Aspira Women's Health Inc (AWH) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the Vermillion financial results for the third quarter year 2010. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session.

(Operator Instructions)

As a remind this conference is being recorded today, Thursday, November 11, 2010.

It is now my pleasure to introduce Mr. Ashish Kohli, Vice President of Corporate Strategies. You may proceed, sir.

Thank you, Operator. And welcome to our conference call. Today, we issued a financial results press release for the third quarter of 2010 which is also on our website and we encourage you to refer to it for more details. 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 regulations, payer reimbursement, relationship with our strategic partners, and other factors described in the Vermillion 2009 form 10-K, quarterly results on form 10-Q, and current reports on form 8-K.

A telephone replay of this call will be available beginning approximately one hour after the call through November 26, 2010. A copy of our financial results release for the period ended September 30, 2010, is 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 question-and-answer session that will follow, are the copyrighted property of Vermillion with all rights reserved. Any redistribution, retransmission, or rebroadcast of this call in any form without the express written consent of Vermillion Incorporated is strictly prohibited.

The agenda for today's call will be as follows. Gail Page, our Chairman and Chief Executive Officer, will lead off by providing an update on some of our key corporate initiatives. She will be followed by Sandy Gardiner, our Chief Financial Officer, who will provide a financial overview. And then Gail will close by providing an update on the sales ramp for OVA1. With that, I would like to turn the call over to Gail.

Thank you, Ashish. Today, I am very pleased to report great progress in six key areas. First, on the sales front, Quest Diagnostics performed 1,973 OVA1 tests during the quarter, representing volume growth of 74%, compared to the second quarter of 2010. This accelerated adoption of OVA1 reflects the effectiveness of our sales organizations, our marketing effort, and the launch of our medical education program. These initiatives combined with the Quest Diagnostics sponsored program has allowed us to achieve significant growth.

Second, I am pleased to announce the successful extension of the strategic alliance agreement with Quest Diagnostics. The new terms, which will be retroactive to the beginning of the launch, allow for Vermillion to receive a fixed payment of $50 on every OVA1 test performed plus a 33% royalty on Quest Diagnostic's gross profit for OVA1. As part of the new terms, Quest Diagnostics exclusivity period will be extended for two years with an option for a third. As the diagnostic industry leader, Quest Diagnostics is well positioned to continue to help us drive growth with the test with its installed physician client base. We look forward to building upon the success to date of our combined efforts to drive growth and adoption for OVA1.

Our third accomplishment involves the initiation of efforts toward international expansion of OVA1 to broaden our revenue opportunity. During the quarter, we laid the foundation for a successful commercialization strategy by achieving one of our major goals for the second half of 2010 which was painting the CE mark for OVA1. Which as many of you know is a requirement for marketing the test in the European union. Next, we hired a chief colleague to develop a comprehensive strategy for an international rollout in 2011.

Finally, while it is early, we have already begun a meaningful dialog with Quest Diagnostics about India, Mexico, and England. Additionally, we have identified China and Brazil as markets of interest. Currently, we are in conversations with potential partners and distributors, and we will give you an update on these conversations on our next call. The fourth accomplishment pertains to our PAD program. We believe that PAD is a compelling market opportunity, given that it is highly prevalent but an underdiagnosed condition that primarily impacts smokers and diabetics over the age of 50, and elderly over the age of 70. Which in aggregate represents a population of tens of millions.

As we indicated on our last call, the next step in bringing our tests for peripheral artery disease to market is an intended use population study. We are pleased to report that we have engaged the Colorado Prevention Center to perform this trial with us. CPC is a renowned academic research organization that has a focus in cardiovascular clinical trials, and is led by Dr. William Hyatt who is currently the Novartis foundation and Dallas professor for cardiovascular research in the department of medicine, University of Colorado, Denver School of Medicine with appointments in cardiology and geriatrics and a clinical focus in vascular medicine. We anticipate that the population will provide us with a finalized marker algorithm and will be completed in the summer of 2011.

During the quarter, we received a notice of allowance from the United States Patent and Trademark office for our patent entitled beta 2-microglobulin as a biomarker for peripheral artery disease. To help fund this program, along with our OVA1 trial, we recently were granted a total of $489,000 in therapeutic tax credits. Fifth, on October 25, at the 13 annual, international Gynecologic Cancer Society meeting in Prague, Dr. Fred Ueland from the University of Kentucky presented compelling sensitivity data on OVA1. Dr. Ueland's presentation demonstrated that OVA1 has sensitivity for ovarian cancer of 92.5% as compared to 68.9% for CA-125, using cutoffs established in the ACOG criteria for adnexal mass evaluation.

Additionally, OVA1 detected 23 out of 24 stage one epithelial ovarian cancers. And 17 out of 17 stage two epithelial ovarian cancers for an overall sensitivity of 97.6% for early stage epithelial ovarian cancer. This compares to 65.9% for 125, using the ACOG cutoff. The improvements in sensitivity was even greater among premenopausal women. For OVA1 sensitivity for early stage was 92.9%, and for CA-125, sensitivity was only 35.7%. Overall, OVA1 detected 76% of malignancies missed by CA-125 including all advanced stage malignancies. Because of the high mortality from ovarian cancer, clinical sensitivity for malignancy is paramount.

Lastly, I want to acknowledge the progress we've made on reimbursement with health plans. Currently, Medicare covering OVA1, which totally reflects its value proposition, however, we realize that broader pair coverage is necessary in order to accelerate other adoptions. When a new technology is introduced, it is common for payers to take months or even years to review the clinical utility and real world utilization of the assay. Where evidence evolves and improves over time.

As an example, genomic Health launched onca type BX in 2004, it took two full years before carriers such as Aetna and United Health Care began to reimburse for the assays. And three years for a positive Blue Cross Blue Shield technical evaluation center review to be issued. With OVA1, we are seeing health plans around the country, including multiple independent Blue Cross Blue Shield plans, and several regional plans publish positive coverage policies within just eight months of OVA1's launch. We are aware that some insurers have called OVA1 experimental and are investigational. Which is not unexpected or unusual with any new technologies such as OVA1.

Vermillion and Quest Diagnostics are working with these carriers to better understand and provide the information these plans require to provide coverage to their members. Even in instances in which a health plan has stated that OVA1 is experimental and/or investigational, we are finding many are reimbursing for OVA1, and these same plans are covering OVA1 for their Medicare Advantage members. We are confident that as volume and demand for OVA1 increases, combined with expected upcoming journal publications, coverage and reimbursement for OVA1 will continue to expand. Moreover, we recently hired Jeff Salsman to be our Corporate Director of Reimbursement. He has 21 years of experience in the payer community as well as with Quest Diagnostics should help build upon the coverage momentum currently under way. With that as a summary, I would now turn it over to Sandy to discuss our financial performance.

Thank you, Gail. The product revenue numbers I'm about to discuss are calculated using the 2005 agreement. As Gail highlighted earlier, we have entered into a new agreement with Quest Diagnostics. This will be implemented beginning in Q4 and as Gail stated will apply to all product sales retroactively. Beginning with the date of commercialization. During the quarter, we estimate that 1,973 tests were performed, and Vermillion recognized product revenue for 1,250 tests. Since the launch of OVA1 through the end of the third quarter, we estimate that 3,220 tests have been performed, of which we recognized product revenue for 1,592 tests, based on the actual amounts received from Quest Diagnostics to date for the performance of those tests.

Total revenue for the three months ended September 30, 2010, was $413,000, $114,000 from product sales of the OVA1 test, and $299,000 from licensed revenue. Operating expenses for the three and nine-months ended September 30 were approximately $4 million and $11.2 million, respectively. This included $1.2 million of noncash stock-based compensation expense in the third quarter 2010, and a total of $3.4 million in the first nine months of the year. Noncash stock-based compensation expense included $828,000 and $2.2 million, related to the debtors incentive plan for the three and nine months ended September 30, respectively.

We entered the third quarter with 17 employees and currently have 26 employees. This number will likely remain stable as we have now built our infrastructure to a level that can support our near-term goal. Total net loss for the third quarter was $2.7 million, which included $1.2 million of noncash stock-based compensation expense as previously stated, and $980,000 in noncash gains from revaluation of warrants during the period. Total net loss for the nine months ended September 30 was $15 million, which included $3.4 million in noncash stock-based compensation expense, $4.4 million in noncash gain, resulting from the exercise and fair value re-evaluation of warrants, and $8.6 million in reorganization items. Reorganization items included an additional $1.9 million in noncash stock-based compensation expense related to the debtors' incentive plan.

Our current shares outstanding are 10.4 million. Weighted average shares outstanding were 10.5 million for the third quarter 2010, and 10.3 million for the nine months ended September 30, 2010, for a net loss of $0.26 a share, and $1.45 per share respectively. Cash and cash equivalents at September 30, 2010, was $25.3 million. We continue to manage our cash judiciously while we build the business. We anticipate that cash usage during the fourth quarter will be approximately $3 million to $4 million. I will now turn it back to Gail for a discussion on the sale.

Now, I would like to delve into our sales and marketing efforts in greater detail. During Q3, there were 1,973 tests performed, a 74% volume increase over the previous quarter. Early results in the fourth quarter indicate an increase matching that of the third quarter on a monthly average, and I will elaborate on those in a moment. The sales and marketing activities initiated in early Q3 that we described in our last call are now fully implemented and will continue through Q4.

During Q3, we completed our hiring and training of 12 sales reps, and they are now all actively engaged in their territories, and working with their Quest Diagnostics counter-parts to drive OVA1 volume. Our medical education program is in full swing, and we have completed 24 events through last week, with over 400 physicians attending. We have another 16 scheduled before the end of the year. These provide excellent opportunities for peer to peer discussion of OVA1 and accelerate our ability to close the position in a timely manner.

September was ovarian cancer awareness month and Vermillion representatives sponsored or participated in seven events nationwide. These audiences consisted of women who have survived ovarian cancer and families of those who have lost the battle. Both are very vocal in the fight against ovarian and having their support is integral in creating patient demand among the patient demographics. During the month of October we participated in each of the seven of the ACOG district meetings which were attended by over 1,500 clinicians and we met with over 900 face to face and captured electronic addresses for follow ups and ongoing updates on OVA1.

During the remainder of 2010, we are attending another four professional meetings and we will continue creating awareness of OVA1 among medical professionals having an impact on the next mass evaluation. Our marketing activities compliment those of Quest Diagnostics, marketing sales and public relations campaign, for OVA1. We continue our focus on the education of over 35,000 gynecologists in the US, and are measuring our initial sales effectiveness by test volume generated in each territory.

Here is what we know thus far. Our most seasoned rep has grown her territory from 71 tests per month to over 228 per month, a 300% increase. Two additional reps with five months experience have grown their territory by 200%. Several of our reps hired in July have increased their territory over 200% in just two months.

Finally, to expand our ability to track and manage our marketing and sales programs, we will be implementing a customer relationship management tool in January. The CRM system will give us the ability to manage customer contact, market penetration, and sales effectiveness on a much more granular level. We are revising 2010 guidance from 8000 to 10,000 tests to a range of 5000 to 5500 tests. Our previous guidance was based on just 16 weeks of history.

Now with greater than 30 weeks of sales history we know the following. Our initial model for the sales reps was too aggressive in terms of the timing associated with actual face time with the doctors and the number of visits it would take for adoption. Our previous selling models concentrated on the primary physicians but we have since shifted our focus to the key influencers to ensure they understand the test and support its use by the referring gynecologists. Therefore we are spending more time educating the expert, the gynecologic oncologists.

Although Q4 trends have been favorable thus far, we recognize with the holiday season approaching, there could be uncertainty around physician visits during this period. We have also factored this into our revised guidance. We have made some great progress but we have also made some mistakes. We are learning from both and now have more data that can help us forecast more accurately moving forward.

I would like to reiterate our key milestones achieved since our last call. OVA1 test volumes grew 74%. We extended our exclusive agreement with Quest Diagnostics with more favorable terms. Payer coverage and reimbursement of OVA1 has expanded and gained momentum. We obtained CE mark for OVA1 which sets the stage for our European launch. Lastly, Dr. Ueland presented OVA1 competency data to the IGCF meeting. Overall, we remain very encouraged of the market opportunity of greater than a million and continue to see physicians embrace this test. Our most recent data show that physicians are increasingly recognizing the value of OVA1. The adoption rate is all the more impressive considering the economic environment and the comparison to other women's health care product launches. In closing, Vermillion remains focused on enhancing shareholder value by expanding OVA1 revenue opportunities internationally as well as looking at ways to expand our product portfolio. Thank you. Operator, we are now ready for questions.

Thank you.

(Operator Instructions)

Our first question from the line of Matt Palmer with Roth Capital. You may proceed.

Good morning, everyone. And thank you for taking the questions. So Gail, first question, you're now expecting -- I wanted to ask about the change in the agreement with Quest, and maybe have you elaborate on that, and specifically start with you're now expecting a 33% royalty from gross margin. Can you remind us what you had been getting from Quest both in 2Q and 3Q? And also if I'm correct, your ASP per test declined in the third quarter. If you could comment on that and sort of what you -- what drove that.

Okay. I'll comment on the first part of the question and then I'll let Jeff talk about the second part. So let me remind you of one thing. There is an upfront payment that we will receive on each test performed, plus the 33% royalty on the gross profit. So there are two components of this new agreement. The agreement will be retroactive to the beginning of the launch as we stated. And we will be paid for all tests performed. And although I don't want to get into too much of the detail today, so that you can respect some privacy on the part of Quest, there will be fixed payments that will occur at the end of each month. The variable payments will also occur at the end of each month, based on the average reimbursement rate from the prior month. And then this will be trued up at the end of the fiscal year.

So we feel that this is a very enhanced agreement for us. It shows a true partnership. Especially given the first early years while you're trying to penetrate the market, and you're trying to drive adoption, and as you know, you're trying to drive reimbursement. So does that help you?

Yes, it does.

And then relative to the pricing, I'll let Jeff address that. And then I will follow up with you.

Okay. Thanks, Gail. We don't believe the actual sales price numbers actually imply anything at this point. Keep in mind, of course, that we are barely eight months post-launch and expect the rate of reimbursement to vary quarter to quarter or even month to month based on a number of factors, including the payer mix, and the billing cycle, and especially while payer coverage is first being established.

As Gail said earlier, remember that the payer community typically takes months if not years to establish coverage. Or for a new diagnostic assay, oftentimes during this period, there is no reimbursement. And in this regard, we believe that we're ahead of the curve with numerous positive coverage policies that we have, including Medicare, and the established Medicare rate allowable of over $516.

Okay. Great. Next, along those lines, in the quarter, you performed 1,973 tests but only recognized revenue from 1,250. Is the discrepancy of tests runs an issue of timing? Is the payment there of, is it an issue of timing, or is it an issue of getting paid at all?

No, it is merely -- this is Sandy. It is merely an issue of timing. And our revenue recognition policy for this quarter, for Q3, remains the same as for Q2. So the amount that we recognized as revenue is based on the actual amount received from Quest for the performance of the tests, and the balance of those tests are on the consolidated balance sheet as deferred revenue. Now, Matt going forward, obviously, the new agreement will have an impact on that, because the way the new agreement works is we will bet paid for every test as they're performed, and then we will true up with Quest on an annual basis.

Okay. So, just generally, you'll see that this is -- the payments will be higher, as a general comment, right?

They should be. We're very early into this. And we've got a lot of things to implement. But I would say that, that is a good assumption at this point in time.

Okay. Great. And then maybe turning to sort of what you're seeing from the field, I was curious what you're able to see in terms of same store sales, reorder rates, and the number of accounts. And then maybe also any commentary on what docs you're seeing, what type of docs you're seeing order the tests?

I'm going to turn that over to Bill Creech our VP of Sales and Marketing.

Thanks, Matt. The increase is ramping up from month to month. We track, as Gail as pointed out, sales by territory, and within the US focus, there are multiple doctors reordering and in the hundreds of doctors ordering for the first time each month.

Excellent. And then maybe if you could care to elaborate on the international expansion plans and with any kind of, which territory do you expect to bring online first, and then any comments around timing would be great? Thanks.

Hello Matt, this is Ashish. As you can appreciate, we're still very early on the international strategy and planning, most of our time over the last little while has been spent with Quest. But now, with that behind us, international is a big focus area for us. At this point, I hesitate to provide any specifics, but the one thing I can share with you is that we have been speaking to Quest. We are very pleased with the progress we've made there, and we really do look forward to giving you a lot more clarity on our strategic roll-out for the international markets on our next call.

I would say now our areas of interest are obviously the three countries with Quest, as well as Brazil and China. Those are the other two countries that we focused on. We don't have the resources nor the time to go out and have a shotgun type approach and go after tons of countries. So what we've decided to do is focus on a few of them, and those five are our primary focuses right now. And we'll be happy to share some more detail on the next call.

Excellent. Thanks for taking the questions.

No problem. Thank you.

(Operator Instructions)

Our next question is from the line of Zarak Khurshid from Wedbush Securities. You may proceed.

Good morning, everybody. Thanks for taking the questions. First question relating to the event costs or the costs around sales and marketing, can you just kind of walk us through how those costs will evolve over the next few quarters, and is this run rate sort of what to expect for the next year or so?

Well, I would say that right now we feel like we've built out our internal sales team and it seems to be working very nicely in concert with Quest, how we've got it lined up. What we did is when we build out our sales for, we try to recruit folks that had an OBGYN background, an OBGYN Rolodex that they had sold in this market so we didn't have to teach them the market, all we had to do was basically teach them the product. And what we've seen is they had really gone in and managed -- they're working a territory, they're aligned with a Quest territory, and so we feel like right now, we're pretty set.

Quest has about 22, I believe, territories and we hired 12 sales reps to manage those. So I think we're in pretty good shape for the foreseeable future. Relative to further down the line, we're just going to have to really -- we're a small company and we've got to make sure that everybody is producing 200% before we start hiring more people. So Bill is on hold at the moment.

Where we will spend in my opinion, where we will really focus, is on the medical education and on the reimbursement. That's where you will see us spend much of our time and our efforts and our money. But as we've said, we expect the fourth quarter to be in $3 million to $4 million range. We think that we're managing our cash really effectively. We have not hired a lot of G&A. Basically with Jeff and Ashish, they're the only people we brought on board, other than our sales and marketing team. So we do try to very diligently work with Quest. Quest has done a great job on a lot of the marketing program, running ads and cap today. They've done a nice job with some television spots and radio spots and their public relations campaign has just been immeasurable for us.

The other thing that Quest brings to the table for us is that they bring a lot of natural support with their patient service centers, their payer relation, their billing expertise, their presence at the physician's office, they have a care 360 program. All of these things they bring to the table that we don't have to go out and hire that expertise. So that's really a big benefit of that agreement.

Great. That's helpful. And then back to the upfront payment from Quest, just curious, what was the rationale behind settling or negotiating that payment versus just maybe, a higher improvement to the royalty? What is the benefit of this upfront payment?

I think there is a lot of benefits to it, especially from a cash flow standpoint. We're a young company. And as you launch a test and I hope you appreciate that I can only comment to a certain extent here, because we do have to respect some degree of redaction on -- for Quest. There is a lot of this, obviously, and in their world, would be confidential, and we realize it is material to us, and we're trying to balance that. But I think that they really come forth as being a good partner.

This is a very important test. It's going to change people's lives. And I think they understand that where they have the ability to work in an environment of working on the reimbursement, and getting that to sort of level out it's a little bit more difficult for a smaller company. So I think this agreement provides for us a certain amount of cash flow up front, and it allows us a certain time to really work with them and the payers to get the payment sort of ironed out and established, and on a more level playing field.

And Zarak, this is Ashish. Just one other point I'd like to add on to that. If you look back at the old agreement, what we got was only a royalty rate or only a royalty payment. What we have here is a combination of an upfront fixed payment, plus a royalty payment. If you look back to Q2, the royalty payment was 25%, now it's 33% and then on top of that we get the upfront fixed payment. So I would say when you compare the old versus the new, you should look at the -- sort of the blended payment that we're going to get going forward versus the old payment.

Great. That's helpful. And then I had a final question regarding the change to kind of the strategy and focusing on the key influencers. Can you just describe what you've learned over the last nine months or so, and what caused you to kind of change this strategy? And how exactly does sort of the information flow between the GYN-ONCS and the people who will be ordering most of these tests? Thanks.

That's a good question. The generalists or the gynecologists are very interested in the test. Some of them adopted early. But then they asked the gynecological oncologists for support or opinion on the test. And if the gynecological oncologist does not have an understanding or understand the impact of the test, and see those -- the purpose for those referrals, they're a little bit more reluctant to support the test.

So we made that shift probably in the early July time frame to spend more time and focus on each of our territories on the gynecological oncologist, meeting with them, sharing the information, especially the information that came out in late October from Dr. Ueland's presentation and showing them the advantage of the test. So we have a much higher adoption rate in those areas where we met with the gynecological oncologists, then the referring physician has that dialogue, and they consult on patients together.

Great. Thank you.

(Operator Instructions)

Our next question from the line of Jeb Besser with Manchester Management. You may proceed.

Hi. I had a question about the extension of the Quest agreement. What -- has there been any change in the way that the payments flow regarding sales to doctors who aren't covered by Quest? Or labs that aren't covered by Quest?

No.

No? So that's still currently a -- you pay Quest a 5% royalty on that and then you book the entirety of the revenue if it flows through to you?

No, if we -- if we sell OVA1 to someone outside of Quest, then we don't owe Quest any royalty. So for instance, let's say hospital X, decided that they wanted to set up OVA1 and that is not part of the territory for Quest, then that would be a direct relationship between Vermillion and that hospital and Quest would not be involved.

So Quest wouldn't even get a processing fee for that?

Not if it wasn't sent to them, no.

Okay. Okay. All right. That's all I have. Thanks.

Okay. Thank you.

We have no further questions at this time. Oh, I'm sorry, we do. We just have someone who just registered from the line of Neil Kline from NH Kline and Company. You may proceed.

Hi, I'm a pretty simple person. I just wanted to do some mathematics. If I recall properly, the reimbursement from Medicare was $525, and under the old agreement -- is that correct?

It's actually $516.25.

Thank you. And then under the old agreement, you would have gotten 25% of that?

Well, we would have gotten 25% of the gross profit.

Okay. And do you get any -- do you get a fee for the test, don't we? Or how much is the fee for the --

Under the old agreement, if you used the Medicare reimbursement as a benchmark, we would have gotten 25% of the gross profit. Under the new agreement, we will get 33% of the gross profit, plus a $50 upfront payment. So if you look at -- if you calculate on the Medicare reimbursement, if you look at that in a blended rate, it is going to be around 40% or better.

40% of the $ 516?

Yes.

Thank you very much.

It is an approximate. I'm just running some quick numbers.

No, I just wanted to be able to make sure I was doing my math properly.

Sure. And if you would like -- if you would like to call us back later today, we would be happy to take a one on one with you.

Thank you.

Yes, sir.

Thank you. We have no further questions at this time. Ms. Page, you may resume with your presentation or closing remarks.

Well, obviously, we feel like we've accomplished a great deal this quarter. We think things are going very well for the company. We appreciate everybody's support. We often know that it just takes some time to work things out. We hope that we continue to meet your expectations. Our goal is obviously to exceed them. But we appreciate your interest in Vermillion. And we look forward to updating you on our progress next quarter. Thank you for joining.

Ladies and gentlemen, that does conclude the conference call for today. We thank you all for your participation. And kindly ask that you please disconnect your lines. Have a great day, everyone.