OncoCyte: Already A Commercial Stage Company With Enormous Revenue Potential

Summary

• OncoCyte is finally already a company in a commercial stage.
• With two products currently on sale (DetermaRx and DetermaIO), the revenue potential it presents for the coming months is enormous.
• I would suggest buying shares at these levels, as I anticipate that the $5 or $6 will be recovered before the end of the year.

OncoCyte (NASDAQ:OCX) continues to execute its plan by laying the groundwork for becoming a leading company in the field of early cancer diagnosis through liquid biopsy test, presenting enormous potential for future revenue.

This 2020 is the year of the definitive transformation of the company, since in the last first quarter it became for the first time in its history, a company in the commercial stage. This was due to the fact that both the DetermaRx test (early detection of lung cancer) and DetermaIO (test that determines whether cancer immunotherapy is effective for patients) are already ready and available for sale.

On the other hand, the latest advances of the company include:

-Clinical validation of DetermaDx that will end soon (end of June)

-Request for medical coverage from CMS for DetermaDx test (after its clinical validation)

-Commercial availability of DetermaIO platform for research use only in the field of oncological immunology.

-Signing of agreements with various health clinics for the commercialization of DetermaRx test.

And above all:

-The communication by the CMS contractor Palmetto of the definitive medical coverage of DetermaRx, which will begin as the effective date of June 14.

This last milestone is, in my opinion, the most important one carried out by the company so far, and surely of this entire year 2020.

Palmetto's decision will soon be followed by that of another CMS contractor, Noridian, who will also report soon on DetermaRx's favorable coverage decision.

The fact that DetermaRx is covered by these two health insurance contractors will imply an extraordinary boost to the commercial potential of the test because its cost will be covered by up to 70% depending on each patient and the type of cancer.

Therefore, for the second half of this year 2020, we will begin to see interesting sales figures.

And as we mentioned before, the DatermaIO test is now commercially available but only for research. Many biotechnology companies that are currently developing cancer-fighting drugs through the immune system are expected to have to use the DetermaIO test to select patients susceptible to the use of these drugs. It should be remembered that only 30% of cancer patients are susceptible to the use of immune therapies, so it will be essential that these companies have to pre-select the patients they will use for the trials.

The estimated revenue from both tests for the coming months/years will exceed several hundred million dollars, which for a company with a current market capitalization of less than 200 million dollars, makes it a fundamental value for any investor who wants to obtain important capital gains.

The effect of the Covid-19 crisis will probably reduce the number of sales of DetermaRx and DetermaIO initially planned for this second half, but this negative effect will be transitory, and by next year 2021, its negative effect will probably have been overcome.

Two tests already available for sale

Now we will analyze the revenue potential of the two tests (DetermaRx and DetermaIO) for the coming months:

DetermaRx

To develop this paragraph on DetermaRx, I am going to use an article that I wrote a few months ago and that will be very useful now: "OncoCyte accelerates the company of transition to a commercial phase".

To estimate the sales that DetermaRx will generate in the coming months, I will base myself on two parameters:

1- Target population of the test

2-Comparison with sales of other similar tests on the market

1) Test target population

DetermaRx is classified as a stratification liquid biopsy test for the early stage (phase I and II) of lung cancer and works by studying the information of the patient's genes to determine what type of treatment best suits.

In the market, there is currently no test of identical characteristics that those of DetermaRx because those that currently exist are indicated for late stages cancer (phase III and IV), so it is very difficult to estimate future revenues that will be generated.

The only data we have is the number of Non-Small Cell Lung Cancer (NSCLC) detected annually in the United States, about 191,000, of which approximately 35% (68,000) correspond to phase I and II which is the target population of DetermaRx.

Therefore, we can assume starting from a very prudent% of market penetration for Q3 of 1% and a test sale price of $4000:

	Q3 2020	Q4 2020	Q1 2021
DetermaRx % Market penetration	1 %	2 %	4 %
Nº test sold	680	1360	2720
DetermaRx Revenue	2,720M$	5,44M$	10,88M$

Click to enlarge

Source: Author

2) Sales of other similar tests

On the other hand, we have the data of two liquid biopsy tests that are currently being marketed for the late-stage cancer (phase III and IV) that determine the ideal treatment after analyzing the genetic information of the patients. Although these two tests have a different target population from those to DetermaRx, they can give us an idea of how they have performed.

1) The Guardant360 marketed by Guardant Health (GH).

2) Target Selector NGS Lung Panel, Biocept (BIOC) test.

The Guardant360 test analyzes different types of late-stage cancer (phase III and IV), was launched in 2014, and in July 2018 received CMS positive coverage decision. It is a test that analyzes 74 genes associated with different types of cancer and determines the best chemotherapy treatment to receive by the patient, thus facilitating the work of doctors.

The Target Selector NGS Lung Panel analyzes in late-stage cancer (phase III and IV) the NSCLC studying biomarkers associated with mutations of genes related to lung cancer and has been released to the market last May.

Between the two tests, there are 2 major differences: The Guardant360 is a CLIA-validate test and also has CMS positive coverage decision. However, the Biocept test does not meet any of these two important milestones. This makes the Guardant360 have a much higher commercial success than the Biocept test.

In the following table we can see the evolution of tests performed by Guardant360 and Biocept in the last quarters:

	Q3 2018	Q4 2018	Q1 2019	Q2 2019	Q3 2019	Q4 2019	Q1 2020
Guardant360	9552	11605	13283	17160	18539	21587	15257
Biocept test	964	1043	1325	1066	1189	1404	1306

Click to enlarge

Source: Author

I consider that DetermaRx will a priori have lower sales than Guardant360 (because Guardant360 is a test targeting a multitude of different types of cancers and has also been on the market since 2014) but higher than Biocept (given that the Biocept test does not have CMS medical coverage and since it has not been on the market for as long as Guardant360).

So I think the sales figures I have predicted for DetermaRx for the next 3 quarters for DetermaRx in the table above provide quite reasonable figures.

DetermaIO

DetermaIO is a test that analyzes biopsies of cancerous tissues and also blood biopsies to determine which patient may be treated with PD-1 / PD_L1 type immunotherapy. It is estimated that only 30% of cancer patients are likely to be treated with this type of therapy, hence the importance of this type of testing in the immediate future. Its use as a previous step to medication will be almost mandatory.

OCX already has it available for use in research by biotech companies that are currently testing drugs in the field of cancer immunotherapy.

The company expects that in the coming months they will submit the coverage request to the CMS. Knowing that it typically takes about 10 months for CMS to resolve the request, it should in principle be available for sale to the public by the end of 2021.

But now, as we discussed earlier, it is only available for biotech research. Due to this, in principle it may seem that it will have a very limited market potential, but nothing is further from reality. Thanks to the fact that the field of cancer immunotherapy is expanding, it is estimated that currently about 750,000 patients are susceptible to being treated with cancer immunotherapy. In addition to this, around 500,000 patients are known to be currently enrolled in different clinical trials to evaluate multiple anticancer drugs. Companies like Agilent Technologies, Inc., Eli Lilly and Company, AstraZeneca, Ventana Medical Systems, Inc. Genentech Inc., Bristol-Myers Squibb, Merck & Co., Inc., Pfizer Inc., and others are developing cancer drugs today in the field of immunotherapy.

Evolution of current trials with immune oncological treatments:

Source: Cancerresearch.org

And all of these companies will necessarily have to pre-select patients enrolled in the trials. For all this, the market potential that DetermaIO has to provide this type of service to large biotech companies is great, estimated at around $ 2.2B.

There are currently several tests on the market to determine the suitability of patients for immunotherapy. What sets DetermaIO apart from the rest of the tests currently available is its degree of effectiveness. In tests, it has been shown to be superior to two of other tests on the market. These tests have been carried out by OCX in collaboration with the biotechnology company Qiagen (QGEN).

When estimating the revenue that DetermaIO could generate in the coming months, the main challenge is to predict the number of tests to be sold. On the other hand, the sale price is also not a known parameter until now. Typically, the selling price of this type of biotech test is higher than the selling price to the general public. The two parameters (tests sold and sale price) are currently difficult to quantify. We could make a very generic estimate of the number of tests that could be sold in the coming months. Knowing that there are around 500,000 patients currently enrolled in clinical immunotherapy trials, we can safely assume that 10% could be captured by OCX in the next few months: 50,000 tests. Regarding the price, knowing that the other DetermaRx test (chemotherapy test for lung cancer) has set it at $ 4,000 for the general public, we could estimate a price of about $ 10,000 (the price of test sold to biotech is always more expensive than the test sold to general public)

Therefore, we have a potential revenue for the next months / years for DetermaIO of; $ 50,000X10,000 = $500M.

I would like to emphasize that these are figures estimations that may not ultimately coincide with reality, but which are based on real market hypotheses.

OCX: an undervalued company

As we have been able to verify, the revenue that OCX is expected to generate in the coming months/years thanks to its two currently marketed products (DetermaRx and DetermaIO) make its current market value clearly undervalued. With a current market capitalization of less than $200M and revenues that by next year 2021 could exceed $150M (DetermaRx + DetermaIO), the company has significant revaluation potential. It would be very likely that next year we will see the market capitalization of OCX above $ 500 million.

Cash status

Regarding the cash status, we can see that as of March 31 they had $ 16.9M. The treasury status has been reinforced thanks to a capital increase made on April 28 for a total amount of $10.7M. This gives us a cash balance at the end of April of approximately $27.6 million. Cash used in operations was $6.9 million for the first quarter of 2020. Therefore, assuming this cash burn rate, it is presumable that at the end of June they had around $ 20.7M, enough to support operations until early next 2021.

Possible risks

Like any company in the biotech and healthcare sector, there are several risks to consider when taking positions:

The main risk it presents is that sales are finally not as expected, due to multiple factors such as:

-The effect of the COVID-19 lengthens more than expected with the consequent damage for test sales.

-The company's commercial teams are not efficient enough to attract customers.

-Increase in the number of tests available from the competition. Although both DetermaRx and DetermaIO have better sensitivity ratios than other tests, there is always a risk that new tests will appear to market that will improve the effectiveness of the current tests.

Another risk could be dilution due to the capital increase.

Any of these risks could damage the evolution of the share price because they would worsen the company's prospects.

Conclusion

OncoCyte is finally already a company in a commercial stage. With two products currently marketed (DetermaRx and DetermaIO), the revenue potential it presents for the coming months/years is enormous. As we have discussed, with estimated revenues for DetermaIO for the next few months of around $20 million and for DetermaIO of around $500 million, it is clear that OCX, with a current market capitalization of around $180 million, is clearly undervalued. And all this without mentioning the other test (DetermaDx) that they intend to put on sale at the end of 2021 with potential sales that multiply by 10 those of DetermaRx.

The price has tried in recent sessions on several occasions to overcome the barrier of $3. It will get it sooner rather than later. Therefore, I would suggest buying shares at these levels, as I anticipate that the $5 or $6 will be recovered before the end of the year.

Analyst’s Disclosure: I am/we are long OCX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[ponderevo]

Honestly, I read this article and conclude one thing only: go long $GH

[Francisco Javier Garcia]

Guardant health focuses on cancer in advanced stages. It has several projects in study for the diagnosis of cancer in its initial stages, but it is not expect to be ready until a minimum of 1 year from now. OCX already has a test for early stage cancer being commercialized (RX test) and another for next year (DX test). OCX has a great future.

[mookdoc]

COUPLE MORE DAYS AND CULLEY CAN LET RIP MORE OCX SHARES! Great can't wait to get this DEAD WEIGHT OFF OUR BACKS! Keep talking Ronnie,keep talking your good @ it too!

[Ana_Banana83]

Since the installment of Ronny, Oncocyte has been issuing shares like crazy. The company must be valued as fully diluted. The last thing the Oncocyte shareholder needs right now is another share purchased acquisition that is capital intensive to finish developing. I am strongly looking forward to the Q2 CC which Ronny shouldn't be able to hide behind a riddle for how many total tests were performed, because "reasons".

But don't worry, the symbolic 30% pay cut management took will make it all better.

[6651781]

Author forgets to mention that the company has recently asked shareholders to approve increasing share count from current 85 million to 150 million. According to the management, this is necessary because the company does not have sufficient shares for stock issuance to cover recent acquisitions and because they will continue to raise capital in the markets. In other words, no profits are anticipated in the foreseeable future. At 150 million shares, the company valuation is almost $400 million. How much of a possible upside can there be from these levels?

www.sec.gov/...

[MarketObserver01]

Reasons for the Common Stock Amendment Proposal

Our Board of Directors believes that the proposed increase in the number of authorized shares of Common Stock is desirable in order to enhance our flexibility in taking possible future actions, such as raising additional equity capital, making acquisitions using our equity as consideration, awarding equity compensation or pursuing other corporate purposes. As of May 12, 2020, we had 67,217,906 shares of Common Stock issued and outstanding, approximately 9,608,000 shares of Common Stock reserved for issuance upon the exercise of outstanding stock options and upon vesting of restricted stock units, approximately 4,155,000 shares of our common stock available for future grants under our Incentive Plan and 3,383,913 shares of Common Stock reserved for issuance upon the exercise of outstanding stock purchase warrants, leaving only approximately 635,000 shares of Common Stock available to Oncocyte for use in raising capital, making acquisitions, or pursuing other corporate purposes. Oncocyte has not yet received significant revenues from the cancer diagnostic tests that it is developing and commercializing, and until such time as it is able to do so and to generate sufficient revenue to finance its operations, it will need to raise additional capital, which may occur through the sale of Common Stock, preferred stock, and securities convertible into or exercisable for shares of Common Stock or preferred stock.

28

We have issued or agreed to issue shares of Common Stock to acquire assets to expand our technology and product portfolios and we may issue or sell shares of Common Stock in the future to acquire additional assets or businesses. We consider potential sources of financing and potential acquisition candidates from time to time when opportunities arise. We have agreed to issue shares of Common Stock to the stockholders of Razor Genomics, Inc. (“Razor”), as described below, if certain conditions are met under agreements related to the acquisition of shares of Razor and rights to develop and market our DetermaRx™ diagnostic test. If the Common Stock Amendment Proposal is not approved by our shareholders, we might not be able to meet our contractual obligations to the Razor shareholders. We may, at our election, also issue shares of Common Stock in lieu of cash to former shareholders of Insight Genetics, Inc. (“Insight”), as described below, under the terms of a merger agreement pursuant to which Oncocyte acquired the cancer assays that we are developing as DetermaIO™.

We have also entered into an Equity Distribution Agreement with Piper Sandler & Co. pursuant to which we may offer and sell shares of Common Stock from time to time for cash in “at-the-market” transactions. We are not presently a party of any other financing or acquisition agreements that require us to issue, or pursuant to which we may issue, shares of Common Stock, and we may not be able to raise capital or consummate future acquisitions on terms we deem acceptable, or at all.

[MarketObserver01]

Assuming the authors number of a $500 million market cap/ divided by all 150 million shares (unlikely in my mind) results in a $3.33 share price, or more than 26% from the the current $2.65.