Vermillion Management Discusses Q2 2012 Results - Earnings Call Transcript

Aug.14.12 | About: Vermillion, Inc. (VRML)

Vermillion (NASDAQ:VRML)

Q2 2012 Earnings Call

August 14, 2012 4:30 pm ET

Executives

Gail S. Page - Chief Executive Officer and President

Eric Schoen - Chief Accounting Officer

William Creech - Vice President of Sales & Marketing

Donald G. Munroe - Chief Scientific Officer and Vice President of Research & Development

Analysts

Trey Cobb - Stephens Inc., Research Division

Kevin DeGeeter - Ladenburg Thalmann & Co. Inc., 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, 2012. Joining us today are Gail Page, the President and Chief Executive Officer of Vermillion; and Eric Schoen, the company's Chief Accounting Officer. Following their remarks, we will be opening up the call for your questions. Then before we conclude the today's call, I'll provide the company's Safe Harbor statement with important cautions against 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, 2012, 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 President and CEO of Vermillion, Ms. Gail Page. Please go ahead, ma'am.

[Technical Difficulty]

Gail S. Page

Can you hear me now operator?

Operator

Yes, please go ahead.

Gail S. Page

Okay. Well, thank you, and we'll begin again. Good afternoon, everyone, and thank you for joining us. During the second quarter, we celebrated the 2-year launch mark of OVA1. Today, we will discuss the original vision of making OVA1 the standard of care and the accomplishments that are putting the cornerstones in place to achieve that goal. We will begin by having our Chief Accounting Officer, Eric Schoen, take us through the financial details for the quarter. Following that, I will discuss more about the quarter and provide an update on some exciting recent developments, as well as our outlook for 2012. We'll then open up the call for your questions. I will now turn it over to Eric.

Eric Schoen

Thank you, Gail. 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 which 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, 2012, was $321,000, $208,000 from product sales of OVA1 and $113,000 from license revenue. Total revenue for the 6 months ended June 30, 2012, was $633,000, $406,000 from product sales of OVA1 and $227,000 from license revenue. OVA1 revenue in the first half of 2012 included only a $50 fixed portion of revenue per test from the OVA1 tests performed. The variable portion of OVA1 revenue is expected to be recognized in the fourth quarter of the year, consistent with 2011.

Operating expenses for the 3 and 6 months ended June 30, 2012, were approximately $4 million and $6.4 million, respectively. Operating expenses included approximately $0.4 million of noncash stock-based compensation expense in the second quarter and $0.6 million in the first half of 2012. This compares with operating expenses of $5.9 million and $10.7 million for the same 3- and 6-month periods in 2011.

Operating expenses in the prior year included $1.3 million and $2.5 million of noncash, stock-based compensation expense in the same 3- and 6-month periods. Along with the noncash stock-based compensation changes, the year-over-year decreases were due primarily to lower clinical trial and collaboration costs, as well as the ongoing execution of our reorganization announced in January 2012.

Total net loss for the second quarter was approximately $2 million or $0.13 per share on weighted average shares outstanding of $15 million. Total net loss for the 6 months ended June 30, 2012, was approximately $3.8 million or $0.25 per share based upon weighted average shares outstanding of $14.9 million.

Net loss for the 3 and 6 months ended June 30, 2012, included a nonoperating $1.8 million gain on sale of instrument business from the release of the escrow account established in the sale of our tools business back in 2006. We used $700,000 of the escrow proceeds to pay the Bio-Rad settlement and returned the balance of $1.1 million to our balance sheet in April 2012.

Cash and cash equivalents at June 30, 2012, were $18.3 million. We utilized $2.7 million in cash during the second quarter before considering the receipt of $1.1 million from the Bio-Rad escrow account. We expect $2.5 million to $3.5 million of cash utilization during the third quarter of 2012.

Now I'll turn it back to Gail for a discussion on various corporate initiatives.

Gail S. Page

Thank you, Eric. Vermillion has become a known and respected pioneer in the diagnostics industry over the past 2 years. OVA1 was the first proteomic nIVDMIA to be cleared by the FDA, creating an entirely new approach to biomedical testing. Second, OVA1 achieved Medicare approval in record time and most recently was awarded a Category 1 CPT code working with the AMA under the new class of multi-marker codes referred to as the MAAA.

Crossing these 3 major hurdles demonstrates the vision and passion of the team and our collaborators. Over the past few quarters, we have discussed the need and progress in the following areas: physician education, reimbursement, establishing clinical utility, publication and the importance of guidelines and enlisting key opinion leaders. The team at Vermilion continues to keep these initiatives as their priority as they are the cornerstones of driving market adoption and making OVA1 the standard of care. It is the convergence of these efforts that traditionally create an inflection point in the market for a new diagnostic test such as OVA1.

Today, I would like to address progress on the reimbursement front first. Our 3 key initiatives in reimbursement are: coding, claims processing, and payer adoption.

First, let's address coding. On July 16, we made our initial presentation to the clinical labs fee schedule committee in Baltimore, Maryland regarding the proposed value for the OVA1 CPT code. Our material was very well-received and the panel was receptive to our proposal that Gap Field would be the best format for setting OVA1 pricing. This logic was supported by the positive coverage by CMS and the Department of Defense, as well as the AMA when they established the MAAA category.

We expect to have another series of discussions with the committee before their final determination of Gap Field standards and pricing, which traditionally is in the fall. The new code is a critical step in the company's commercialization efforts, and we are working to maximize its impact to the company when it becomes effective in January 2013.

Now let's speak about the claims process. Our territory development managers and reimbursement department continue to work with physician offices across the country to assist with the payment appeals process. This has become an established program using claims to educate payers and create awareness about the medical necessity of our test.

This process has been well-received and is seen as a proactive response by our physicians. We continue to work with individual Quest Diagnostic business units to assist with claims and appeals. This ongoing program will create payer awareness about the new CPT code and facilitate the acceptance of claims in 2013.

With regards to payers. The ongoing influential physician program has shown to be a significant step in the payer adoption process and has resulted in key layers of support to both national and regional payers. We are pleased to announce that we have picked up OVA1 coverage from Blue Cross Blue Shield of Michigan, which is the single largest independent payer remaining within the Blue Cross Blue Shield network. This payer adds 4.4 million lives under coverage and is indicative of the movement we are striving for from other key payers.

We are now able to manage the payer coverage process with multiple plans on a regular basis and expand the number of payers to realize new coverage decisions such as Blue Cross Blue Shield of Michigan, and Blue Cross Blue Shield of Louisiana. Thus, we expect to have a pool of active payers considering coverage at any given time as we move forward.

We have stepped up our activity with 2 national payers by leveraging the OVA500 press release and using it as an additional piece of evidence. While it is difficult for us to predict when a national payer will issue a positive coverage decision, we understand the importance of pursuing such payers and the potential impact of their coverage.

On July 30, we announced outstanding top line results from the OVA500, a new perspective, multi-center study of OVA1. The study was led by Dr. Robert E. Bristow, Director of Gynecologic Oncology Services at University of California Irvine Healthcare in Orange County, California, and Deputy Director of the Journal Gynecologic Oncology. This study was also assisted by the Johns Hopkins University Center for Biomarker Research led by Dr. Daniel Chan.

In this study, OVA1 performance was assessed in a prospective, multi-institutional blinded study with a new cohort of 494 patients, representing the intended use population for OVA1. We are very pleased to report that OVA1 sensitivity and negative [indiscernible] value in the OVA500 study met or exceeded levels previously reported in the pivotal OVA1 study published last year by Dr. Fred Ueland and colleagues at the University of Kentucky.

As we discussed previously, the overall sensitivity of OVA1 when combined with clinical assessments was identical to the first study at 96%. These malignancies included primary ovarian cancers, low malignant potential tumors and metastatic adnexal malignancies involving the ovaries or not involving the ovaries. They also included 31 early-stage ovarian cancers that is Stage 1 and 2 in which the sensitivity of OVA1 was reported at 91%. These results demonstrate in a new patient group, the high sensitivity of OVA1 and its ability to offer the general physician tools to detect and refer the large majority of all adnexal cancers. A manuscript based on this work has been written and submitted for publication. We expect this data to be further evidenced supporting clinical utility, payer coverage and hopefully, inclusion of OVA1 in medical guidelines moving forward.

To quote Dr. Bristow, "These results point to the possibilities of a standardized triage protocol using OVA1, with high sensitivity for all ovarian malignancies including the most curable early-stage cases and a broad range of subtypes." We remain and look forward to sharing more results of this study as they are published.

Turning to our Vascular Medicine program. On our last call, we described the steps we are taking to publish the intended use study on the detection of Peripheral Artery Disease. We are pleased to report that a poster titled Results of a Biomarker Screen to Identify Peripheral Artery Disease authored by Dr. John Cooke of Stanford and his coworkers was presented at the Society for Vascular Medicine's 23rd Annual Scientific Session, which was held June 14 through 16, 2012, in Minneapolis, Minnesota. The poster reported results from the 1,025 subject prospective multi-center study of intended use subjects. That is the elderly, aged 70 or over, and smokers and diabetics aged 50 and over. The study demonstrated feasibility of a blood test using beta-2 microglobulin, Cystatin C, and high-sensitivity CRP, and more important, identified 17 to 20 of the PAD patients missed by the Framingham Risk Score high-risk cutoff. The data suggests that further refinement of a multi-marker model may hold promise as an important adjusted tool during assessment of patients at risk for PAD. The population estimated to be approximately 60 million in the U.S. alone.

As to the manuscript, we have submitted for publication in a peer-reviewed vascular medicine journal and expect to report on this during the next quarterly call.

Turning to our market development efforts. Our expectation for Q2 was 4,100 to 4,400 tests, and our partner Quest Diagnostics performed an estimated 4,150 OVA1 tests during the quarter, a 5% increase over Q1 2012. As you may recall, we downsized our team in January and are pleased that the team has focused in those areas of the country where our early efforts are creating a target environment.

One of our key metrics at this point in time is the number of ordering physicians. At the end of June, we had over 4,500 physicians that have ordered OVA1 or 13% of the gynecologists in the U.S. That correlates well with a survey of approximately 300 physicians conducted by contemporary OB/GYN magazine in June, which indicated 17% of the respondents have used OVA1. The survey also told us over 50% of physicians are requesting more information, and over 30% claims incorporate it into their practice. This is very encouraging and supports all the efforts we are making in the areas of reimbursement, physician education and publications.

As we move forward, we will be utilizing the new data from the OVA500 study to reengage our current physicians, open the door to new ones and begin to educate our audience on the numerous advantages brought forth in this study relative to early-stage cancers and the performance as it relates to the wide range of tumor types. Studies like the OVA500 are a key sale base as we continue to develop this market.

The task for Vermillion is to change the standard practice for individual physicians to include OVA1. We expect these tactical sales initiatives combined with our strong marketing efforts and additional clinical studies to result in new physician orders, as well as reorders from our existing customers.

Turning to our guidance. We expect 4,100 to 4,400 OVA1 tests to be formed in Q3 of 2012. While quarterly test volumes are one measure of progress, we remain focused on those catalysts that will ultimately drive an inflection and test adoption and confirm that OVA1 is the test of choice.

Our primary focus remains on the following: gaining national payer coverage decisions, focusing on the valuation of the CPT code and its successful implementation in 2013, leveraging the OVA500 study publication, and expanding the base of clinical publications.

We are confident all of these initiatives will lead to increased clinical usage of OVA1 and its adoption as a standard of care for managing ovarian cancer. The last topic I would like to update you on is the progress of the CEO succession plan. As previously announced, our Board has formed a succession committee of independent directors to oversee the process of selecting our new CEO and has retained a leading executive search firm. We have met with a number of impressive potential candidates and expect to identify a successor with the ability and experience to take advantage of the tremendous growth opportunities in the ovarian cancer diagnostics market, as well as continue to develop Vermillion's pipeline of new products.

Given the amount of interest and goal of assuring we select the correct candidate, we have extended our time to complete the search from September until October 2012. I expect to continue in my role until the new CEO is named, and then assist in a smooth and successful transition of responsibilities. As previously discussed, I will continue to act as the strategic advisor for the company going forward as directed by the Board of Directors.

Now with that, I would like to open up the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Scott Gleason with Stephens Inc.

Trey Cobb - Stephens Inc., Research Division

This is Trey Cobb on for Scott. Gail, it looks like test volume was up sequentially after dropping off some in the first quarter. Maybe if you could talk a little bit about how that trended throughout this quarter and kind of how that has progressed from what you've seen early in the third quarter?

William Creech

Trey, this is Bill. We saw a flattening in the first quarter as you recall. And then the second quarter picked up, and it was consistent throughout. We track it by number of tests per day and then monthly and it was consistent throughout the quarter.

Trey Cobb - Stephens Inc., Research Division

Okay. And then I may have missed this, Gail, in your commentary, but could you tell us the number of incremental physician adds during the quarter? And then maybe if you could talk about how the reorder rates were in 2Q?

Gail S. Page

Okay. We didn't touch upon those metrics today. One of the things that we're doing now is as we're maturing in this market, and we're looking -- we have, as we talked about last quarter, we have a reorder program that we're working on with Quest, and that's one of the things that we see data like the OVA500 study being very instrumental in. So what I would do is defer that. If you want to give us a call offline and -- we'll try to talk you through some of that. But right now, what we're really trying to focus on is letting Quest work with us on the reorder program. And we're trying to get out and knock on the new doors with the [indiscernible] and get this data in front of them.

Trey Cobb - Stephens Inc., Research Division

Okay. And then lastly, and I'll hop back in the queue, you mentioned the top line data from your OVA500 clinical study, it was impressive. What are you hearing from the payers, given the additional positive data, which follows the green journal publications? And is there any other big step that you guys need to meet before we start seeing some of the large payers come onboard?

Gail S. Page

So the OVA500 study, we just press released that a couple of weeks ago. So obviously, we are being very careful to make sure that we have the right packets, getting it in front of the right people. This is a big study for us. It took over a year to complete. Unbelievable data that came out of it. And we just want to make sure that we put it out there at the right time, in the right meeting, in front of the right people. And some of that, we're going to hold up with certain payers until the manuscript is published. But what we are doing is we're working with the data that we're allowed to share at this point in time. So I guess, one, we think it will be very instrumental. This is not the only thing we're working on. We have other studies that we'll be talking about over the coming months that, that will even go further and support us further. But I guess the point is that now we have another piece of data that we can put in front of them, and this will go, I think, a long way into making an impression upon these folks.

Operator

Our next question comes from the line of [indiscernible] with Emerging Growth Equities.

Unknown Analyst

Just one, thinking out loud here. Given the trifecta of positive things that's going to happen for the company, the publication of the new OVA1 study, the expanded insurance coverage and the CPT 1 codes early next year. How -- what steps in particular are Vermillion and Quest are doing together to benefit from the trifecta of good news that's going to hit the company next year?

Gail S. Page

So I think we're looking at things on a multiple level. Quest has been very supportive in working with us on the current -- continue to educate the physicians, making sure that those that have touched the product will continue to get it in front of them. OVA1 is as I described it to people, it's not like on HPV or a ThinPrep where the doctor' going to run on every patient that walks in the door. I mean, there are selected patients that need this test. So while we're continuing to do that ground-level education, that's one of the things you're absolutely right on is that we've got to continue to feed the market, do those things, prep everybody. That's why it's really important that we continue to work on getting coverage decisions, positive coverage decisions because the more of those you have in place, that way when the CPT codes hits, you don't have to go back and get the coverage, you've already got the coverage and now the CPT codes comes into play. So a lot of these things it's like a roadmap and is a little bit like playing chess. And so you have to lay the groundwork on certain areas, so that when the other things hit, you've got something to take advantage of. So I think there's a multitude of marketing programs. We just launched another campaign. If you look on our Facebook, it's called Pump Up the Volume. That's been well-received. We've had an external firm to help us with a little bit on the social media, and they actually did a huge mailing for us on the press release about the OVA500 study. It had one of the highest open rates of anything that we've sent out into the market. So we continually are looking for those ways to get in front of people and to help them retain that knowledge and set ourselves up as I indicated for this convergence of things. And I think anybody on this phone call that has worked in diagnostics would know, you have to be doing all those things in concert with each other so that at some point in time, they all converge. And that's when you kind of see that the whole test will kind of takeoff.

Unknown Analyst

And one more think about on Quest and collection in general. Do you think Quest, or have indicated any problems with the expiration of the grandfather clause, especially out of potential Medicare payments?

Gail S. Page

I can't comment on that. They have not discussed that with me, no,

Unknown Analyst

And one last question them. In many ways, Vermillion has been perceived as a women's healthcare company. And as you transition out and a new person transitions in, how do you ensure that the new person is going to have the same level of passion for women's healthcare and not just look at it as a diagnostic lab franchise?

Gail S. Page

Well, I think that my own personal passion for women's healthcare is permeated throughout the Board of Directors. I think they share that vision that they see the benefit and see all the hard work. And I think that they will be looking for certain skills in this new person that will drive that value proposition. I also believe that they'll be looking for a person that realizes the opportunity and has a lot of growth in their background, growing the business of commercialization. So -- and I think that's one of the reasons why I've indicated that I fully plan to make a smooth transition to help that person in any way possible. I've enjoyed a long 8 years here, gone through a lot of trials and tribulations to get this product to where it is. So it's certainly one of my personal goals to support that person and make sure that they have all the historical knowledge or anything they need to drive the company forward.

Operator

Our next question comes from the line of Kevin DeGeeter with Ladenburg.

Kevin DeGeeter - Ladenburg Thalmann & Co. Inc., Research Division

I want to know a little bit about, I guess, the OVA2 program and just -- could you give us an update as to where the focus of that second-generation product for ovarian cancer is at the moment and maybe any timelines and updates?

Gail S. Page

Sure, Kevin. And thank you because the team put an awful lot of effort into that study, and so we appreciate the recognition of it. We are no longer headed in the direction of what I would call an OVA2. Companies mature and they progress. And with Dr. Monroe coming on board with his vast experience and the depth and breadth of his knowledge, we have now turned that into an ovarian cancer franchise approach. And a lot of that has to do too with the accumulation of the assets of CoreLogic and when we put all that together. This past year at the SGO and ACOG, we held numerous focus groups. And now, being in the second year, we have over 30 key opinion leaders that we can reach out to, to help us understand or better understand where should we be directing our efforts relative to developing that ovarian cancer franchise. So with that, I know there's been a multitude of opportunities that have presented themselves. I'm going to let Donald comment briefly on them. But I'm going to say that we're not going to get too much in-depth for competitive reasons. We don't want some of the competition out there to actually know our res map. But I'll let Donald comment to the extent he feels comfortable. Fair enough?

Kevin DeGeeter - Ladenburg Thalmann & Co. Inc., Research Division

Fair enough.

Donald G. Munroe

Sure. Well, thanks, Kevin, for your question. It is a little bit of a chess match. And I guess, in any chess match, you take a look at kind of what you've got as far as assets and positioning and what your strategy is. And early-stage research doesn't really move very quickly, especially when we're focused on some of the key priorities that have already been discussed. But I would add that we obviously have a very good IP portfolio. It comes not only from the biomarker discovery research we've done but now the acquisition of CoreLogic assets. We continue to have a very healthy collaboration with Johns Hopkins. We do a biweekly call with them to discuss progress in terms of looking at what results we can get from the biomarker discovery efforts we've got. And then importantly, as Gail mentioned, we did this series of meetings with some of the key opinion leaders, gynecologic oncologists who have probably realized that Vermillion is capable of engaging in real translational research. And that's brought us a collection of opportunities that we might not have realized we had just a year or 2 ago. So we are lining those up into a portfolio, a roadmap and you'll hear more about that as we go through the coming quarters.

Gail S. Page

The one thing I would close on there, Kevin, is that we do tend to really like the high-risk triage market. And as we do a little bit more marketing research and collate that with our own internal research, we'll comment. But I guess the end all be all is that our ovarian cancer franchise program is coming along quite nicely.

Kevin DeGeeter - Ladenburg Thalmann & Co. Inc., Research Division

Terrific. And maybe just 2 kind of related follow-ups and then I'll get back in the queue. Quest has the option to license commercial rights through to a third program, I guess, at least according to the existing contract by the end of October. Is there a program that's available for a discussion at this point or can you kind of update us as to how we should think about Quest's rights to consider rights to a third program? And then just consequently or perhaps related, there is still the issue of the $7 million note out there from Quest coming due later this year. Just any update on thoughts there in terms of restructuring, rolling out or repaying would be very helpful?

Gail S. Page

I wish I could comment on it, but it's just the one thing that, unfortunately, our conversations with them are confidential. And I'm just not in a position to comment on that. But as soon as we do have something to say on that, of course, we will let the shareholders know and our analysts know. But today, I'm sorry, we just can't comment on it.

Operator

At this time, this concludes our question-and-answer session. I would now like to turn the call over to Ms. Page. Ms. Page, please proceed.

Gail S. Page

Thank you. As always, I want to thank each of you for joining us today, and we look forward to updating you on our next quarterly call.

Operator

Before we conclude today's call, I would like to take a moment to read the company's Safe Harbor statements.

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 2010 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, ladies and gentlemen, for joining us today for our presentation. You may now disconnect your lines.

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