Epigenomics AG (ECX) Earnings Call Transcript & Summary

Ladies and gentlemen, hello, and welcome to the Epigenomics AG conference call regarding preliminary CMS decision. [Operator Instructions] Let me now turn the floor over to your host, Mr. Frederic Hilke.

Thank you very much, Elena. Hello, and welcome to Epigenomics investor conference call. My name is Frederic Hilke. I'm the Investor Relations Manager for Epigenomics. With me on the phone is the CEO of Epigenomics AG, Greg Hamilton; and President and CFO, Dr. Jorge Garces. On today's call, we will be discussing the CMS proposed NCD and preliminary Q3 results. This call is being webcast for anyone who would like to follow the presentation. The link can be found on the Epigenomics website in the financial calendar. Before I hand over the presentation to Greg, let me point out some of the usual legal information. The following presentation will contain expressly or implicitly certain forward-looking statements concerning Epigenomics AG and its business. Such statements involve certain known and unknown risks, uncertainties and other factors, which could cause the actual results, financial condition, performance or achievements of Epigenomics AG to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Please find some of these factors described in the safe harbor statement. And now I would like to hand you over to CEO, Greg Hamilton, who will continue with the presentation.

Thanks, Frederic. Good morning, everyone, and thank you for joining our call. Obviously, the past 72 hours have been incredibly frustrating and disappointing for all of us. On Friday, CMS issued the proposed NCD for blood-based screening that includes a noncoverage decision for Epi proColon. We are appalled and vehemently disagree with this proposed decision, as the proposed criteria is in direct conflict with the goal of CRC screening and scientific evidence. Epigenomics is in agreement with CMS that the goal of a screening program is to reduce the mortality associated with the cancer. However, we are shocked that CMS has recommended to set arbitrary sensitivity and specificity point estimates with a 3-year interval as a key criteria for coverage. The main rationale behind the proposed decision is CMS claims there's no direct or indirect evidence that a blood test will decrease the mortality of cancer. Hence, they proposed arbitrarily electing the sensitivity of FIT at 74%, the specificity of Cologuard at 90%, along with a 3-year interval and inferring mortality reduction based solely on these factors. It is incomprehensible that CMS claims there is no evidence of mortality with Epi proColon when, in fact, that exact data was published in August of this year by the CISNET Group within their sister agency of the National Cancer Institute. As a backdrop, it is important to understand that it is impossible for any new technology to have direct evidence that it reduces the mortality of colon cancer. Direct evidence requires a long-term study, typically 10 years or more, to prove the test reduces mortality over time. Thus, the only evidence for reduced mortality by a new technology is through indirect evidence. To date, the only methods that have such direct evidence are long-term FIT and flexible sigmoidoscopy studies that have been conducted by governments, such as the United States and Great Britain. As such, the National Cancer Institute created the CISNET Group to develop, validate and publish sophisticated models to understand and evaluate cancer control interventions. These models are considered the industry gold standard in determining incidence and mortality reduction for all new screening strategies. These models have been developed and validated over the last 2 decades, utilizing the direct evidence from the long-term studies just mentioned. As the gold standard, these models are utilized as the basis for both the USPSTF and the American Cancer Society guidelines. In August of this year, the CISNET authors published the MISCAN model that included Septin9. As you can see from the graph above, annual testing with Septin9 reduces the mortality of CRC more than annual FIT testing and Cologuard performed every 3 years. It is incomprehensible to us how CMS can claim that no evidence of mortality reduction exists when the gold standard, NCI-sponsored CISNET Group has published such data only a couple of months ago. In fact, the publication is listed in the bibliography of the proposed NCD, but it is not referenced once in the entire 69 pages of the proposed decision. In addition to the CISNET publication in August, the Harvard Medical School also published a peer-reviewed microsimulation model with similar outcomes. CMS ignored the holy grail of clinical evidence in -- of CRC screening, which is a validated mortality reduction outcome data analysis tool used by all the experts in the field. Instead of utilizing the gold standard, CMS is proposing to arbitrarily select various test parameters and interval from FIT and Cologuard with an inference that it will lead to greater mortality reduction. We don't have access to the CISNET model, but an analysis with the Harvard model using the proposed nonexistent CMS test of 74%, 90% every 3 years will ironically result in less deaths averted than annual Septin9 testing, annual FIT or Cologuard every 3 years. We believe that the test proposed at a 3-year interval would lead to inferior outcomes as compared to annual Epi proColon. It is not rational to cherry-pick point estimates at an interval from various tests and hope it reduces cancer, while ignoring validated and published data analysis methods available. What's next for Epigenomics? First, we will comment on and challenge the proposed NCD, and we will urge others to do the same. There has been precedent for CMS making substantial changes between a proposed decision memo and the final NCD. For example, CAR T-cell therapy proposed decision memo only would cover CAR T-cell therapy through coverage with evidence development. That is, the therapy would only be covered if the patient is enrolled in a CMS-approved clinical study or registry. In the final NCD, there was a major shift to broadly cover CAR T therapy when used for medically accepted indications. As CMS has already communicated to us, this is only a proposed decision, and they are looking for feedback. We will continue our interaction with CMS and utilize the 30-day public comment period to influence all stakeholders. While this will be challenging, in the end, we know that the clinical and scientific evidence is on our side. Second, as we have disclosed on our previous investor calls, we need to raise capital as our current cash balance of EUR 6.6 million at the end of Q3, coupled with the cost saving measures we have implemented, give us liquidity through Q1 2021. The negative proposed NCD has put the company in a difficult position. As such, Epigenomics is forced to explore all strategic alternatives at this time. It is too early to get into specifics. However, based upon the current situation, we need to explore all value-creation activities. In order to discuss our 9-month liquidity, we are also presenting our 9-month preliminary financial results. Revenue for 9 months 2020 was approximately EUR 0.5 million compared to EUR 0.8 million for the 9 months in 2019. The preliminary adjusted EBITDA for 9 months is approximately negative EUR 8.2 million. And as mentioned, our liquid assets at the end of September 2020 were EUR 6.6 million. It pains us greatly to be having this call today, as we expected a very different result from the proposed NCD. We will fight the proposed decision with all of our efforts and resources. As shareholders, we all deserve a better outcome and so with Medicare beneficiaries. I will now open the call to questions.

[Operator Instructions] And the first question comes from Mr. Dennis Berzhanin from Pareto Securities.

Dennis Berzhanin, Pareto Securities. Just a couple of questions from me. Number one, could you provide some color why CMS did not consider the microsimulation models, despite expectation that it would? Have they provided any feedback as of the rationale and why they haven't looked at the adherence at all? And then also, it looks like one of CMS requirements is for inclusion into professional society or guidelines. Is this something that you would still have to do? Or is there a possibility to avoid this requirement?

Okay. Yes, we have discussed this issue with CMS in regards to why did they ignore all of the microsimulation model data when that is the gold standard. There -- where we're at is they acknowledge that, and that will be a major talking point during the comment period. We can't go into any more detail about it. But clearly, that is just an underlying theme that is a major, major driver in our goal to, in essence, turn this around and get coverage because at the end of the day, the clinical data is there, and it needs to be part of the conversation, so we are doing everything possible to make that happen. In regards to the guideline requirement, this is something that is inconsistent with previous approval. So Cologuard was -- when it was approved, it was not required to be in guideline nor was it in a guideline when it was approved, so that is something else we will discuss with CMS. The reality is that in the latest version of the NCCN guideline, we were included in there for patients who refuse other screening modalities, and that is aligned with our FDA label, so we do believe we meet the requirement of a professional guideline. The language needs to be tweaked in the NCD for that, but we do believe we meet that. And then in addition, we believe, with the microsimulation data published by the CISNET Group, that is the input for all future guidelines, so the next USPSTF decisions utilize those models. That's how they make their decisions. So we also feel confident about upcoming guidelines as well.

Okay. And just a quick follow-up. Could you just talk a little bit more about the whole appeal process? What are some of the steps there? And historically speaking, how often have these appeals been successful?

Well, in general, Dennis, just so you know, most NCDs are positive anyways. It's actually pretty rare to getting negative NCD. So in the end, I mean, we still got to get to the final NCD. This is only proposed. So for example, as we discussed in the presentation, the CAR T proposed NCD was considered negative by most people, and that coverage would only be given to patients who enroll in a CMS-approved study. So basically, people would be denied therapy, unless they enrolled in a trial. That was a major shift at the end to, basically, they covered that therapy for all patients with that medical indication. So we do believe we have a fighting chance to get that switched. Now once it goes final, if it's still negative, then there is an appeal process. The first is a departmental appeal process. And then the second is a formal appeal process, what's called reconsideration. That reconsideration process takes longer. Typically, you can be looking at time lines of about a year for appeal. People who have been shareholders for a long time will remember, in essence, we had to do the same appeal process for the rate. We initially were given a rate of $83 from CMS. We went through the appeal process and ultimately one and got a rate of $192. It took a while, but in the end, we were successful. So as we want to be realistic with everyone, the NCD process in this 90 days is challenging. But at the end of the day, we feel that the evidence is on our side, and that it is inappropriate for Medicare to ignore the gold standard on that evidence. And if we think -- if we can get over that hurdle, it changes the entire complexion of the conversation.

The next question comes from Mr. Simon Scholes from First Berlin.

So -- I mean, my information is that CMS used microsimulation studies to evaluate FIT, Cologuard and CT colonography. So -- and I share your astonishment that they haven't -- they don't deem it a FIT method for use with Epi proColon. I mean, did CMS give any indication of their aversion to microsimulation studies with regard to Epi proColon when you met them in March for the consultation?

I mean, absolutely not. I mean, that's why we're in shock. And I mean, the reality is CMS has commissioned microsimulation studies to do various analysis for CRC screening methods. So actually, members of that group are authors on microsimulation model papers, so it's again incomprehensible. It's been a very, very challenging 72 hours as we've digested this NCD because at the end of the day, Cologuard did not have any direct or indirect outcome data when it got approved. We actually have it. We actually have data that shows Epi proColon reduces mortality in an independent, scientifically validated, peer-reviewed publication. That data, they even exist for Cologuard, and Cologuard got approval. And we are currently recommended for noncoverage. So like I said, we are not going to stand on the sidelines here. We are going to challenge this with everything we have. And at the end of the day, we believe we will be successful. It will be challenging. The process is not one that is transparent as anyone would like, but it's one that we just have to follow.

Okay. And I mean, presumably, you'll make your response to CMS public.

Yes. The -- we will do a response in the public comment period, but we are also encouraging all supporters of evidence-based decisions to comment as well in the public comment period on the CMS website.

Okay. And then you said that -- and you said just now that, by far, the majority of NCDs are positive. I know you mentioned this CAR T case. I mean, is that the only -- I mean, how many cases have been -- how many negative decisions have there been?

I mean, I don't know the specific number, but they're pretty rare. I mean, you got to remember, for them to even accept and open the NCD, they have to believe there's a reasonable amount of evidence for coverage. So that's the criteria for them to even accept it and open it. So again, it's hard for us to express how shocked we were not only based on the strong body of evidence that we do have, but our interactions previously with CMS and walking them through the data, I mean, we -- they are fully aware of the Harvard data. The NCI data came out, obviously, very late in the process. It came out in August, so maybe that's one of the reasons why it wasn't in the proposed, but...

I mean, they also say that they only consider documents up to February.

Yes. I mean, they said that. But then for some reason, they listed the JNCI paper from August in the bibliography, but again, did not reference it anywhere in the decision. So it's challenging for us to rationalize how that could happen, but it's our job right now to try and get that fixed.

Yes. And so we are saying is that they seem to change their methodology, and they used microsims for all the other tests, but not for you.

Yes.

So that is very...

Yes. Brief coverage. Hello, can you hear me?

Yes, Jorge, we can hear you.

Yes. This is Jorge. I just want to clarify. So the NCD proposal is actually positive and that they say they will cover blood-based CRC screening. However, the criteria that they set in order for them to cover the blood test led to noncoverage for our test, Epi proColon. So we're not trying to flip a negative NCD into a positive. We're trying to modify the criteria, so that Epi proColon can get coverage. So it's a positive NCD, and we're pushing to change the criteria, so that it would lead to coverage of Epi proColon. So I just want to make sure everybody is clear on that.

The next question comes from Hogan Mullally from Encode Ideas.

You obviously have some powerful competition out there with Exact Sciences, Freenome and Guardant. This sort of arbitrary, 74% sensitivity, 90% specificity that CMS has put in the proposed decision memo, to the best of your knowledge, of your competitors out there, can any of them achieve this sensitivity, specificity bar based on the liquid biopsy data they've generated thus far?

Hogan, it's unknown. The data that's been presented so far by Freenome and Guardant has all been kind of case-control data that, as we know, can vary pretty substantially between that and prospective trial data, so we don't know. I mean, their initial data that they've presented, yes, clearly, would meet these hurdles. But you also got to remember that those tests are designed on sequencing machines and are going to be very, very expensive. So they need a 3-year interval. So the only way that they actually can work is if they have a sensitivity level and a specificity level that would justify a 3-year interval. So meaning, the key to this disease state is the sensitivity, specificity interval all work together to, in essence, determine whether an assay works. So for lower sensitivity assays, they're extremely effective, but the interval needs to be more frequent, hence, FIT is every year. The optimal interval for our test in both the Harvard and the NCI paper is a year, right? And both of those show that each of our tests is more effective. FIT and Septin9 is more effective, for example, than Cologuard at a 92% sensitivity because Cologuard is 3-year interval. So again, we are encouraging CMS not to issue an incredibly dangerous precedent of just cherry picking random numbers from various tests and inferring it somehow that's going to lead to reduced mortality. So in the end, they need to make decisions based upon evidence, not upon cherry picking.

Right. I guess, I'm just sort of curious -- sorry, go ahead, Jorge.

No. If we could refer to Slide 6 in the presentation where we look at the number of deaths, Greg, I don't know if you could project that. Yes. So Hogan, if you can look at the slide, I want to make sure the message wasn't missed. So the orange bar would be kind of the -- a test with the performance that Medicare is suggesting it's acceptable. So 74% sensitivity, 90% specificity done every 3 years. And here, the number of deaths that are averted with -- would be averted with such a test. One bar above it is Epi proColon done every year. And you can see that our tests, with our clinical performance parameters performed every year, is expected to do much, much better at averting a lot more deaths for patients. In fact, Cologuard and FIT every year would be better than that test. So they're proposing actually a test that would be inferior in terms of outcomes, even though it's 74% sensitive, 90% specific. So again, the clinical performance alone does not measure what the clinical outcomes are going to be. So as Greg said, this is a dangerous precedent because they're pushing for an inferior outcome for patients over what Epi proColon could provide.

Right. I guess, where I would start leading with this is that the -- it almost seems like CMS is foreshadowing a test that they want to approve as opposed to looking at the evidence in its totality for Epi proColon. It almost looks like the large muscular competitors out there have created a bar or influenced a bar, which is rather arbitrary. I know that's a leading question. I won't ask you to sort of opine on that per se, but it certainly is a curious decision by CMS, and it just looks like the bigger players here have had some influence as far as the levels of sensitivity, specificity that are thrown out by CMS.

Yes. Hogan, I mean, obviously, that would be challenging for us to confirm or not. I mean -- so all we can go on is what they've written in the proposed NCD. And clearly, what they've written, we just know to be categorically false. So we just have to move forward with what's in front of us and bring enough eyeballs and people to the table to -- for CMS to make decisions based upon clinical and scientific evidence and, to your point, not some theoretical assay that doesn't exist and, quite honestly, clearly, wouldn't even work.

The next question comes from Mr. Bruce Jackson from The Benchmark Company.

So you're still FDA-approved. You've done a fair amount of work with HMOs like Geisinger. Is there anything to prevent an HMO or a commercial plan from running the Septin9 test as part of a colon cancer screening option?

Bruce, yes. No, there's not. I mean -- but the realistic challenge here is that Medicare is the dominant payer in this space, about 40% of the available population is Medicare. So what you've seen historically is all of the other payers, commercial, et cetera, look to Medicare to be the first mover. So if you look at Cologuard, I mean, Cologuard was launched successfully because they got FDA approval and 2 months later, they got Medicare approval. And then after that, then the commercial payers started lining up. And that took a bit of time after Medicare did it. But if you look at the initial days of Cologuard. I mean, I think they announced that typically, they were like 60% to 65% of their samples in their first couple of years were Medicare samples. So it is challenging for commercial payers to lead in this space when Medicare is the dominant player. And ultimately, they're seen as the leader because the average onset of this disease is actually at 67, so when patients are Medicare age. So Medicare is more incentivized than anybody to increase screening rates and reduce the burden of this disease. So that's why they play such an important role. And this NCD is -- that's why it's so critical to us to get it because it really then is the launching pad to commercialize then across the entire payer spectrum.

The next questioner is Mr. Randy Baron from Pinnacle.

You mentioned that you spoke to Medicare. I'd be curious to get a little more color on the conversation that they had in terms of what seems to the previous questioner's point about arbitrary kind of picking and choosing, is it? And then by them referencing the bibliography of that August study, did they just come out and say we didn't consider? I just want to get a little more color on the conversation. And then in terms of the open comment period, I mean, this has a lot of ramifications, almost beyond CRC. Do you think you'll get more open comments in this next month than you did in the initial ones?

Well, Randy, I mean, first of all, in the comment period, I mean, the initial comment period, I mean, even CMS and the proposed decision acknowledged that a vast, vast majority of the comments were positive. And so we are fully expecting a very active comment period because, yes, we are in agreement with you that the precedent that CMS is setting here could be very dangerous. And so we are highly encouraging people to get involved and to support the clinical and scientific evidence. And so we do believe that there is an opportunity to get this moved. I mean CMS made it very clear to us. This is only a proposal. And I think the more attention we can bring to the fact that they just made an absolute statement that no direct or indirect evidence exists for the reduction in mortality of the disease is just completely false. Now if CMS said they want to ultimately ignore that data for some reason, then they should have to come out and justify why that is that they will now want to ignore microsimulation modeling data when they've used that as a standard throughout their history. So we believe that it's going to be a very active 90 days. And ultimately, we do believe there's a path forward for us to get the positive decision. Now that said, we are realistic that it is going to be challenging, right? That it is -- this is not easy. But again, at the end of the day, we feel confident that it is very hard to ignore the graph -- one of the graphs we showed on this presentation from the NCI experts that says Epi proColon works, and it works really well.

Yes. There's no doubt, this is not a logical decision. What is the exact date for 90 days out? And then related to that, let's just drill into the strategic review a little bit. Obviously, you have less than a year of cash. I just love a little more color into timing when you think kind of the next potential strategic decision could be. Is it going to be before that 90 days? Is it -- to a previous questioner, it certainly seems like some of the bigger players in the space threw some political weight around. You have basically the future of testing. So what happens if they come and knock on the door at a high level?