Vermillion Management Discusses Q2 2013 Results - Earnings Call Transcript

Aug.14.13 | About: Vermillion, Inc. (VRML)

Vermillion (NASDAQ:VRML)

Q2 2013 Earnings Call

August 14, 2013 4:30 pm ET

Executives

Thomas H. McLain - Chief Executive Officer and President

Eric J. Schoen - Chief Accounting Officer and Vice President of Finance

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 second quarter ended June 30, 2013. Joining us today are Thomas McLain, President and Chief Executive Officer of Vermillion; and Eric Schoen, the company's VP Finance and Chief Accounting Officer.

Following their remarks, we will open up the call for questions. Then before we conclude today's call, I'll provide the company's Safe Harbor statement and 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 August 28, 2013, starting later this evening via the link provided in today's press release, as well as on the company's website.

It's now my pleasure to turn the call over to Mr. McLain. Please go ahead, sir.

Thomas H. McLain

Thank you, Jason. Good afternoon, everyone, and thank you for joining us. On May's call, I outlined how 2013 begins a period of significant transition for Vermillion. There's a lot of work ahead and there are many challenges for companies in the diagnostics space. We look at this as a period of tremendous opportunity for companies that can anticipate change and adapt to change. We plan to capitalize on that opportunity. However, we are not realizing the full value of our novel diagnostic tests today. Our operational and strategic focus for 2013, 2014 and 2015 is on addressing 3 core drivers to realize that value. One, commercialization leadership. Rather than relying on our strategic partner, Quest Diagnostics, Vermillion will be the primary driver of the sales, marketing, practice guideline and reimbursement efforts needed to expand the use of OVA1 and our next generation diagnostic to improve patient outcomes. Two, expanding our customer base. Migrating the test to a global IVD testing platform will mean OVA1 can be available in more laboratory facilities in more regions around the world. And three, expanding our patient base. Launching a next-generation diagnostic with improved performance will allow Vermillion to pursue expanded indications. Our goal is to identify ovarian cancer earlier and further improve patient outcomes.

Before turning to our recent operational progress, I would like to ask Eric Schoen, our VP Finance and Chief Accounting Officer, to review our second quarter financial performance. Eric?

Eric J. Schoen

Thanks, Tom. Today, we filed our Form 10-Q with the Securities and Exchange Commission, as well as released our second 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 June 30, 2013, was $323,000 comprised of $210,000 from product sales of OVA1 and $113,000 from license revenue. Second quarter 2013 product revenue was derived from 4,184 OVA1 tests performed. This was consistent with the 4,150 tests performed in the year-ago quarter. Total revenue for the 6 months ended June 30, 2013 was $651,000, $424,000 from product sales of OVA1 and $227,000 from license revenue. OVA1 revenue in the first half 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 on 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 and 6 months ended June 30, 2013, were approximately $2.4 million and $5.3 million, respectively. Operating expenses included approximately $0.1 million of non-cash stock-based compensation expense in the second quarter and $0.2 million in the first half of 2013. This compares with operating expenses of $4 million and $6.4 million for the same 3- and 6-month periods in 2012. Operating expenses in the prior year included $0.4 million and $0.6 million of non-cash stock-based compensation expense in the same 3- and 6-month periods. Along with non-cash stock-based compensation changes, the year-over-year decrease was due primarily to start-up expenses for our post-marketing study in 2012 not being repeated in 2013 and lower sales and marketing costs due to lower average headcount.

Total net loss for the second quarter was approximately $2.1 million or $0.11 per share on weighted average shares outstanding of 19.6 million. Total net loss for the 6 months ended June 30, 2013, was approximately $4.7 million or $0.27 per share based on weighted average shares outstanding of $17.4 million. Our total shares outstanding at June 30, 2013, were 23.5 million. Cash and cash equivalents at June 30, 2013, were $16.4 million. The company utilized $1.7 million in cash in the second quarter, and we expect $1.8 million to $2.3 million of cash to be used in operations during the third quarter of 2013. In addition to the $11.8 million of net proceeds from our May 2013 private placement, we also received proceeds of approximately $524,000 from the exercise of stock options during the 3 months ended June 30, 2013.

Now I'll turn it back to Tom for a discussion on various corporate initiatives and operational matters.

Thomas H. McLain

Thanks, Eric. I'd like to begin by focusing on the initiative to take on the leadership role in commercializing OVA1. We are not satisfied with our current test volumes. During the second quarter, Quest reported approximately 4,200 tests run through their lab. That was a 34-test increase from the prior year, but it was a 90-test decrease from the first quarter of this year. We are taking steps to address underperformance. 2 major state territories were opened during the second quarter, and that reduced our OVA1 test volumes. We will continue to actively address performance issues in the field. But in understanding our sales performance, it is important to note that in the 14 states with active coverage from Vermillion's sales force, test sales increased year-over-year by 13% in the second quarter. That was despite some insurance coverage challenges I will describe shortly. We have more than 6,200 clinicians or accounts that have ordered OVA1 since its launch. And our base business of physician practices that have ordered consistently over the previous 9 months increased from 515 accounts in Q1 to 600 accounts as of June 30. We're also going back to the remaining 5,600 clinicians who have not consistently or routinely ordered OVA1 to address issues such as keeping OVA1 on their radar, addressing reimbursement questions or denials, answering technical questions or assisting them with access.

To help drive the success of our sales force, we know we need to offer the test through more laboratories, drive change in patient care through new medical society guidelines and expand insurance coverage. Our long-standing relationship with Quest Diagnostics was integral in developing OVA1 and driving its adoption. Their sales and coverage efforts helped to build our early success. However, the slow growth in test sales over the last 18 months demonstrated that with a specialty diagnostic like OVA1, Vermillion needs to play a more active role in the commercialization process and in changing physician practice. In May, we filed a notice of default under our exclusive commercialization agreement. The notice cited a number of material violations, breaches and failures to perform by Quest. The strategic alliance agreement states that if a party fails to cure material defaults within 90 days of the notice, the other party has the right to terminate the agreement. Quest has disputed our assertions. I am not able to provide more detail at this time. When this matter is resolved, we plan to offer the test through other reference and clinical labs, expanding the addressable market for OVA1 in the United States.

Turning to a positive development in the quarter, practice guidelines. The Society of Gynecologic Oncology, or SGO, is the professional society most specialized in standards of care for ovarian cancer patients. In May, SGO issued a new position statement on a 5-biomarker test, Vermillion's OVA1. Over the last 18 months, we have significantly expanded the body of peer-reviewed evidence demonstrating the clinical utility for OVA1. The SGO statement references are 2 clinical validation studies published in Obstetrics & Gynecology in 2011 and in the February 2013 edition of Gynecologic Oncology. The statement also references OVA1 in the context of current American Congress of Obstetricians and Gynecologists, or ACOG, practice guidelines. Under ACOG's current guidelines for detection of early-stage ovarian cancer, CA125 is being used off-label to predict malignancy before surgery. Our clinical studies have clearly demonstrated CA125's inferior sensitivity when compared to OVA1's five biomarker approach. Building on that foundation, we are using subset analysis from these 2 clinical trials to answer questions about the impact of OVA1 on clinical practice. Together, the 2 studies include over 1,000 surgeries collected at 44 centers across the U.S. and over 250 malignancies. 3 follow-on manuscripts are in process. And they are important in extending the statistical conclusions from our clinical studies to present targeted support for the clinical utility of OVA1. 2 of the follow-on studies were presented at the Annual Meeting of the Western Association of Gynecologic Oncologists in Seattle in June. One study predicts that referral patterns and medical practice economics will not be adversely impacted by incorporating OVA1 into the care for patients with adnexal mass requiring such surgery. The second study predicts significant improvement in referring early-stage Ovarian cancer patients to specialists for their surgery and treatment. Because these manuscripts have been submitted for peer-reviewed publication, we cannot review the detailed results from the studies at this time. With the SGO statement issued in June, we have turned our focus to the ACOG and NCCN, or National Comprehensive Cancer Network. ACOG represents over 35,000 primary gynecology caregivers across the U.S., and NCCN represents 23 of the nation's leading cancer care facilities. As I indicated previously, the ACOG guideline still is CA125 as the biomarker of choice in assessing pre-surgical ovarian cancer risk. That is despite CA125 missing about half of early-stage cancers and 20% of late-stage cancers. Their current guideline was issued jointly with SGO, and is timed for reconsideration this fall or next spring. We reviewed the SGO statement and our expanded body of clinical study evidence with ACOG during the second quarter. And we will provide additional information to support their reconsideration of care improvements for these patients, as requested. We have been informed by ACOG that their review process could take 18 months. NCCN will hold an ovarian cancer panel meeting during the fourth quarter. We will submit new evidence on OVA1 utility, including the OVA500 study, the Bristow ovarian cancer treatment standard study, the subset analysis and the SGO statement. We will request urgent action to improve the documented low adherence to NCCN standards of care through the appropriate use of OVA1. Again, the key change is to disallow CA125 as a pre-surgical test to rule out ovarian cancer in favor of tests cleared by the FDA expressly for this purpose. Changing physician practice guidelines is a challenging and time-consuming process. While the burden of evidence is high for a change in these guidelines, we believe the published data cited by SGO and a new subset analysis submitted for publication fully support making this improvement in care. We will update you as the progress unfolds.

Let me now turn to an area of challenge in the quarter, coverage decisions and test reimbursement. Vermillion spent the last 18 months compiling a large database demonstrating the clinical performance of OVA1. We have the data to demonstrate clinical benefits. We are now focused on compiling the outcome, economic and healthcare efficiency data that is becoming integral to expanding private insurance coverage for innovative diagnostic tests. We were disappointed by a development with Blue Cross Blue Shield in the second quarter. In April, the Technology Evaluation Center or TEC of BCBS published the statement categorizing OVA1 as experimental investigational. Prior to this, we had received favorable coverage decisions from 27 BCBS plans based in part on positive assessment from the association's medical policy panel in both 2010 and 2011. Based on the TEC assessment, 10 BCBS plans have reversed their coverage decisions for OVA1. That has reduced the number of covered lives by 14 million. This did not have any impact on OVA1 test volume in Q2. Let me be clear, we do not take this BCBS development lightly, but our experience supports an expectation that our cumulative efforts to increase test volumes will more than offset any negative impact from the TEC assessment. Further, we believe the TEC assessment is flawed and can be reversed based on multiple points. Most notably, the TEC assessment was conducted during 2012. It does not consider the OVA500 study published in February 2013, the updated SGO statement on the use of OVA1 issued in May 2013 or a large clinical study led by Dr. Robert Bristow, documenting widespread flaws in the care of women with ovarian cancer that can be addressed in part with the use of OVA1. We are taking the steps needed to maintain those plans that have established coverage and to overturn those Blue Cross Blue Shield plan decisions that have stopped coverage of OVA1. We are actively engaging with BCBS plans that still maintain those favorable decisions. We are providing the peer-reviewed studies that have been published since 2012, and we will request that TEC rescind its April 2013 decision on OVA1. When Quest provides us with information, we are also actively appealing any decision where coverage for OVA1 is denied. And we have an aggressive stream of publications over the upcoming months and will provide this additional data to BCBS plans, to TEC. And we expect to see the positive impact of these steps over the next 9 to 12 months, and we'll provide updates on our progress. We are also actively pursuing other private payor coverage decisions. To support our success with those efforts, we have initiated the development of outcome and economic study data for OVA1. We signed a cooperative research and development agreement with the U.S. Army Medical Research and Material Command to assess health and economic benefits of OVA1. That agreement and other collaborations under development will provide economic outcome and health efficiency data needed to drive success with national payors, and to overcome the BCBS-TEC decision.

Next, focusing on the annual Medicare national rate setting process. There have been numerous meetings, articles and analyst reports regarding the CMS process for reimbursement for molecular diagnostic tests, including clinical lab fee schedule reductions for basic laboratory services. There is growing concern that these codes will be cross-walked by CMS to their individual components. And in the case of the MAAA codes, there will be no recognition for the algorithmic portion of the test. As you may recall, in the 2012 process, the preliminary CMS recommendation for all MAAAs including OVA1 was cross-walked. In part, through our follow-up efforts, including KOL comments, input from professional societies, members of Congress and others, that blanket decision was reversed to consider each product on its own merits. Consequently, we again presented at the clinical lab fee schedule meeting in July, arguing for gap-fill pricing for OVA1. Nevertheless, we've been advised that CMS will, again, suggest a crosswalk methodology for all MAAAs in their preliminary decision due in early September. Our follow-up efforts will be patterned after our 2012 success, and we expect CMS will ultimately recommend gap-fill for OVA1. Based on the evidence supporting OVA1, gap-fill is the only appropriate rationale for reimbursement.

To summarize where we are today with coverage, factoring in plans potentially impacted by the TEC decision, there are currently 17 independent Blue Cross Blue Shield plans representing approximately 32.8 million lives which provide coverage for OVA1. After including Medicare and other private payors, approximately 80.7 million patients have access to and coverage for OVA1.

Turning now to our second strategic initiative, to expand our customer base through the relaunch of OVA1 on major automated platforms, we will migrate our test to automated clinical platforms that provide ready access to a large installed base of their customers in cancer care hospitals and reference labs throughout the United States. In addition, these platforms are available worldwide and open up global opportunities for the commercialization of OVA1 through distributor and commercialization partners. We have evaluated the 4 major IVD platforms. Our plan is to migrate the OVA1 algorithm to 1 or 2 of these platforms initially using their existing reagents with a revised version of our OvaCalc software. We are executing the initial stages of this project with our collaborators at Johns Hopkins. This effort will significantly ramp up in the fourth quarter. Our roadmap of program milestones is dependent on our technical progress in the third quarter and our pre-submission meeting with the FDA. Key steps are the adaptation and optimization of the OVA1 algorithm to the new platform and the completion of validation studies. In that pre-submission meeting with the FDA, we will present our validation and 510(k) submission plans. While we cannot predict with certainty, we will propose using OVA500 study samples to evaluate concordance between our current platform and the optimized algorithm for new platforms. As you may recall, the OVA500 study published in February assessed OVA1 clinical performance in a cohort of about 500 adnexal surgery patients enrolled from non-gynecologic oncology physicians. And of course, the 510(k) submission will also include comparisons of sensitivity and PV and other analytical claims to the original OVA1 submission. Based on current planning estimates, we target a commercial launch by early 2015. We plan to announce additional milestones, including the selection of 2 or more external validation partners and the publication of validation results as they become available. In future calls, we will keep you updated on this important program as it progresses.

Finally, I want to briefly update you on our third strategic initiative, to expand the patient base addressed with our ovarian cancer diagnostic tests. The development of a second-generation biomarker panel will support eventual peak adoption as the triage test of choice and will also set the stage for pursuing additional diagnostic claims. To advance this goal, we presented proof of concept work in a poster by Dr. Zhen Zhang, Johns Hopkins University and coworkers, at the Annual Meeting of the American Society for Clinical Oncology, or ASCO. Our collaboration work targets the identification of markers, then they complement existing OVA1 biomarkers to improve specificity and positive predictive value. The studies identified a set of 5 biomarkers, CA125, prealbumin, IGFBP-2, IL-6 and FSH, which optimally reduce false positives among a targeted set of OVA1-positive benign patients. This proof-of-concept panel was then tested in a 50-50 cross-validation strategy against the sampling of OVA500 study patients. At a fixed sensitivity of 90%, the median improvement in specificity over the current OVA1 panel was about 20% using the proof-of-concept markers. These results demonstrate that we have the technology to significantly improve specificity over that of the first-generation OVA1 algorithm while maintaining a high sensitivity in pre-surgical assessment of adnexal masses for risk of malignancy. This work will be submitted to a peer-reviewed journal for publication later this year or early in 2014. In addition, these new discoveries are also included in patent filings that will further expand and strengthen claims, which support our ovarian cancer franchise beyond OVA1. Our next steps are to evaluate options for development and launch of an improved specificity, next-generation OVA product. This may or may not utilize the proof-of-concept biomarkers, as we are analyzing certain fast-track options that could accelerate the program. Briefly, a fast-track option would involve the use of all FDA-cleared kits. This strategy takes advantage of the superior strength such kits have in manufacturing robustness and quality engineering. Under ideal circumstances, this might enable a next-gen, 510(k) submission as early as year-end 2015. We will update you on these -- as these efforts unfold.

In closing, Vermillion, like all innovative diagnostic companies, faces many challenges. Success will be hard-earned, and we expect setbacks along the way. The recent TEC statement highlighted that for Vermillion. But we are confident because of the strong foundation to support our commercial franchise. OVA1 filled an important gap in the care of women with ovarian cancer. We have been through the 510(k) process successfully with OVA1. We have a significant and expanding body of peer-reviewed data that supports the clinical utility of our test. We have statement support for the Society of Gynecologic Oncology. We have a Category 1 CPT code. We are initiating high-profile collaborations to generate economic and patient outcome study data. We have a strong collaboration with Johns Hopkins' Biomarker Discovery Center to develop next-generation diagnostics. But most important of all, since its launch in 2010, clinical experience has demonstrated that OVA1 delivers unique value, value in terms of patient outcomes and helping to save lives, value in reducing the cost of care and value in improving healthcare efficiency.

Jason, that concludes our remarks, and we're ready for questions.

Question-and-Answer Session

Operator

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

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

So Tom, when you mentioned, regarding the Quest situation, when the matter is resolved you plan to offer the test to other vendors. When do you expect some kind of resolution here? What is the level of partner interest should the exclusivity with Quest no longer hold? And would Quest still perform the test at the Chantilly facility right now?

Thomas H. McLain

Debjit, thanks for the question. First of all, I want to make clear that it is business as usual with Quest. Quest continues to provide testing services through Chantilly. All of the commercial relationship is intact. Both parties are continuing to perform under the terms of the agreement. Obviously, it's important for Vermillion to resolve the issues as soon as we can because of the 90-day timing, because of the nature of the discussions with Quest. Unfortunately, I'm not able to give you any more guidance on the timing at this time. When we can offer the test to other reference labs, we believe there will be strong interest in the OVA1 test. It has advantages over the other tests that are available today. And we're confident that we will be able to expand the market for OVA1 tests with the addition of other reference laboratories and hospital laboratories.

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

So I understand you can't disclose much, but during the negotiations with Quest right now, is the economics of the partnership in question? Or it's just purely based on the lack of comprehensive support from Quest?

Thomas H. McLain

So under the agreement, the economic terms of the Quest were not a condition for default. So anything that we've communicated with Quest relates to performance under the agreement.

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

Now given the challenges with CMS, does it make sense to pursue OVA2 using the FDA route as opposed to having a lab developed on a patient paid test to start with?

Thomas H. McLain

Certainly, as we bring forward a next-generation diagnostic, a new panel of biomarkers, we will look at all options along the way. Donald, do you want to comment further on that?

Donald G. Munroe

Yes. I guess, what I would add is that the CMS makes pricing decisions not only about FDA-approved tests, but about lab-developed tests as well. And so we clearly need to continue to pursue our avenues in terms of substantiating the value and publishing further studies to prove the value.

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

For the second quarter, has the transition taken into effect in terms of Vermillion sales reps being the primary driver? And if so, I mean what fraction was the direct Vermillion sales effort versus Quest?

Thomas H. McLain

Certainly, in the 14 states where Vermillion reps are active, we believe our reps have been the primary drivers of sales. There are opportunities where Quest reps have supported some of that effort. And Bill Creech, who's with me, can provide more color on that, Debjit.

William Creech

Debjit, we've transitioned pretty much to being the primary commercial driver, especially in those 14 states. We have various levels of support from the Quest reps. So that has some positive impact in that area as well.

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

And one final question, in terms of the test performed, I mean what fraction was this repeat customers versus say, de novo growth?

William Creech

It's an increase. I believe, in the first quarter, it was around 60%. And that has increased nicely during the second quarter. I don't have those numbers right in front of me. But both -- the number of base accounts, as Tom pointed out, and the volume have both increased.

Operator

[Operator Instructions] And there appears to be no further questions at this time. This concludes our question-and-answer session. I would now like to turn the call back over to you, Mr. McLain. Please proceed.

Thomas H. McLain

Okay. Well, thank you very much, Jason. In closing and on behalf of the management team here with me, we appreciate your interest in the company. We look forward to continuing to provide our pioneering diagnostics and building value for you as shareholders. Have a good rest of the day. Thank you.

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 managements 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, the competitive environment, the speed of market adoption, changes in government regulations, payor reimbursement, relationships with our strategic partners and other factors as described in Vermillion's 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 August 28, starting later this evening via the link provided in today's press release, as well as available in the Investors Section of the company's website.

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

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