Aspira Women's Health Inc (AWH) 2012 Q3 法說會逐字稿

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Vermillion's third quarter ended September 30, 2012. Joining us today our Gail Page, the President and Chief Executive Officer of Vermillion; and Eric Schoen, the Company's Chief Accounting Officer. Following their remarks, we will open up the call for your questions. Then, before we conclude today's call, I'll provide the Company's Safe Harbor statement with important cautions regarding 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 November 26, 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 the President and CEO of Vermillion, Ms. Gail Page.

Thank you. Good afternoon, everyone, and thank you for joining us. Today we will discuss the progress we've made with our ovarian cancer franchise and vascular medicine program, including the strategic foundation we have put in place to advance these programs. There was a lot of exciting news we announced during, as well as after, the quarter that we'd like to delve into.

But first, I'd like to turn the call over to our Chief Accounting Officer, Eric Schoen, to take us through the quarter's financial results.

Following his remarks, I will discuss the operational highlights for the quarter, provided an update on some exciting recent developments, and then provide our outlook for the remainder of the year. We'll then open up the call for your questions.

Now, to Eric.

Thank you, Gail. Today we released our third-quarter financial results in a press release, and will file our Form 10-Q when the SEC reopens tomorrow. Both of these will be unavailable for download via the Investors section of our website, at www.vermillion.com.

In Q3, the volume of OVA1 was in line with our forecast at approximately 4100 tests. Total revenue for the three months ended September 30, 2012, was $319,000 -- $205,000 from product sales of OVA1; and $114,000 from license revenue. Total revenue for the nine months ended September 30, 2012, was $952,000 -- $611,000 from product sales of OVA1; and $341,000 from license revenue. OVA1 revenue in the nine months ended September 30, 2012, included only the $50 fixed portion of revenue from each OVA1 test 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 three and nine months ended September 30, 2012, were approximately $2.6 million and $9 million, respectively. Operating expenses included approximately $0.2 million of non-cash stock-based compensation expense in the third quarter; and $0.8 million in the nine months of 2012. This compares with operating expenses of $4.8 million and $15.5 million for the same three- and nine-month periods of 2011.

Operating expenses in the prior year included $0.4 million and $3 million of non-cash stock-based compensation expense in the same three- and nine-month periods. Along with the non-cash stock-based compensation changes, the year-over-year decreases were due primarily to lower clinical trial costs, decreased legal fees, and continuing cost containment with improved operational efficiency.

Total net loss for the third quarter was approximately $2 million, or $0.13 per share, on weighted average shares outstanding of 15.1 million. Total net loss for the nine months ended September 30, 2012, was approximately $5.8 million, or $0.39 per share, based on weighted average shares outstanding of 15 million. Net loss for the three and nine months ended September 30, 2012, included a nonoperating $50,000 and $1.8 million gain on sale of instrument business, respectively, from the release of the escrow account established in the sale of our Tools business back in 2006. We recognized the final $50,000 gain upon the release of the remaining Bio-Rad escrow funds to our balance sheet in September 2012.

Net loss for the three and nine months ended September 30, 2012, also included a nonoperating $0.3 million and $0.7 million gain on litigation settlement, respectively, related to a favorable litigation settlement with Oppenheimer earlier in the year. We recognized the final $0.3 million gain upon receipt of the final scheduled payment in August 2012.

Cash and cash equivalents at September 30, 2012, were $16.3 million. We utilized $2.3 million in cash during the third quarter, offset by the $0.3 million payment received on litigation settlement. We expect $2 million to $2.5 million of cash utilization during the fourth quarter of 2012, excluding approximately $5.9 million paid to Quest Diagnostics under the secured line of credit agreement in October 2012.

Now, with that, I'll turn the call back over to Gail.

Thanks, Eric. Beyond the numbers, it was a very exciting quarter for Vermillion for both our ovarian cancer franchise and vascular medicine programs. First, as many of you know, we reported favorable results from the OVA500 study, our second prospective clinical trial of OVA1. We are pleased to report that the principal investigator, Dr. Robert Bristow of UC Irvine, has now submitted a manuscript of the OVA500 study for publication.

The study showed an overall sensitivity of 96%, a negative predictive value of 98%, and detection of a broad range of ovarian cancer subtypes. These findings are important, since doctors, payors and professional societies make their decisions in part on the publication of multiple independent clinical studies. As Dr. Bristow stated, we are especially excited that the sensitive detection of ovarian cancer was paired with the classification of most benign masses as low risk, and greater than 95% confidence that a negative test will result in a benign pathology finding.

The study also found a 91% detection of early-stage malignancies. Combining the results of both pivotal studies, OVA1 correctly identified 78 out of 84 early-stage ovarian malignancies among more than 1000 total patients evaluated. This represents a combined risk stratification, or standalone sensitivity, of about 93%. This high percentage reaffirms the unrivaled sensitivity of OVA1 for early-stage ovarian malignancies, which is the least diagnosed and the most curable form of ovarian cancer. And it underscores how OVA1 may aid primary physicians in the presurgical detection, referral, and optimal management of this often deadly disease.

I would also like to update you on the publication of data from our peripheral arterial disease multi-marker clinical feasibility study. This study and [2U] study, led by Dr. Will Hiatt from the University of Colorado, concentrated on validating three Vermillion biomarkers and their utility in an algorithm to assess the risk of peripheral artery disease. We are pleased to report that the manuscript was published online this month in the peer-reviewed journal Vascular Medicine. It will also be appearing in hard copy in the near future. This is a premier international journal featuring peer-reviewed research articles and reviews on vascular disease, diagnosis and treatment.

As we previously announced, the 1000-plus patient study identified 85% of PAD patients missed by the Framingham Risk Score high-risk cut off. These results paved the way for the development phase of this program. The potential value of this test is bringing sensitive detection of PAD to the primary care physician in an easy-to-use, reliable, and affordable format for at-risk patient assessment. Unlike the Ankle-Brachial index test, our simple blood test would require no specialized training, equipment, or allocation of precious exam room time and staffing.

In order to advance our PAD program, we are currently evaluating commercial partners who could bring the necessary primary care physician reach along with the vascular medicine credentials to accelerate FDA clearance and drive market penetration.

In October, we achieved an important milestone with the repayment of the outstanding development loan to Quest Diagnostics at maturity. This repayment helped de-lever our balance sheet and brings to a successful conclusion the development phase of our alliance with Quest Diagnostics. Contrary to what has been portrayed in some non-Vermillion material, our repayment of the Quest loan is not the result of a lack of interest by Quest in OVA1; but, rather, an ordinary course payment of liabilities as they come due. With the repayment of the Quest loan, both parties are now focused on the broader commercialization of OVA1. So it's been an exciting few months, and the outlook remains positive.

But before we go further, I would like to step back a bit and share a few thoughts and perspectives on who we are and how far we've come. As we have announced, our Board is continuing its efforts to recruit a CEO and remains committed to that path,. So I'll soon be turning the reins over to a new CEO, who will be taking Vermillion to its next level of accomplishments.

As a primary in the diagnostics industry, and in just more than two years, Vermillion has transitioned from product discovery to commercialization. Few companies in our space have made such rapid progress over such a short span of time. Through it all, we have demonstrated tremendous perseverance. And this perseverance has generated a groundbreaking record of accomplishments, particularly in the development and commercialization of multi-marker diagnostics. This includes the first-ever FDA clearance of a proteomics-based IVDMIA.

We then acheived Medicare coverage within weeks after the launch of OVA1, and we have extended this coverage to nearly 100 million lives across the US. And now we are among the first class of MAAA algorithmic assays to achieve a Category 1 CPT code by the American Medical Association. This means we can realize the value we established as a result of the gap-fill decision granted by CMS earlier this month. While Vermillion has clearly set the standard in developing and commercializing proteomics based algorithmic IVD test, we also possess an impressive portfolio of un-commercialized biomarker IP.

This IP includes ovarian, endometrial, and breast cancer biomarkers, as well as cardiovascular and Alzheimer's Disease. Our acquisition of the assets and IP of Correlogic further strengthened our leading position in diagnostics for ovarian cancer.

The repayment of the Quest Diagnostics development loan allows us the broadest range of strategic options to monetize these assets and expand our product portfolio. With these building blocks in place, our focus is on establishing the clinical relationships that will drive publications and leverage these assets into a broader product portfolio. Fortunately, the early success and clinical relevance of OVA1 has led to an extensive roster of supporting key opinion leaders. These relationships have enabled a new series of clinical collaborations with some of the nation's most respected teaching hospitals and medical centers.

These studies are focused on pre- and post-surgical monitoring of high-risk patients, as well as developing tools to aid in the differential diagnosis and management of the gynecologic cancers. We referred to this in our last call as an ovarian cancer franchise. Unfortunately, some took those words to mean a step back from our commitment to the next-gen OVA2 program. Nothing could be further from the truth.

In fact, besides continuing our biomarker discovery collaboration with Dr. Daniel Chan and coworkers at Johns Hopkins, we expect these collaborations to result in even more opportunities for deployment of current and new biomarker combinations. Our successes, along with these unique opportunities, make Vermillion an attractive partner for IVD platform players or women's health diagnostic franchises considering biomarker-based products.

For example, MAAA tests can bring the opportunity for a high ROI to an otherwise parity-driven gynecologic IVD test menu. Or they can help women's health companies or providers differentiate themselves in a crowded or commoditized marketplace. Such partnerships can offer the potential, in return, to accelerate Vermillion's R&D programs, expand our sales efforts, gain entry into the hospital testing market, and expand our presence beyond the US.

For example, the interest in OVA1 has grown to a point that major hospitals and cancer centers are considering adding OVA1 to their standard of care. As a result, Vermillion's exploring the potential of implementing OVA1 testing in a selected hospital lab. This pilot program is strategically important, as it could expand our base of accounts, promote broader access to OVA1; and, moreover, possibly impact our profitability. This pilot program is in its early stages, and we will keep you up to date on our progress.

But for now, I'd like to turn back to cover some operational improvements we have made with OVA1. As many of you know, the three common challenges inherent in the commercialization of any new diagnostic test are reimbursement, physician adoption, and market education. So, let's discuss the steps our management team is taking to address these challenges.

In terms of reimbursement, on November 6, a clinical lab fee schedule committee announced its CPT code test within MAAA such as our test, will be gap-filled, representing a two-year process of establishing long-term pricing. In anticipation of this process, during the early stages of OVA1 launch, we secured approval for reimbursement from Medicare at $516.25 per test, which is a common benchmark for reimbursement of a new diagnostic.

We also established another benchmark with our Department of Defense at the stated list price of $650 per test. Therefore, we are very pleased to have established this range of pricing ahead of receiving our Category 1 CPT code. We now have the ability to drive reimbursement at these price levels during the gap-fill process. And having a CPT code unique to OVA1 will streamline claims processing and strengthen our reimbursement position.

These developments provide us new information to engage payors in continued dialogue. These discussions revolve around an executive summary of the OVA500 study, the new Category 1 CPT code, and how the pricing for OVA1 should move forward in 2013. We anticipate this will enhance payor recognition, contribute to more successful claims being processed, as well as begin to resolve the lumpiness associated with claims billed under a miscellaneous code.

On previous calls, we have discussed our physician reorder rate. To address this we have created a targeted program based on two key initiatives. First, Vermillion and Quest Diagnostics have initiated a joint program focusing on six key states. One important element of the program is to identify physicians who are not reordering at a consistent rate, and address their concerns and to re-establish OVA1 at the top of mind as a means to improve the use of OVA1 in their practice. We foresee the publication of the OVA500 study to be a key catalyst in this program.

Second, we have rolled out a Claims Assistance Program designed to renew physicians' interest in reordering of OVA1 in cases where patient bills were an issue. This program proactively assists the physician in appealing patient bills, and thereby restores their confidence in ordering OVA1. We expect these two initiatives to drive more consistent ordering patterns and resulting in the OVA1 annuity, which is the long-term goal.

Finally, reaching physicians and creating a top-of-mind physicians continues to be a challenge, with more practices adopting a no-see policy and fewer physicians traveling to industry meetings. To address this, we have our current founded by its campaign along with our recently launched educational webinar series that is available on demand on the OVA1 website, along with OVA1 case studies. This provides the physicians the freedom to learn at their convenience. Quest Diagnostics is also launching a similar OVA1 webinar program later this month. These webinars are a cost-effective evolution to our marketing program that will reach more physicians, especially those in the academic and no-see facilities, as well as those located in rural areas.

These programs that support coding, claims processing and physician adoption clearly strengthen our OVA1 commercialization efforts. However, we don't expect to begin realizing the full impact of these programs until after the CPT code goes into effect early next year. So, for the fourth quarter, we expect favorable to slightly growing use of OVA1, ranging from 4100 to 4400 tests to be performed. This also takes into account the fewer number of business days in the quarter due to holidays, and the recent weather events affecting the Northeastern states.

In closing, I'd like to note that in addition to growing organically through these operational strategies, programs and initiatives, we have kept an eye out for possible M&A transactions. We always consider opportunities that have merit and complement our business, keeping in mind our ultimate goal of creating shareholder value. We strongly believe that we are a leader in the multi-marker diagnostics space. We are confident that, given time and the support of our shareholders, our potential will be realized in market leadership, growth and, ultimately, profitability.

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

(Operator Instructions). Scott Gleason, Stephens.

Hey, Gail. Thanks for taking my questions. Gail, congratulations first on titrating down operating expenses here and mitigating the cash burn. When we look at where that translates to, can you talk through a little bit where your current salesforce stands? And whether you guys have seen any turnover there? Whether it's company-directed or individual-directed?

Right now, we vacillate between about eight and 10 people in the field. You always have what I would call the normal course of business. We had one sales rep that was -- I think broke a leg. And occasionally you'll get one that does have a family issue. But we try to keep around eight to 10 out in the field at any given time. Our focus right now is not to continue to build that force, but to, rather, make it become more efficient.

We're firmly of the opinion right now that our focus should be on continuing to really secure this reimbursement, secure those things that are the foundation that which you would build a salesforce upon. So we feel like we have the proper amount out there to really continue to do the market development at this point in time, and wouldn't look to expand that till after we really get things moving here in early 2013.

Okay. Gail, it sounds like you guys are increasingly optimistic on potentially having some success on the private payor aside, following the establishment of the Category 1 CPT code. Can you give us a little bit of an indication on how those discussions are progressing, now that you guys have this in the Category 1 CPT code in place?

And also, maybe talk a little bit about how you expect the gap-fill process to play out. Thanks for taking my questions.

Sure. So, first let's talk about our strategy. As you know, from day one, we've been very aggressive in looking at this reimbursement, because we all know that you can have the best test in the world, but unless you get it reimbursed, it really doesn't mean anything.

I think if you look back over the course of the past two years and you compare that to other tests, it's done quite well in getting coverage decisions. So, originally, our thought was you'd go after the low-hanging fruit, then you would go after the middle majority. Because you cannot really approach the good payors until you have enough demand out there and you start to really have clinical evidence.

But as we've indicated, we have been knocking on the doors of the larger payors. And I'd say to those conversations have gone very well. They're being very attentive. And with the publication of OVA500 we expect other meetings to occur around that event. Having the CPT code has really caused people to pay attention. So, I would say that all of that is on track and is moving in a positive direction.

Let's see, I think you had the second part of the question. Sorry.

Yes, Gail. I was asking about gap-fill; how you expect that process to play out. I think there's a pretty close grouping in terms of what you guys get paid today. But if you can talk a little bit about your thoughts there, that would be great.

Yes, I think we believe that we are in a good position for gap-fill, because we do have the Medicare as a benchmark, and we have the DOD, and we have players in between. So I think having those as benchmarks and having the CPT code gives us the ability to go out, now, and work and play in that value proposition; to really take our health economic data and all the studies we've got and the payors that are existing, and now really focus on helping people see the value that the test brings. That's what I would say -- we are very focused around in those particular benchmarks.

Did that answer your question, Scott?

Debjit Chattopadhyay, Emerging Growth Equities.

Good evening, Gail and Tim. Thanks for taking the question. I was just wondering, given where OVA1 is in its product lifecycle, do you have any sense of historic balance between OVA1 and any other products that have been launched in the OB/GYN community; so we can model our 2013, especially when you potentially land big players like Aetna?

Well, off the top of my head, I think about -- the days that I've personally spent LabCorp and the iterations of products like ThinPrep, Fetal Fibronectin -- a lot of other products in the women's healthcare space. I think about [Sci-Tech], I know -- I don't know if I have my dates exactly right, because it's been a while -- but I know that in the late 90s, they actually did a relaunch of that product. Because it came out, and it had some problems, and they actually had to redo their clinical trial. And then they had a relaunch.

And I know that for a couple of years they were relatively flat. We were one of the first labs to work with them, but after about a couple of years, when they also went through a gap-fill process -- and once they landed, I believe that you'd have to go back and double-check me -- but I believe they landed Aetna. And then it seemed like, once they got that reimbursement situated, they started to land the big plans.

It just really -- their ability to dominate the market really took off in that regard. So, we look at products like that and go back -- we have looked at HPV; we looked at other tests to say, what were the trigger points that really got the market to fully accept it, so that they could become the standard of care? Because that's what drives the hockey stick, and we believe are on track to do that, where by just clicking off these milestones.

You mentioned standard of care. Could you, if possible, give us a little bit more color on these studies that are being planned out with some of your key thought leaders, and how that might impact OVA1 or the subsequent OVA2 to be -- in becoming the standard of care? And thank you so much.

Sure. So, one of the things that has been very instrumental for us over the last, I would say, three to six months, is bringing on a person to lead these efforts with the background of Dr. Munroe. And he has been very successful in getting out there and having a dialogue with these thought leaders to start to plan out what these clinical collaborations may look like; and which ones, from a marketing perspective at the end of the day, as we engage with them, do they address the questions that were being asked out there. Do the further our programs? Do they create new products or new uses for our products? So with that, maybe I'll ask Donald just to speak briefly about some of the folks that he is targeting; and, on a high level, what those studies might look like.

Sure. Thanks, Gail. I think we mentioned on a previous call that we had a meeting at SGO focus group around unmet needs in ovarian cancer diagnostics. I think that one reason why we got very good attendance at that focus group is because of what OVA1 has been able to accomplish, both a product with the strong performance of OVA1 has clinically, and then just a track record.

A lot of people talk about biomarkers. OVA1 can demonstrate that it has achieved this track record of getting FDA approval, getting Medicare coverage, CPT code and so on. We have probably about four or five new collaborations that are in the works. I really can't disclose names. We will have press releases as we sign deals with people. But they are named institutes in, for example, New York, Indy, Northwest, and other places. And we expect to work on things, as we said -- high-risk monitoring; potential new indications or broader labeling of OVA1; and other types of cancers, such as endometrial cancer.

Thank you so much.

(Operator Instructions). Kevin Degeeter, Ladenburg.

Thanks for taking my questions, and congratulations on all the continued progress. One or two things -- you mentioned potential partnering for the PAD program. Can you talk about the opportunities there in the context of the rights that Quest had previously -- or has, to commercialize that program? Has the structure of the agreement with Quest been modified, or would it need to be modified, to fully take advantage of any partnering discussions for the PAD program?

The first part of your question would be, I think, the key for the PAD program, as we indicated -- the more we learn about that product, the development, and the more that we learn about that market, that's a test that really ought to be in the hands of the primary care physician. So, what we've really started to do is to detail out, in our minds, who might be a good partner for that.

Because, obviously, our sales force, and all the things that we've created, have been very focused on the oncology market. We wouldn't want to set up duplicity there. But we do want to bring that program far enough along and find the right partnership for it, so that we can realize the value of it. Certainly, as we move forward, any company that might want to work with us -- all companies would like to have Quest and other clinical labs offer that product.

So, depending upon what product is generated out of that work, that would be up to that company, how they might want to work with Quest going forward. But, certainly, Quest is a good partner. And they certainly have a big salesforce in the hospital market. So those things would have to be determined in the future.

Okay, but maybe if I could just put a finer point on it. Previously, Quest had exercised the right for commercial rights to the PAD program in certain distribution channels and certain geographic markets. Is that still in effect? Or does that -- has been changed in the last quarter, maybe in part related to prepayment of the term loan?

Yes, with the repayment of the loan, that took care of -- we repaid for the [VAT] development program. And then, there was a third one that Quest never elected; so, it returns that intellectual property back to Vermillion.

Okay, great, and I appreciate that. That's helpful. And maybe one other, if I may. You mentioned in the prepared comments the pilot program with a [gap-fill], everyone testing in a hospital setting. Sounds actually, potentially, and quite exciting. Can you talk a little bit more about the genesis of that program? And assuming the pilot hits the metrics that you're looking for, next steps behind that pilot program?

Sure. As you know -- and I know, Kevin, you cover some other companies that are somewhat similar. We're always -- I think all molecular diagnostic companies are always thankful for the big labs. Because they really help you get out there and start to leverage their system towards your product. And we need take a test like OVA1, you have to create demand in the market before hospitals want to bring it, quote, in-house. And mostly what we've seen of late -- and our focus early on with the resources we had was working with Quest. And we continue to work with them. And they've been a good partner. And we will continue to work with them.

But as any test grows and any market grows, generally you will see demand to decentralize in certain areas. And in our particular case, we've had several organizations contact us that they feel like that they have enough volume now; they might want to consider bringing it in-house. And maybe they have a pretty good OB/GYN population. So, we're being very careful to make sure that it's the right location; it's one that can support the volume; it's one that we can support; and it's meaningful to the Company. Because we have to make sure that every resource we spend is in a place where there is significant return, and certainly that it is not in conflict with our arrangement with Quest.

Okay, that's terrific. Very helpful. Maybe just one more housekeeping question for me. You provide a cash burn guidance for the fourth quarter, which is very helpful. Can you maybe walk us through in a little bit more granularity what the underlying assumptions are with the regard to the operating cost structure? Because we do have, I believe, the true-up payment from Quest flowing through in the quarter. So it's a little more challenging to appreciate what's assumed within that cash burn guidance. Thank you.

Sure. And at the beginning of the year, we announced that we planned on cash operating expenses of about $12 million, and we're on target to meet or beat that target. We really think, now, we have approached, given our current level of operations, what I'd call a steady state. Q3 is very indicative of what you'll see going forward. (Multiple speakers).

This concludes our question-and-answer session. I'd now like to turn the call back over to Ms. Page.

Ms. Page, please proceed.

Thank you. In closing, and on behalf of our management team, we appreciate your interest in Vermillion. We look forward to continuing to provide pioneering molecular diagnostics and building value for you as our shareholders. Thank you again for joining us today.

Before we conclude today's call, I would like to take a moment to read the Company's Safe Harbor statement. 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 or uncertainties that could cause actual results and outcomes to be materially different. Risks and uncertainties that may affect future results of the Company include, but are not limited to, the competitive environment; the speed of market adoption; changes in government regulations; payor reimbursements; 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 November 26, 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.