Quite a lot has happened since I accused Vermillion’s (NASDAQ:VRML) CEO Gail S. Page and the company’s Board of Directors of a possibly illegal disclosure practice. I have received an overwhelming number of supporting phone calls and emails from shareholders in response to my letter and article. A week after I sent a copy of my letter to Page and to James S. Burns (the Chairman of the Board), the company reacted to it in an 8K filing on December 22, 2011. After learning about this, I issued a short statement as a response, but I think the latest developments deserve a longer explanation.
Vermillion’s Disappointing Reaction
Before talking about the 8K filing in detail, credit should go where credit is due. I would like to congratulate Vermillion’s lawyers; the 8K filing is smartly worded and makes the best out of the situation that Page is in.
Unfortunately for Page, there are situations where even the best lawyers can’t help. The trick they tried to employ is to highlight a less relevant fact from my letter, twist it around and use it to discredit my main message. They tried to shift the debate away from the high denial rate and the active concealment to the volume of Medicare. I do not intend to walk into this trap, and will therefore spend little time on the volume issue.
As company spokeswoman, Page claims in the 8K statement that Medicare billings represent only 18% of performed tests, but she didn’t specify whether that figure included Medicare Advantage plans as well. Even more notably, three days before Page become aware of my letter, the company uploaded a shareholder presentation where it claimed that Medicare/Medicare Advantage represents 55% of the covered lives, very close to my original assertion of “approximately 50%” and far away from the now claimed 18% of performed tests. It is very difficult to believe that the percentage of performed tests would not be closer to the percentage of covered lives.
The 8K statement was much more notable for what it did not dispute. That can be interpreted as an indirect admission of the fact that Medicare denied over 80% of the OVA1 claims. Additionally, the 8K statement provided some clarity on the non-Medicare part of the business, suggesting that it does not look any better than the Medicare part. It was ironic that while providing quite a few details, the text still claimed that management had limited visibility and was not allowed to provide more details by Quest Diagnostics. Apparently, the visibility is murky only for inconvenient facts.
Although I previously had no doubt, the 8K statement has definitely made crystal clear what an unsustainable business model Page created. Calculating with 15,000 performed tests and an assumed 80% denial rate across the board, the best Vermillion can hope for is about $1 million in sales revenue from OVA1 in 2011. This fact never held them back from wasting approximately $20 million of shareholder money in the same year. A fellow shareholder told me that “Page spends like a drunken sailor”, but I have to reject that characterization strongly in the name of all drunken sailors. Those guys at least know when to call it a day.
A Hijacked Company
Back in 2009, Page drove Vermillion into bankruptcy while maintaining control of the remains of the company. Admittedly, it was a difficult macroeconomic environment and was probably not exclusively her fault. During the bankruptcy procedure, the company received FDA clearance for OVA1 and its shares skyrocketed. Page cut a deal with all parties involved, sold more shares and collected $3 million cash bonus plus free shares . Let me repeat this - she drove the company into bankruptcy and collected a multimillion dollar bonus. This is quite an achievement, especially considering that she had a minor role in the FDA clearance as the actual work was done by Dr. Eric Fung and Gillian Crutcher. Her bonus was a result of the guidance, and the optimism that followed, where she predicted that OVA1 would sell 217,000 tests in first year. In reality, the company performed 6,155 tests in 2010 and expects to perform 15,000 in 2011. The bonus stayed but the optimism vanished.
On the top of the multimillion dollar bonus she charged the company ‘consulting fees’ for $377,000. Additionally, she was obviously entitled for her salary too in 2010 - she collected more cash in 2010 as bonus, fees and salaries than the company’s revenue in 2010 and 2011 combined.
After Vermillion emerging from bankruptcy Page was cautious to handpick new Board members from among her friends. She created a group of “yes-men” who would never stand up to her. It is now practically a hijacked company, acting in the interest of Page and the Board instead of shareholders. I could provide many examples of how dysfunctional the Board is but probably the best is the recent decision of paying Page’s tax by the company. This happened after two years of what was a complete disaster for any shareholder: damage to 86% of shareholder value in 2011 after the 70% damage in 2010. What does the Board do after such performance? Pat her on the back and pay her taxes. Two days after this scandalous decision, it is noted that the company’s CFO (Sandra A. Gardiner) announced her resignation.
It is also remarkable how Page sold 45,000 of her shares in 2010 December on $5.92/share, fully knowing the high Medicare denial rate and withholding of information from investors. She tried to sell another 100,000 shares during the secondary offering in 2011 February, while still not disclosing the high denial rate to unsuspecting investors. James Besser, whose firm used to own 10% of the company, wrote the following about the 100,000 share issue in April 2011:
Instead of endorsing the company's prospects, CEO Gail Page added 100,000 shares of her own stock to the green shoe of the deal. The outside counsel for Vermillion, when asked to explain this, said this was anti-dilutive because otherwise that stock in the green shoe would have been company stock, per the agreement with Roth. Ms. Page put it more succinctly- she said that she needed to sell the shares to pay her taxes- less than a year after the multimillion dollar cash pay-out she received as compensation for her work during the bankruptcy.
Now we understand why she couldn’t provide a straight answer, as she appears to have been hiding material information from the public.
It is notable how everything that James Besser’s letter foretold came true. Page and the Board reacted to his criticism by sending their lawyers after him and threatened him with a Poison Pill. I wonder if this is the company’s definition of “maintaining open communications with our shareholders” as they described in the recent 8K filing? Page went so far as to admit under oath in a previous litigation that the Poison Pill “would give [her] the leverage to negotiate . . . some kind of resolution [in dealing with dissatisfied shareholders]”. Isn’t the Poison Pill simply there to prevent hostile takeovers?
To the best of my knowledge, Besser is not a significant shareholder anymore, which is unfortunate considering his vast knowledge of the company and of the industry.
Time For Shareholders To Act
CEO Page’s plan to keep paying herself and her friends until the money runs out is facing one serious obstacle: Vermillion shareholders. Fortunately, neither she nor her friends on the Board own a significant part of the company. She never spent a penny of her own buying shares.
Remaining or new shareholders have multiple tools allowed by the company’s bylaws to get organized and express dissatisfaction. I encourage all Vermillion shareholders, small and large, to voice their opinion in public. Shareholders also have the option to form groups representing up to 15% ownership and have themselves heard even louder.
The only way we can turn this around is if we let the public know how seven Board members hijacked a listed company and made a mockery out of corporate governance.
Disclosure: I am long VRML.