Aspira Women's Health Inc (AWH) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Vermillion, Inc., review of Q2 financial results and Company update conference call.

(Operator Instructions)

As a reminder, this conference is being recorded today, Thursday, August 12, 2010. I would now like to turn the conference over to Ms. Sue Carruthers. Please go ahead.

Thank you very much. Welcome our conference call.

Today, we issued a financial results press release for the second quarter of 2010 which is also on our website, and we encourage you to refer to it for more detail. Some of our 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 webcast and does not undertake any obligation to update any forward-looking statements contained in this document 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 regulation, payer reinvestment, relationships with our strategic partners, and other factors described in the Vermillion 2009 Form 10-K, quarterly reports on Form 10-Q, and current report on Form 8-K. A telephone replay of this call and presentation material will be available beginning approximately one hour after the call through August 31, 2010. A copy of our financial results release for the period ended June 30, 2010, are available on our website at www.vermillion.com.

At the request of the Company, this call is being recorded. The entire contents of the call, including the presentation and the question-and-answer session that follow, are the copyrighted copy of Vermillion, with all rights reserved. Any redistribution, retransmission, or rebroadcast of this call in any form without the express written consent of Vermillion, Inc., is strictly prohibited.

Now, I'd like to introduce Gail Page, President and CEO of Vermillion.

Thank you, Sue.

With me today are Dr. Eric Fung, our Chief Scientific Officer; Sandy Gardiner, our Chief Financial Officer; and Bill Creech, our VP of Sales and Marketing. We are pleased to provide this update, the first since late 2008, which reflects the incredible turnaround for Vermillion. Because many of you may be new to our story, today's call includes an overview of Vermillion, and in particular details our lead product, the OVA1 test. Let me begin by describing three key differentiators that make Vermillion a unique value proposition. OVA1 is the first and only FDA-cleared test for the preoperative assessment of ovarian tumors; our strategic alliance with Quest Diagnostics; and our investment in a pipeline of additional assays.

As I indicated, Vermillion has experienced an incredible turnaround that was made possible by the FDA clearance of the OVA1 test. Using that as a launchpad, we've made tremendous progress in the first half of 2010. We emerged from bankruptcy protection on January 22. We launched the OVA1 test on March 9. We obtained Medicare coverage on March 11, which is being covered in the amount of $516.25. We were issued a European patent for ovarian cancer biomarkers and a US patent for Alzheimer's Disease biomarkers. We hired six sales people by June 30, and subsequently we have hired five more in July. We were relisted on the NASDAQ on July 6, 2010.

Sandy will now discuss our financial performance, and I will return with an overview of our Company, our accomplishments thus far in 2010, and our plans for the balance of the year

Thank you, Gail.

Since the launch of OVA1 through the end of the second quarter, we estimate that 1,247 test have been performed, of which we recognized revenue for 342 tests. Total revenue for the three months ended June 30, 2010, was $344,000, $45,000 from product sales of the OVA1 test and $299,000 from licensed revenue. Product revenues for tests performed are recognized when the following revenue recognition criteria are met. Persuasive evidence that an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed or determinable, and collectibility is reasonably assured. Prior to meeting all these revenue recognition criteria for tests performed during the period, we recognized deferred revenue on the consolidated balance sheet.

It will not be easy for us to estimate revenue from Quest during the early period of OVA1's commercial availability. As we enhance our ability to estimate reimbursements, we will be in a position to recognize revenues in better alignment with the actual performance of the tests. Operating expenses for the three and six months ended June 30, 2010, were approximately $4.1 million and $7.2 million, respectively. This included approximately $371,000 of noncash stock-based compensation expense in the second quarter 2010, and a total of $767,000 for the first half of the year. Other noncash charges were $828,000 and $1.4 million related to the debtor incentive plan for the three and six months ended June 30, 2010, respectively. We entered the second quarter with ten employees. At the end of the second quarter, we had 17 employees, and as of today we have 23 employees. During the second quarter, we made significant investments in sales and marketing, including the hire of six sales reps. In July, we hired an additional five sales reps for a total of 11.

Total net loss for the second quarter was $698,000, which included $3.5 million in noncash gains from valuation of warrants and their exercises during the period. Our current shares outstanding are $10.3 million. Weighted average shares outstanding were $10.3 million for the second quarter 2010 and $10.2 million for the six months ended June 30, 2010, for a net loss of $0.07 a share and $1.20 per share, respectively. Cash, cash equivalents, and short-term investments at June 30, 2010, was $29 million. We continue to manage our cash judiciously while we build the business. We expect increases in operating expenses for the second half of the year as we continue our efforts to establish the adoption of and reimbursement for OVA1 and increase our investment in our pipeline. We anticipate that cash usage during the balance of 2010 will be approximately $3 million to $4 million per quarter.

Now, I'll turn it back to Gail.

Thank you, Sandy.

As I indicated earlier, because this is the first call since filing for Chapter 11 and because many of you may be new to our story, I thought it would be beneficial to provide some background for the clinical needs surrounding ovarian tumor triage and how OVA1 fills this unmet clinical need. Numerous studies have shown that women with malignant ovarian tumors have better outcomes when operated on by specialists, typically gynecologic oncologists. These physicians are especially trained to perform tumor debulking and tumor staging, both of which improve a woman's care and chances for survival. Unfortunately, today only one-third of women with malignant ovarian tumors are being operated on by the gynecologic oncologist for their initial surgery. This is in large part due to the absence of tests that can detect ovarian cancers with high sensitivity. OVA1, as you will see, fills this void.

Turning to the market opportunity, the first thing to note is that ovarian tumors are quite common. Two independent screening studies, the PLCO and the University of Kentucky, have identified ovarian tumors in up to 5.3% of women. A different analysis from the AHRQ suggests that the prevalence is at least 1.5%. Based on the consensus number of 116 million women, this implies that there are over one million ovarian tumors. One figure that has been postulated to represent the market opportunity for OVA1 is the number of surgeries for ovarian adnexa tumors, which typically is described as being 300,000 annually. We believe this to be an understatement of the real market. I will not read this slide word for word, but you can see that as the AHRQ reports, this number underestimates the true number of procedures performed for ovarian adnexa tumors.

As I indicated earlier, a clear unmet need in the management of ovarian adnexa tumors is a test for high sensitivity for malignancy. As our prospective clinical trial demonstrated, OVA1 fills this unmet need. OVA1 increased sensitivity for malignancy by 20% over clinical impression based on current available tools. Moreover, OVA1 strengthens the prediction that cancer is absent, with a negative predictive value of 93%. When compared against tools that physicians typically use to manage ovarian adnexal tumors, OVA1 clearly shows it's improved sensitivity for malignancy. CA 125, although not cleared for this indication, is often used in this situation. The ACOG/SGO guidelines incorporate physical examination, menopausal status, C 125, and imaging finding. In an effort to improve sensitivity, the CA 125 cutoff was lowered in the modified ACOG/SGO guidelines.

As you can see, OVA1 detected more cancers in the prospective clinical studies than in any of the other modalities. Physicians are obviously excited to have this new tool available to them. In a physician poll suggested by ScriptLogic prior to the launch of OVA1, 84% of physicians said that OVA1 fulfilled the unmet surgical needs.

A real-life testimonial comes from Dr. Michael Randell from Northside Hospital in Atlanta, and I quote, "I used OVA1 on a patient with a suspicious mass. Because of the difficulty of these cases, I would have typically referred her to a gynecologic oncologist. However, because OVA1 was negative in this case, and because of the high negative predictive value, I felt confident enough to keep her in my practice. I performed the surgery, and the patient indeed did not have cancer. This is a clear instance of OVA1 helping guide my surgical decision making process."

Our initial launch goal for OVA1 included leveraging Quest's sales force, attending the SGO and ACOG meetings to create awareness, and working through the media. Remember, we did not have an internal sales force upon launch, but we rapidly recruited a Director of Sales who had experience at Cytec and Precision Therapeutics. A major goal in the second quarter was to begin the process of hiring an internal sales force. Our initial strategy included hiring between 12 and 15 sales reps within the first 12 months. I'm pleased to report that we are ahead of the hiring curve, and we now have 11 highly-qualified sales reps on board, which gives the department a total of 14 people. We were very fortunate to recruit a team that has a good understanding of the OBGYN market. Our sales force fully acts as subject matter experts who are fully dedicated to selling OVA1 and work closely with their counterparts Quest Diagnostics.

Many sales calls include both Quest and Vermillion sales reps, although obviously both groups of reps make calls independently as well. Both organizations are working to align territories and to build strong awareness among physicians. To support the sales force, we have launched a multi-faceted marketing campaign working with [Scott Stoltenberg]. This program focuses specifically on the physicians and patients. Again, our goal is to build product awareness and provide educational programs for the physician.

For the physicians, we have had a presence at the National Meetings of OBGYNs and Gynecologic Oncologists, as well as many of the regional- and state-level meetings. These regional meetings often afford us a more intimate direct interaction with clinicians. In the second quarter, we attended two national patient advocacy conferences and have targeted seven regional ACOG shows in October that will cover the US. Our direct marketing initiatives include full-page product ads in the leading clinical journals, Gynecologic Oncology and Obstetrics and Gynecology, starting in July and continuing through the remainder of 2010. These have a combined circulation of approximately 48,000. Our initial ad in the Wall Street Journal on July 13 was to support Ovarian Cancer National Alliances Advocacy Day in Washington. We will have additional hard copy ads in upcoming issues, as well as be present in the wallstreetjournal.com.

The Quest-sponsored CME program has been very successful and allows physicians to learn about OVA1 while achieving education credit. Dr. Ueland, the Principal Investigator of the OVA1 trial, has submitted a manuscript for publication in a peer-reviewed journal, and we plan to submit additional publications. We are also launching a major speaker bureau initiative in early fall. Again, I am pleased to report that we already have ten physicians who have accepted an invitation to be a [KOL] speaker. We will be training these physicians in the third quarter.

As an example of the power of the collaboration with Quest, we completed an initial pilot program this past week in San Antonio, which reached over 20 physicians at one sitting. As part of this education effort, we recently launched an OVA1 specific website, ova-1.com, that provides link to many of our new marketing initiates. As part of this program, we have implemented a search engine optimization program to increase traffic to the site. Additionally, in the coming weeks we will be launching an updated Vermillion website. Our early efforts for patient education include Twitter, Facebook and patient blogs such as Inspire. All are underway, and will become more of a focus during the remainder of this year and into 2011.

Turning to reimbursement, Vermillion obtained coverage for Medicare almost concurrent with the launch of OVA1, and our experience is this is one of the fastest timeframes in which to do so, and reflects OVA1's value proposition. Vermillion and Quest are working collaboratively to secure coverage from private payers. To do so, we are providing data supporting the value proposition for OVA1. These include improved outcomes for patients with ovarian cancer, the possibility of fewer second surgeries, and more efficient delivery of chemotherapy. In summary, we believe that many of the questions that form the basis of market adoption have been answered. Clearance of the test by the FDA provides important independent validation of the clinical data. The availability of test at Quest Diagnostics means that physicians and patients have ready access to the test, and reimbursement by Medicare means that a substantial portion of patients who would benefit from the test are covered and paves the way for coverage for other patients.

Dr. Fung will now discuss our pipeline.

Thank you, Gail.

From an internal R&D perspective, there are two areas we are currently focusing on, ovarian cancer and peripheral artery disease. Our first project is to develop OVA2. We are evaluating and validating biomarkers that may expand our ability to enter into other diagnostic arenas in the field of ovarian cancer. Tests that have a wider field of views, such as evaluation of symptomatic women or high-risk women, will require greater clinical sensitivity. In collaboration with our colleagues at Johns Hopkins, we are currently working to identify biomarkers that may help us achieve this. Our initial plan for OVA2 includes additional biomarker discovery to enhance the overall positive predictive value and specificity achieved by OVA1.

We will provide an update on progress in this program at the end of 2010. We are developing [Vasclear], our PAD test, in collaboration with Stanford University to aid physicians in the diagnosis of PAD, which is a disorder affecting approximately 12 million Americans and that is underdiagnosed and undertreated With the rising incidence of diabetes, the incidence of PAD is expected to increase as well. The absence of a blood test contributes to the underdiagnose of PAD.

To date, we have two peer-reviewed publications describing our discovery and validation efforts for those tests. We are very pleased that Quest Diagnostics has accepted those potential test as a second diagnostic under our existing strategic alliance agreement. The next step in bringing this to market is an intended use population study, which we expect to commence before the end of 2010.

Now, I'll turn it back to Gail.

Thank you, Eric.

Let me close by recapping our achievements in the first half of 2010 and providing some insight into goals for the remainder of the year. As I said, we emerged from bankruptcy on January 22. We launched OVA1 on March 9. We obtained coverage on March 11. We had issued patents in ovarian cancer and Alzheimer's. We hired six people in June, and subsequently we hired five more in July. And then we were listed on the NASDAQ on July 6. We are very pleased with the initial adoption of OVA1. In just 16 weeks, we estimate 1,247 tests have been performed. Given our short time in the market, we continue to see steady adoption, as is demonstrated by the month-over-month run rate. Going forward, we will discuss our performance on a quarterly basis, but will provide annual guidance to allow for the market variability that often accompanies a new product launch.

With the addition of our new and talented sales personnel, along with recently implemented marketing initiatives, we fully expect these efforts to accelerate revenue growth over the remainder of 2010 and into 2011. Given we are only five months into our launch, we would like to reemphasize that it will take time to reach and educate the roughly 35,000 OBGYNs in the US. We believe the long-term market opportunity of over one million tests per year remains very compelling and are driving hard to tap into this as quickly as possible.

Moving on to forward guidance, we currently anticipate volumes of OVA1 to be between 8,000 and 10,000 tests for the 2010 calendar year. Additionally, we expect to be launching internationally during 2011. Our initial strategy includes working with Quest in the following countries; England, India and Mexico. Both organizations are working closely on developing a meaningful strategy, and we will discuss our plans in more detail as the year progresses. We will also be evaluating other territories such as Europe, Asia, and South America.

Our goals for the remainder of 2010 are as follows. First and foremost, we will focus on driving market adoption. We will do this through our well-trained sales infrastructure, and implementing programs such as the KOL initiative, the CME program, and increasing our marketing activity. A key driver of market adoption will be the acceptance of the OVA1 clinical trail manuscript by a peer-reviewed journal. Both Quest and Vermillion are determined to broaden reimbursement coverage. Lastly, in preparation for entering the European markets, we will achieve the CE mark.

I want to end by acknowledging the employees at Vermillion for their hard work and dedication in getting the Company back on its feet. The future has never looked brighter, and we must stay focused in order to ensure ongoing success in launching OVA1, which remains our key near- and mid-term growth driver. Over the long run, however, we want to provide a broad array of diagnostic tools in disease states with significant unmet clinical need. We will accomplish this goal through a combination of our internal R&D pipeline, as well as potential external opportunities, whether they be end licensing, small acquisitions, or distribution agreements.

This should allow us to leverage our unique business model of being a software-centric diagnostic Company with R&D collaborations with important academic institutions and a great distribution partner in Quest. Additionally, I want to thank the shareholders who have supported us through the volatility over the past few months. I know it has been difficult, but you can be assured that Management is determined to act in the best interest of our shareholders and will look at all avenues to enhance value over time. Thank you.

Operator, we are now ready for questions.

Thank you.

(Operator Instructions)

Our first question is from the line of Zarak Khurshid. Please proceed with your question.

Good morning. Thanks for taking my questions.

No problem. Good morning.

Good morning, Gail, Dr. Fung, and company. So, on the publication, I didn't quite catch it on the comments. So, can you just remind us what exactly is that data and what is the journal again?

No, we'll not disclose the journal to which we are submitting the manuscript, but it is a high-profile oncology journal, and would describe the data from the OVA1 study as well as some additional data that describes comparison against standard of care. And demonstrates the improved sensitivity of OVA1 compared to standard of care.

Okay, great. And then any sense for how many of the OVA1 tests performed in Q1 -- how many of those were for pelvic mass triage versus other uses?

No, we don't have that type of granularity.

Okay, fair enough. And then just some housekeeping. With respect to the milestone revenues, how should we think about that for the remainder of the year?

Well, the milestone revenues are recognized over the period of which -- that is $3 million forgiveness, and it is recognized over the period of the exclusivity of the OVA1 test.

Okay, so that's essentially for the next five years, we should assume?

Three to five years. Correct, yes. Because at this point in time, we don't have visibility to that, so it's just three to five years.

Got you. Okay and then, could you just remind us briefly about the revenue recognition policy? It seems to be a little bit of a disconnect between the kind of revenue assumption that we had made off of something similar to this 1,200 test number. And maybe any comments you have around pricing and current reimbursement levels would be great. Thank you.

Sure, this is Gail. I'll make a comment, and then I'll let Sandy provide a little bit more detail. So, I think we're very pleased to see this type of adoption, given that when we launched the test we were a Company of three people. It has just been very successful for us, and the early indication for this coming quarter look very promising. And the way that this is working is that, as this thing gets billed, if you'll see, there's a lag time -- excuse me -- between what we got paid and of the test actually performed. But you can do the quick calculation, and you can see that the average reimbursement for the tests that were paid out was about $571, which indicates that we are getting coverage outside of Medicare, and it's looking very favorable. So with that, I'll let Sandy then comment on some of the revenue recognition.

Correct. Well, as Gail indicated, we have four criteria that need to be met in order for us to recognize revenue. And in absence of those four criteria being met, we recognize the balance of the revenue on the balance sheet under "Deferred Revenue." So, also as Gail indicated and as I stated earlier, 342 tests is what was recognized on the income statement for product revenue. The balance of the tests for the 1,200 tests were recognized on the balance sheet.

Great, thank you.

Thank you.

(Operator Instructions) Our next question is from the line of Jeb Besser with Manchester Management. Please proceed with your question.

Hi. Two quick questions here. One on this issue of the reimbursement, just a little bit more detail there. So, you said you recognized 342 tests on the income statement, so that would imply 342 tests, $45,000 implies about $132 a test. Is that a fair assessment of your economic take on each test?

Currently, we're operating under the 2005 agreement with Quest which allows for a minimum of 25% of Quest's gross margin. And as we look at this, it's too early to tell the foregoing reimbursement, so we'll be evaluating this over time. However, the revenue, the average reimbursement rate was $571, so it does indicate that we are getting additional reimbursement in excess of the Medicare reimbursement rate of the $516, which we believe is the floor.

Right. No, I understand that. And that's very favorable. I'm just trying to understand exactly just -- okay, so the bottom line is that you get at a minimum 25% of Quest's gross profit.

That is correct. Gross margin.

Gross margin, okay. And then as far as the new Quest international territories, are they going to pay you any additional upfront money when they launch in those territories, or are the economics going to be the same as the US? What's the --

There will not be any money up front because this is part of the original agreement, that they had access to these territories. We are working with Quest right now. In fact, will be meeting with them tomorrow on this plan. And it will be dependent upon how we launch in these countries. And each country is very different, as you know, and the reimbursement from each country is very different. So, we don't have that clarity yet. That's what we're going to be working on in the fall.

But what I can tell you is that they are very excited about having this product as part of their portfolio in these countries because they see it as being something that's very important to women's healthcare and it's a clear differentiator. So, we're very excited about that. We also have quite a few people in the queue that are very interested working with us in the Europe, and that is something that we will be working on in the fall. So as you can imagine, having the Quest strategy is very important to us before we pursue any other alternative strategies. So, they all have to work very synergistically.

Okay, very good. Very good. And then just one more follow-up on this 2005 agreement. So, should we assume as Quest scales up and as the test volumes ramp up that their gross profit will also scale up?

That's certainly a possibility.

Okay. All right. Very good. Thank you.

Thank you.

Thank you. Our next question is from the line of Jim Wiggins with Phronesis Partners. Please proceed with your question.

Yes, wondered if you could tell us who performs the tests, some breakdown between OBGYNs and GOs?

The -- this is Bill, Jim. The primary focus is the gynecologists. Those are the referring physicians. That is the intended use so that the physicians will conduct the test prior to referral to a specialist.

Okay. And then -- I'm sorry, and then anything else you can say about the plans for PAD, what timing of that will be?

I think it's too early, Jim, for us to talk about the timing. But I will say that it is our plan as we continue this ramp-up and we get ourselves organized, Eric will be spending more time planning this intended use study. So, that's a test that you're looking out, it's just certainly not a 2010, 2011. It just depends on how far we get with that as a clinical trial. But it's not multiple years away. It just depends on how fast we proceed. Right now, we have a lot of work to do, and we're very focused on making OVA1 a success while Eric works in the background.

Thank you.

Thank you. Our next question is from the line of Kevin Ellich with RBC Capital Markets. Please proceed with your question.

Good morning. I jumped on the call a little late, and I might have missed this, but I think I caught that you guys said that you recognize 342 tests on the income statement this quarter? But there were 1,200?

Yes, that's correct. There were over 1,200 that were performed during the period, the balance of which is on the consolidated balance sheet for deferred revenue.

Deferred rev. Can you just explain why you only recognized 342 versus the 1,200?

Yes. It's just a simply timing of reimbursement. When you launch a new test in the market, as you can imagine, you have to set up a lot of things with a lot of plans relative to billing. So, the billing don't always happen and the payments don't always happen concurrent with the quarter. So, I would say overall it's more of a timing issue.

Okay, and then that 571 number that you guys were talking about, is that a contracted rate with the commercial payers? Or is that out of network billing?

It's actually an average. So, if you look at how many tests we performed and the revenue and do a simple division, you'll see that it's a blended reimbursement of about $571. So, what that means is that there's certain tests that were billed through Medicare, and they paid at $516. And there some that were probably billed and they were paid at list, then there were some that billed that may have been paid at various prices. So, it's going to be a combination of Medicare, some contracted rates, some list price. It just depends on who the client was.

Okay. And I guess maybe a better way to think about it, Gail, is the average -- can you tell us a little bit about the average patient, who's getting the OVA1 tests? Would they be more Medicare versus commercial? Does that make sense?

I think we don't have enough data yet to give you an adequate distribution of the payer mix. What I can tell you is that, in general, we're estimating that about 30% or 35% of our volume is probably going to be Medicare. But with just five, six weeks in the market, it's just a little bit too early to give clarity on that.

Got you. That's helpful. Thanks.

Thank you. Our next question is from the line of Jim Parker with Alliance. Please proceed with your question.

Hi, good morning. It's Jeff Parker.

Hi, Jeff. How are you?

Good. Couple of questions. First, maybe if you could give a little more clarity around your expected operating expenses on a quarterly basis? I know you said $3 million to $4 million would be the cash burn for each quarter. So, this quarter you had about $4.1 in operating expense. It looks like a little over a $2 million of that was noncash. So, maybe a little more guidance here would be helpful.

Sure. So, for the first six months of the year, we incurred approximately $7 million in operating expenses, and then we expect operating expenses for the remainder of the year will be approximately $8 million to $10 million. We did incur, as you said, noncash charges of approximately $371,000, and then also related to the debtor's incentive plan, $820,000 roughly, which is strictly the fair value valuation of the restricted stock award.

So, this quarter, we also incurred costs that I wouldn't consider as ongoing costs in terms of we -- there was a strategic -- where we had to get compliant with the SEC and bring everything forward, so there was certainly an investment to do that, which incurred certainly legal expenses as well as accounting expenses, to bring everything compliant.

Okay, great. Thank you. And then one last question, on the balance sheet, the deferred revenue of $1.3 million, $1.5 million, I can't reconcile that with -- so you have about 900 tests that you've put on the balance sheet, as you talked about earlier. What else is included with that number?

The license revenue. As we amortize the license revenue, it's the balance. There is a component that's in the current deferred revenue in the current as well as the long-term deferred revenue.

So, about $3 million forgiveness that you talked about?

Yes.

So, is it fair to assume that from a product perspective, it would basically be the 900 tests not recognized times the approximately $131 per test?

Yes.

So, a little over $100,000 of that $1.3 million is product, and the remainder is the license fees?

Yes, that would be correct. And then as I said, also the long-term deferred revenue includes the license revenue.

Okay. Great, thank you.

Thank you, Jeff.

Thank you. Our next question is from the line of Greg [Vennett], private investor. Please proceed with your question.

Good morning, Gail.

Good morning.

How are you today?

We're doing good. We're much better than we were a year ago.

Well, I want to congratulate you. For the people that are listening to this call, I've been following Gail when she came on Ciphergen and now Vermillion, and I'd like to say, Gail, you're one of the most credible executives I've ever had the pleasure to invest with. You've done everything that you said you were going to do from your first days at Vermillion.

You're the first CEO who's ever brought a company out of bankruptcy in which the original investors -- the equity investors -- originally in Vermillion have -- actually, you've protected their assets and they've kept their equity. I want to congratulate you and your team on that, Gail, and keeping Eric on board. I know it was a tough time for you.

Thank you very much. It has been a struggle -- but look, we're very pleased today to have a product and have one that's getting paid for and to have an organization like Quest out there selling it, and to have doctors ordering it. So, I think it's going really nicely. And I think the benefit -- if I could say to everybody on this call, I sent an e-mail to this entire staff last night telling them that one of the things I think they can be the most proud of is the e-mails we get from the women who have had access to this test already and the difference that it's making in their lives.

Hopefully, there will be more tests for everybody out there. Let me ask you -- and I'm not really sure how this works, and maybe some other people do. On obtaining private pay from insurance companies for this test, is that one of the big challenges now is to have this test covered the Aetnas and the United Healthcares out there? Or are they covering any part of it now?

Yes, it is a challenge. It's a challenge every company faces with every product. But I think the great news for us is that, again, only being on the market this short time, several product payers are reimbursing for OVA1 at this time. That's obviously why you see this mix being as high as it is already. And like I said, Quest and Vermillion both are continuing to work to increase the coverage.

Also, it's a little bit difficult for us because due to specific contractual obligation, and it's Quest's policy not to comment on specific payer coverage and reimbursement rate. But it's clear that when you look at the number of tests and everything, you can see that our average is way above the Medicare, which says that people are paying for the test. So, but it will be -- it is a challenge. We will need to do more peer-reviewed publications. We know that. I would say that the most comforting thing that I can say to investors is that we recognize it, we know the challenge, and we think that we're well-positioned to take on that challenge.

On a timetable, Gail, do you think that's something that you think you can have accomplished in the next year or six months? Or is there any way for us to judge when everybody may cover this test for you?

I think it's very tough to say. All I can -- again, all I can reassure you is that it's a high priority for Quest and it's a high priority for Vermillion. So, we are both very focused on it, and we think we've had -- we looked at some comps. We've looked at about five different companies that we think have some similarity to this launch, and we did a spreadsheet and we looked at their metrics. And we're way above the curve of most companies that you would even compare to us So, we feel very fortunate that we already have Medicare and a lot of the small regional plans paying, and we're working diligently on many of the other plans.

Great. If I can ask you another question, for Europe, you've gotten the patent. And you indicated that Quest -- you're working with Quest in England and India and Mexico. In order for you to market this test in the EU, I guess in Europe. Quest doesn't have the rights to do that from what I understand, so you're going to be picking -- you'll probably be working with a different party. What's the timetable or what's your challenges over the next -- I don't know if it takes six months, a year, or what will -- how do you get this test marketed in Europe?

So, there will be a couple of different things that we're looking at already. The first thing you need to do to be able to be successful in Europe is to have a CE mark, and we're projecting that -- we've always said that we would try to have that by the end of 2010, and we feel that we're still on target to achieve that goal, because that opens up a lot of the doors, if you will. As I've said, we're working with Quest right now because there are a lot of ideas and there are a lot of ways that we can attack that market, and we just want to make sure that we take our time and that we do the right thing.

So, what we'll do is we'll figure out our strategy with Quest and figure out how that that's going to be worked out. We have meetings set up with a lot of other folks who have expressed an interest in partnering with us in Europe, and we'll just have to work out all that plan, and then like I said, we'll communicate that as the year progresses. But it's certainly our goal to be in Europe in early 2011.

Great. So, 2011 revenue will be recognized, hopefully, in Europe then?

Well, a portion of it, certainly. The US is -- yes, because the US is going extremely nice for us, and Bill can speak to that. We just brought in 11 sales people about two weeks ago for few days of training, and we are very fortunate -- it's really quite interesting because most the time you can't find women executives. But I can tell you that we've found a lot of really strong women that wanted to sell this test, and we've got two gentleman on board that are just fantastic.

So, this team came in and spend a couple of days. And the great news for us is that we were able to recruit people that had a really strong OBGYN background in a Rolodex. So, it was really just getting up to speed on all the nuances around the tests, so we really have already seen the impact of the lady that we hired in New York and the lady we hired in Florida. Both have been very productive territories in the second quarter.

Great, and a final question. Hopefully, it will be for Eric. Eric, you're working on a -- I guess the longer-term product development. And there's PAD, which you guys have indicated might be a 2012, I guess, would be the earliest. And then I also noticed that you have registered patents for Alzheimer's. I guess this is from a bodily fluid. Do you know of -- how far along are you on the Alzheimer's test? And do you know of any competition that's using a bodily fluid for another way of targeting whether a patient has Alzheimer's or not? Or you've patented some of these proteins for that. Do you think that you're the first marker for proteins for Alzheimer's, for a test for Alzheimer's, whether it's a bodily fluid, or spinal fluid or blood or whatever?

Yes. So, obviously, we have to allocate our efforts and R&D judiciously, and as we've indicated, our primary areas of focus are OVA2 and Peripheral Artery Disease. Although we were issued the patent for Alzheimer's Disease biomarkers, that reflects work that was done a few years ago, and it is not currently an active program. Obviously, there's a lot of work going on in the field of Alzheimer's disease. There's a rather large, well-publicized manuscript that came out earlier just this past week looking at spinal fluid for some biomarkers for Alzheimer's Disease.

So, certainly it is an area of interest. I think that the important take-home message regarding the Alzheimer's Disease patent specifically are, a. It really validates our approach to patenting biomarkers and the fact that we understand the process and have a good strategy for patenting biomarkers, and this is obviously true of our ovarian cancer portfolio as well. But additionally, it represents an asset that we can either choose to continue to develop internally, or in fact it's an asset that we may choose to partner out. And because there are companies and because there are people interested in developing tests for Alzheimer's Disease that are inclusive of the cerebral spinal fluid markers, I think it represents a very important asset for this Company.

Great. I lied. One final question, OVA2 -- Quest hasn't chosen OVA2 as their third and final test? Is that correct?

That's correct.

And OVA2, am I correct, that's more of a screening for all women, somewhat like a Pap smear? They don't necessarily have to have a pelvic passage? It's something that they would have a screening done once a year or whenever their OBGYN suggested having that? Is that -- that's the purpose of that test? It's like a mass market test?

So, as I indicated, the goal of OVA2 is to penetrate broader markets than the OVA1 market. I think the final intended use nature of OVA2 will be dependent on the data. Whenever you use the S word, being screening, you have very large levels of data that you need to be able to generate. And this kind of data -- the effort required to that is really an important economic, business, and corporate decision, but it all derives from the data.

So I am -- what I can tell you today on this call is, as I indicated, we're doing the work, we'll look at the data, and I think in a few months out we'll be able to have greater clarity on what we anticipate the ideal intended use statement would be.

Great. Thank you for all your hard work, Eric and Gail.

Thank you.

Thank you. Our next question is from the line of Jeff Graph with Springhouse Capital. Please proceed with your question.

Hi, I had a question on the royalty formula that you mentioned, the 25% of the Quest gross margin. Is this a formula that will stay in force going forward, or are there certain milestones or other benchmarks you'll reach in which case that -- the formula will change?

There are no milestones associated with the formula. The milestones are only associated with the development loan.

Okay, so that's the formula going forward then?

Yes.

Okay. And then the second question on the adoption curve, you mentioned that you had looked at five comparable launches. Is there anything you can describe about the adoption curve? Maybe if you look at a couple years in terms of just how that adoption curve looks?

I mean, I think it's way too early to say what's going to happen in years from now. Certainly it's our goal to penetrate as much of this market as we can as fast as we can. What we tried to do was we tried to look -- we started out with about 13 companies. We narrowed it down about five just so we can internally benchmark ourselves. And what we can tell you is that there are very few companies that we can find that have had in the first 15 weeks this type of adoption, especially given the Medicare and the fact that we were a Company of three people when we launched this test, right?

So we're just looking at metrics for other companies as far as their penetration rates, did they have reimbursement, what was their market opportunity? So, I think it's just to give you guys comfort that we are measuring ourselves, and we feel like the first quarter was great; and I'll let Bill comment a little bit on what he's doing and how things are looking.

Well, we're obviously very excited about the performance in the second quarter, especially when you look at the fact that we hired salespeople throughout the second quarter that really didn't have an impact on those numbers. So, we expect to continue to accelerate that growth trend with the salespeople that we have on board now with the 11. And with the market initiatives that Gail outlined, we feel that we will have very effective third quarter and fourth quarter, as we've outlined in the guidance for 2010.

Okay, thank you.

Thank you. Thank you. Our next question is a follow-up question from the line of Zarak Khurshid with Wedbush Securities. Please proceed with your questions.

Thanks for taking the follow-up question. I think the prior gentlemen was essentially trying to ask -- the current royalty rate appears to be somewhere around 25%. What are the catalysts or what are the events that allows you to get to 40% of that gross margin?

I don't know that there's a catalyst that allows us to get to 40% of that gross margin. That would require a renegotiation. But what we can do is continue to drive down the cost of goods so that the gross margin is higher. The higher that we get the average reimbursement, obviously the more take-home for us.

So, I think that it's in our best interest to continue to drive this reimbursement as high as we can get it and to get the cost of goods as low as we can get it. And I fully believe that that trend has already -- we've already seen that in the first quarter. So, I think we're very fortune to be in this position.

Okay, and then along those lines, can you just maybe talk about the logistics of the test itself? Is Quest running all the tests in one site? Are they aggregating the results from multiple different platforms? And I guess, how is the algorithm applied? And what is the potential leverage and I guess personnel that's used to --

Sure. To answer your first question, right now the test has been set up in the Chantilly lab. So, everything is being shipped to Chantilly, and everything has been running there for exactly that reason -- for efficiency's sake. I'm assuming that -- it's a question you would have to talk to Quest about, but my best guess would be that once the volumes reach certain points, they may decentralize and maybe set it up on the West Coast or something like that. But I think in the near-term, their plans are to continue to expand into the Chantilly lab.

And, I mean, how -- at the current reimbursement rate, I would assume that the gross margin on their test is extremely high relative to their other tests. I don't know the labs that well, but if they have a 50% gross margin on a lot of the ME2 tests, with the premium price here, it's probably already in the 90% gross margin level. Is that how you would think about the test?

I think you'd better ask Quest about their gross margin and their specifics. It's all I can do to take care of Vermillion.

But I would say that in general in the market, I think this is a very attractive test for Quest. And I think they've done an excellent job of supporting the test through their marketing efforts, through the media, through their salespeople, and we see -- look, when we launched this test, we all had to learn to work together. And as we've built our sales groups, we see our salespeople working with the Quest reps and really getting together and really attacking these territories and coming up with the best sales plans, the best practices.

So, given everything that we had to do, again, to do over 1,000 tests in your first few weeks is just unbelievable in my history of launching tests, and I've been involved in launching ThinPrep in HPV, HIV -- I mean, for most of you on the call, you know that I spent many, many years at LabCorp, and to see the uptake be like it is has been fantastic.

Okay, thank you.

Thank you.

Thank you. Our next question is from the line of Neil Klein with NH Klein & Company. Please proceed with your questions.

Hi, Gail. Neil Klein, private investor. The gross profit that the gentleman just referred to at 90%, which you didn't agree to, can you give us some range of what the gross profit might be from Quest?

Well, as Gail said, I think you need to talk with Quest about that. But what we estimate is about $45 for cost of goods on a test. And we do see that the average reimbursement rate is approximately $571, which indicates that there is a blend in there certainly higher than the Medicare reimbursement rate. And so there were some of private payer as well as list price as well. Our gross margin range we estimate to be approximately 80% to 90% gross margin.

I was meaning for our Company, but not for their company?

Yes, I mean, our concern is for Vermillion.

Yes, right. But our reimbursement of $571 average is based not on that figure but on 25% on whatever Quest's cost of goods sold is. Is that not correct?

If it is based on 25% of Quest's gross margin.

Right, so that's after their cost of goods sold?

Yes, after their cost of goods sold. So, our average sales price represents in this current quarter approximately $132 per test.

So, your average reimbursement is running $132 per test?

At this current quarter with the minimum 25%, based on the 2005 agreement, that's correct.

Okay, that answers the question. And the only other thing is, the formula for gross profit in Quest's contract with you. Is that pretty much stated out what goes into gross profit? Because as an accountant, sometimes other items might be added to cost of goods sold that one might not expect.

I think we're pretty clear on what -- it is defined in the contract, and we've been working diligently with them, so we feel like that's a pretty good number.

Okay, I thank you very much.

No, thank you.

Thank you. That will conclude our Q&A session for today, Ms. Page. I will turn the conference back over to you to continue with your presentation or closing remarks.

Okay. Thank you, operator. On behalf of the Management team, we just really want to thank everybody for joining us today. We appreciate your interest in Vermillion, and we look forward to updating you on our progress on our next quarter. Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and we ask that you disconnect your lines. Thank you.