Welcome to the OpGen Fourth Quarter 2018 Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded, today, February 26, 2019. I would now like to turn the conference over to Ms. Kim Golodetz. Please go ahead, ma'am..

Thank you, Operator. This is Kim Golodetz with LHA. Thank you, all, for participating in today's call. Before we begin, I would like to caution that comments made during this conference call by management will contain forward-looking statements regarding the operations and future results of OpGen.

I encourage you to review OpGen's filings with the Securities and Exchange Commission, including without limitation, the company's forms 10-K and 10-Q, which identifies specific factors that may cause actual results or events to differ materially from those described in the forward-looking statements.

Factors that may affect the company's results include, but are not limited to, its ability to successfully complete the demonstration project with New York State; successfully, timely and cost effectively seek and obtain regulatory clearance for and commercialize its product and service offerings; the rate of adoption of its products and services by hospitals and other health care providers; the success of its commercialization efforts; the effect on its business of existing and new regulatory requirements and other economic and competitive factors.

The content of this conference call contains time-sensitive information that is accurate only as of the date of the live call today, February 26, 2019. The company undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call, except as required by law.

I would now like to turn the call over to Evan Jones, OpGen's Chairman and CEO.

Evan?.

Thank you, Kim, and thank you, everyone for joining us today. This afternoon, we will review our 2018 fourth quarter and full year financial results, provide an update on our business plans and discuss the company's progress towards achieving key objectives for 2019.

Our discussion will include an update on the ongoing FDA clinical trials for our Acuitas products, the New York State Infectious Disease Digital Health Initiative and our new products and pipeline with a focus on our first planned FDA submission to testing of antimicrobial resistance genes and bacterial isolates as well as later planned FDA submissions for direct testing from urine and our Acuitas Lighthouse software.

We continue to work to submit three separate FDA submissions for our lead rapid molecular diagnostic test, Acuitas AMR Gene Panel and the Acuitas Lighthouse software. These products are currently being marketed for Research Use Only.

We completed the clinical trial for the detection of antimicrobial resistance genes and bacterial isolates having tested more than 1,000 clinical isolates at four participating clinical sites.

Sites included the Johns Hopkins University School of Medicine; Wadsworth Center, New York State Department of Health; University Hospitals, Cleveland Medical Center; and IHMA Incorporated. We expect to submit this first 510(k) submission to the FDA by the end of the first quarter.

We are also continuing development to support direct from urine testing for the Acuitas AMR Gene Panel and for the Acuitas Lighthouse software. This indication and accompanying software will provide for pathogen identification and antibiotic resistance detection and prediction direct from patients at risk for complicated UTI.

We expect to complete the urine clinical trials over the summer and submit two de novo 510(k) applications in the second half of 2019. We've begun work with our partners on the groundbreaking initiatives to develop a state-of-the-art research program and platform to detect, treat and prevent the spread of infectious disease in New York State.

The New York State Infectious Disease Digital Health Initiative was announced in September 2018. There is a one year demonstration project with the New York State Department of Health and ILUM Health Solutions, a wholly owned subsidiary of Merck.

As we've told you previously, Governor Cuomo of New York State has committed approximately $1.3 billion to upgrade the Wadsworth Center Public Health Laboratory in New York's capital region and to building a life science cluster in the state.

The initial OpGen funding is anticipated to be approximately $1.6 million in 2019 with the initial funding beginning in the first quarter as we install our Acuitas testing systems and Acuitas Lighthouse software in three New York City Metro area health systems.

We are proud to be working with New York State and these prestigious health systems that include approximately 35 hospitals and 12,000 beds. The goal is to rapidly identify and genotype carbapenem-resistant bacteria in realtime, resulting in improved outcomes. The outlook for the Acuitas family of products continues to be encouraging.

Participation in the New York State Initiative represents just one meaningful commercial opportunity for our Research Use Only product. I will now turn the call over to Tim Dec, our Chief Financial Officer, who will discuss our financial results.

Tim?.

research and development expenses were $5.7 million, down from $6.9 million; G&A was $7.1 million, up slightly from $6.7 million; and sales and marketing expenses were approximately $1.5 million compared with $2.8 million for the prior year.

The net loss for 2018 narrowed to $13.4 million or $2.22 per share, down 13% in 2017's net loss of $15.4 million or $9.80 per share. Turning to our balance sheet. We had cash and cash equivalents of $4.6 million as of December 31, 2018. Cash burn for the fourth quarter of 2018 was $3.3 million.

Again, this increase in cash burn in the fourth quarter was due to our clinical verification and clinical trial work. We have made great progress towards our pursuit of the FDA 510(k) submissions during 2018.

As we move our primary focus in 2019 from R&D to regulatory submissions, following receipt of FDA clearance, initial commercialization of our Acuitas diagnostic tests and software, we anticipate that we will see growth in our top line revenue from our Acuitas AMR Gene Panel products in the latter part of 2019.

In terms of our New York State demonstration project milestone schedule, we anticipate recognizing the first $1 million during the first half of the year in conjunction with installations of our Acuitas system and the delivery and acceptance of customized Acuitas Lighthouse software.

We have stated publicly that our current cash will provide runway until the latter portion of Q2 of 2019. Due to our expected FDA submission schedules and our commercialization plans, we will be looking to strengthen our balance sheet in the coming weeks as we move closer to the end of Q1.

We will be evaluating various alternatives, including strategic partnerships, development and collaboration agreements and equity and debt arrangements to ensure those critical objectives and shareholder value are realized in 2019.

We realize the importance in commitment of maintaining our cash burn at acceptable levels, which we have done for the past few years, while achieving significant internal milestones throughout 2018. With that, I'll turn the call back to Evan..

Thank you, Tim. In the next part of the call, I will share more details regarding the commercial opportunities for our Acuitas products and their ongoing FDA clinical trials. Our focus since last spring has been on the FDA clinical trials for the Acuitas AMR Gene Panel test.

We are in the final stages of preparing the 510(k) submission for testing of bacterial isolates. More than 5,000 samples have been tested, including testing of approximately 1,500 samples tested at third-party sites and whole genome sequencing of more than 1,000 bacterial isolates.

Results to date support our clinical objectives and the performance threshold established by the FDA. The statutory review time for Class II 510(k) is 90 days. We believe average review times are approximately 120 days, and it can expand further for molecular diagnostic applications.

During the review process, we anticipate completing the 2 follow-on submissions. Although there are rigorous guidelines regarding customer interactions during the FDA review process, we anticipate continued commercial progress with our RUO test during this period.

The bacterial isolate FDA submission is foundational to the direct from urine testing indication. With the isolate work nearing completion, we anticipate pressing hard to complete the de novo 510(k) submission for the Acuitas AMR Gene Panel urine indication and Acuitas Lighthouse software.

The bacterial isolate testing opportunity includes the CRE confirmatory testing we are performing in New York State. While there are no precise figures for the total number of CREs in the U.S., recent estimates from pharmaceutical companies are as high as 90,000 cases annually. Most states have mandated confirmatory testing for these CREs.

The opportunity expands from there to include isolate testing for clinical purposes. There are more than 10 million microbiology specimens tested annually in the United States. We estimate that approximately 1 million of these samples result in bacterial isolates that could be candidates for testing with the Acuitas AMR Gene Panel.

The first meaningful revenue from our Acuitas products and services anticipated to begin in the first quarter with the completion of the initial milestones for $1.6 million New York State Digital Health Initiative demonstration project.

An important part of the New York State project is the customization of our Acuitas Lighthouse software to take real-time data feeds of patients and hospital data from health care exchanges through the Merck ILUM software and whole genome sequencing data from the Wadsworth Department of Health Laboratories.

There is an increasing need for rapid pathogen and antibiotic resistance testing for patients at risk for complicated urinary tract infections. Antibiotic resistance for E. coli has expanded dramatically in recent years and E. coli is the most common UTI pathogen. Approximately 35% of these isolates are resistant to fluoroquinolone antibiotics.

And a new type of resistance called ESBL or extended spectrum beta-lactamase resistance has been increasing at over 30% annually in recent years. As a result, resistance to third-generation cephalosporin antibiotics that are the workhorses for patient treatment is now in the 15% range.

The Acuitas AMR Gene Panel and the Acuitas Lighthouse software, once FDA cleared, are ideally positioned to address these urgent clinical needs.

In the United States alone, there are more than 10 million patients with urinary tract infections and 1.3 million or more of these patients are potential candidates for testing with the Acuitas AMR Gene Panel.

Our near-term strategy is to establish an installed base at top health care institutions with our RUO products and to build awareness for our work via peer reviewed papers and presentations at key conferences. During the fourth quarter, we completed the clinical verification study for our Acuitas urine test and Acuitas Lighthouse software.

670 remnant urine specimens were tested in a real-world setting at Beth Israel Deaconess Medical Center, Geisinger and Intermountain Healthcare. The study was initiated to evaluate potential diagnostic and antibiotic decision-making improvements that could be possible using rapid molecular testing and bio informatics.

We are very pleased with the preliminary results of the study. We confirmed the performance of our technology to identify urinary tract infections and provide antibiotic resistance decision-making information in under three hours. This compares with the current two days that it takes for results using culture methods.

The investigators are preparing the manuscript, summarizing the results with a publication goal in the near term.

In December, we completed the contracts on the Centers for Disease Control and Prevention, or CDC, to develop smartphone-based clinical decision support solutions together with ILUM for antimicrobial stewardship and infection control in low- and middle-income countries.

We received the final payment milestone under the award during the fourth quarter. Three hospital sites are using this software currently, and they're pleased with the results.

Under the terms of our subcontractor agreement with ILUM, we are negotiating distribution rights for the new software platform to support a commercial launch in the region later this year.

We have received approval to market our rapid pathogen identification products in Colombia, we expect our first new customers in the region during the first quarter. We also plan to market more broadly in South America. In 2018, we established an operating company in Colombia to help lead our activities in the region.

During the fourth quarter, we announced a collaboration with QIAGEN to advance rapid diagnostics for antimicrobial resistance. We entered into a multi-year supply agreement that provides OpGen the ability to commercialize QIAGEN EZ1 automated nucleic acid purification instrumentation and kits in the United States.

The EZ1 is utilized in the test workflow for the Acuitas AMR Gene Panel products. We are already recognizing revenue under this agreement. During 2019, we anticipate expanding our agreements with established channel partners to help accelerate commercialization of our Acuitas test and software.

We see this submission of our first 510(k) application as a critical inflection point for the company. Customers understand the high bar for an FDA submission for a multiplex DNA test, and we will work to capitalize on the opportunities in front of us in 2019.

Looking forward, we expect to advance the following business objectives during 2019 as OpGen further transitions to the commercial phase of our molecular informatics business.

File 510(k) submissions to the FDA for the Acuitas AMR Gene Panel and the Acuitas Lighthouse software to support full commercial launch, achieve program milestones for the demonstration project phase of the New York State Infectious Disease Digital Health Initiative, continue to install Acuitas AMR Gene Panel systems in support of Research Use Only sales and full launch following first FDA clearance, expand commercial activities to support FDA clearance and launch of the Acuitas product family following FDA clearance, publish clinical verification and validation results for the Acuitas product in peer-reviewed journals, continue work to establishing commercialization products to help accelerate revenue growth and development programs and to commercialize rapid testing products and software in South America.

All of us at OpGen are proud of the work we've accomplished during 2018 and we see tremendous opportunity for 2019 and beyond. We appreciate your support, and thank you for your time this afternoon. We are now ready for questions.

Operator?.

[Operator Instructions]. Your first question comes from the line of Yi Chen with H.C. Wainwright..

My first question is, just for clarification, the de novo 510(k) submission for the FDA for the Acuitas AMR Gene Panel for urine samples and Acuitas Lighthouse software are actually going to be two separate submissions in the second half of this year, is that correct?.

That's correct, and thanks for joining, Yi..

And my next question is, to expand the commercial activities for the Acuitas AMR Gene Panel for bacterial isolates, what kind of specific color can you give us now regarding commercial team that is needed to support the launch -- commercial launch for the AMR Gene Panel and whether the company's existing sales personnel will support the commercial launch? And also, what the initial commercial sales trajectory of the gene panel could possibly look like? Is the sales of the Research Use Only products in anyway indicative of the potential sales trajectory for the full commercial launch?.

Well, that was a big question. We'll try to take it one step at a time and answer all of the key points. Let me begin by saying that the key part of our strategy is to build off of our current installed base.

And during 2018, we finished the year with close to a dozen systems placed at top health systems and CRO accounts and places like the Wadsworth Laboratories up in Albany. So some of these were clinical trial sites.

But this installed base represents an excellent place for us to build revenue from for the RUO product, and ultimately, to expand with the IVD post FDA approval. And our existing team of five professionals in sales and marketing have been helping spearheaded that work.

I think you'll recognize being a participant in the industry that is really scaled to growth, we will need to expand the commercial organization both in terms of leadership at the company, but also commercial sales representatives. And those activities, as we go into the back half of the year, we'll start to do that work.

We are not expecting a dramatic ramp in our cost structure frankly, until we have the full suite of approvals, and we are looking at the potential to see really meaningful increases in the ramp.

I guess, the other point, just back to your questions of, are the sales -- are the RUO sales indicative of the future trajectory, we didn't have tremendous RUO sales during 2018. We had some pharma RUO clinical trial revenues that will continue in 2019.

And of course, we're honored to be working with New York State, that is beginning to deploy this product in the Digital Health Initiative. And from there, we think, we can grow the RUO base.

But I would qualify and say that it's our experience that the acute care hospital accounts that we are targeting really look to the FDA clearance as a critical milestone. And so that's why we're both thrilled and enthusiastic and looking forward to getting the submission done for the FDA, and ultimately, getting the clearance..

Your next question comes from the line of Bob Wasserman with Dawson James Securities..

Just a little more color, if I could on New York State contract.

I'm wondering maybe we're jumping the gun, but to look after the first year, how they'll roll that out to additional systems in the metro area and out states and also, whether there is an additional revenue component attached to getting the software and the systems into the hospitals? Do you also get diagnostic testing revenue or will that come later after the demonstration project is complete?.

Let me take a crack at that and then Tim can join in. And thanks for calling, Bob. So the first year includes a demonstration project.

As we mentioned, we're going to these three large New York City health systems, we hope to be able to announce the names of them later in the year, but we are, as we noted doing installations in February and March, so that's ongoing. And then there'll be a go-live phase that begins in the late spring, mid-summer.

When you think about where this could go, the goal is to expand this project across all the New York State hospitals, there are over 170 hospitals.

And if we're successful, demonstrating the outcomes and the state's able to keep going, you could look to Acuitas systems being installed in the large hospitals, not all of them, but a reasonable percentage and then the Acuitas Lighthouse portals being installed alongside the Merck software in the hospitals and networks across the state.

So that would be a multi-year deployment and then the bigger picture, just to finish on this quickly, is that we envision after we've demonstrated success hopefully, of course, with the partners in New York that we'll be able to go to other states starting first with their public health departments, but then working to expand this, whether it's in New England or some of the other top states across the country in the coming years.

So it could be very attractive for the commercial partners, but also for the public health organizations because there are fundamentally transformational capabilities that are being built through this groundbreaking initiative up in New York State..

Okay, great.

And will there be later additional milestone later in the year, so we know how the deployment is going? And what the plans are for rolling it out into the rest of New York State? Or will it be more next year?.

Well, I don't want to speak for the New York State team and Merck. We're really just one player in this ecosystem, and there'll be a lot of work to be done.

But we will do our best to appraise you and particularly because as we accomplish the milestones, we will recognize revenue, which as Tim mentioned, it's about $1 million of revenue in the first half tied to specific milestones.

We complete those, we'll communicate that in our -- either through milestone announcements with all the partners or as we report our financial results..

Your next question comes from the line of Nathan Weinstein with Aegis Capital..

So I have a couple of quick ones and the first one, I'm actually thinking about your Lighthouse software and the algorithms that are underpinning that.

Are those immutable when they go to FDA submission? Or once they're out in the field, can you -- can they go through the learning where they get smarter as more data is seen over time?.

So again, I'll take this one. The algorithms that are being -- that were tested first of all in the verification study are fixed algorithms that were derived from that testing of some 2 million data points and all of the machine learning knowledge-based analysis. So those are hardcoded.

The data from the training panel is in press and will be published shortly. So that's a nice piece of data that you'll be able to see for those. And then as we progress, we anticipate updating those algorithms, and we're working with the agency on methods to do that.

And we have other methods that sit alongside those algorithms that can include information from the individual hospitals and their ecosystems and those will evolve over time.

And a good example would be the network that we're building in New York State, where the isolates that are coming from these 35 hospitals will be tested in our Lighthouse, whole genome sequenced in Albany and all of that data is going to sit in the Lighthouse knowledge base that is really proprietary to New York State and those hospitals..

That's really clear. And then I just have one more at the moment.

Just thinking about potential customers down the line on the hospitals and the way hospitals and hospital systems could view your technology, maybe not so much as a cost center, but perhaps a revenue generator and it would help them to improve in the CMS' hospital-acquired condition reduction program.

Maybe you could just sort of speak to the way hospitals will look at you guys?.

Sure. It's a great question. As we transition now to this commercial phase, I think reimbursement will also become a question we get on more of these calls. So let me start on the reimbursement side to say that in the hospital environment, we see two types of patients, ones that are inpatient and covered under DRGs.

In that case, the hospital absorbs the cost. But they have an incentive to use our product if it can reduce the days of stay, so length of stay or days on therapy. These are all metrics that improve outcomes and reduce cost. So they will pay out of pocket for that, the test costs.

The other area which saves them money and, if you turn beds more quickly, you can increase revenue. The other area where there is some potential income generation is that when you look in the emergency room, many of those patients can be billed because they haven't been admitted yet.

And so there, there are codes that can be used to gain reimbursement for our test today. And after FDA approval, we'll work to firm that up so that there's specific coding for the OpGen product. But they will not have to take that on their DRG, that will be revenue-generating income generated in their hospital app..

I apologize. Yi Chen from H.C. Wainwright has a question..

I have a quick follow-up.

So would you say the full commercial potential of the AMR Gene Panel for bacterial isolates would not be realized until the approval and commercialization of the Lighthouse software?.

That's certainly true, Yi, but we've started to run the numbers for these different opportunities and I can just for the interest of the folks on the phone here and you gentlemen, I can give you some of the metrics that we think are relevant.

If you look at the state's surveillance initiatives and say, beyond New York State, if you're able to capitalize on the whole U.S. market, which would be an isolate-based testing opportunity. That could be north of $50 million in terms of opportunity on an annual basis.

If you look at the isolate testing, the initial opportunity that I mentioned of those 1 million tests, some of them can be done directly from our initial indication, but to fully capitalize on that, we want to add additional indications, for instance, out of whole blood, things like that where you would be able to expand and get deeper penetration.

So we're actually pretty optimistic about the utility for the isolate test, just even in confirmation of those 90,000 CREs, but it expands to the 1 million tests that we can get to, but as I said, over time, we'll work to further expand our labeling..

Okay.

Have you announced the potential pricing of the Gene Panel and gross margin associated with it?.

We've said for some time that our target ASPs we would like to be in the $150 to $200 range. And Tim, wanted to....

Yes, in terms of the gross margin, that range should be in the 65% to 75% range..

And the pricing, just to clarify, we envision splitting that between informatics and the Acuitas Gene Panel..

And that is all the time we have today. Please proceed with your presentation or any closing remarks..

I'd like to thank all of you for joining our call this afternoon. And we'll look forward to updating you as we continue to progress the business. Thank you for your time..

Thank you..

Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your line..