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Vermillion (NASDAQ:VRML)

Q1 2013 Earnings Call

May 15, 2013 4:30 pm ET

Executives

Thomas H. McLain - Chief Executive Officer and President

Eric J. Schoen - Chief Accounting Officer

Donald G. Munroe - Chief Scientific Officer, Senior Vice President of Business Development and Member of Scientific Advisory Board

William Creech - Vice President of Sales & Marketing

Analysts

Debjit Chattopadhyay - Emerging Growth Equities, Ltd., Research Division

Operator

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Vermillion's first quarter ended March 31, 2013. Joining us today are Thomas McLain, President and Chief Executive Officer of Vermillion; and Eric Schoen, the company's Chief Accounting Officer.

Following their remarks, we will open up the call for your questions. Then before we conclude today's call, I'll provide the company's Safe Harbor statement with important cautions regarding forward-looking statements made during this call.

Before we begin, I would like to remind everyone that this call is being recorded and will be available for replay through May 29, 2013, starting later this evening via the link provided in today's press release, as well as on the company's website.

Now I would like to turn the call over to Mr. McLain.

Thomas H. McLain

Thank you, Lindsay. Good afternoon, everyone, and thank you for joining us. It's good to have this opportunity to speak to all of you for the first time as Vermillion's CEO. I am very pleased to be the newest member of the team here, and I'm at Vermillion because I'm confident that we can build a sustainable business that makes a real difference for women with gynecological cancers and related health issues and deliver long-term value for our investors.

On Monday, we closed on a significant financing transaction for the company. The combination of stock and warrants can fully fund the execution of our 2013 to 2015 strategic plan. The investors have experience and a proven record in diagnostics, and they are committed to Vermillion's success.

There is a lot of work ahead. We will commit the resources that are required to achieve our goals, and we will keep you informed about our progress and challenges along the way.

On today's call, we will focus on our financial results, review our recent financing transaction and outline our strategic plan objectives.

To kick things off, I would like to ask Eric Schoen, our Chief Accounting Officer, to review our first quarter financial performance and the financing transaction that closed earlier this week. Eric?

Eric J. Schoen

Thanks, Tom. Today, we filed our Form 10-Q with the Securities and Exchange Commission, as well as released our first quarter financial results in a press release. Both of these will be available for download via the Investors section of our website at www.vermillion.com.

Total revenue for the 3 months ended March 31, 2013, was $328,000, comprised of $214,000 from product sales of OVA1 and $114,000 from license revenue.

First quarter 2013 product revenue was derived from 4,274 OVA1 tests performed. This was an 8% increase from the 3,952 OVA1 tests performed in the year-ago quarter.

OVA1 revenue in the first quarter of 2013 included only the $50 fixed portion of revenue per test from the OVA1 tests performed. The OVA1 product revenue in both periods does not include the additional royalty component of revenue based upon 33% of Quest Diagnostics' gross margin. The company recognizes this portion of revenue when reported by Quest Diagnostics via an annual true-up after the end of the calendar year. This is based on reimbursed and unreimbursed tests for which Quest Diagnostics considers the payment status as final. For the full year of 2012, the true-up provided $816,000 in revenue to Vermillion or an additional $60 per test reported.

Operating expenses for the 3 months ended March 31, 2013, were approximately $2.9 million. Operating expenses included approximately $180,000 of noncash stock-based compensation expense. This compares with operating expenses of $2.4 million for the same 3-month period in 2012. Operating expenses in the prior year included $140,000 of noncash stock-based compensation expense. The year-over-year increase was due primarily to onetime items, including costs related to our delayed 2012 annual shareholder meeting, which was held in March 2013, our proxy contest and the CEO transition, partially offset by lower sales and marketing costs. Net loss for the first quarter was approximately $2.6 million or $0.17 per share on weighted average shares outstanding of 15.2 million. This compares to a net loss of $1.8 million or $0.12 per share in the first quarter of 2012 on weighted average shares of 14.9 million.

Cash and cash equivalents at March 31, 2013, were $5.8 million. The company utilized $2.2 million in cash in the first quarter, and we expect $2 million to $2.5 million of cash to be utilized during the second quarter of 2013.

We are also increasing our guidance in regards to cash-based operating expenses for the full year 2013 to between $12 million and $13 million. This in comparison to the $9.5 million to $10 million guidance previously provided, as we intend to utilize proceeds from our recently completed private placement to accelerate our research, clinical and commercialization programs.

In the private placement, we sold 8 million shares of common stock and issued warrants exercisable for an additional 12.5 million shares of common stock. Gross proceeds of the private placement totaled approximately $13.2 million, with net proceeds totaling approximately $11.8 million after anticipated offering expenses. The warrants are exercisable at the election of the holder at an exercise price of $1.46 per share. If the warrants are exercised, Vermillion has the potential to realize up to an additional $18.3 million in proceeds, which would bring the total investment to $31.5 million before transaction costs. Following the private placement, we have approximately $16.6 million in cash and equivalents. This is after payment of all but approximately $100,000 of expected operating expenses.

Now I'd like to turn it back to Tom for a discussion on various corporate initiatives.

Thomas H. McLain

Thank you, Eric. One of the main reasons I joined Vermillion was the opportunity to make a difference in the care and outcomes for women with ovarian cancer. This is a disease that too often results in death. The challenges these women face were made clear in a front-page New York Times article published on March 11. It was titled, Widespread Flaws in Ovarian Cancer Treatment. This article summarized results from a study presented at the SGO annual meeting in March. This study reported that 2/3 of women with ovarian cancer received inappropriate care, and to quote, "missed out on treatments that could add a year or more to their lives." Only 37% of the roughly 13,000 ovarian cancer patients included between 1999 and 2006 were given the NCCN recommended standard of care. Most were treated by doctors in hospitals that lacked expertise in the complex surgery and chemotherapy that can change outcomes or prolong the lives of these women.

Quoting the principal investigator, Dr. Robert Bristow, "If we could just make sure that women get the people who are trained to take care of them, the impact would be much greater than that of any new chemotherapy drug or biological agent." That is why OVA1 was developed, to improve the identification of women who need to be treated by a gyneoncologist. This opportunity to make a real difference motivates the team at Vermillion to work hard every day.

To accomplish that goal, we need to run a successful business, and we need to generate a return for our investors. As Eric indicated, we now have the funding to drive forward on our plans. I'd like to briefly cover where we are, our key operational objectives for 2013 and '14 and our longer-term strategic goals.

First, on operations. Vermillion has positioned OVA1 for success in the market. That includes an FDA approval, a Category 1 CPT code, intellectual property, 2 large clinical studies. Our operational focus in 2013 and '14 will be on improving commercialization results for OVA1 on treatment guidelines and on national insurance coverage. This will not only generate and improve cash return for the company, it will also help in building the value of the OVA1 and Vermillion brands.

Turning first to guidelines and coverage. Achieving these goals requires a steady flow of economic and clinical study data documenting the costs and outcome benefits of our product and how it fits into the patient care model. As an example of this effort, in April, we announced the initiation of a study focused on health economics and OVA1's use in managed care organizations. We signed a cooperative research and development agreement, or CRADA, with the U.S. Army Medical Research and Materiel Command to study the potential for OVA1 to deliver significant health and economic benefits across a large managed care organization. Building on this model, we plan to undertake additional health economics and outcome studies to further document the value OVA1 brings to the management of ovarian surgery patients.

We continued to provide input into key medical societies such as the Society of Gynecologic Oncology, the American College of Obstetricians and Gynecologists and the National Comprehensive Cancer Network. These targeted outreach efforts are designed to build recognition of the importance of OVA1 as a standard of care in the diagnosis and treatment of women with ovarian cancer. In our view, the OVA500 study published in February is a critical new clinical proof source, which these organizations should consider incorporating into updated physician statements or practice guidelines.

Our message is concise and direct: OVA1 should replace the off-label usage of CA125 for pre-surgical triage of ovarian masses.

Reimbursement is another key focus area. OVA1 is in the process for the setting of a national payment rate by CMS this year. The test was granted a Category 1 CPT code in 2012. After Vermillion provided input at a clinical lab fee scheduled public hearing last year, CMS allowed our request to use a gap-fill process. This recognized the value of the OVA1 algorithm. Many other protein-based tests are subject to a crosswalk process based on their immunoassay components.

During that same hearing, Vermillion cited 2 established benchmarks for pricing of the OVA1 CPT code. Those benchmarks were the existing Medicare rate of $516 and the Department of Defense price of $650. We have since provided additional data and analysis inputs as evidence for setting the gap-fill rate.

The process follows a fixed calendar, which includes a comment period and expected publication of the CMS rate this November. We have provided a strong evidence-based rationale to support a favorable gap-fill rate, and we'll proactively monitor and offer input as the process unfolds.

Before I leave this topic, I'd like to clear up confusion as to whether recent changes in molecular pathology coding might impact OVA1. While molecular diagnostic testing, code stacking and rate-setting by CMS has been the subject of much controversy, it has nothing to do with OVA1 rate-setting. Molecular diagnostic tests fall under a Tier 1 and Tier 2 molecular diagnostics scheme, while OVA1, as a proteomics-based algorithm falls under a separate class of diagnostics called MAAA or Multianalyte Assays with Algorithmic Analyses. Our gap-fill process should proceed just as I outlined independently of any new developments in molecular diagnostics rate-setting policies.

In 2013, we've also added reimbursement staff to assist patients and physicians in resolving adverse coverage decisions. This is good for patients and good for our revenue per test. Improved coverage decisions this year will also help drive usage in 2014. We expect to hire additional staff over the next 12 months to facilitate a higher level of communication, activity and results in key national and regional payers.

In summary, guidelines and national payers are among the most important and most challenging commercialization milestones for a diagnostic company to achieve. At Vermillion, we know what is required to be successful. Our focus is on generating clinical and economic studies supporting OVA1 use. We will continue working proactively with medical associations and insurance providers to make the test available to the patients who need it.

I would like to turn now to sales execution. We have learned a lot from our partnership with Quest to commercialize OVA1. As a high-value diagnostic, retaining current users and expanding into new accounts requires a specialty sales skill set. Coverage is also a significant factor in driving increased use of the test. That is not core to a high-volume reference laboratory business model. For that reason, Vermillion has decided to take on a major role in OVA1 commercialization efforts.

In 2013 and 2014, we are approaching the market as the primary sales driver. As part of this change in approach, we're using historical sales data to realign our sales territories and target expansion opportunities where we have the following: Favorable coverage, a significant population and repeat testing with OVA1. These efforts will be ongoing and target growth in test sales for the full year, and again, in 2014.

Our analysis of physician level data indicates we have a base of 515 accounts that order OVA1 on a routine basis. That is 4 or more times per year. They account for 61% of our sales volume. Our 2013 sales efforts are focused on assuring test levels in these accounts are maintained or increased, solidifying that business for the long term. In the first quarter, we also added 362 new accounts.

Now I would like to turn to our plan to build long-term investor value. We are focused on 2 areas of opportunity for our ovarian cancer franchise: Growing our customer base and expanding our addressable patient base.

We plan to grow our customer base by migrating the OVA1 test to a widely available, automated clinical testing platform. Currently, the test is run on 2 older platforms with limited availability. This project will expand access to the test to more facilities and hospitals across the U.S. market. It is designed to also provide a scalable and reliable way to deliver OVA1 to non-U.S. markets together with suitable commercialization partners. To be successful, we will need to perform validation studies, file and obtain FDA clearance, and launch on the new platform. We target completion by the end of 2014.

We are also engaged in developing a next-generation ovarian cancer diagnostic for launch by the end of 2015. Working with our partners at Johns Hopkins Center for Biomarker Discovery Research, we are developing a test combining the high sensitivity and negative predictive value of OVA1 with a substantial improvement in specificity.

Later this month, our partners will present proof of concept work at ASCO in Chicago. We will follow that up with a focused accelerated program to develop and commercialize a gen 2 test. In parallel, we have initiated customer input on a product profile and potential labeling of an expanded use product.

In closing, our recent financing will allow the team at Vermillion to execute a focused sales and marketing plan in 2013 and 2014, growing the market for OVA1 and expanding coverage. Our goals are to generate more cash from operations and to build value in the OVA1 and Vermillion brands.

We will also drive 2 strategic programs to build long-term value for our investors by growing our customer base and expanding our addressable patient base.

As a company, we are committed to delivering diagnostic tests that will improve patient outcomes in gynecologic cancer and women's health. As I said at the start of our call today, there is a lot of work ahead. We will commit the resources that are required to achieve our goals, and we will keep you informed about our progress and challenges along the way.

This concludes our remarks, and we're ready for questions. Lindsay, please provide the appropriate instructions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Debjit Chattopadhyay with Emerging Growth Equities.

Debjit Chattopadhyay - Emerging Growth Equities, Ltd., Research Division

I was just wondering, have you had any recent dialogue with your partner to kind of push forward with OVA1 test growth despite -- I mean, I understand that you're taking over as a primary sales driver, but the $1 million in dispute and any recent discussions to kind of -- to regain the rights to OVA1 again?

Thomas H. McLain

Quest Diagnostics is our key partner, so we're in constant dialogue with them at an operational level, and we also are in discussions with them on a strategic level. So yes, we are. There's nothing at this point, though, that we can comment on as far as the strategic discussions, Debjit.

Debjit Chattopadhyay - Emerging Growth Equities, Ltd., Research Division

Now how confident are you regarding your statement or guideline change from SGO in favor of OVA1 sometime in the second half of this year?

Thomas H. McLain

As you know and as everyone appreciates, guideline changes statements are something that a company needs to spend a great deal of effort on -- in substantiating the evidence for making those changes. On the actual timing of those changes, when they can happen, that's up to the organizations themselves. So it would be difficult for us to project with certainty any specific dates by which those changes would be made. With that said, as I indicated in my remarks, we believe that the OVA500 study is a data set and a result that changes the dynamic here. And we believe that it is very important for changes to occur so that the OVA1 test can be used to help guide the treatment decisions for women who have ovarian masses.

Debjit Chattopadhyay - Emerging Growth Equities, Ltd., Research Division

You haven't provided any guidance regarding estimated test volumes for the second quarter. Is there kind of a strategy behind it or it's too early in as you take over the primary responsibility from Quest in terms of marketing the product?

Thomas H. McLain

Yes. I think in exactly what I talked about that we are looking fundamentally at the way we're approaching the market, the structure of our sales force, and we are making adjustments to that. So in the short term, there may be some territories that are opened up. And as we shift the emphasis to territories that are higher potential, we'll begin to see the results from that as we get closer to the end of the year. So at this point, it would be difficult to provide second quarter guidance.

Debjit Chattopadhyay - Emerging Growth Equities, Ltd., Research Division

Now as you upgrade to the new platform, are there incremental data points that we should be tracking or it's going to be pretty much end of 2014 to move to a fully automated platform? Or do you see OVA1 being marketed by potential other partners not in a fully automated platform before the end of next year?

Thomas H. McLain

I think on the project plan itself, that's something that Donald Munroe has developed. So I'm going to let him address what the timing and milestones are, Debjit.

Donald G. Munroe

Yes. I mean, clearly, we have more than one choice of excellent platforms that have market share and availability of OVA1 markers. Really, since the markers in some cases are already available, it's a matter of optimizing the algorithm and then producing the validation data and the package for submission to the FDA. And so we see that that's very doable in the timeframe that we've articulated. As to any other tactical interim placements, maybe I should leave it to Bill to see if he has any comments on that.

William Creech

We're moving forward on a plan to broaden the commercialization, and we'll give you more details in upcoming calls.

Debjit Chattopadhyay - Emerging Growth Equities, Ltd., Research Division

One last question before I hop on. In terms of OVA2, have you thought about pricing at this point? Or is it just too early to even speculate your pricing given these significant advantages OVA2 would have over anything that's available or will be available in the foreseeable future?

Thomas H. McLain

The decision on pricing for OVA2 really depends on the profile of the product, how it performs in clinical studies and the targeted indications. So until we have that data, it would be difficult for us to project a price point. But certainly, when we look at that opportunity, we will look to match the price with the benefit that it brings to both cost of care and patient outcomes.

Operator

[Operator Instructions] [indiscernible] I would now turn the call back over to Mr. McLain.

Thomas H. McLain

Thank you very much, Lindsay. In closing and on behalf of our management team, we appreciate your interest in Vermillion. We look forward to updating you on our progress and building value for you as our shareholders. Thank you very much.

Operator

Before we conclude today's call, I would like to take a moment to read the company's Safe Harbor statement. Some of the commentary and answers to today's questions may contain forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements. Vermillion is providing this information as of the date of this conference call and does not undertake any obligation to update any forward-looking statements contained on this call as a result of new information, future events or otherwise.

Forward-looking statements reflect management's current estimates, projections, expectations or beliefs, and involve risks and uncertainties that could cause actual results and outcomes to be materially different. Risks and uncertainties that may affect the future results of the company include, but are not limited to, a competitive environment, the speed of market adoption, changes in government regulations, payer reimbursement, relationships with our strategic partners and other factors as described in the Vermillion 2012 Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

Now again, I would like to remind everyone that this call will be available for replay through May 29 starting later this evening via the link provided in today's press release, as well as available in the Investors section on the company's website.

Thank you, ladies and gentlemen, for joining us today for our presentation. You may now disconnect.

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