Insight Molecular Diagnostics Inc. (IMDX) Q3 2020 Earnings Report, Transcript and Summary

Greetings, and welcome to the OncoCyte Corporation Third Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ron Andrews, CEO, OncoCyte. Please go ahead sir.

Hi. This is actually -- before Ron starts, this is Bob Yedid from LifeSci. I’m going to be reading the forward-looking statements. Thank you, Jerry, and thank you to everyone for joining us for today's conference call to discuss OncoCyte's third quarter 2020 financial results and recent operating highlights. If you have not seen today's financial press release, please visit the company's website on the Investors page. Before turning the call over to Ron Andrews, OncoCyte's President and CEO, I'd 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 are forward-looking statements. We encourage you to review the Company's SEC filings, including, without limitation, the Company's Forms 10-K and Form 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. 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 those prepared remarks, it's my pleasure to turn the call over to Ronnie Andrews, CEO. Ronnie?

Hey, thanks Bob, and welcome everyone to our conference call to discuss our third quarter 2020 financial results and operating highlights. Joining me today are Mitch Levine, our Chief Financial Officer; Dr. Doug Ross, our Chief Medical Officer; and Padma Sundar, our Senior Vice President of Commercial. We'll all be available at the end of our -- of the end of our prepared remarks for a question-and-answer session. We've made great strides in advancing our mission in the third quarter, having made the leap to becoming a commercial diagnostics company, generating revenue, while also laying a strong foundation with multiple growth engines that together support our near-term objectives and the company's long-term growth trajectory. We have a lot to share today. So we appreciate your patience today as I walk you through our strategy and share milestones and highlights of our tangible progress with each of our growth initiatives, which we believe position OncoCyte as a leader in oncology diagnostics with an immediate focus in lung cancer and immunotherapy diagnostics. Over the last 15 months, we've successfully transformed the company and established four solid growth engines that each independently have the potential to drive the enterprise value beyond its current level. And when combined, create a dynamic value multiplier in large market opportunities. The market forces are in place to move immune and targeted therapies to early stage diagnosis from their current use as a late stage salvage approach. Our vision is to facilitate the path for pharmaceutical companies to transition their drugs to early stage utility first for lung cancer, followed by triple negative breast cancer and ultimately to become the immune therapy diagnostic company across all solid tumors and across all stages of cancer. While that may sound like a bold vision, the reality is that in the last five quarters, since I started as a CEO, we've acquired our license the majority of the components we need to execute on this mission, which we fully expect will build significant enterprise value for our shareholders. The combined U.S TAM for the current menu of OncoCyte products and services is well over $6 billion and we're moving rapidly to deploy our offerings to secure our position in these large and growing markets. Importantly, our revenue growth combined with our recent operating cost reduction and selective staff reduction should translate into lower cash needs. This leave us remarkably well-positioned to execute across all our programs. Today, we'll give an update on each of our four business pillars that we put in place to drive our growth both now and for the future. To how I far newer investors, the four products or services that make up our comprehensive offering are as follows: first, DetermaRx, the only commercially available treatment stratification test for early stage lung cancer. Second, DetermaIO, our expression profile test currently available for research use in predicting response to immune therapy drugs, as well as the second generation targeted therapies that may overcome resistance to immune checkpoint inhibitors. Third, TheraSure-CNI MONITOR tests for immune therapy response monitoring that we are in-licensing from Chronix Biomedical; and finally our pharma services offering, a suite of technologies that accelerate and derisk biomarker driven clinical trials. It is important to note that while each of our products has a different timeframe to mature the final clinical revenue phase, our pharma services lab and our Nashville facility allows us to drive immediate revenue growth from across our product offerings in the research setting, particularly in clinical trials for drug development as we currently complete the process for commercialization into clinical use. We've steadily executed across each of these four revenue engines with dedication and focus that enabled us to hit every milestone we laid out a year ago on schedule, even with the challenging headwinds of the COVID-19 pandemic. And while we achieved several major milestones in the third quarter, none were larger than gaining final CMS reverse reimbursement for DetermaRx, which led to our initial quarter of clinical revenues for the company. As a reminder, DetermaRx is the first and only predictive test for the identification of patients with Stage 1 to do a non-squamous non-small cell lung cancer, who are at high risk for recurrence following surgery. Unfortunately, more than half of the early stage patients who received supposedly curative surgery will have a recurrence. DetermaRx addresses the critical unmet need for identifying early stage lung cancer patients who have a high likelihood of recurrence. We've made incredible progress with DetermaRx since our launch in late January. And once again achieved several highly significant milestones during the third quarter. First, we announced the final Medicare coverage determination, which secured national Medicare payment for DetermaRx. This is a significant milestone as Medicare patients account for approximately 70% of eligible patients nationwide. And while securing nationwide medical coverage is a monumental achievement in its own right, it is significant to note that the coverage policy also established a new class of predictive test for Medicare coverage based on our compelling clinical evidence, which now positions DetermaRx as the first and today only test in the class for early stage non-small cell lung cancer. On top of this, we also received a final pricing decision for our tests from the centers for Medicaid -- Medicare and Medicaid services with pricing in line with comparable high value molecular test and oncology. These milestones in combination with payment from private payers, such as Anthem, which is the Blue Cross and Blue Shield plans for California positions DetermaRx for rapid adoption, which of course brings me to the great traction we've experienced in commercial adoption and test growth. In Q3, our testing volume more than doubled from Q2 to 175 billable patient samples. In addition, we maintained our physician reorder rate of approximately 60%, which we believe reflects a high level of physician satisfaction and clearly demonstrates the clinical utility and value this test brings to patients and doctors in guiding treatment decisions for early stage lung cancer. We now have successfully on boarded additional hospitals. And by the end of Q3, we had 67 on boarded hospitals, which excitingly includes prestige -- prestigious national comprehensive cancer centers and national cancer institute centers. We're also seeing increased adoption at major health care systems, including HCA Healthcare, Cancer Treatment Centers of America, Florida Cancer Specialists, Scripps Health, and Providence Cancer Institute. While we continue to be very encouraged with the volume growth and new account onboarding, it is important to note though, fourth quarter is typically a slower quarter for surgery since patients traditionally have not wanted to be in the hospital during Thanksgiving and Christmas holiday season. So even though our sales team continues to close new business, when we combine the impact of the holidays and the growing increase in CoV-2 cases nationally, we're not projecting another quarter of delving of our volumes in Q4. Global markets also represent a large market opportunity for us. And in third quarter, we were able to expand our international distribution by adding Chronix Biomedical for Germany and GenCell in Mexico, Colombia, and Brazil. In addition, we continue to explore relationships with potential partners in China, the world's largest market opportunity in terms of total patients. It's very important though, that we get the right deal structure in this imported market and feel we've made solid progress towards finding the right partner. So stay tuned. And finally, let's touch upon important data recently presented at this year's IASLC 2020 North American Conference on lung cancer. Here we present a new perspective data that build upon our prior results, demonstrating that DetermaRx informed treatment significantly improves lung cancer patient survival. It is this compelling data that will continue to drive the success of DetermaRx. The benefits of using DetermaRx are clear to patients and their doctors. Our test is able to identify the early stage lung cancer patients that may benefit from chemotherapy post-surgery to prevent recurring disease, which will lead to significantly improved survival. But our research is not stopping there. We're also working to better understand how to leverage the power of DetermaRx with other available molecular diagnostic tests that drive decisions for the selection of targeted therapy. For instance, at this past summer's ASCO meeting, a large pharma company presented data, showing a subset of patients who've benefited from a drug targeted at the EGFR pathway, which is one of the main drivers of certain types of lung cancer. If you've been following the OncoCyte story for the past year, you've heard us talk about how targeted and immune therapies are moving upstream to manage early stage tumors. Remember today, the majority of treatments are only indicated for late stage salvage treatment versus earlier stages when there's more hope for either management as a chronic disease, or even in some cases a cure. This movement in the earlier stages is exactly why OncoCyte strategy is focused on owning the early stage diagnostic and therapy selection decisions in lung cancer, and ultimately we believe across solid tumors. In a rapid response to this exciting data from AstraZeneca, we now have data that show combining DetermaRx EGFR mutation status may inform optimal treatment strategies for lung cancer patients who are EGFR mutation positive. Approximately 30% of these EGFR mutation positive [technical difficulty] DetermaRx, which we expect will drive another revenue stream for this test. Overall, in less than a year, we've demonstrated incredible progress, having gone from gaining access to the test from Razor Genomics to a global commercial launch, yielding a solid growth trajectory that includes the establishment of a new class of molecular test. We look forward to advancing DetermaRx towards standard of care for early stage lung cancer, and we believe our clinical benefit and the significantly improved survival rates support such adoption. We're extremely proud of our team's efforts to build a solid foundation with our first growth engine, which is providing immediate and increasing revenue to support our continued growth as a company, as well as saving many lives. And now I'd like to transition to our second and third growth engines, DetermaIO and the TheraSure-CNI MONITOR test, which together have the potential to position OncoCyte to offer the first and only comprehensive solution for immunotherapy treatment selection and response monitoring. While introduction of immune therapies has been transformative in oncology, the fact remains that the majority of patients will not respond to these drugs nor will they gain a sustained response and will eventually relapse. DetermaIO has a huge opportunity to change this dynamic and here's how. Two major challenges in the area are: one, identifying patients that respond to immune therapy or second-generation therapeutics in combination with immune therapy; and two, assessing their response to treatment via noninvasive blood based monitoring to facilitate a prompt treatment change. If we can identify the right therapy for the right patients at diagnosis, we have the potential to treat patients, maintain their sensitivity to treatment and detect and overcome resistance, which ultimately will maximize benefit for patients by unlocking the full potential of this powerful and important class of drugs. The immunotherapy market is substantial with an estimated 750,000 patients potentially eligible for immune therapy in the United States, in addition to the nearly 5,000 ongoing clinical trials evaluating these drugs. And this opportunity will continue to grow with estimates from Grand View Research that the IO immune therapy market will reach approximately $130 billion by 2026. And the adjacent testing market to identify the most appropriate therapy patients will grow to over $3 billion within the same time period. While this is a huge market, tools for response prediction are lacking. There's no biomarker panel currently available that’s powerful enough to accurately identify patients who will have a sustained response versus patients who require either combinatorial therapy or totally different approach. Tests that are currently used to select patients for immune therapy are not able to reliably predict complete responders from partial and non-responders. So if you consider the current treatment response rates at around 45% at the upper end of the response range, this means well over $60 billion will be spent on treatments per year, that will never provide patient benefit. We can do better. And we believe that DetermaIO is uniquely positioned to play a role in more effective use of immune therapy and an improvement of patient outcomes. DetermaIO, our proprietary gene expression profile test evaluate the entire immune microenvironment and biopsies from cancer patients to identify what the industry now calls hot tumors, which are cancers likely to respond to checkpoint immuno therapies such as Keytruda and Opdivo. And unlike current tests, DetermaIO is also able to identify early in the diagnostic process to negative or cold tumors, which will not respond to checkpoint inhibitor monotherapy and will require second generation targeted therapy in combination with immune checkpoint inhibitors in order to benefit the patient. We believe that these biological mechanisms, which DetermaIO identifies are not only effective in lung cancer, but are also broadly applicable to all solid tumors. DetermaIO is the first predictive tests for clinical trials that assess as the comprehensive molecular biology of the tumor and today outperform measures of any single component alone. Based on this capability, we were thrilled to announce an immune therapy biomarker collaboration with a leading research Institute in Milan for an investigator sponsored trial to evaluate DetermaIO as a biomarker of neoadjuvant checkpoint inhibitor response in triple negative breast cancer, considered to be the most deadly form of breast cancer. This is a meaningful accomplishment. As we believe this collaboration has the potential to drive patient selection in the neoadjuvant setting where PD-L1 IHC fail to sufficiently identify responders that may enable the accurate application of immune therapy in this very challenging indication. This collaboration is also important as it generates near-term pharmacy services revenue for OncoCyte and also may help facilitate a path to that clinical launch of DetermaIO. DetermaIO was a huge part of the immune therapy diagnostic story, but the need to monitor for resistance remains an important unmet need. And that's where our licensing and collaboration agreement with Chronix Biomedical for the TheraSure-CNI MONITOR test comes in. This is a patented blood based test that uses copy number instability, or CNI for immunotherapy response monitoring. With response monitoring, physicians can catch a tumor that is becoming resistant to treatment and then change treatment to second generation therapy, or even a combinatorial therapy that will prevent disease progression and improve the patient's chance for disease free survival. We are -- by operating both DetermaIO and therapy monitoring tests, OncoCyte will differentiate itself by being the first and only company to provide a comprehensive solution that addresses two of the biggest outstanding challenges in the field of immune therapy. We're incredibly excited to continue to mature on immune therapy offerings, and believe these two new test applications working together are a powerful and compelling opportunity first in the pharma trial setting and eventually we hope in the clinic to support our immediate and long-term revenue objectives. Our plan is to complete transfer and launch the test for research use in immune therapy clinical trials during Q1 of 2021. So more to come on this exciting addition to our product menu. And finally coming to our fourth revenue engine, our very successful boutique pharmacy services business. Our pharma services lab is an important revenue source that is rapidly growing with numerous contracts with pharmaceutical companies, both large and small, as well as major molecular diagnostic companies. And while the final pharma services revenue recognition in 2020 depends on how fast we complete the various milestones are the speed at which pharma partners enroll patients and collect samples, I can say that in just a few months, this business has tremendous velocity. We believe we are just starting to scratch the surface of this opportunity, and in 2021, we are expected to generate operating cash, which will help reduce our cash usage in the future by delivering resources to fund other growth areas. Along with DetermaRx, our pharma services provide immediate and growing revenue engine, which support our operations. So when you put it all together, it's clear that we've made remarkable progress, executing across all of our programs while also laying a solid foundation with multiple strategic growth engines, creating a robust portfolio to generate immediate revenue to support our operations as we work to achieve our long-term goal, delivering significant enterprise value to our stakeholders and our shareholders. We've come a long way in just the last five quarters, which we believe is a testament to the dedication of our team, the power of our approach and the value of our tests and services to provide patients, physicians, partners and payers with additional resources to manage their patients. Before I turn the call over to Mitch for review of our financials, I want to take a moment though, and thank the entire OncoCyte team for their continued dedication and hard work in a very unprecedented environment to ensure we stay on track with each of our strategic initiatives. I hope that after today's call you're confident in OncoCyte's strategic path forward as I am, and I thank you for your support and for your confidence. Now I'd like to turn the call over to Mitch Levine, for review of the financials. Mitch?

Thanks, Ronnie. Hey, everybody. To start, as of September 30, 2020, we had cash, cash equivalents and marketable securities of $10.7 million. Before I discuss our operating results, I'd like to update our investors about our revenue recognition policies around DetermaRx. In light of the recent CMS and Noridian pricing decision, which became effective in September, we were able to recognize revenues for Medicare covered tests on an accrual basis when the tests are performed rather than on a cash basis. For all healthcare payers, other than Medicare, that is private health care plan, we recognize revenue on a cash basis for DetermaRx tests. In the future, we will be able to recognize revenues on an accrual basis for the DetermaRx tests once we have contracts for reimbursement in place with those plans in accordance with U.S accounting principles. In addition, from a standpoint of costs, we will incur and accrue cost of revenues and other operating expenses for all pharmacy services and DetermaRx tests we perform. For the third quarter of 2020, we reported a net loss of $6.8 million or $0.10 per share as compared to $5.2 million or $0.10 per share for the third quarter of 2019. Operating losses as reported for the third quarter of 2020 were $6.2 million, an increase of $900,000 as compared to $5.3 million in the third quarter 2019. Operating losses, as [technical difficulty], were $6.1 million for the quarter, an increase of $2 million from $4.1 million in the third quarter of 2019. We have provided a reconciliation between GAAP and non-GAAP operating losses in the financial tables, including with our earnings -- included with our earnings release, which we believe is helpful in understanding our ongoing operations. Revenues for the 3 and 9 months ended September 30, 2020 were $555,000 and $713,000, respectively generated from pharma services and DetermaRx tests. Costs of revenues for the 3 and 9 months ended September 30, 2020 were approximately $601,000 and $1.1 million, respectively. It is important to note here that as we ramp up our sample volumes, we will expect to see an improvement in our gross margins in future quarters for DetermaRx. Moreover, and as mentioned previously, we expect our pharma services business from our Nashville Lab to be accretive to our P&L in 2021, as that business unit benefits from increased scale that will come from higher project volume we can see in our contracted pipeline. Research and development expenses for the third quarter of 2020 were $2.6 million as compared to $1.6 million for the third quarter of 2019, an increase of $1 million. The increase was primarily attributable to personnel and related expenses, including a stock-based compensation expense increase of $300,000. Management made the tough decision to reduce our operating expenses starting in the third quarter with a partial reduction in force plan and agreements to reduce salaries, which we instituted in September, 2020. Personnel and related expenses for the current quarter also include a $400,000 severance charge and $200,000 in accelerated stock-based compensation expense related to these proactive decisions. As you know, the stock-based compensation expenses are non-cash. General and administrative expenses for the third quarter of 2020 were $5 million as compared to $3 million for the same period in 2019, an increase of $2 million. The increase was primarily comprised of $2.2 million in personnel and related expenses, including stock-based compensation expense. Due to the actions I mentioned earlier, personnel and related expenses for the quarter include a $900,000 severance charge and $500,000 in accelerated stock-based compensation expense. Sales and marketing expenses for the second quarter were $1.6 million as compared to about $630,000 for the same period last year, an increase of just under $1 million. This increase was primarily attributable to personnel and related expenses for continued ramp up in sales and marketing activities for commercialization of DetermaRx. Cash used in operations was $6 million for the third quarter of 2020, which includes about $900,000 in transactional and other business development related expenses. That concludes my remarks concerning our financial highlights. I'd like to call -- turn the call back to Ronnie.

Thanks, Mitch. Operator, we'd now like to open the call for Q&A as that concludes our prepared statements.

[Operator Instructions] The first question is from Mark Massaro, BTIG. Please go ahead, sir.

Hey guys, congrats on a strong quarter. I guess with DetermaRx starting to ramp up, really strong growth in billable samples. The number of hospitals is also increasing nicely. You read out some really compelling perspective data showing 90% disease free survival rates at 5 years for high-risk patients with chemo. Can you just give us a sense for the funnel that you have as we exit Q3? What types of trends you saw maybe in October. And a related question is you said that you don't expect DetermaRx volumes to double in Q4 due to the holiday season, but can you help me understand the funnel, what do you think it would look like if there were no holidays?

Yes. Hey, Mark. Thanks for the question. Yes, first off, let me just say that we continue to onboard new accounts. We continue to execute our virtual. If you remember, we've got a really thorough series of virtual web -- webinars is what I like to call them with some of the leaders in our industry in lung cancer. And those continue -- we continue to see new hospitals on boarded, and we continue to bring in new physicians into the fold. Our hesitation in Q4 is it's just too early to tell what Thanksgiving, Christmas combined with CoV-2 increase is going to actually do right now. I mean, obviously we're hopeful that these new accounts that we bring in, in Q4 will continue to move us towards doubling again. But I just didn't want, as you guys create your models to anticipate that we would be able to do that. One important note though is that in Q3, our revenues included 61 recognized patients. And as you might imagine, we have quite a few patients in Q2 and Q3 that we had accumulated more than that. So the $219,000 in revenue was for 61 patients. So we do expect that our revenues will grow in Q4, but some of that will come from the patients that we actually tested in late Q3 are from patients that were tested before we got our final pricing, which we are now adjudicating. So it is very plausible that we'll continue to see revenue growth in Q4. I just don't know if our volumes will be able to double given the holidays in COVID.

Okay. And just as a housekeeping question, was the entirety of your revenue in the quarter due to DetermaRx, or was there some services business in there and can you quantify that?

Yes. $219,000 of the total was from RX. The rest was from our pharma services business.

Got it. That's helpful. And then I think in your press release, you talked about $2 million was committed projects in the pharma services business …

Correct.

… for 2020. Can you help us bridge with $200,000 of that coming in Q3. Should we think of that as maybe a backlog rather than penciling in the balance of that, so that's like $1.8 million for Q4. Is that more of a backlog number than it is a near-term number?

Yes, exactly. Yes, Mark, exactly. We get these contracts, these contracts typically extend over a year or so. And so we are able to -- so if it's a $1 million contract or a $500,000 contract, we can only recognize the milestones we achieve within a given quarter. And/or if it's an actual trial, we can only bill for the patients we actually tested within that quarter. So as you know from your history in this industry, pharma revenues are lumpy. But we do like to project the pipeline so that our investors will know that we do have a growing pipeline of business and that pipeline does give us a sustained revenue strength over the coming quarters based on our ability to achieve milestones and complete patient test.

That's terrific. And then another one for me. You talked about Anthem, Blue Cross Blue Shield in California for DetermaRx, obviously Medicare. Can you speak to the conversations you're having with additional health plans? I think you might've mentioned Cigna in the past, but how should we think about new commercial health plans coming on in the next couple of quarters?

I have Padma Sundar here, who is on top of all that. So Padma, why don't you add for some color commentary to Mark, so.

Yes, happy to do that. So on the one hand, I mean, Anthem, Blue Cross Blue Shield is just one example. So we have been collecting payment from multiple commercial payers and sometimes even at list price. So that's happening. Simultaneously, we have a good sense now for who our top payers are and we are in discussions with several of them to get a network. And so one of the positive elements in those discussions, because we have CMS coverage and we have a high value price, as well as a strong health economic model showing benefit to the plan, those discussions are going quite well and we hope to be able to report on getting in contract or in network with some of them over the course of the next few months.

That's great. And then final question from me on TheraSure, the CNI monitoring test. You talked about looking to complete the tech transfer in launching for RUO in Q1 of '21 across a range of cancers. The first part is, should we think of this as across all solid tumors or are there also some heme malignancies? And then secondly, can you walk us through the dynamics of this license? So if you complete the tech transfer, will you be able to realize all the money off of these tests or do you have to split it with your partner?

Yes. So I’m going to take the first part and then I'll let Dr. Ross sort of handle the -- sort of the strategy around CNI, how it plays in. So the license itself has a license to the test and to the IP surrounding the test. We're interested in and certainly enthusiastic about the intellectual property that comes with it. Some of this intellectual property has very early dating in the world of blood based testing for cancer as well as for transplant. So we're eager to work with our friends at Chronix to understand how we might build upon that patent state so that we have a representative play in the world of therapy monitoring, but also in the world of MRD. So with that, Doug, do you want to walk through sort of the timing in Q1 to Q2, and then we'll be going out to get in and begin to offer this as part of our trial menu.

Yes, so we're going to be transferring over to our labs over here in Q1 and Q2, but the test is up and running as well in the Chronix lab, in Germany. And so both of those can offer it here in the U.S. obviously, and over there for Europe in terms of the tissue types that it's appropriate for. So as opposed to most of the stuff that's out there, this is a test that focuses on copy number variation as opposed to mutations. And the real distinction there is that as opposed to some of the other things on the market, it does not require you to sequence the tumor either whole exome or in some cases whole genome in order to identify that subset of mutations that you're going to go after. So we can use this on any tumor type that has copy number variation. Our focus in the early days is on lung. It's one of the tumors with the highest amount of copy number variation. So it's a great candidate. But in fact, most solid tumor types have a tremendous amount of copy number variation. So in principle, it's a candidate for any of those. But our early days are going to be focused on therapeutic monitoring in lung cancer. The therapeutic monitoring is observing whether the tumor load in the blood goes up or down following the initiation of therapy. If it goes down, then the therapy is working, but if it starts going up, that means the therapy is not working, and you should be switching to a next generation agent or other salvage strategies. And so that's our focus starting in lung, but obviously a candidate for all solid tumor types, all of which have a prominent copy number variation.

The next question is from Paul Knight KeyBanc. Please go ahead, sir.

Hi. Ronnie. Could you talk to the level, the type of patient in the third quarter? Was it the profile of 70% CMS payers, I guess from the reimbursement level it was not. Could you talk to that?

Yes. I think about -- well [indiscernible] you promise here with me she can answer that specifically, so …

Yes. I think the numbers you see reflect a lag in the payment. So if we look at the two Medicare categories, if you combine Medicare and Medicare Advantage, these are people who have the private Medicare Advantage plan by law. Medicare Advantage has to pay just like Medicare. So when you combine the two, it is about 68% now, right in line with the 70%. So that's what we're seeing as the trend. And so sometimes I think the lag is between when the cases comes into the door and the billing and then the subsequent payments, so those payments will come in the near future.

Your point is a good one though, that if you think about those 61 patients, we actually recognize revenue on for $290,000, you guys already beat me to the math. That's about 35 -- almost $3,600 a patient. So some of that some of those patients that were not Medicare or Medicare Advantage, actually got paid at list price, which actually helped us improve our AEP for the test.

Got it. And then you had mentioned 67 hospitals at the end of the third quarter. What was that total at the end of 2Q?

Oh, gosh.

I have it right in front of me.

Padma is going to look it up. She has it right in front of her.

It was 36.

36.

Okay. And your sales force count, where are you with that now versus earlier in the year?

Yes, it's the same Paul, but we now have really, because of the Brooksville world, Padma and team has done so well with given the pandemic. We've actually penetrated some areas of the country that we don't have sales representation in today. So you will see us add another three to four reps as we exit this year and head into next year, because these are areas that once we start to pick up prominent at hospital systems, we want to have sales representations because we can piggyback off of those placements. Padma, anything?

Completely agree. So we have even with the virtual events, we are in very high volume state where a large volume of these early stage lung cancer surgeries happen. So we want to add sales reps who can go now and penetrate deeper into those accounts, convert more physicians and get more repeat order. So that's our strategy.

What will be the -- what’s the expected reduction in cash burn in Q4? What are the steps you've taken?

Hi, Paul. It's Mitch. So we have a modest reduction in burn in Q4, but it's going to accelerate over time as severance is paid and exhausted.

Okay. All right. Thank you.

Thank you, Paul.

Thanks, Paul.

Great to hear you again.

We have a question from Steve Unger, Needham. Please go ahead, sir.

Great. Thanks. Congrats on the progress. It looks like the portfolio is really, really coming together. First question, I wanted to understand now that you've got real commercial experience with DetermaRx, who is the primary ordering physician? Is it the surgeon or the oncologist?

Yes, in terms of the ordering, it is -- it over-indexes towards the surgeon. So they are the ordering physician and, however, the way they work is they also bring the oncologists into the mix in terms of a decision to use the test because it's the oncologist who makes the decision on the chemotherapy. But we are finding that it's the surgeon who's largely placing the order.

Okay. And then the -- it's up to the oncologist to determine the level of their [multiple speakers] response?

Yes.

Okay.

So the [multiple speakers] lower risk than the oncologist doesn't even get the referral in most cases, because they are watched by the surgeons via surveillance strategy. If there are high risk, then the patient is referred to the medical oncologist who then makes the decision to get chemo.

Great. And that appears to be an easier sales contact then a surgeon rather than an oncologist. And I was just wondering at this point as far as that group of individuals, what do you think your exposure has been as far as marketing either with reps or the virtual platform?

Yes, I think we've done remarkably well for the first year. We've -- our CME alone had several thousand people download and watch the program including several surgeons. So -- and that's the reason we were able to get 67 hospitals on boarded in Q3. But I do think our work continues and that's exactly why we need to continue to invest in physician education efforts next year and add a targeted number of reps. We're actually able to now have some face-to-face engagement with the surgeons. So we will continue to invest in those.

Steve, you probably -- as you follow this industry for a while, if you look at the success of Oncotype DX in their early days, it really was this sort of multiple -- multiplication effect of a rep getting an account, then telling an account, they start to go out and educate the next account. And we know we're in the early days of this still, which is why we want to build some further sales critical mass because our virtual capabilities are really to be honest, I knew we were good, but that's -- it's been surprising as to how much uptake they've had. But I still think as we exit sort of this world of COVID and we start to get back to face-to-face, a lot of this is still hand to hand education, hand to hand combat, if you will. So the combination of the two we've touched well over 2,500 healthcare professionals today since COVID started. So we feel good about where we are, but we still got a long way to go.

Great. And then as far as billing is concerned, yes, great job of getting a 3,500, 3,600 [indiscernible], and it looks to me like you have what, 400,000 then from these 175 billable tests to recognize over time. And when I look into the fourth quarter, for example, are you expecting the level of billable tests to be at least 61? So they have either a similar mix or how does that, or would that mix percentage go higher, given the status of now it wasn't quite at the beginning of the quarter that you had.

Yes, Steve, let me -- yes, it's a great question. And we don't -- we want to be as transparent and clear as we can. What we were able to do in Q3 was the date we got the pricing, everything post that date we were able to bill and collect for and recognize. Everything prior to that date, which is over a hundred patients, we are adjudicating now and we believe there's a high percentage of those patients will be paid because they were after the actual date where they received our coverage decision, but were before the pricing decision. So that gap in time, we should not be penalized for. We really won't know till we get those payments, but we expect that some of that will come in, and if you do the math, it's a little over $300,000 being adjudicated. And that's just from Q3. That doesn't include anything we'll pick up in Q4. And we do expect Medicare and Tony Kalajian, our Chief Accounting Officer is in here, so I believe we're expecting 30-day or less payment cycle for Medicare for RX [ph]. So as you guys start thinking about your model, Steve, we do think that we'll get paid. Ultimately we'll always have a carryover from one quarter to the other based on tests that are done late in the quarter. But this first quarter revenue is a little clunky, because we have these tests that were before our pricing decision that we're adjudicating and we're not ready to call victory yet.

And there's a slide [indiscernible] if I may, Medicare Advantage, like I said before, by law, they have to pay and they have to pay the same price. Some of the Medicare Advantage plans don't know that Medicare is paying -- is covering the test and paying it. So we are having to do a little bit of appeal to get that payment. And that's another line that you're saying, but we will get those Medicare Advantage.

Yes. Ultimately this will all start rolling together and the first quarter is still a little clunky [ph] given that sort of this nuance of the pricing date versus the positive coverage decision date.

Great. And then on the subject of getting paid, it's my understanding that the trial in Milan is revenue generating. And I was wondering if there was some color you could provide as to sort of the duration of that project and perhaps maybe frame it, if you can, as far as overall revenue contribution.

Yes. The first phase of the trial that we are entering now is -- will be a per patient fee that they will pay us. And we're expecting, Doug, that to be somewhere between $250,000 and $400,000 in revenue that should take place over to the next two quarters. So that'll come in over the next two quarters, assuming success and a solid publication, then we'll be moving to what we hope will be a next round of prospective potential CDX opportunities, but that's yet to be determined. If that happen as you know, Steve, that'll take year -- a couple of years to actually fulfill, but will be paid across that time for the patients we do. But the current phase, it should complete by the end of Q1 or early Q2 at the latest.

That's excellent. And then as far as DetermaIO is concerned, it's a gene expression test. And there are many ways, I guess, to go after the tumor microenvironment. And I was curious as to -- and maybe, not so much detail, but in a high level, what is your competitive pitch for DetermaIO versus the use of NGS technologies for tumor profiling?

Well, I'm going to give you the high level pitch, because that's what I can only give. I’m going to let Dr. Ross go a little deeper than me though. I mean, the reality is in order to provide access to patients globally to these emerging therapies, you need to be able to democratize this test. You need to be able to do it, especially in long on fine needle aspirates, which means you're not going to have access to large amounts of tissue and you need to do it in a cost effective manner with rapid turnaround time. And so by doing what we've done of taking a 2000 gene unsupervised classifier, taking relevant RNAs from the various components of microenvironment and synthesizing those into a 27 gene PCR panel, we are able to accomplish all the things that today are unmet by next gen sequencing. But Doug, in terms of the actual immune -- hot versus immune cold and our differentiation between tumor mutational burden, maybe a little bit of color commentary on what we do is differentiated from TMB.

Yes. So it's a great question because a lot of folks have gone after gene expression profiles that attempt to predict outcomes with checkpoint inhibitors with modest outcomes, frankly. And what we believe makes this different is that we're not only integrating information on the positive side, the subset of genes that are in infiltrating leukocytes and amount of what excels in the tumor that make the tumor sort of poised to respond to checkpoint inhibitors. We're counterbalancing that with a negative signal that comes from the wound response around the tumor. The tumor -- cancer-associated fibroblasts that give a repressive signal to the tumor. We think the combination of the positive signal and the negative signal is much more powerful. We've actually done that experiment and you cannot get the same information out of the positive signal alone or the negative signal alone. It requires both. It's probably both biology and frankly there's some redundancy there. So when in the real world, when you do this testing, you get really core samples, they're needle biopsies, who knows what fraction of the tumor they sample. And so the sampling error is a big problem with diagnostic assays like this, because we're getting signal both from the positive side and the negative side, the algorithms can combine those to deliver an accurate result more often. So we think it's a combination of those that make this more effective. And regardless of competing markers out there, PD-L1 has been very controversial because there's a lot of different antibodies that are used in different ways and just IAC has a number of problems that make it challenging biomarker. Tumor mutation burden is clearly real biology. Again, the method of analyzing it, the way of counting mutation and so forth has been non-standardized. The interesting thing though is that at least in the data that we have so far, it looks like DetermaIO and tumor mutation burden may in fact add together to give even more information than either one alone. So to the degree that your mutation works, it works better in conjunction with DetermaIO.

Great. And then if I could just add one more, speaking of adding on -- as far as EGFR is concerned, as far as adding targeted treatment within early stage lung cancer patients, what needs to happen for you to start getting reimbursed? I understand that EGFR testing is reimbursed, but does this need to be a labeling change for the product?

Not at all. What we'll do is add EGFR as a second test, so the doc will order DetermaRx and EGFR. We'll run them both and we'll build them both as separate bills.

Our existing CPT codes and we build those and that's all that's needed.

Excellent. Thank you.

Thank you, Steve.

We have a question from Steven Mah, Piper Sandler. Please go ahead, sir.

Great. Thank you. Hey guys, congrats on the traction you guys are getting.

Thanks, Steve.

Thanks, Steve.

Yes. So quick question. So most of my questions have been answered by the group, but just a couple. On the 60% reorder rate of physicians for DetermaRx, is that in line with your expectations, given the early stage of the launch and how actually do you define the reorder rate? Because I can see maybe potentially some surgeons may not have candidates or are those [indiscernible] even though they didn't have actual candidates. And so therefore they couldn't prescribe DetermaRx. Maybe just a little bit of more color on that.

Great question, Steve. Yes, I mean the 60% is well ahead of -- the only comparable we have really is Oncotype DX in its early years. In their first couple of years, they got about 30% to 40% in the academic world and less than 10% in the community. So to average it out, they were in the 30s and we're in the 60s and we're across the community, which typically is the hardest group to bring on board. So we're very encouraged by that. We also know that the way we count it is if they haven't reordered in a certain period of time that they are deemed not to have reordered. But to your point, this is a smaller market opportunity than Oncotype. That may be an unfair metric for us to look at in terms of determining the percentage. So we'll continue to monitor it, but right now 60% is a really good number for us. And to your point, it could be higher than that given that we have surgeons that don't see these low-risk patients -- or these are early stage patients as often.

One trend that we've noticed is to the extent that they are performing the surgeries are quite satisfied with the result. And they come back whenever there's next surgery and there's an eligible patients and order the test. To your point, not all of these surgeons do very high volume. And so if they don't come back for a while and we go -- we do go back and our sales reps ask, it's usually because they haven't done the surgery, not because they've done the surgery and they do not have the test, if that makes [indiscernible].

Got it. And maybe just a follow-up on some of your surgeons that are reordering. Can you give us a sense of how many they're giving in the quarter? And yes, I appreciate it sort of early stages, but is this like two or three or …?

Yes, given the -- there's only about 40,000 to 45,000 of patients a year in this space. And given that we have six reps and basically six territories, but with the virtual capabilities. I mean, Padma, I don't know off the top of your head, but they're not doing 10 or 20 of these a quarter, they're doing 3 to 4 a quarter, typically when you get to the academic centers -- I'm sorry, when you get to these larger community networks, we'll see more, but the academic centers don't see as many because they see more late stage salvage treatment type patients.

Okay, great. Yes, that's useful. And then on DetermaRx, on the distributor side, yes, you have Chronix in Germany and then you have your Latin America distributors. I tend to remember, you guys were also intending to go into China. You mentioned that earlier in your prepared remarks, but -- and you have to get the right deal. But are we talking about like months or 12 months, or can you give us a sense for timing?

Yes, I would just say conservatively, I think if you stay tuned, you'll see something over the coming few months. We have been very close, but it's important as you know it's a large market and we have to make sure given some of the intricacies of the Chinese market and some of the patent/IP protections that you don't typically get when you go into that market. We have to be careful that we don't see parallel trade and these tests come back to us. So the negotiations of those clauses become pretty important, but I do think we're very, very close, Steve.

Okay, great. That's helpful. And then my last one, switching gears over to DetermaIO. I also remember you guys mentioned that you were planning to go ex-U.S using an IVD kit. I mean, if you can give a quick update.

Yes, we have -- we now have numerous potential suitors for the PCR version of the test. I think you -- everyone knows we can run it in either [indiscernible] or we can run it in the PCR version given pharma's need for distribution and a democratized network to get patients globally on boarded to their drug, we do see increased interest. Our decision right now to be honestly, just to be totally transparent is do we pick one and we ride one or do we try to be Switzerland and just get our product on our own and sell it across the 10,000 plus PCR instruments that exist in Europe and the parts of Asia where we want to go. So we're in definitely deep discussions around that, but there's interest and we are eager to see mark this kit before the IVDR regulations hit Europe and start to become part of that regulatory challenge, which will be sometime late next year. So we're going to -- you'll hear more about that as we enter Q1 more than likely.

Okay, great. Thank you.

We have a question from Bruce Jackson, The Benchmark Company. Please go ahead, sir.

Hi. Thank you for taking my question.

Hi, Bruce.

So looking at -- hey, so talking about DetermaIO getting it from a research use only test to a clinical test, you've got this study you're doing right now with Fondazione Michelangelo, in Italy. Is that going to get you enough data to get this thing to a [technical difficulty] you might need some more data?

Yes, we're going to need more data, but we didn't really talk a lot about it. But we have a full core [ph] press on multiple sources of retrospective samples. Doug, you want to comment on some of the activities there and just the critical mass that we were gaining there?

Yes. So I mean, I think the Milan study, as you say, is a really important study in a new indication to get neoadjuvant checkpoint inhibitor therapy into triple negative breast cancer. And depending upon the results we think we could play a major role there, but that's obviously very associated with the drug and the trial. And so we'll see how those results come out. In terms of, in general, getting this to market, obviously the biggest market for checkpoint inhibitors with one cancer and right now to be candid, patients are accessing those drugs in a biomarker independent way. Although they came out associated mostly with PD-L1 staining. In fact, it's evolved that if you've got a late stage lung cancer, you can find a way to get access to the drugs. And that's obviously not optimizing the use of those drugs in terms of both their benefits, their side effects and their costs. So the guidance that we've been given by the reimbursement folks is that if we can demonstrate convincingly that we're adding incremental information, that will help make what is a very difficult decision as to whether or not to use a checkpoint inhibitor alone, a checkpoint inhibitor combined with a cytotoxic agent or perhaps some other approach given how sick these folks are and how toxic -- cytotoxic therapy is as well as the side effects of immune therapy. If we have robust incremental information, we feel that we can get reimbursed. So as Ronnie said, we're putting together retrospective cohorts that allow us to demonstrate our performance relative to PD-L1 as well as tumor mutation burden when that's relevant. And our plan is to assemble that data and take it for reimbursement regardless of our other efforts in both companion and complimentary diagnostics.

Yes. So, Bruce, really we're on target now to try to have all that data by the sort of middle of Q2 with the idea that once we have that we'll go-to-market in Q3 with DetermaIO for clinical use as well as we will be bringing up as you might imagine, the targeted panel, because the current clinical requirements are to run both targeted panel for targeted therapy decisions, and IO together. And so we'll be bringing that up as you might imagine, DetermaTX as we'll probably call it, the targeted panel. those are already reimbursed at somewhere between $2,500 and $300,000. So that'll be an additional revenue stream as we enter Q3 of next year for us, as we bring in patients who might be eligible for IO, but also have to make a decision of the positions here between target therapy and IO. We'll run both of those in conjunction. And that's the market voice Padma we're hearing that they want both.

Yes, absolutely. So we will become that one -- and it's the single lab that will answer all their questions on who needs to get immune therapy. So with the big panel, that's reimbursed in the $2,000 range, you get your PMB question answered as [indiscernible] experiment, then you will extract RNA from that same sample, you get your DetermaIO results, and then you have the usual EGFR [indiscernible] also. So with a single test report, the doctor will be able to decide, should I start targeted therapy? Should I give immune therapy or should I just pick the chemotherapy? So that's the vision.

That's our vision.

That’s great. Anyway, congratulations on all the progress. Thank you very much.

Thanks, Bruce. We appreciate it.

Ladies and gentlemen, we've reached the end of the question-and-answer session. And I'd like to turn the call back to Ron Andrews for closing remarks.

Yes, thanks everyone. I know it was a long call. We appreciate your patience. We got a lot going on here at OncoCyte. It's been an exciting third quarter. We know that we have still lots of work ahead of us and we are working hard to deliver for both our stakeholders and shareholders. We look forward to continuing to update you guys on our growth, and we just appreciate you joining our call and hope you all stay safe. Thanks, everyone.

This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.