Epigenomics AG. 00:00 Operator

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1 Epigenomics AG 00:00 Operator Good afternoon, ladies and gentlemen. I would like to welcome you to Epigenomics conference call regarding the nine-month financial result At this time all participants have been placed on a listen-only mode. The floor will be open for questions following the presentation. I would now like to turn the call over to Dr. Thomas Taapken, CEO and CFO at Epigenomics. You may begin your conference call. 00:27 Thomas Taapken Thank you very much. Good afternoon, good morning ladies and gentlemen, welcome to our conference call on the occasion of the announcement of our Q3 financial results. The last few weeks have been difficult for us and for our shareholders as a result of the FDA response letter to our PMA application for Epi procolon in the United States. While this outcome was both unexpected and also disappointing, we remain committed to identifying the next step in collaboration with the FDA and in order to ultimately be able to make our product, or innovative and patient-friendly blood test for colorectal cancer screening available to US in due course. I will go into this in more detail later during this call, but now I would like to first take a look into our Q3 financial results. First of all, I am happy to report that revenues in the third quarter increased by 66% compared to the third quarter of 2014 to a total of 471,000. If you look at the accumulative nine-month numbers, we also saw a nice increase of 21% compared to last year s revenues to 1.3 million. So, if you look at the situation that despite declining licensing income due to expired technology license agreements, we saw this nice increase in revenue. This indicates that most of it, if not all of it, is coming from increasing product sales, mainly in the Chinese market.

2 We have in Europe also our sales. The situation hasn t significantly changed in Europe, whereas you know we are currently not undertaking any active efforts; but we are seeing a steady flow of orders from those laboratories that are using the product here in Europe. Taking a look into China: we are quite encouraged by some of the recent developments that we saw over the last 12 months that the product has now been approved on the Chinese market. Our partner has made significant efforts, in both during its marketing sales group; it has hired additional people; it has established a network of local distributors in the different regions in the country, and is very actively working with key opinion leaders and with the authorities in order to implement the product into the formularies and to negotiate the pricing on the different provincial level. At this point there are first provinces that have actually included Epi procolon or Septin9, I should say, into their reimbursable items. We are starting to see first commercial sales in some of these provinces in China. I have to admit, though, that at this point we are only talking about two or three of the 32 total provinces in China, but it typically takes some time to get this over. Our partner is diligently working at the level of all the provincial governments in order to expand this. We expect that within the next few months it will be possible to increase that list by a significant amount. Also lets keep in mind that one of the obstacles that our partner sees for the Chinese market is the pricing level of our product. Here, BioChain has made significant efforts to work towards the approval of their own version of the product to which they will then switch parts of the market that are not able to cope with the relatively high price of an imported medical product in the Chinese market. So we are very hopeful that the situation that was very much dominated by market preparatory activities in 2015 will, when it comes to 2016, really develop into a success story.

3 If you look at our results in Q3, it was negative EBIT of 2.5 million, accumulative for the first nine months of this year. It was -8.3 million compared to 5.4 million last year. The main reasons for this increase, negative EBIT, were the already on-going preparatory work for the US launch of Epi procolon, including the build-up of inventory and other strategic market measures that we have entered into. But another factor is, of course, also the fact that most of the cost that was associated with the ADMIT study, which we ran at the beginning of this year, also was accounted for in Taking a look at our financial position, I am happy to report that cash and cash equivalents at the end of the third quarter amounted to 9 million. In fact, 9.8 million, if we include the marketable securities, which we typically do in our reporting. This increase was mainly driven by conversions of outstanding convertible bonds that require the holders of these instruments to make payments upon conversions. We were able to maintain a cash level, which is significant enough, which can fund our business activities well into the second-half of This puts us in a position that we have now the possibility to carefully plan the next steps. As a result of the FDA decision and as the consequence that we will not be able to make product sales in 2015 in the United States, we also corrected our financial prognosis in a talk release a couple of weeks ago. We expect that once we have more clarity on the time lines towards a US launch of the product, it will be possible to again make more accurate predictions for next year. At this point, we mentioned in our outlook that we will, of course, be very cognisant to defer as many calls that we can, be very cash efficient to save money where we can and consider raising some additional funds, if it becomes a necessity to do so. But on a more positive note, I would also like to report a little bit on the progress that we made in other areas of our business. Very interestingly, and most of you

4 probably have seen this: the recently held meeting of the Molecular Pathology in Austin, Texas, we were able to announce preliminary results from our bloodbased lung cancer products, which is based on a panel of two proprietary DNA methylation marker, most notably the SHOX2 and the PTGER4 marker. With this product we were able to show initial very high sensitivities and as an additional indication for this product we are looking into developing it for a follow-up of positively tested patients with lung cancer diagnosis suspicion. This confirmatory assay will allow to follow up on the large number of people that are expected to be inconclusively diagnosed by imaging methods, such as low-dose computer tomography. We think that it would be able to generate a very interesting alternative confirmatory assay to very few available products that are on the market right now. There are other clinical indications that are possible. We will look into these in the future. I would like to remind you that this work has been funded by a 2.8 million grant that the European Union has awarded to us earlier this year. Turning back into the initial discussion that we had around the ADMIT trial and the FDA discussion, as you know, and as we have recorded early this year, the ADMIT trial that we run since the FDA wanted us to show an increase compliance to colorectal cancer screening by offering a blood test, showed a very impressive demonstration of what can be achieved with the blood test in that close to 100% of the patients in the study that were offered a blood test basically completed colorectal cancer screening. However, at the same time, we also showed an extraordinary high level of participation in the comparator arm, which was (? 08:33) in chemical testing base, where 88% completed also an FIT test. We think that this is a very clear effect based on the study design. Since there was already the fear or the possibility that this could be the result of the study, we had introduced a third arm in this study, which we called a passive control arm, where we looked at the patient behaviour during the same time of the duration of the study to see what the regular uptake for standard of screening methods, either FIT or

5 colonoscopy would have been. We showed that less than 25% of the population that we ultimately enrolled completed a test if they were just part of their regular health care program. So it is quite clear and quite obvious that the high rate of compliance that we saw was driven by the efforts within the study, and now we will have to discuss with FDA how it will be possible to come up with a study design that will allow to show a high-level of compliance to blood-based testing without introducing a bias by having the rigour of a clinical study in which we have a full informed consent population that would be included in this. At this point it is probably premature to say, however, how we will be doing this. It is our goal to discuss the ideas that we have with the FDA in the very near future. We will be very clearly communicating to the market once we have reached agreement with the FDA on how we can make the point and how we can demonstrate that indeed what seems to be common sense, a blood-based test like Epi procolon should be able to drive more people into colorectal cancer screening and to make them compliant in order to achieve the goal of the American cancer society and many other US organisations. This is to have 80% of the US population screened by We remain convinced that the only way of doing this would be by offering additional testing methods. We are firmly convinced that blood-based testing with Epi procolon is one of very few methods that is available in order to make that a realistic goal. So, as I said in the beginning, we are committed to bring this product to the market, we see ways forward. We are encouraged by the fact that FDA actively looked for the dialogue with us; FDA seems to be having an interest in finding a way to making this an approvable product in their eyes, and we will be working collaboratively and closely with the FDA in order to reach that goal. With that, I would like to finish the brief presentation and open up the floor for any questions that you might have. Thank you very much.

6 11:22 Operator Ladies and gentlemen, if you would like to ask a question, please press 9* on your telephone keypad. In case you wish to cancel your question, please press 9* again. Please press 9* now to state your question. The first question comes from Simon Scholls from First Berlin. Please go ahead with your question. 11:50 Question Yes, good afternoon. You have talked about the encouraging third quarter sales performance in China. You have also talked about promising growth in terms of numbers of provinces, where you expect to see sales of 39 next year. I was wondering if you give any indication at all as to the sales uplift that you might expect in China next year? 12:22 Thomas Taapken Yes, thank you very much, Simon, for the question. I think at this point it is very speculative for us really to be able to make predictions. We rely on information that we get to BioChain. We have a very active dialogue with them. But even for BioChain, I think it is very difficult to really assess the likelihood and the timing of all these pricing and local regulatory approvals that seem to be necessary in order to be making sales in these different provinces in China. So while I think it is fair to say that the effort that they have put in 2015 has been fantastic and really very big. The question really will be: When will this pay off, and when we start seeing some more meaningful level of sales in China. If you compare this with other product launches in this field, I think it is fair to say that it is typically a period of months before we really see some noticeable growth in sales. It is our expectation that it is exactly what we will see

7 here. But, again, we cannot quantify at this point how much and how fast this growth will be looking like. 13:37 Question Ok, thanks very much. 13:44 Operator The next question comes from Anastasia Karpova from Kempen. 13:52 Anastasia Karpova, Kempen Good afternoon, one question if I may. In the response letter, have they suggested that the further or the approval would require a change in addressable population or in target population that you pursue with Epi procolon. Can you specify a little bit more what is the FDA thinking on an appropriate population? Because previously you were targeting first nine screening patients without any further research. 14:28 Thomas Taapken Thank you Anastasia for the question. In fact, it is not quite true that the FDA made any request of that nature in that response letter. In fact it was us when back in 2014 we had the panel meeting of the medical devices advisory committee taking place. When we based on the study design and the discussion in the panel, basically proposed to modify our label claim to those patients who have not completed or are not up to date for what you called to be first-line colorectal cancer screening, which today is colonoscopy and FIT testing in the United States. It was always our goal to target those 30 million in the United States that are not current for screening and that have received offers but never completed offers

8 to be screened. We think that that market is significantly enough for us to have a fair share of the market once we are approved. Also I think it is fair to say that from the beginning, any test that comes to the market cannot make the claim that they are able to replace colonoscopy, because colonoscopy not just have 100% performance by definition. But colonoscopy has, of course, this preventive element in the interventional element that makes it different from all other tests, because colonoscopy basically is the first step towards treatment. Therefore, every test that comes to the market would have to take a second line to colonoscopy from the onset. In order to be able to get first-line treatment like FIT did over a 50-year period, you have to show long-term utilisation data that would actually justify first-line treatment alternative positioning. Therefore, I think there has been no change with this letter. It has always been the case to look at those patients, and this is how it was planned actually to look at those patients that have been non-compliant with previous offers for screening. 16:30 Anastasia Karpova, Kempen Ok, thanks. Yes, thank you for taking my questions. 16:42 Operator The next question comes from Marietta Miemietz, equinet. Please, go ahead with your question. 16:52 Question A couple, please. The first is on Epi procolon in the US. I appreciate that it is always very difficult to predict what the FDA is going to do. But I am just trying

9 to understand very level. The only way to provide them with the reassurance that they are looking for in terms of appearance would probably be to do something very similar to the ADMIT study, but with a statistical analysis plan and primary endpoint chosen to reflect the very high participation rate in all arms in that type of environment. Would you say that this a fair assessment? Is there a risk that the coming study then would also be significantly beyond ADMIT just in terms of scope, i.e. that you might just need to enrol a very large number of patients to achieve statistical significance? The second thing is on Epi prolung. I was just wondering about potential next steps there and also financing requirements to push this product towards potential. Is it likely that you will await cash flow from Epi procolon in the US before taking this significantly further? Or do you think that the initial steps could actually be financed based on the current financing and with potential additional rights issues as you go back to the capital markets? Thank you very much. 18:21 Thomas Taapken Yes, thank you very much Marietta for your questions. To start with, Epi procolon in the US and the design of the study, I would not want to pre-end any discussions that we might want to have with the FDA this point in terms of that the study would look like. However, what we had in mind when we went to the FDA first and discussed the ADMIT design, it was a design where we would not actively enrol patients into a study like we had to do in ADMIT but find alternative ways to really if I may say this in a lament speech, to look at realised behaviour and how the product would be utilised in a true clinical setting. If you take that approach, I think it is quite obvious, almost intuitive that it should e possible to demonstrate that there is a possibility to grow the number of people that would choose to be screened if this additional alternative would be made available to them.

10 So it is really less a matter of repeating ADMIT with more people. That is certainly not going to be the goal. I don t think that would be actually desirable. I think it is really to find a design that would allow to mimic the real life situation in a better way almost as if the product would be approved already and then study clinical behaviour in real life. That is going to be the ultimate way to dissipate the FDA s fears that Epi procolon would only lead to replacement of first-line screening options and not to bring additional people to screening. I am quite convinced that there is protocols that are very doable that would actually allow us to do this. But I would not want to discuss them in detail before having had the conversation with the FDA on this. 20:09 Question That is very clear, thank you. 20:12 Thomas Taapken On the second question regarding Epi prolung: So, as I said, we have a 2.8 million grant from the European Union under the Horizon 2020 program. Here it is obvious that this grant is to develop the product to its end basically until we get the E-marking in Europe. That is what we will be pursuing for the next 12 months for the product in Europe. At the same time we are looking at additional clinical studies that we perform in order to generate peer-reviewed literature describing the inclusion of this test. I have also to make clear: at this point it is not a CE-marked test but really a research-use only test, which hasn t really gone through the rigour of an IBD development process with all the documentation. That is what is going to take the next 12 months to complete. But the data is already encouraging enough and the already generated clinical data supports these efforts and will help us in designing clinical trials for US regulatory approval. Here, you are right: Here we are going to be more careful, because this is not funded at this point. We will certainly wait with any significant steps towards US approval until we have

11 additional funding, potentially, for example, through Epi procolon revenues or other means. 21:37 Question Thank you very much. 21:41 Operator The next question comes from Bruce Jackson, Lake Street Capital Markets. Please, go ahead with your question. 21:47 Bruce Jackson, Lake Street Capital Markets Hi, thanks for taking my questions. In terms of getting the Epi prolung through the next year, what are the steps that are required in order to get the test ready for market? Can you confirm that you are expecting CE-mark by the end of 2016? 22:07 Thomas Taapken Thank you, Bruce. Yes, that is absolutely right: We want to complete the project and the CE-marking before the end of That is what was in the grant proposal, and I think that is a realistic timeline. In terms of what needs to be done: I think most of it really relates to it is really formal development steps. I think all the scientific work, the initial clinical work, has already been successfully completed. We will have to turn this research use produce by implementing a design freeze and starting the formal form of requirement for the CE-marking, all the necessary documentation, the manufacturing controls. Everything has to be put in an organised manner and completed according to the IBD directive in Europe. But also we want to make this in a way that would allow us to receive clearance in other countries, for

12 example like in the US. So, we will be clearly paying close attention to man affects under GNP and things like that. To implement this is what we will do the next 12 months. 23:16 Bruce Jackson, Lake Street Capital Markets Ok. Then moving over to the Epi procolon situation with the FDA: when do you think you might have a meeting scheduled with them to talk about the test? 23:31 Thomas Taapken Well, the way communication with the FDA works is that you have meetings, you have calls, and you have exchanges. We have initiated that process; we have scheduled initial meetings and calls. I hope you understand that we will not be communicating dates at this point, because sometimes you need to go back and clarify additional points with additional follow on telephone conferences. But I think it is clear that our goal would be that within the next few weeks we should have the necessary clarity to understand in detail FDA concerns, to understand what they would like us to do and to have hopefully already FDA to agree on some of the ideas that we have brought forward at this point. 24:17 Bruce Jackson, Lake Street Capital Markets Ok. Then with the convertible note holders that you have right now: How much cash would you raise if everybody converted their notes? 24:30 Thomas Taapken We would raise in the range of 5.5 million with all the outstanding notes at this point. However, given the recent share price development the notes are now

13 not in the money; so the conversion price is above the market price at this point. That is why I would be cautious in factoring in that money at this point. 24:55 Bruce Jackson, Lake Street Capital Markets Ok, thank you very much. 24:57 Thomas Taapken Thank you, Bruce. 25:00 Operator The next question comes from Brian Brookmeyer, Cantor Fitzgerald. Please, go ahead with your question. 25:08 Question Hi, good morning. What was the biggest issue the FDA had with the data that you submitted? Were they really focused on achieving that 8.2% margin over the FIT despite the uncommonly high FIT compliance in the study? 25:24 Thomas Taapken Well, I think there might be formal points like what you just mentioned. But I think beyond that their biggest concern was the fact that having a compliance as high as close to 90% for a FIT test is everything you find in the literature and is everything you find in real life situation. Actually, we have compiled a large list of what the typical compliance would be even in well-managed and tightly managed programs. We never get to numbers at this range. It is really something that can only be explained by either a design flaw in the study, which is what we sort of assume, is the case. But it can also be attributed to the fact that we might not have approached the right target population. Because if we

14 show that it is still possible to make many of them compliant, it is not really a non-compliant population as the FDA would want to see it. That is, of course, questionable. I think the biggest fear they have is a spill over effect from standard of care to a more convenient blood test. They want to make sure that that doesn t happen or if it happens it only happens in a situation, where ultimately more people get screened. That is what we have to find a way to demonstrate to the FDA. 26:43 Question You talked about expectations that you are going to try and design a study that would demonstrate a real-life setting. Would you expect the study to be much larger with thousands of patients to demonstrate the physical significance? 27:00 Thomas Taapken No. Again, I think in fact, what we would expect from the common sense perspective to be the difference in compliance between the stool test, for example, and a blood test, in a situation where it would be offered as part of a medical routine, we think the difference would be very much in favour to bloodtesting. We have done studies, as you know, for example, in Europe demonstrating that there is a clear preference for blood tests and even patients that would turn down screening offers. If offered a blood test, they would still go and do that. That is why I don t think that numbers is really the issue here. It is rather an issue of finding the right entry point, defining what is the right population to have in to this study and making sure that we find a design, where we don t have to bias study participants by telling them that they are going to be monitored, because that is really what kills this. If you tell somebody that you are doing a study in which their behaviour will be monitored, it is quite likely, and it is

15 actually well documented that is these kinds of settings people change their behaviour. That is something that we need to avoid. 28:09 Question Is the PMA still active? Will the additionally requested data be an amendment to the existing estimation? 28:18 Thomas Taapken Yes, that is correct. PMA is active; so that is why this was not a rejection. It was basically a request for additional data under the current PMA. 28:31 Question Ok. Lastly, are you expecting the timeline, given the time, particularly the requirements to try and design a study that is similar to the real world setting and then having to attract a number of patients, even if you are only talking about a similar size to the ADMIT study in the hundreds as opposed to in the thousands. Would you expect approximately another year to be required before you could even submit the amendment to the FDA? Or what sort of timeline are you thinking? 29:03 Thomas Taapken Well at this point we are very cautious in making any estimates on a timeline, because we don t really know what we are facing. It could be anything from a very light design, where we would basically observe something and basically record data rather than generate data in a controlled study to having to do a fully controlled study with IRB approval and other things. So that is why it is so difficult at this point to give you a clear view. Our goal is to be as fast as possible, and we think that if we would have to run ADMIT today

16 again, based on the experience that we gained, I think we could be fairly quick in doing that. But, it is fair to assume that easily six months go by. I think that it would be wrong to assume that it is much faster than six to nine months or so before we can complete a study no matter what study that is. 30:02 Question Ok, thank you very much. 30:09 Operator Ladies and gentlemen, if you would like to ask a question, please press 9* now. Mr. Taapken, there are no further questions. 30:35 Thomas Taapken Well, in this case, I would like to thank everybody for on-going support, everybody who was listening in today, for their insightful questions. As said, we will keep everybody and the markets informed as soon as we have a clear indication of what the next steps are. We are very appreciative of those shareholders who are committed to support us throughout the process. We are hoping that it will be possible to regain the confidence that we will be able to get this product approved in the United States. With that, I would like to close. Thank you everybody. If there are questions, like always, feel free to reach out directly to us. We would be happy to answer that. Thank you very much.