Biocept, Inc.
Q3 2020 Earnings Call Transcript

Published: 13 Nov 2020

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Biocept Third Quarter 2020 Financial Results Conference Call. . As a reminder, this conference call is being recorded today, November 12, 2020. I'd now like to turn the call over to Bruce Voss. Please go ahead.

[Bruce Voss:]

This is Bruce Voss with LHA. Thank you all for participating in today's conference call. Joining me from Biocept are Michael Nall, President and Chief Executive Officer; Tim Kennedy, Senior Vice President of Operations and Chief Financial Officer; and Dr. Michael Dugan, Senior Vice President, Chief Medical Officer and Medical Director.

[Michael Nall:]

Thank you, Bruce, and good afternoon, everyone. Before we discuss our results in more detail, I'm pleased to welcome Dr. Michael Dugan to his first Biocept quarterly conference call. Dr. Dugan joined us in mid-August as our Chief Medical Officer and Medical Director. He is highly respected in the molecular diagnostics industry and has served in leading medical positions at Exact Sciences, Quest Diagnostics and Roche Medical Systems. We are thrilled to have him on our team. During today's call, Dr. Dugan will discuss our increased focus on neuro-oncology. We see our Target Selector cerebrospinal fluid assays, which were launched earlier this year, as having clear advantages versus the standard of care. We are proud of our decision to support the fight against the pandemic by offering COVID-19 testing, which is benefiting our customers and patients as well as our company. Revenues during the quarter reached a record $6.6 million, up more than fourfold over the prior year of $1.5 million. We experienced some of the recovery we anticipated in our commercial oncology and development testing volume compared with the second quarter. That said, like many other molecular diagnostic labs, our commercial testing volume has not returned to pre-COVID levels owing to lower patient visits to physician offices. With resurgence in COVID cases currently occurring, we may see an extended impact on the oncology volume.

[Timothy Kennedy:]

Thanks, Mike, and good afternoon, everyone. As Mike mentioned, for Q3 2020, we reported revenues of $6.6 million. This increase from $1.5 million in Q3 2019 is primarily due to $5.7 million in commercial test revenue from COVID-19 testing. In Q3 2020, we received 52,993 total accessions. This is a significant increase from 1,429 total accessions in Q3 2019. Commercial volume in Q3 2020 was 52,773. Total cost of revenues was $5.9 million compared with $2.8 million for the prior year period. Gross margin was 11%, which we attribute to our COVID-19 testing business.

[Michael Dugan:]

Thanks, Tim. I'm delighted to be speaking with all of you today. It is a pleasure to lead our efforts to further develop and commercialize Biocept's portfolio of advanced molecular diagnostic assays. These assays are primarily used to help properly diagnose and characterize cancers in patients with advanced or metastatic disease, including metastatic tumors that can involve the brain and spinal cord. But they are also used to monitor response to therapy in patients with cancer, an area where we are continuing to focus efforts with our liquid biopsies. We also currently perform and are developing a new assay to aid in the public health fight against COVID-19. Since joining Biocept, I've been evaluating various areas of unmet clinical needs in oncology and public health that we can better serve with our offerings and working with my colleagues to develop strategic projects that address these needs. These efforts include the development of important clinical studies, advisory teams, publications and additional new or more versatile assays. We are also further developing the clinical market with first-hand clinical, technical and client service support for the commercial and research use of these products. We are particularly excited to develop the use of our proprietary Target Selector CSF assays for detecting lung and breast cancer that has metastasized to the brain or central nervous system. Metastatic cancers frequently involve the central nervous system in advanced disease, sometimes as the only manifestation of the disease when it has been successfully treated in the rest of the body. 10% to 30% of adult patients with cancer, depending on type, will develop brain metastases. Although involvement of the central nervous system is usually associated with a worsening prognosis, patients with metastatic cancer are now living significantly longer due to many advances in treatment strategies and various new targeted therapies. There are many patients for whom timely confirmation of brain or spinal cord involvement and appropriate early treatment can lead to significantly better projected survival and marked reduction in neurologic symptoms, such as headaches, impaired mobility or loss of vision. Biocept's Target Selector CSF assays address a significant underserved need in this area. As the current standard of care, microscopic evaluation of the cerebrospinal fluid, known as CSF cytology, has very limited sensitivity for detecting metastases and provides no additional information about molecular targets for therapy choice. Due to technical limitations of the method, CSF cytology is often negative when tumor involvement of the brain or spinal cord is suspected, often generating repeat attempts to collect a CSF sample from a lumbar puncture procedure. Results of our earliest clinical studies of CSF in lung and breast cancer patients as well as developmental work with other tumors involving the brain has attracted the interest of many leading neuro-oncologists, thoracic oncologists and breast oncologists. Several of these key opinion leaders are working with us as study collaborators to better establish the clinical utility of our Target Selector assays and determine future uses of our diagnostic assays in this underserved area of oncology. Initial studies have already been or are being presented in 2020 at major international meetings. Last month, results from a small prospective study of our Target Selector CSF assays compared to CSF cytology was presented at the 2020 International Association for the Study of Lung Cancer, hot topic meeting devoted to liquid biopsy. In this study, 28 cerebrospinal fluid samples from 15 patients with metastasis to the central nervous system obtained sequentially before and during treatment were compared. Target Selector testing improved detection of tumor involvement, finding CTCs in 78% of the CSF samples collected versus 55% of samples examined with conventional cytology methods. Target Selector testing also provided sensitive quantitative identification of actionable EGFR mutations in cerebrospinal fluid that could inform more specific and appropriate treatment selection. Results from another small study using our CSF assays to analyze cerebrospinal fluid samples from patients with primary lung or breast cancer with either brain or leptomeningeal disease will be presented later this month at the Society for Neuro-Oncology, SNO, 2020 conference. SNO is S-N-O 2020. More than 2,600 neuro-oncology professionals are expected to register for this year's conference. We will be announcing study results following the listing of the data embargo. In particular, these studies illustrate that while CSF cytology has significant limitations and remains a qualitative tool, Target Selector allows for a more sensitive, cell-specific and quantitative assessment of tumor in CSF to gauge treatment response, matched with information about molecular alterations that can aid physicians in choosing the most appropriate therapy. This can be a more clinically effective and cost-effective approach compared to existing methods to assess response to therapy, which are largely limited to conventional CSF cytology and radiology. While CSF testing currently represents less than 10% of our oncology volume, we are focused on developing clinical studies and awareness of our Target Selector technology for use by neuro-oncologists and other oncologists treating patients with metastatic cancers of various types. We expect to see this business gain volume over the next year. While still in the early stages of developing a commercial strategy, we are excited about the traction we are already gaining. Our work in the coming months will focus on supporting the clinical information needs of our early adopters, highlighting the value of our existing assays and expanding the tumor types which we can characterize. We are also developing more robust clinical studies related to various indications for use and developing a comprehensive study plan that will move these assays toward widespread adoption as a standard of care. I look forward to sharing more about our clinical development strategy and progress in upcoming conference calls. With that, I'll turn the call back to Mike Nall.

[Michael Nall:]

Thanks, Mike, and welcome, again, to the team. I'd also like to welcome Sam Riccitelli to Biocept. Sam joined our Board of Directors last month and brings us extensive experience in the molecular diagnostics industry, having served in executive positions and on the boards of multiple publicly traded companies. Bruce Huebner, who has served as a director for the past 7 years, is retiring from our Board at the end of this month. We very much appreciate his many contributions, and we wish him well in his retirement. At Biocept, the safety and well-being of our employees is a priority. We are providing safe working conditions for our staff through routine COVID testing, social distancing and staggered shifts while delivering the same excellent quality, turnaround time and customer service without interruption or delay. Our longer-term corporate priorities remain unchanged. These include increasing market penetration of Target Selector assays with a focus on neuro-oncology in addition to urology, breast and lung cancers; growing sales of our target selector molecular assay, RUO kits and our CEE-Sure blood collection tubes; increasing market penetration of our Target Selector NGS offering under our collaboration with Thermo Fisher and securing Medicare coverage; entering into additional strategic commercial and technology partnerships, both global and domestic; signing more agreements with third-party health plans, including capitated plans and expanding our relationship with the Blue Cross Blue Shield network; publishing clinical case studies and presenting data at scientific conferences that further validate our Target Selector testing; launching additional assays; and strengthening our patent portfolio in the U.S. and internationally. In addition, we are pleased that we could expand our offerings to support public health needs for COVID-19 testing and plan to continue to provide this much needed service as long as the need is there. Finally, we continue building on our position as an established leader in liquid biopsy, and our Target Selector testing provides critical information to assist physicians in determining treatment decisions for their patients diagnosed with cancer. Our assays are based on our differentiated platforms that leverage information from both circulating tumor cells, or CTCs, as well as circulating tumor DNA, or ctDNA, both in blood and cerebrospinal fluid. To date, we have tested approximately 26,500 patient samples with our proprietary oncology biomarker assays and have received more than 100,000 COVID-19 samples. We fully expect our oncology test volume will gradually increase and return to more normal levels as the pandemic subsides. We are particularly pleased to have a strong balance sheet. As Tim mentioned, with the uncertainty of COVID-19 brings to revenue and collections, our cash run rate may be shorter than we currently anticipate. Like everyone, we're looking forward to the day when the pandemic is under control and returning our business to more normal operations. In closing, I'd like to thank our entire team of Biocept for their hard work and dedication during this challenging period. As always, we are committed to improving patient treatment choices and clinical outcomes. And with that overview, we're now ready to take questions. Operator?

[Operator:]

.

[Michael Nall:]

While waiting for the first question, I'd like to mention that we'll be presenting at the virtual H.C. Wainwright BioConnect Conference being held January 11 through 14. The webcast of our presentations will be posted to our website at biocept.com. Okay, operator, we're ready for the first question.

[Operator:]

First question comes from Jason McCarthy of Maxim Group.

[Jason McCarthy:]

Congrats on the quarter. So I'd like to ask a bit about the COVID testing because it seems like you've been basically doubling the number of tests of specimens received each month. So could you provide a bit more color on how much it costs you to run an individual COVID test compared to the reimbursement? I'm trying to gauge how we should look at your -- the impact to your gross margins as we go into the fourth quarter with what looks like increased testing.

[Michael Nall:]

Yes, Jason. Well, thanks for the question. I'm going to let Tim answer most of that, but I appreciate your highlight of the gross margin question because that COVID business helped us achieve gross margin for this quarter as folks may have noticed once we put the earnings release out. And one of the challenges in COVID business right now is keeping ahead of the game with the inventory. So to highlight some of the smart work our team has done is we've kind of bulked up on some inventory so we can continue to handle this growth. And I'm trying to stay ahead of some of these shortages that are plaguing the industry. But we're not immune to that. Every lab in this industry is sometimes calling each other, trying to figure out solutions for whether it's pipette tips or reagents or equipment. That all needs to be solved. Once it is, I think we can all handle even more volume, but we're doing a great job of doing that so far and excited to be able to continue to help more and more folks get this needed testing. So with that, I'll let Tim address some of the other questions.

[Timothy Kennedy:]

Thanks, Mike. As Mike said, Jason, doing COVID testing isn't the least expensive thing that you could do, especially for a company like Biocept, that was accustomed to doing oncology testing, which COVID basically has nothing to do with that. So -- but we've been -- we've worked really hard to provide capacity since we launched COVID testing basically at the very end of the second quarter. And as time has gone by, volumes have ramped, and we've gotten better and better, I would say, at being able to service that volume as we go forward and expect to get better and better as we continue to go forward. But right now, I would say, for the third quarter, our cost of revenue associated with COVID is about 50% to 55% of the revenue number that we generate associated with COVID. As Mike said, it's been tough to get various consumable materials. And our leverage with that, as we started, wasn't all that wonderful. But as time is going by, I think we're getting better and better at that. And being able to command those higher volumes associated with COVID is giving us the ability to get a little bit better economies of scale.

[Jason McCarthy:]

And then I have one more on the COVID side of things. We've seen a few companies with some progress on saliva-based PCR testing as a potential new phase of the overall testing paradigm. I'd like to get your take on that and if there are any plans to expand Biocept's capabilities into saliva-based testing on either the actual lab side or the sample collection side.

[Michael Nall:]

Well, a few answers to that, Jason. One is we're staying abreast of some of the advances there. And in fact, our development project with Aegea, that might be a good fit for the enhanced sensitivity that, once that assay is validated and released, would potentially offer. So there could be a big help there. However, we're also staying close to our clients. And I think we've shared before that the majority of the specimens we're getting in are from skilled nursing. We've just kind of done a good job there and folks really like us. And one of the reasons they like us is that we don't require -- although we can -- we're validated for it, we can have them, we don't require a nasal test. So most of the listeners are probably aware that for a lot of the testing out there that's being done, you have to be sampled up inside your nose. Our test is validated also with an oral collection, meaning kind of at the back of your throat. So it's much easier for these residents of the skilled nursing to be able to gain a sample. And so, so far, the skilled nursing centers are happy with this oral collection, and I think it maybe lessened some of the need to go to saliva. That being said, we're also having opportunities with schools and, as you heard, the racetrack and other facilities, where saliva assay might be quite helpful in those populations. So more to come on that, but interesting times. In the meantime, I think it was smart of us to validate both the nasal and the oral collection because that's been a big differentiator for us.

[Jason McCarthy:]

Yes. It definitely sounds a lot easier than the nasopharyngeal swab.

[Michael Nall:]

That's right. Especially in that group of residents and patients, if you think about the situation in most of those cases.

[Jason McCarthy:]

Yes. And then I have one more if you guys don't mind, a bit more broad. So I'd like to see if you could provide a bit more color on just the overall pipeline of strategy for growing your core oncology business, especially now that you have COVID-19 testing as a bit of a cash engine to help with capital and offset the burn?

[Michael Nall:]

Sure. No, absolutely, Jason. I always want to reiterate, and I think everybody gets this, that we entered into this because we know it was a service that needed to be provided to care for folks. And so we're very thankful that the reimbursement covers our costs and provides a little bit of extra cushion there for us. And you're exactly right that we plan to reinvest that in our core business. And one of the challenges with our previous resources was really investing in a clearly defined, statistically significant clinical utility studies that are needed to prove the true value that we bring. The Highmark VITAL thing shows we can do this. And we were very fortunate to be able to be chosen as a participant in that study with relatively low cost for us in the tens of thousands of dollars. However, as you know, to really create big value with these kind of studies to get tons of attention and get you in the guidelines, you're talking about a larger expense. And thanks to some of the cushion that we're getting from the high volume of testing we're doing, we're going to be able to fund those going into it. So we'll be communicating more on that. Dr. Dugan mentioned our investments, I think, very well today in his discussion on neuro-oncology. And that's a real area we're differentiated. You have to have the cell to do what we're doing there. So all the folks that have cell-free DNA assays, while it can be helpful as a Stage 2, can't answer the question, are there cancer cells present or not in the CSF. We can. So it makes a ton of sense for us to invest some money there, get the clinical utility established that will lead us into standard of care and guidelines inclusion. I look forward to getting back to New York and seeing you guys live. I missed the travel, let me tell you. That's the thing, but anyway...

[Operator:]

The next question comes from Sally Yanchus of Brookline Capital Markets.

[Sally Yanchus:]

Good quarter, and yes, come back to New York to visit us. That will be great.

[Michael Nall:]

Right.

[Sally Yanchus:]

Yes. I mean really good quarter. I guess one of my questions is, what's your sense of -- I mean the COVID volume testing has really been expanded. I mean do you expect to see this level of testing volume, I mean, I would say, through next year, but going into 2022? Do you have any thoughts on that?

[Michael Nall:]

Well, just like you were modeling through next year, we don't know what to expect, but we're expecting to continue to grow it. Like I say, there's -- even just here in California, there seems to be tons of demand out there. And we were very fortunate. Tim undersells his capabilities in operations sometimes as well as our teams. And even though we're all very thankful of them because for us, we were fortunate we already had a good laboratory operation. So we've been able to grow this because we already have things in place, some of the other start-up COVID labs did not. We had a fantastic operations team that knew how to scale the business and already had done this before. An example would be that because of our relatively low volume of oncology, we never invested in automated ordering, meaning that the client just types in a requisition instead of manually filling it out. Well, you can't do that with the volumes we have now. So in a matter of weeks, we were able to get online ordering up, and now greater than 90% of the specimens coming in here are ordered by our clients via our portal with a bar code that goes on the sample and we just bar code it when it comes in. Otherwise, I'd have to have an army of people doing nothing but data entry with the kind of volumes we're doing. So it's -- that's over and over. We have that experience. And what we're finding is, and Dr. Dugan just prompted me, that the clients that we serve -- the bulk of the clients we currently serve, which is skilled nursing, they love the service levels we're getting. They're not used to getting that detailed service that an oncology lab is geared up to provide with a local representative that visits them and services their staff, handles their issues, with people that answer the phone call 24/7, that kind of white glove service, rightfully, is standard of care in oncology through most of the providers, but it is not always the case when it comes to the bread and butter lab testing that you get. So they really appreciate what we've done. And I think for us, we were just well positioned to be able to take advantage of this and have the right team in place to do it.

[Timothy Kennedy:]

Let me just add to that -- to what Mike said, that's really how we got our COVID business, and it came from word of mouth. I mean it was servicing one skilled nursing facility and word got out to another skilled nursing facility and another and another. And before you know it, our volume's been increasing pretty much weekly here.

[Sally Yanchus:]

Interesting. Okay. And as far as the standard liquid biopsy business, you have seen an improvement in the third quarter, correct? I mean because...

[Michael Nall:]

We've seen volumes go up -- yes, we've seen volumes go up, but not to the levels of growth and the levels that we have seen pre the pandemic. There's a couple of reasons. One of the challenges is that we're still in early phases of adoption of our testing by the clients, and it requires a fair amount of interaction with our sales team to keep that growth happening. And they don't have access to the oncologists right now. So it's -- for lunches like you normally do and things you do to visit them in person. We're getting a fair number. Especially with neuro-oncology, it's actually taken a lot of time with us on the Zoom calls, but the folks that are ordering the blood testing, they're difficult still for us to get access to. And I think you've heard this from other labs and people who have other labs, they've seen their results over the past couple of quarters. But the other thing is our sales team, especially those on the West Coast, spend a lot of their time focused on getting new COVID clients right now. So I think as this starts to shake out going into 2021, we're going to have a strategy where we're able to -- now with the resources to go after both those things as aggressively as we've done in the past.

[Sally Yanchus:]

Tim, G&A expenses were $3 million in the quarter. Do you expect that kind of level to continue for the fourth quarter of $3 million? Because you said you did bring on more people.

[Timothy Kennedy:]

No. Like I mentioned, we've learned how to become more efficient in our operations. And I do expect that to go down, not to pre-COVID levels, specifically, but it will go down, yes.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Mike Nall for any closing remarks.

[Michael Nall:]

Well, thank you, operator. And on behalf of our Board of Directors and our very hard working team here at Biocept, I want to thank everyone for participating on today's call and for your interest in our company. We look forward to providing an update on our progress during our next conference call in March when we report fourth quarter and full year 2020 financial results, and the year 2020 will be behind us. Thanks, again, and have a great day.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.