Insight Molecular Diagnostics Inc. Q1 FY2025 Earnings Call

Welcome everyone and thank you for joining us to discuss OncoCyte's First Quarter 2025 Results. If you have not seen today's shareholder letter, please visit OncoCyte's Investor Relations page at investors.oncocyte.com. Today's prepared remarks build upon the information already shared in this robust letter. Joining us today are OncoCyte President and CEO, Josh Riggs; Chief Science Officer, Ekke Schutz; and CFO Andrea James. We also have our analysts with us as panelists. After our prepared remarks, our analysts may ask questions. Before turning the call over to Josh Riggs, I'd like to go over our Safe Harbor. The company will make projections and forward-looking statements regarding future events. Any statements that are not historical facts are forward-looking statements. These statements are made pursuant to and within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. We encourage you to review the company's SEC filings, including the company's most recent Form 10-K and subsequent Forms 10-Q which identify risks and uncertainties that may cause future actual results or events to differ materially. Please note that the forward-looking statements made during today's call speak only to the date that they are made and OncoCyte undertakes no obligation to update them. And with that, I would like to now turn the call over to Josh Riggs.

Hi, everyone. Thanks for joining us today. It's great to be checking in with you about 2 months after we reported our annual results. We've been focused on executing our 2025 plan. For those of you who are new to us, we're a molecular diagnostics company investing in the significant opportunity to improve transplant rejection testing. We are just over 2 years into a strategic pivot that has now brought us to the cusp of delivering a kitted molecular test kit. Our key areas of focus for 2025 are: first, finalizing our clinical assay and trial design; second, getting through our clinical trial to submit a data package to the FDA by the end of the year; and third, preparing for the latter half of 2026 revenue by signing up transplant centers to use our research use-only kit. We finalized our clinical trial design, and just a few weeks ago, we got central IRB approval. This is a key milestone where an external committee has reviewed and approved the safety and ethics of our trial. We continue to have productive dialogue with the FDA and are now preparing for our final pre-submission meeting ahead of locking in for the trial. The clinical trial itself, which we've discussed in previous quarters, has drawn interest from several university hospitals that would like to participate in both the U.S. and Germany. We expect to welcome at least 3 of the top 10 transplant centers in the United States as clinical trial participants. And if we look at all of the U.S. transplant hospitals actively engaged in supporting our trial, we see nearly 10% of U.S. transplant volumes represented. In the near future, we are going to be up on clinicaltrials.gov and on our way to first patient in, and I'm really looking forward to sharing that milestone. We'll follow that with an introduction to one or more of our site principal investigators in a KOL call. We believe the strong interest we are seeing for the trial will translate well to future demand for our IVD assay. We believe we are on track to submit to the FDA by the end of this year, which is the same timeline we communicated in March. Like with any FDA program, there are several work streams that must come together, and from what we can see, we're on pace. So we continue to target FDA approval in the first half of 2026. Continuing on, we are on track to have 20 sites trained on our GraftAssure workflow by the end of this year, which is the kick-off to our land-and-expand strategy, to land hospitals with our RUO product and then expand to selling our clinical kitted product post FDA clearance. We now have 10 sites running our RUO assay. They are in the U.S., Germany, U.K., Switzerland, Austria, and Southeast Asia. And the researchers at these universities are starting to perform real studies using donor-derived cell-free DNA and discovering new applications for our tests, such as pediatric transplantation, the role of absolute quantification in long-term kidney transplant management, and ultrasensitive detection of microchimerism for bone marrow transplants. We are thrilled that researchers are exploring new ways that our technology could potentially help future patients. You'll see in the shareholder letter that we are starting to demonstrate the value of digital PCR as a technology differentiator. It's simpler, it's faster, and it offers better sample economics than NGS at low volumes. Most transplant centers don't have the sample volumes needed to efficiently run an NGS platform. These machines require a processing chip that costs well north of $1,000 per run. That math just doesn't work when you only have a couple of samples a day. With PCR testing, even running a single sample is an affordable option given that the batch size does not significantly alter the cost per result. With only a few pipetting steps and a simple readout, labs don't need sophisticated hands to get the work out. There are some technical challenges we're overcoming, but we are doing really well. And just a few years after our strategic pivot, we are closer than ever to building a rapidly growing sustainable business. Speaking of that pivot, you may have noted that our company name, OncoCyte, doesn't really fit our strategic direction which has broadened considerably. The first market in which we are commercializing is transplant. And while we do have an oncology pipeline that I will get to in a minute, the name OncoCyte no longer makes sense. In the coming weeks, we plan to unveil our new name. Additionally, our CFO has asked me to inform you that this rename is being done on a very tight budget so we can strategically allocate our capital toward the things that we believe will create real shareholder value. Regarding oncology, because our main focus on transplant is going well, I want to spend a few minutes updating you about our oncology pipeline and where we are carefully investing to unlock future value. DetermaIO is showing real promise in the drug rescue category. We are proficient at finding patients who respond to immunotherapy for certain types of cancer. Enriching for responders is a great way to get a drug with marginal benefit across the finish line. We are out there talking with strategic partners about DetermaIO. One of those potential partners told us, 'Never in my wildest dreams did I think the results would look this good based on the work that you are doing.' So with all the caveats that our oncology pipeline is still earlier than transplant, we do see future markets for potential long-term revenue growth where we will be able to invest in R&D after our transplant business is healthy and self-sustaining. Before I turn it over to Andrea, I'll conclude with the fact that from where I sit, I feel good about how far we've come and where we are going. Not only are we successfully building a market for our transplant product, but also we are seeing increased interest from potential corporate partners who see the value in our technology in both transplant and oncology. This type of external validation supports our confidence that we are on the right path, making the right investments, and have the right people to build a valuable business. Let me turn it over to Andrea.

Thanks, Gabby and Josh. Hello, everyone. Just a few financial highlights this quarter. First, pharma services revenue of $2.1 million exceeded our expectations, particularly with a large order that came in late in the quarter that we processed quickly and efficiently. This enabled us to invoice $1.4 million with just a few days left in the quarter. Our Nashville lab team brought more automation this quarter, which drove gross margins of 62%. This revenue is great for us. It extends our cash runway and it deepens our relationship with our customers. In Q1, the vast majority of the revenue came from a single corporate customer that was impressed with our lab team's work and they had asked us to help them meet some of their own deadlines. This customer is now seeking partnering opportunities on one of our oncology assays, which Josh alluded to in his prepared remarks. As thrilled as we are to meet this customer's demand, it is situation-driven and pharma services revenue, as I had said last quarter, will continue to naturally vary as we balance it with our own strategic priorities. This is particularly true because our sales team doesn't focus on it. We want our sales team out there moving potential GraftAssure customers through our funnel, so that we can meet our goal to have 20 transplant centers by the end of this year and, therefore, spring-load our commercial launch and our back half 2026 revenue. To put it simply, we want our sales team focusing on the land-and-expand strategy that you just heard Josh talk about. At this time, we expect Q2 pharma services revenue to be less than $500,000, and we did not invoice for any services in the month of April, which really speaks to its lumpiness. We concluded the first quarter with nearly $33 million in cash, including restricted cash which we will begin having access to later this year. Our free cash flow was negative $6.2 million in the quarter, which is right in line with our target average quarterly cash burn of $6 million. For free cash flow, we're simply calculating cash flow from operations less purchases of property and equipment. Finally, we collected $1.4 million in receivables in the first week of April. As we noted last quarter, we will have a couple of quarters this year where cash burn picks up a bit but not a lot before coming back down. The biggest needle mover here is our clinical trial and the instruments that we must purchase to support that trial at our partner sites, albeit at a discount. Additionally, R&D will continue to reflect the added cost of FDA-compliant software development for our IVD program. We continue to target an average of about $6 million per quarter of cash burn until our commercial launch next year. Finally, Josh talked about our corporate rename. I'm really excited about this. Along with the rename, we will also announce a new corresponding NASDAQ ticker. We really took a resource-conscious approach to the rename. We take capital stewardship seriously and we want to keep the spotlight and our investments where they belong, which is on advancing research; on serving our customer community so they can, in turn, better serve their patients; and on investing in the commercialization of our transplant assay, which we expect to translate to real shareholder value creation. Okay. With that, Gabby, let's come up into gallery view and start taking questions.

Okay. Can you hear me okay? Great. So I am intrigued by the larger revenue-generating pharma customer that seems to be asking about oncology. And so I was wondering if you could expand on that a little bit. To what extent can you share if this partner is interested in potential oncology kits in the future? Or is this more a function of just perhaps generating revenue that can fund the base transplant business?

Yes. Thanks, Mark. No, it's definitely around DetermaIO and a kitted version of that. There are multiple flavors of how that can work either in concert with a larger NGS panel or stand-alone as a PCR assay. I think the data that keeps coming out there is seen as differentiating and stands well against things like MSI and TMB. Particularly in the tougher cancers like colon cancer, I think we have some unique advantage there.

Fantastic. I wanted to ask about just what the next milestones are on DetermaIO. Apologies if I missed it, can you just share any additional readouts we should be looking for, and when we think that might represent a more tangible opportunity for the company as far as revenue generation occurs?

Absolutely. So I think if you stretch the way back machine, we submitted to MolDX back in December of 2022 for reimbursement. And so we've been kind of in a holding pattern with them since that time. I think the data that came out at the end of last year helps kind of push things forward. But I think the biggest thing we're looking forward to is the SWOG study that we've talked about a couple of times. It's 800 patients, 5 years, 2 years of follow-up. So it started in 2016. We have all of those samples in-house now and are starting to process those. I don't control when that data gets reported out. So that will go up to the study's primary investigator. We're hopeful that this comes out toward the end of this year. I think San Antonio Breast is a natural place for a triple-negative breast cancer study to read out. But that's me kind of reading some tea leaves there, Mark.

Yes. I have one more question before I return to the queue. I would appreciate any recent feedback from the larger U.S. transplant centers over the past two months. I believe you mentioned that three of the largest ten plan to participate in the trial. What is their level of enthusiasm for the study? These transplant centers likely currently utilize one of the send-out tests, so I'm curious about how we should view the situation. It may be a bit early to assess, but after securing FDA approval, do you have an idea of what percentage of tests they might potentially transition within the first year or two?

I would say enthusiastic is probably the best word I have to describe their relationship with us. I think we're feeling a lot of pull-through from these centers. They want access to the technology. There are a lot of questions that they want to ask that are really hard to do when there's only a send-out option available. So having something that they can run in-house just makes a lot of sense for these guys. I mean these are the top academic research institutions. They've got big questions they want to answer. So I think we're feeling kind of this partnership approach is creating a lot of friends. It's hard for me to tell how quickly they'll switch. I mean transplant centers are generally risk-averse, I think, like most major academic centers. It's nice that they'll get to interact with it. It's nice that they'll be a part of creating the data that goes to the FDA. So maybe they'll be the quickest to switch. But I can't really assign a number on how quickly they'll flip those centers. I think we estimate at a minimum 6 months of them kind of introducing it to their clinical environment before any kind of meaningful ramp-up in volumes.

I look forward to learning the name change. But I will hop back in the queue.

Thank you, Mark. Mason Carrico, you're up next.

I think the iota model is set to kick off midyear. I was curious what you're hearing from the field around how much of an impact that could have on market growth in the back half or maybe just moving forward?

Yes. We consider it one of the wins in the sales of donor-derived cell-free DNA in general. I think there were a lot of strong opinions when the program was announced by some of our partners. They're not very excited about it. I think change is met with skepticism here in an environment that is increasingly full of change. So I think it's going to be, I think, demand increasing in general. It's something that we've pointed to for about the past year that, if you use more marginal kidneys or you use more marginal organs, you're going to have more adverse events. And I think that leads to more testing and more demand for tools to help manage those patients. I think we're very hopeful that the anti-CD38 drugs get to market quickly because I think they'll help offset some of the worst effects of using the marginal organs. But I am not a physician, so that's my best guess on how it's going to play out.

And as we kind of think about your tests rolling out in the clinical market, is there any risk of friction between the transplant centers themselves and the physicians who work there in terms of the test they order, I guess? The way I kind of think about it, is there a scenario where centers may prefer in-house testing because they can participate in the economics but physicians may tend to continue leaning towards LDTs because that's what they're used to or that's where there's more clinical evidence. And if that is a scenario, I mean, how do incentives align? How does that all shake out exactly?

Yes. I would say there's very few centers that we've come across that take a heavy-handed approach by like saying, 'You have to use this. You have to use that.' There are some that take that approach. But I think, in most cases, it's up to the doctor to choose what test is right for their patients. Obviously, we won't have a role in deciding, that will be up to the institution. But I think there's going to be a lot of demand for evidence once we get out there. They're going to want to see that it performs as well as what they've been using. One of the hardest things to change in the world is physician behavior. But I think we're confident that our technology performs and that it will stand up to any kind of comparative analysis.

Got it. Okay. And last one for me and I'll hop back in the queue. Could you just walk us through how you're thinking about the final Q-Sub meeting? What do you expect to be the focus there? And given the discussions you've kind of already had, what's derisked, if that's the right word, versus what will be the focus here?

Yes. I'd like to invite Ekke to respond on this one because I know he's been doing a lot of prep work and he just had a call with them explaining to the FDA about digital droplet PCR. But yes, I'd say we've slimmed down the assay, made it more user-friendly and developed a trial design that's really, really simple. But I know, Ekke, maybe you can talk a little bit about the last Q-Sub that we've got coming up and what you see as the big topics there.

Yes. I mean we are on track with submitting this week the Q-Sub to the FDA. As Josh said, we had the first pre-meeting. I talked about that on the last call what the outcome was, which was somewhat in our favor. We had this informational meeting since they needed to understand what digital PCR is and what are the specifics. I think that went very well. And we also had the opportunity to ask about certain things and the FDA was very forthcoming and told us, 'Okay, we want to see this. We want to see that. We want to see this.' That was actually very good. So we took the opportunity and incorporated nearly everything they were asking for into our Q-Sub now. And you know that the Q-Sub is kind of a question-and-answer game. So we have 5 questions that we want to ask that I think will give us a lot of comfort if we reach an agreement with the FDA that our final submission is going to be accepted and is addressing everything that they could think of. And so that's still on track, as Josh said, by year's end. I'm not sure, Josh, if you mentioned it but we have received central IRB approval already, and the good news is that our largest center is one of the centers that are using a central IRB. So that means as soon as we have our documentation ready, which we think is next week and we got the kits produced, which might take another 2 weeks, that we can collect the first samples for the clinical trial.

Thank you, Mason. Thomas Flaten, you're up next.

Josh, just following on from the prior questions, aside from the study, is there anything else that you guys need to do from an FDA submission perspective to complete that document for filing?

No. I mean it's all about the data generation at this point. There's a lot of work that we do in-house. So there's a lot of verification and validation work done at our lab in Nashville. That's a big lift. There's the software development that you heard us talk about. All of that is proceeding on pace. But the biggest piece is getting these clinical samples collected and accrued and ready to run.

Got it. And then of the 20 centers that you're hoping to have by year-end. I saw that 3 of the 10 you have already are in the U.S. Would it be proportional when we get to the end of the year? Will 6 of the 20 be in the U.S.? Or are you trying to skew that more U.S.-oriented ahead of the launch?

I think we'll see more in the U.S. ahead of launch.

Got it. And then Andrea, just a quick one for you. With respect to sales and marketing spend, how are you thinking about ramping that ahead of launch? Is that more of a 2026 activity? Should we anticipate anything towards the tail end of this year?

There will be some incremental spend tied to unlocking the RUO sites which is already incorporated into the $6 million cash burn. So we've got some incremental sites associated with the FDA program. And as we get closer to submission, we're going to divert those dollars to sales and marketing at the end of the year. So we should be okay. I mean, the good thing about this is the customer market is very concentrated. And so part of the value proposition is that we don't have to go out and hire a big sales force. There's just a handful, maybe 100 call points in the U.S. and similarly in Europe. And so the sales team, they're doing a great job with the resources that they have. And as we are able to divert some of the investment from the clinical trial to the RUO site unlock, we'll be able to convert some of those dollars over there.

Thank you, Thomas. Mike Matson, you're up next.

So just a few on some of the transplant centers that will be in the study. Currently, there are 3 U.S. centers using GraftAssureIQ. Are the 3 centers expected for the study going to be different from the 3 you have right now?

Yes, there's going to be a mix of incremental and some that are current users, but it's going to be much more than 3.

For the new centers participating in the trial, is there a learning curve they need to overcome? Will they need some experience with GraftAssureIQ before starting the actual trial?

No, it's a good question. Fortunately, it's PCR. So it's pretty easy for these guys to come up on the workflow. There will be an instrument drop, and there will be about 1.5 weeks of training, and then they're ready to go.

Okay. You currently have 6 centers in Europe and 3 in the U.S. Does this reflect any differences in interest or demand? I understand that they don't have the send-out tests available there, so perhaps there's even greater demand. I'm not implying that there isn't a demand here, but could you provide some insights on that?

Yes. No, absolutely. So what happened is we did feel an initial pull from Europe that was much stronger than the United States. But what we did is we kind of focused on our favorite sites in the United States and held them off for the FDA program. And so you're going to see many more pop up in the U.S. just by virtue of that.

Thank you, Mike. And last, we have Yuan Zhi.

Maybe, Josh, can you remind us, within the current standard of care, how many tests do you need to run to detect transplant rejection in the first year of kidney transplant? And what would that look like beyond 1 year? A follow-up question will be, what is the compliance rate for those tests right now?

Yes. So we're not out commercializing a ton right now. So most of my information here is going to be second-hand. I mean there are publications that recommend 4 or more tests in the first year and then maybe quarterly to biannually after that. I would say, in general, the average is somewhere around 2.3 to 2.5 tests per patient under management. And that gives you an average to think about as you're looking at market sizes.

And in your current trial, how frequently do patients receive your tests?

So it's a single time point in our study.

Got it. So one of the benefits of your test is you will be able to detect some of these subclinical rejections. So if those are detected, what does it mean for the patients and doctors? What kind of treatment will they start after that? In other words, what is the additional benefit to detect such subclinical rejections?

Yes. I'd like to hand this one to Ekke because he was a part of that ground-breaking research that came out last year. Ekke, if you could talk just a little bit about why catching antibody-mediated rejection matters now, especially with the anti-CD38s that are coming out.

Yes. Thank you for the question. So we could show last year that using our test in patients that are at high risk for antibody-mediated rejection, which are those patients who have certain types of antibody called donor-specific antibodies. It was also at the same time that you could say it doesn't matter because there's no treatment. But in parallel to that, we were evaluating a new treatment that works very well on anything that is antibody related. And so that is a drug called felzartamab, which is a CD38 antibody. So shortly after we showed that we can shorten the time to diagnose antibody-mediated rejection, we found that there is a very effective treatment for it, which completely changed the perspective on testing for antibody-mediated rejection because now we can catch it in time to treat the patient. Antibody-mediated rejection, especially chronic long-lasting antibody-mediated rejection, is the major cause of graft loss. So it was always a very bad prognosis to tell a patient, 'You have antibody-mediated rejection. It's not going away, and most probably you're going to lose your graft over the next 3 or 4 years.' That perspective has completely changed. And there are additional drugs coming out that are targeted to antibody-mediated rejection. We are participating in one Phase II trial as the measuring partner for donor-derived cell-free DNA. We are also having an investigator-initiated study that is happening in Germany and Austria, like in German-speaking countries, where we are testing another CD38 antibody called daratumumab. The beauty of this drug is that it is already approved in the U.S. It's just not for antibody-mediated rejection, but it's a drug that you can give off-label. The other positive event is that the FDA gave felzartamab a breakthrough device approval. So in the U.S., felzartamab can now be used for antibody-mediated rejection. What we have shown in studies is that it's very beneficial to monitor while giving this drug. No drug is without side effects, and it's clear you don't want to give a drug forever. So that's usually given for about half a year, and then you stop. We have already seen in studies published in the New England Journal that once the disease, the antibody-mediated rejection, starts to recur, the donor-derived cell-free DNA is rising again. So that's a really good tool that indicates that at a certain point, the patient who was previously treated for antibody-mediated rejection will need the next cycle of the drug. That's where we're heading over the next year. And especially in this case, I think donor-derived cell-free DNA plays a pivotal role for these patients.

We're excited. We've got some more data coming out this year on the recurrence monitoring. We're excited about that. All this ties to the claims expansion that we got last fall, where we looked at the de novo DSA-positive patients, where we basically got a screening claim there that requires testing those patients 6 times at the first sign of de novo DSA. So we're excited. I mean we feel like the market is growing overall for testing. So the pie is getting bigger for everyone, and I think that feels really good.

I want to quickly address some housekeeping before we move on to see if anyone has any follow-up questions. I want to acknowledge our analysts present today and make sure to include your firm names in the transcript. We have Mark Massaro from BTIG, thank you for your question; Mason Carrico from Stephens, thank you for your question; Thomas Flaten from Lake Street, thank you; Mike Matson from Needham, thank you; and Yuan Zhi from B. Riley Securities. We appreciate your presence and want to ensure your firm names are noted in the transcript.

All right. If there are no follow-up questions, we will say thank you and look forward to catching up with you guys on the follow-ups.

Thank you. See you next quarter, everyone.