to see if adapted for use as a confirmatory test for guidance in making patient care recommendations regardless of the size of the nodule detected by a low dose CT of the scan.

Our plan remains to launch DetermaVu independently in US and in preparation of making it commercially available, we have begun to build a small and targeted commercial team to effectively promote DetermaVu among the approximately 6000 pulmonologists in the U.S.

We're in the early stages of building a talented team of medical science liaison professionals, sales reps, marketing professionals and patient support staff. We will provide updates to our commercial plan as they are finalized in the near future.

Of course after commercialization a major focus of the Company will move towards securing broad reimbursement for Medicare and private payers, an essentials step for a commercially successful diagnostic test.

To accomplish this, we have developed a comprehensive reimbursement strategy, it includes conducting a post commercialization clinic utility study which will follow actual patients for one to two years measuring in the real world, how to use DetermaVu and improve health outcomes for patients and lowers costs for the healthcare system.

Thus far we're highly encouraged by the results from 10 public and commercial health plans. They all view DetermaVu favorably and recognize a large unmet need we are working to address.

However, as I said before as with other diagnostic companies and given the reality of reimbursement in the diagnostic space we believe that it would be one to two years before we generate significant revenues from DetermaVu. So as I said start of this call this is a transformational time for OncoCyte.

We believe we are only months away from our first commercial product and are beginning to explore our unique approach can be leveraged for our pipeline of revolutionary liquid biopsy tests for early stage cancer diagnosis.

We're convinced that DetermaVu can fundamentally change the paradigm of lung cancer diagnosis and treatment leading to meaningful improvements for patients, physicians and payer. At this time I would like to turn the call over to Mitch Levine for a review of the financials.

Mitch?.

Thanks Bill, good afternoon everybody. At March 31, 2019, we had cash and cash equivalents and marketable securities of $39.9 million as compared to $8.4 million at December 31, 2018.

As we mentioned earlier, our balance sheet was strengthened in February 2019 with the successful equity raise of $37.3 million in net proceeds from an underwritten public offering.

For the first quarter ended March 31, 2019, we incurred a net loss of $3.9 million or $0.08 per share as compared to $3.8 million or $0.12 per share for the three months ended March 31, 2018.

Our operating expenses for the three months ended March 31, 2019 were $4 million and $3.2 million on an as adjusted basis as compared to $3.9 million or $3.4 million on an 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 quarter ended March 31, 2019 were $1.3 million as compared to $1.5 million for the same period in 2018 relatively unchanged quarter over quarter as we continue to focus resources on the development of DetermaVu.

General and administrative expenses for the quarter were $2.4 million as compared to $1.7 million for the same period in 2018, an increase of $700,000. This increase was primarily due to $400,000 in personnel and related expenses, and $300,000 in stock based compensation expense due to increased grants of equity awards to our employees.

Sales and marketing expenses for the three months ended March 31 2019 were $200,000 as compared to about $700,000 for the same period in 2018, a decrease of $500,000 as we reduced our marketing activities and personnel after Q1 2018 and concentrated our resources on the development of DetermaVu.

Cash used in operations was $6.7 million in the first quarter. Typically we use more cash in the first quarter because of timing of payments of merit salary increases and personnel related costs.

We also had some significant nonrecurring cash outlays this quarter, including a $2.1 million payment to BioTime in February for shared services from prior years. That concludes my remarks concerning our financial highlights..

Great, thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] And our first question here is from Bill Quirk from Piper Jaffray. Please go ahead. .

Great. Thanks and good afternoon, everybody. First off, Bill, recognizing that you're obviously focusing on DetermaVu for lung cancer. You did comment several times and applying the technology and other areas of oncology. And so I guess which one should we be thinking about and if it's not too much to ask when we see some initial data? Thank you..

Thanks Bill. Yes, we are -- as we mentioned before, we do believe that the underlying mechanisms in our immunological approach may be very applicable across multiple cancer types, particularly solid tumors. We are in the process right now of looking at different opportunities and deciding and prioritizing on research projects in other cancer types.

And we haven't finished that exercise yet, but when we do, we will be talking in further calls about what our R&D strategy and plan going forward will be. .

Okay. Understood. And then just staying on that subject rather, excuse me, on DetermaVu for a moment. Based on the ATS comments you made concerning the clinical relevance of DetermaVu.

Help us think about your strategy or potential for guidelines inclusion there?.

Sure. Well, certainly at this point in time, there are no guidelines for a test such as ours, because it's a brand new space, there really aren't any alternatives right now to the use of clinical data. We would very much like to see in the future guidelines developed and we'd like to be included in those guidelines.

And that's what we, we'll be moving forward with the various studies which we have talked about, particularly the clinical utility study post commercialization. We hope to be able to give data, which would be helpful for the bodies that develop guidelines..

Okay, got it. And then last one for me, one for Mitch, you've talked about this in the past. Any change your initial thoughts concerning the sales force build around the brand initial commercialization. I'm assuming, you're going to continue to have that be relatively small, I mean until you get to reimbursement.

But can you just remind us what you're thinking there?.

Hey, Bill. Yes, you're exactly right. We are not making any changes in the development of our sales force. We expect to ramp modestly and slowly, as we develop milestones, such as peer reviewed papers that get published will bring in some more sales people at that point.

But I think in the early going mostly through medical science liaison and possibly a couple of outside sales people, ultimately at full ramp when we have reimbursement, we expect to have approximately 40 outside sales people at peak..

Okay, perfect. And then just last one for me. I asked last quarter about getting New York CLIA certifications, is this still the plan, guys.

In other words, you are going to pursue that following the commercial release?.

Yeah.

Lyndal, do you want to answer that?.

Sure. Glad to. New York is absolutely in our plans, as you may have realized it has a cue that because of takes time for the state to have their inspectors come through all the various CLIA Labs. So we are looking forward to that as soon as they can get things done, post our commercialization that the ball's sort of in their court at this point..

Got it. Thank you..

Thanks, Bill. .

Thanks, Bill..

Your next question is from Bruce Jackson from The Benchmark Company. Please go ahead..

Hi, thanks for taking my question.

In terms of getting to the 40 reps post launch, how long do you think that would take?.

Our suspicion is that we will have reimbursement within about two years plus or minus. And at that point, we'll have our 40 reps. I think that as we see milestones along the way, as I point out, perhaps it's peer reviewed papers that are published, et cetera, that would make openings into the physicians' office easier.

That will be very helpful to us and we'll ramp up at that time, but we expect it to be modest in the foreseeable future..

Okay.

And then with the R&D expenses and the operating expenses generally, do you think that didn't kind of stay in this current range, or might they drift up a little bit as we get towards the end of the year?.

Yeah, I think that you'll see them grow very modestly, Bruce, as we bring in some more professionals and we begin to commercialize DetermaVu will have a modest ramp up, but it shouldn't be more dramatic than what you've seen in the past..

Okay. And then last question the R&D strategy here, you had a breast cancer test in the pipeline at one point in time also a pretty good bladder cancer test.

Would you start there with the tests that you have and then to perform a process similar to DetermaVu where you ran the test through the samples with some new candidates and then came up with a new test or would you just start from scratch and just use the DetermaVu platform as a discovery vehicle and then and then prioritize the test? And that's it for me.

Thank you. .

Yeah, good question, Bruce.

Lyndal, do you want to answer that?.

Sure. And just to clarify, as Bill said, we're still in the planning process and evaluating all the opportunities first. But second, we know there's areas that we want to explore based on just the biology and the biology of the immune system interrogation. And so, first and foremost, we need to expand and protect our DetermaVu, product in that line.

And then pass that is where we want to look at other opportunities, both within lung cancer and potentially other solid tumors. But that's still at this point in the planning stage..

Okay. Thank you..

Thanks Bruce..

[Operator Instructions] Next question here is from Casey Woodring from Janney Montgomery Scott. Please go ahead..

Hi, guys, this is Casey on for Paul.

Lot of my questions have been answered here, but maybe one that you guys could speak to as maybe what sort of opportunity will the presentation that you guys had at the American Thoracic Society Conference be, would it simply just be your first chance to present, the details of the R&D validation study? Will you be able to go out and market yourselves to pulmonologist and attendants there maybe talk to payers and any color you can give there.

Thanks?.

Yeah. So, you know, the American Thoracic Society Conference is largely a scientific conference. So it is not so much a conference for payers and others. Perhaps Lyndal, you could talk a little bit about the -- what we would be representing, mindful that we're under embargo until that point in time..

Sure. Glad to.

So in general sense we will be sharing not just the top line results, which we've already reported, but also the details underneath in terms of the patient population, the characteristics that were there, what we've used, in this such that -- we -- my hope is that the physicians that are looking at us will see that we've done a good job in our clinical study collection itself and getting a cross sectional representation of these patients at risk for lung cancer.

The other piece that we will be disclosing there is the performance against clinical factors along which doctors already have and they use today in their best efforts to try to identify patients who are at higher risk of cancer as a guidance for themselves as to which ones to carry the biopsy.

The trouble is the clinical factors alone, while they're helpful are not sufficient, and are not, in my opinion, good enough. And that's where the biology and our biomarkers, we believe will perform those clinical factors significantly. And we'll be sharing some of that new information at the ATS presentation..

Okay. Thank you. .

Thanks, Lyndal. And as a reminder, that presentation is next Tuesday, May 21, at ATS. So we will be making the poster and the information available after that point..

Great. Thank you..

This concludes the question-and-answer session. I'd like to turn the floor back to Mr. Annett for any closing comments..

Thank you. And thanks everyone for joining our call this afternoon. So we did hope that you are all as excited as we are about OncoCyte's progress and our upcoming milestones. We're well funded. We're well positioned to develop an exciting potential pipeline of liquid biopsy tests.

And of course, we continue to rapidly advance the development of DetermaVu and expect in just a few months to have a commercially available product and potentially multi-billion dollar lung cancer diagnostic test market. We look forward to providing you with further updates in the upcoming months..

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