Vermillion's CEO Discusses Q3 2013 Results - Earnings Call Transcript

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

Vermillion, Inc. (NASDAQ:VRML)

Q3 2013 Earnings Conference Call

November 14, 2013 04:30 PM ET

Executives

Thomas McLain – President and CEO

Eric Schoen – VP, Finance and CAO

Donald Munroe – VP, Research & Development

Analysts

Debjit Chattopadhyay - Emerging Growth Equities

Operator

Good afternoon, everyone, and thank you for participating in today's conference call to discuss results from Vermillion's Third Quarter ended September 30, 2013. Joining us today are Thomas McLain, President and Chief Executive Officer of Vermillion; and Eric Schoen, the Company's Vice President of Finance and 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 November 28, 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 McLain

Thank you, Dave. As we’ve discussed on our previously investor calls, 2013 is a significant year of transition for Vermillion. The opportunity for our ovarian cancer diagnostic test is significant but there is a lot we need to accomplish and the business and environmental uncertainty and risks are also significant for innovative diagnostic companies like us.

Vermillion though had several advantages it can leverage during this transition period. We’ve developed the first FDA cleared multivariate diagnostic test using biomarkers in collaboration with Johns Hopkins and M.D. Anderson. The AMA recognized our innovation and market approach with one of the first Category 1 CPT codes for MAAA test reimbursement. And SGO acknowledged the value of our expanding clinical trial evidence and publications with a new statement in May 2013.

OVA1 addresses a critical decision in the care for women with an ovarian mass that must be removed surgically. With its high negative predictive value, OVA1 improves patient care by helping gynecologists and general surgeons assure they operate on ovarian masses that are highly likely to be benign. With its high sensitivity for all stages and all forms of ovarian cancer, OVA1 also helps the generalist assure that for the 25% of ovarian cancers and the 50% of early stage ovarian cancers missed today that he or she consults with a gynecologic oncologist before surgery, in accordance with NCCN guidelines and SGO’s ovarian cancer care model. The combination of these factors differentiates OVA1 from any other ovarian cancer diagnostic test or procedure.

Focusing on three key drivers that will increase the value of our Company is essential for us to be successful in improving the care for women with gynecologic cancers. These core strategic business initiatives will also build long term value for our investors. They are first, taking the leadership role in commercializing our diagnostic test; second, expanding our customer base by migrating OVA1 to a test platform that is available globally for launch in 2015; and third, expanding our patient base by launching a next generation ovarian cancer test to monitor at risk patients for launch in 2016.

On today’s call, we will review our third quarter financial performance, update you on our commercialization efforts and focus in more detail on the platform migration initiative. To start I would like to ask Eric Schoen, our VP, Finance and Chief Accounting Officer to review our third quarter financial performance. Eric?

Eric Schoen

Thanks Tom. Today we filed our Form 10-Q with the Securities and Exchange Commission, as well as released our third 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 three months ended September 30, 2013 was $330,000, comprised of $216,000 from product sales of OVA1 and $114,000 from license revenue. Third quarter 2013 product revenue was derived from 4,328 OVA1 tests performed. This represented a 6% increase, compared to the 4,100 OVA1 tests performed in the year ago quarter.

Total revenue for the nine months ended September 30, 2013 was $981,000, $640,000 from products sales of OVA1 and $341,000 from license revenue. OVA1 revenue for the nine months ended September 30, 2013 included only the $50 fixed portion of revenue per test from the OVA1 test performed. The OVA1 product revenue 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. There was no change to our revenue recognition methodology in Q3, despite the termination of the Quest Strategic Alliance Agreement on August 23, 2013. Notwithstanding the termination, we agreed that Quest Diagnostics can continue to make OVA1 available on the same financial terms following the termination, while negotiating in good faith towards an alternative business structure.

Operating expenses for the three and nine months ended September 30, 2013 were approximately $2.6 million and $7.9 million respectively. Operating expenses included approximately $0.1 million of non-cash stock-based compensation expense in the third quarter and $0.3 million in the first nine months of 2013. This compares with operating expenses of $2.6 million and $9 million for the same three and nine month period in 2012.

Operating expenses in the prior year included $0.2 million and $0.8 million of non-cash stock based compensation expense in the same three and nine month periods. Along with the non-cash stock based compensation changes, the year-over-year decrease was due primarily to lower sales and marketing costs, due to sales force realignment and a more targeted marketing effort.

Total net loss for the third quarter was approximately $2.3 million or $0.10 per share on weighted average shares outstanding of 23.5 million. Total net loss for the nine months ended September 30, 2013 was approximately $7 million or $0.36 per share based on weighted average shares outstanding of 19.5 million. Our total shares outstanding at September 30, 2013 were 23.5 million.

Cash and cash equivalents at September 30, 2013 were $14.6 million. The company utilized $1.8 million in cash in the third quarter and we expect $2.1 million to $2.6 million of cash to be used in operations during the fourth quarter of 2013. In addition we will also utilize $0.3 million in the fourth quarter for the purchase of a top tier IVD platform as part of our research and development plan.

Now I’ll turn it back to Tom for a discussion on operational matters.

Thomas McLain

Thanks Eric. I’d like to first provide some context around our operating performance in the third quarter. For a small company like Vermillion, the challenges in successfully managing the scope of work and the investment in resources to be successful can be significant. Initially, we believe that it would be effective to work with a partner to handle the effort required. Since OVA1 launched three years ago we have learned that this is a specialized test and requires significant effort to build relationships and credibility with physicians, other healthcare professionals and patients. That is why Vermillion is driving the commercialization effort in 2013.

Our overall test volumes increased modestly in the third quarter, up 6% from the third quarter of 2012 and 3% from the previous quarter. With our limited field sales presence in 2013, it is important to note that is the areas where Vermillion sales reps are calling on physician offices, test volumes are up more than 15% from the third quarter of 2012. We believe this improving sales performance is due to the relationships our sales force is building with gynecologists and gynecologic oncologist, a SGO position statement released in May 2013 and new clinical publications.

Based on that demonstrated success we added sales reps in two new territories in the third quarter and they are beginning to build their base of business. We have also added an inside sales function that will contribute to our test volumes going forward. As planned we also increased our managed care team from two to four, adding new directors in the field focused on expanding coverage and resolving claim disputes. As we define other markets where critical success factors support that we can earn a return on investment, we will continue to expand our field sales presence.

On our second quarter call, we discussed the 2012 BlueCross BlueShield Technical Evaluation Center assessment that OVA1 should be considered experimental investigational. The SGO statement and peer reviewed clinical evidence available in 2013 are significant factors for reconsideration of this determination. We are pursuing decisions with individual plans to maintain current coverage or reverse decisions to drop coverage.

Although the action by tech has resulted in 13 BlueCross BlueShield plans reversing their positive coverage decisions for OVA1 and reducing total covered lives to approximately 67 million, it did not affect test volumes for the quarter. We will not be able to assess if its action has affected revenue per test until Q1 2014 because we see an annual true-up from Quest based on actual payments for OVA1 tests just once each year. But I again want to reiterate this has not affected test volumes for this quarter.

Shifting to Medicare coverage, in 2012 Medicare coverage accounted for less than 15% of our test volumes. In 2013 Vermillion and other diagnostic companies ACLA, Bio, AdvaMed, Personalized Medicine Coalition are focused on precedence being established through Medicare’s clinical lab fee schedule rate setting process.

In September CMS published a preliminary recommendation that coverage for diagnostic tests with CPT codes that use algorithms to generate their results MAAA tests would not be covered under the clinical lab fee schedule process. This means the test that had met the AMA’s criteria for a Category 1 CPT code, namely FDA clearance, support from peer reviewed publications and national utilization would not be covered while LDT tests, which have not met the same criteria are being paid for by Medicare.

Vermillion has been actively engaged in a process involving members of Congress, leading research institutes, the FDA, the NIH, and industry organizations to cause the MS to reconsider disposition. Their final recommendations are expected soon.

Through our advocacy and outreach effort, there is a chance that CMS will reverse its position and follow our recommendation that OVA1 should be covered using the gap-filled method. If not Vermillion will appeal that decision, leveraging the evidence and key opinion leader relationships we have developed in 2013. It is important to note that regardless of the outcome this year, OVA1 continues to be covered by Novartis under miscellaneous code.

We are now applying what we are learning in the field to define our 2014 global commercial strategy and goals. To help drive that effort, Marian Sacco recently joint our team as Strategic Planning Consultant. Marian brings over 20 years of commercial experience in gynecology, oncology, and IVD test. She has built and lead sales and marketing teams ranging from early stage companies to global sale organizations. Her experience spans the launch of CA125 for Centocor to Kirin Diagnostics, Barron Diagnostics and Adeza Biomedical. We will be prepared to discuss the specifics of the next phase of our commercialization plan on our yearend earnings call.

We were pleased to announce the publication of two new clinical studies in AJOG this week. These studies were advanced to address specific questions of OVA1 clinical utility by analyzing the combined results of our two previous OVA1 perspective clinical trials. One study analyzes the benefit from using the OVA1 on early stage ovarian cancer. Among 1016 qualified ANEXO surgery patients, there were 86 early stage ovarian cancers, a prevalence of 8.4%. There are three benchmarks that were compared to OVA1 in this study.

First, clinical assessment missed 31% of early stage cancer. Second, modified ACOG guideline assessment, which is the current standard of care missed 27% of these early stage cancers and the CA125 biomarker missed 37%. In contrast, OVA1 as a standalone risk stratification test correctly identified 92% of all early stage malignancies demonstrating significantly higher sensitivity than CA125 for modified ACOG guidelines and when added to clinical assessment, OVA1 identified over 95% of all early malignancies and 93% of stage I cancers.

These results are a powerful confirmation of the potential for OVA1 to aid generalists in the pre-surgical detection of early stage malignancies. That is essential to achieving optimal care for the most curable forms of ovarian cancer. The second study focused on 770 surgery patients originating with intended use physicians, that is gynecologists and generalists to compare predicted specialist referral patterns based on clinical assessment, modified ACOG guidelines, CA125 or OVA1.

OVA1 as a standalone risk stratification test was significantly more sensitive than either modified ACOG or CA125 and OVA1 identified the significant of cancers missed by each benchmark method. In clinical use, OVA1 is combined with clinical assessment for even higher sensitivity as described in previous clinical publications. Although the low sensitivity and high specificity of the benchmark methods was predicted to result in referral rates of 20% to 33%, the actual referral rate in this study was 60% of all patients.

OVA1 use was predicated to refer a roughly similar percentage of patients, 56%. This finding suggests that sensitive detection and specialist involvement may be achievable for the vast majority of ovarian malignancies without traumatically alternating overall referral rates.

Finally, I wanted to update you on our strategic alliance with Quest Diagnostics. In May, we filed a Notice of Default under our exclusive commercialization agreement citing a number of material violations breaches and failures to perform.

The strategic alliance agreement states that if a party fails to cure material defaults within 90 days of notice, the other party has the right to terminate the agreement. On August 23, we sent Quest a notice of termination with a proviso that Quest can continue to make OVA1 available to healthcare providers on the same financial terms following the termination while negotiating in good faith towards an alternative business structure. Quest has disputed the effectiveness of the determination.

I am not able to provide more detail at this time. When this matter is resolved, we plan to expand the addressable market for OVA1 both in the U.S. and in rest of world markets. On today’s call, I wanted to focus on our second strategic initiative, the OVA1 platform migration program. This program is essential to expanding our customer base; that is the number of laboratories here in the U.S. and worldwide that can run the OVA1 test. This initiative will also give Vermillion new options for the development of additional multi-market products that used in-Vitro Diagnostic biomarkers like OVA1.

The platform migration program is fully funded, staffed and underway. We are currently in the design and planning phase of this program and expect to move into development in the first quarter of 2014. In the current phase, several activities are in progress to build the foundation for our success.

First we have identified at least two of the top four IBD automation platforms which qualify for OVA1 development. The first targeted migration platform has been selected; the instrument is purchased and is being installed during the fourth quarter.

Second working with our collaborators at the Hopkinson Institute for Biomarker Translation and Research, we have completed feasibility studies to assess any potential technical obstacles to perform this platform migration.

All five OVA1 analytes [ph] are already found on the instrument. The measuring ranges and other assay parameters are roughly comparable between the current and new platforms and they span the range of clinical values found in our two pivotal trials.

In our initial feasibility runs, small or negligible differences have been found in the biomarker values measured from the same samples on the two different systems. And our initial simulations and calculation support that reproducibility in precision are similar of better on the new platform.

So in summary no showstoppers have been identified and the technical outlook for the next phase of formal development work is promising. We're also pursuing additional collaborations to conduct external clinical validation and for publication of the new assay performance results. Our collaboration partners will include academic and clinical institutes, pre-eminent cancer centers and managed care organizations. Our objective is to concurrently produce evidence leading to coverage and healthcare models at the same time we are generating data for our FDA submission.

During October we met with the FDA and we expect to complete our formal FDA pre-submission meeting early in the first quarter of 2014. This feedback should help us finalize our plans and clear the way to enter the development phase. Based on our current knowledge, we remain optimistic that the development can be completed in calendar year 2014 targeting launch of OVA1 on the new platform in early 2015. We expect to update you on our progress on our year-end earnings call.

In summary Vermillion is making progress on its strategic objectives. We are establishing relationships that will support expanding the OVA1 commercial opportunity and position us to successfully introduce new tests to the women's health and gynecologic oncology markets. There are many challenges for Vermillion and all diagnostic companies in terms of regulations, coverage and changes in healthcare delivery and we cannot guarantee our success. But we will continue to take the steps necessary to address these risk areas and position Vermillion for long term success.

Operator, this concludes our remarks and we’re ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from the line of Debjit Chattopadhyay from Emerging Growth Equities. Your line is open.

Debjit Chattopadhyay - Emerging Growth Equities

Just wondering if you could help me understand the distribution and ordering pattern here during the quarter. In terms of the 4,328 tests that were performed, what fraction was OB-GYN and what fraction was the GYN/ONCs?

Thomas McLain

We don't have that split out at this time Debjit, because we receive any information from Quest on a lag. So we won't have insight into the full quarter results until we are almost concluded with the fourth quarter.

Debjit Chattopadhyay - Emerging Growth Equities

Fair enough. So if you can go back…

Thomas McLain

One thing that I can't stress for you though, with the FDA labeled indication the prescriber is the gynecologist. So the driver of the majority of our testing, and it should be 100% of our testing would be the gynecologist or generalists.

Debjit Chattopadhyay - Emerging Growth Equities

So if you go back a quarter then, there are roughly between 35,000 and 38,000 OB-GYNs in the country. So what fraction has ordered so far as of the end of the second quarter?

Thomas McLain

Historically there are about 6,000 of those gynecologists who have ordered over one. Of that today, 600 are frequent prescribers of the test. And what's important to understand in that Debjit, is that among gynecologists there is a sub-set of gynecologists who are becoming more actively engaged in gynecologic surgery, specializing in that area. And so that is a factor that that we are now considering in our commercialization efforts.

Debjit Chattopadhyay - Emerging Growth Equities

So when you say frequent prescribers, does this come to two-three orders per quarter or per month? I mean that's what the typical rate is in terms of, adnexal masses which need surgery are roughly about two to three per month. So have they come to that level or are they still in a two to three per quarter.

Thomas McLain

So, our definition that we’re using and continue to use at this point in our commercialization efforts are any physician who has prescribed four or more OVA1 tests in the preceding six months. Now obviously there are physicians that prescribe more than that but that is the criteria that we use for that number.

Debjit Chattopadhyay - Emerging Growth Equities

In the prepared remarks you had mentioned that in territories where you have active reps, you had a 15% year-over-year growth, right. How does that compare quarter-over-quarter?

Thomas McLain

More than 15%.

Debjit Chattopadhyay - Emerging Growth Equities

Sorry.

Thomas McLain

That rate - that more than 15% growth in those territories is increasing as we go through the year, that is due to the factors that I outlined in my remarks, that is now the targeting and the excellent work that our sales reps are doing and in this new role of being the primary driver, they are becoming more and more skilled. The second is the positive effect of the SGO statement that came out in May of 2013 and adding to that the positive value of new clinical evidence that is being published and as you saw this week that we continue to bring to publication working with our collaborators.

Debjit Chattopadhyay - Emerging Growth Equities

Now what do you think the growth rate will be, given that you have potential challenges with CMS in getting OVA1 reinstated as a gap-fill hopefully. Does that impact the ordering patterns or I mean, I'm just trying to understand how that would impact the second half or the first half of next year.

Thomas McLain

Sure, so two things that are going to get us quickly to the point. In overall test volumes Medicare patients in 2012 accounted for less than 15% of our test volume. So that gives you a materiality context that I think is important for this conversation. The second is I want to reiterate where we stand today, today the test is performed in the Novitas jurisdiction. Novitas is one of the MACs and the test is reimbursed under a miscellaneous code and regardless of the outcome with CMS, Novitas has told us that we will be continue to be reimbursed under that miscellaneous code. So we don't believe that this decision would have an immediate negative impact on our results but we want a positive decision and a price set by gap-fill so that we have the opportunity as we go forward to have a single price for the test nationwide.

Debjit Chattopadhyay - Emerging Growth Equities

And one last question before I hop off. Could you update us on the economic benefit study that was started with DoD and do you think the data comes out sometime this quarter, or it's more of a first half next year?

Thomas McLain

Sure, and Donald is here on that, so I'll ask Donald to give us an update there.

Donald Munroe

Sure, the short version of that is that has been a delay that’s probably caused in part by sequestration and subsequent reprioritization within the DoD. Now having said that we have other collaborations that really strike at the same question of OVA1 utility and economics and we expect that we'll be able to announce some of those within the next one to two quarters.

Operator

(Operator Instructions). Sir, there appear to be no further questions at present time.

Thomas McLain

Okay, great, thank you very much. In closing, we’ve had a very active quarter, moving towards our goals and accomplishing many of the key actions we have laid out for the company. We've encountered some headwinds at a national level and we're taking steps to overcome those. In closing, on behalf of our management team, we appreciate your interest in Vermillion and we look forward to continuing to provide updates for you, our shareholders in the future. Thank you. Have a good afternoon.

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, the 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 November 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, ladies and gentlemen for joining us today for our presentation. You may now disconnect.

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