Vermillion: Turning The Page Over

Dec.20.11 | About: Vermillion, Inc. (VRML)

I recently uncovered a potentially illegal disclosure practice at Vermillion and at the time of the submission of this article, the company has not yet denied any of my allegations.

The company's CEO (Ms. Gail Page) lost all her remaining credibility. Any current or future shareholders should be extremely cautious when relying solely on news coming from the company. As we have learned the hard way, she has the tendency to tell only the "good half" of the story. However, I don't want to spend too much time on the disclosure case here, other than to warn all shareholders again.

The good news for all remaining shareholders is that Page's mistakes can be fixed. I hoped it would have happened earlier, but in the worst case, she has to step down at the next shareholders' meeting in June 2012. The sooner it happens, the more shareholder value will be preserved. Let's be optimistic here for a moment and imagine a new, honest and capable CEO supported by a similar Board. What actions should he or she take to recover the company's valuation?

OVA1 Test

I was and am a true believer in the product. But the referenced article was written before I discovered the Medicare fiasco, so keep that in mind when reading my prior valuation. The OVA1 test for ovarian cancer was the reason why I invested in the company in 2010.

The dreadful Medicare reimbursement figures (denying over 80% of OVA1 claims) make it crystal clear what a disaster Page created. We have an organization burning $4 to $5 million per quarter and selling products but not getting paid for them. Revenue from OVA1 is pathetic, considering the cost of the sales team, but don't get me wrong. I believe William Creech (VP Sales and Marketing) and his team are doing an amazing job considering the headwinds they are fronting. It's impressive to add 300 new physicians in a quarter when facing mounting denials from insurance companies.

First and foremost, the new CEO of the company has to address the issues of OVA1. It is obvious that we can't afford to be a sales organization. We can offer Quest Diagnostics (the exclusive distributor of OVA1 in the USA) to take over our sales team. It is probable that Quest Diagnostics would see the value of this team and might be interested; they have been doing Quest's work anyway.

OVA1 should sell only as many as Quest Diagnostics can manage with no added cost for us. Vermillion is not a sales company, and never should have tried to be one. Transferring the sales team alone could save approximately $1 million per quarter.

It's a recurring topic when I talk to investors about OVA1 that it will be included in ACOG guidelines soon, and that could solve all our problems. Since there are no set rules for inclusion, it may happen tomorrow or never. But most likely, ACOG will have to see further studies; they even implied that in March. Not surprisingly Page "forgot" to include that detail in the PR announcing the revised ACOG opinion in March. The exact text regarding OVA1 in the opinion is the following:

"The U.S. Food and Drug Administration has recently cleared for marketing a qualitative serum test, which appears to improve the predictability of ovarian cancer in women with pelvic masses ( This is not a screening test, but it may be useful for evaluating women with a pelvic mass. The test evaluates five biomarkers: 1) transthyretin, 2) apolipoprotein A-1, 3) b2 microglobulin, 4) transferrin, and 5) CA 125 II (36). This test is cleared for use in women older than 18 years, with an already detected ovarian adnexal mass needing surgery. Clinical utility is not yet established." (emphasis is mine)

Addressing that the clinical utility can be done by post market studies, last time I checked the company told me it was "ongoing." Knowing Page's disclosure practice, this could mean several things, and we have no way to check it independently. Additionally, ACOG most likely needs more experience with the product, as it is just not yet mature enough to be included in the guideline. I would be happy to be wrong on this one, but I really don't see it included in 2012.

Therefore, major actions have to be taken to save the company from bankruptcy until that occurs.

Lean and Mean

Running a public company is not cheap, but under Page spending went wild. Without getting into the details of actual examples from inside the company, let me just say that Page is not the most conservative person when it comes to spending shareholders' money. The proof for that is spending nearly $2 million on "general and administrative expenses", keeping in mind that this is in addition to the $1.4 million spent on the sales team and marketing. My estimation is that a 5 to 7 member management team could easily run this company. Compensation should change from cash to stock in order to further reduce spending and to motivate the people involved toward increasing shareholder value. Doing so, we could easily save $1 million or more with this action alone.

Cutting these two expenses would reduce the spending rate by $2 million per quarter and give the company more leeway to develop and launch its VASCLIR (PAD) product and OVA2.


When I talked recently to a fellow shareholder whom I have the utmost respect for, he asked me a simple question: "What would a company with a product like VASCLIR be worth in an IPO?" For a potential peripheral artery disease (PAD) blood test, the answer would probably be a minimum of $100 to $200 million. But Vermillion is now trading with a negative enterprise value.

This extremely low valuation can be explained only by the lack of trust in Page and the Board. As much as I like to be a contrarian, I have to agree with the Street on this. If the unimaginable happens and she stays in her position, not even good PAD test data will save the company. Actually, we wouldn't even know what the real PAD data is, since Page has the tendency to tell only the good half of the story. Just look what happened to Sequenom (NASDAQ:SQNM) after mishandling study data. That is one of the reasons why I urgently think Page has to leave - we need somebody credible to present the PAD study.

VASCLIR, together with OVA2, should be accelerated and are not something to save money on. I would go as far as to increase spending on either or both of them, if that would speed up the approval process. The company's new focus should be research and licensing, instead of losing money on a product hardly anybody pays for, as is currently true for OVA1.

Additionally, the company should look for marketing partnerships with drug companies selling medicines for PAD like Plavix. Considering the huge, untapped opportunity in this market, it shouldn't be difficult.

New Board of Directors

The company's Board failed to fulfil its fiduciary duties when letting Page run amok and damaged shareholder value for two consecutive years. There is no way around it - the company needs a new Board. At the same time, a reduced size for the Board should be reconsidered. Why does a small company like this need and pay for 7 Board members? A reduced 5 member Board should be sufficient with no salaries paid. Their only compensation should be in the form of shares and/or stock options encouraging profitability and growth.

As you can understand, the situation is far from hopeless. With these simple but decisive actions, the company and share price could regain their former glory. My estimation is that as a pure IP, research and licensing company, with its current assets, it could soon be trading over $10 again.

As a born optimist, I expect current Board members to take a hard and honest look at their two years of poor performance, step away, and let the company's owners decide on the future.

The current CEO and Board are the only obstacles we have to creating new "Vermillionaires."

Stay tuned. (I suggest subscribing to my twitter feed to stay updated on this story.)

Disclosure: I am long VRML.