Aspira Women's Health Inc (AWH) 2013 Q3 法說會逐字稿

Good afternoon, everyone, and thank you for participating in today's conference call to discuss results from Vermillion's third quarter, ended September 30, 2013.

Joining us today are Thomas McLain, President and Chief Executive Officer of Vermillion; and Eric Schoen, the Company's Vice President of Finance and 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 28, 2013, 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 Mr. McLain.

Thank you, Dave.

As we have discussed on our previous investor calls, 2013 is a significant year of transition for Vermillion. The opportunity for our ovarian cancer diagnostic test is significant, but there is a lot we need to accomplish, and the business and environmental uncertainty and risks are also significant for innovative diagnostic companies like us. Vermillion, though, has several advantages it can leverage during this transition period. We've developed the first FDA-cleared multi-variant diagnostic test using bio-markers, in collaboration with Johns Hopkins and MD Anderson. The AMA recognized our innovation and market approach with one of the first category 1 CPT codes for MAAA test reimbursement, and SGO acknowledged the value of our expanding clinical trial evidence and publications with a new statement in May 2013.

OVA1 addresses a critical decision in the care for women with an ovarian mass that must be removed surgically. With its high negative predictive value, OVA1 improves patient care by helping gynecologists and general surgeons assure they operate on ovarian masses that are highly likely to be benign. With its high sensitivity for all stages and all forms of ovarian cancer, OVA1 also helps the generalist assure that for the 25% of ovarian cancers and the 50% of early stage ovarian cancers missed today, that he or she consults with a gynecologic oncologist before surgery, in accordance with NCCN guidelines and SGO's ovarian cancer care model. The combination of these factors differentiates OVA1 from any other ovarian cancer diagnostic test or procedure.

Focusing on three key drivers that will increase the value of our Company is essential for us to be successful in improving the care for women with gynecologic cancers. These core strategic business initiatives will also build long-term value for our investors. They are first, taking the leadership role in commercializing our diagnostic test. Second, expanding our customer base by migrating OVA1 to a test platform that is available globally for launch in 2015. And third, expanding our patient base by launching a Next Generation ovarian cancer test to monitor at-risk patients for launch in 2016.

On today's call, we will review our third-quarter financial performance, update you on our commercialization efforts, and focus in more detail on the platform migration initiative. To start, I would like to ask Eric Schoen, our VP Finance and Chief Accounting Officer, to review our third-quarter financial performance.

Eric?

Thanks, Tom. Today we filed our Form 10-Q with the Securities and Exchange Commission, as well as released our third-quarter financial results in a press release. Both of these will be available for download via the investor section of our website at www.Vermillion.com.

Total revenue for the three months ended September 30, 2013 was $330,000, comprised of $216,000 from product sales of OVA1 and $114,000 from license revenue. Third quarter 2013 product revenue was derived from 4,328 OVA1 tests performed. This represented a 6% increase compared to the 4,100 OVA1 tests performed in the year-ago quarter. Total revenue for the nine months ended September 30, 2013 was $981,000; $640,000 from product sales of OVA1 and $341,000 from license revenue. OVA1 revenue for the nine months ended September 30, 2013 included only the $50 fixed portion of revenue per test from the OVA1 test performed. The OVA1 product revenue does not include the additional royalty component of revenue based upon 33% of Quest Diagnostics' gross margin.

The Company recognizes this portion of revenue, when reported by Quest Diagnostics via an annual true-up after the end of the calendar year. There was no change to our revenue recognition methodology in Q3, despite the termination of the Quest strategic alliance agreement on August 23, 2013. Notwithstanding the termination, we agreed that Quest Diagnostics can continue to make OVA1 available on the same financial terms following the termination while negotiating in good faith towards an alternative business structure.

Operating expenses for the three and nine months ended September 30, 2013 were approximately $2.6 million and $7.9 million, respectively. Operating expenses included approximately $0.1 million of non-cash stock-based compensation expense in the third quarter, and $0.3 million in the first nine months of 2013. This compares with operating expenses of $2.6 million and $9 million for the same three- and nine-month periods in 2012. Operating expenses in the prior year included $0.2 million and $0.8 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 decrease was due primarily to lower sales and marketing costs due to sales force realignment and a more targeted marketing effort. Total net loss for the third quarter was approximately $2.3 million, or $0.10 per share, on weighted average shares outstanding of 23.5 million. Total net loss for the nine months ended September 30, 2013 was approximately $7 million, or $0.36 per share, based on weighted average shares outstanding of 19.5 million. Our total shares outstanding at September 30, 2013 were 23.5 million.

Cash and cash equivalents at September 30, 2013 were $14.6 million. The Company utilized $1.8 million in cash in the third quarter, and we expect $2.1 million to $2.6 million(sic-see press release "$2.4 million to $2.9 million") of cash to be used in operations during the fourth quarter of 2013. In addition, we will also utilize $0.3 million in the fourth quarter for the purchase of a top-tier IVD platform as part of our research and development plan.

Now I'll turn it back to Tom for a discussion on operational matters.

Thanks, Eric.

I'd like to first provide some context around our operating performance in the third quarter. For a small Company like Vermillion, the challenges in successfully managing the scope of work and the investment in resources to be successful can be significant.

Initially, we believed it would be effective to work with a partner to handle the effort required. Since OVA1's launch three years ago, we have learned that this is a specialized test, and requires significant effort to build relationships and credibility with physicians, other healthcare professionals, and patients. That is why Vermillion is driving the commercialization effort in 2013.

Our overall test volumes increased modestly in the third quarter, up 6% from the third quarter of 2012 and 3% from the previous quarter. With our limited field sales presence in 2013, it is important to note that in the areas where Vermillion sales reps are calling on physician offices, test volumes are up more than 15% from the third quarter of 2012. We believe this improving sales performance is due to the relationships our sales force is building with gynecologists and gynecologic oncologists, the SGO position statement released in May 2013, and new clinical publications.

Based on that demonstrated success, we added sales reps in two new territories in the third quarter, and they are beginning to build their base of business. We have also added an inside sales function that will contribute to our test volumes going forward. As planned, we also increased our managed care team from two to four, adding new directors in the field focused on expanding coverage and resolving claim disputes. As we define other markets where critical success factors support that we can earn a return on investment, we will continue to expand our field sales presence.

On our second quarter call, we discussed the 2012 Blue Cross Blue Shield Technology Evaluation Center assessment that OVA1 should be considered experimental/investigational. The SGO statement and peer-reviewed clinical evidence available in 2013 are significant factors for reconsideration of this determination. We are pursuing decisions with individual plans to maintain current coverage or reverse decisions to drop coverage. Although the action by TEC has resulted in 13 Blue Cross Blue Shield plans reversing their positive coverage decisions for OVA1 and reducing total covered lives to approximately 67 million, it did not affect test volumes for the quarter. We will not be able to assess if this action has affected revenue per test until Q1 2014, because we see an annual true-up from Quest based on actual payments for OVA1 tests just once each year. But I again want to reiterate, this has not affected test volumes for this quarter.

Shifting to Medicare coverage, in 2012 Medicare coverage accounted for less than 15% of our test volumes. In 2013, Vermillion and other diagnostic companies -- ACLA, Bio, Advamed, Personalized Medicine Coalition -- are focused on precedents being established through Medicare's clinical lab fee schedule rate-setting process.

In September, CMS published a preliminary recommendation that coverage for diagnostic tests with CPT codes that use algorithms to generate their results, MAAA tests, would not be covered under the clinical lab fee schedule process. This means the test that had met the AMA's criteria for a category 1 CPT code -- namely FDA clearance, support from peer reviewed publications, and national utilization -- would not be covered; while LDT tests, which have not met the same criteria, are being paid for by Medicare. Vermillion has been actively engaged in a process involving members of Congress, leading research institutes, the FDA, the NIH, and industry organizations to cause CMS to reconsider this position. Their final recommendations are expected soon.

Through our advocacy and outreach effort, there is a chance that CMS will reverse its position and follow our recommendation that OVA1 should be covered using the gap fill method. If not, Vermillion will appeal that decision, leveraging the evidence and key opinion leader relationships we have developed in 2013. It is important to note that, regardless of the outcome this year, OVA1 continues to be covered by Novitas under a miscellaneous code.

We are now applying what we are learning in the field to define our 2014 global commercial strategy and goals. To help drive that effort, Marian Sacco recently joined our team as Strategic Planning Consultant. Marian brings over 20 years of commercial experience in gynecology, oncology, and IVD tests. She has built and led sales and marketing teams ranging from early stage companies to global sales organizations. Her experience spans the launch of CA 125 for Centocor, to Chiron Diagnostics, Behring Diagnostics and Adeza Biomedical. We will be prepared to discuss the specifics of the next phase of our commercialization plan on our year-end earnings call.

We were pleased to announce the publication of two new clinical studies in AJOG this week. These studies were advanced to address specific questions of OVA1 clinical utility by analyzing the combined results of our two previous OVA1 prospective clinical trials. One study analyzes the benefit from using the OVA1 on early-stage ovarian cancer. Among 1,016 qualified adnexal surgery patients, there were 86 early-stage ovarian cancers, a prevalence of 8.4%.

There are three benchmarks that were compared to OVA1 in this study. First, clinical assessment missed 31% of early stage cancer. Second, modified ACOG guideline assessment, which is the current standard of care, missed 23% of these early-stage cancers, and the CA 125 biomarker missed 37%. In contrast, OVA1 as a standalone risk stratification test correctly identified 92% of all early-stage malignancies, demonstrating significantly higher sensitivity than CA 125 or modified ACOG guidelines. And when added to clinical assessment, OVA1 identified over 95% of all early-stage malignancies and 93% of Stage 1 cancers.

These results are a powerful confirmation of the potential for OVA1 to aid generalists in the pre-surgical detection of early stage malignancies. That is essential to achieving optimal care for the most curable forms of ovarian cancer.

The second study focused on 770 surgery patients originating with intended use physicians -- that is gynecologists and generalists -- to compare predicted specialist referral patterns based on clinical assessment, modified ACOG guidelines, CA 125, or OVA1. OVA1 as a standalone risk stratification test was significantly more sensitive than either modified ACOG or CA 125; and OVA1 identified the significant majority of cancers missed by each benchmark method. In clinical use, OVA1 is combined with clinical assessment for even higher sensitivity, as described in previous clinical publications.

Although the low sensitivity and high specificity of the benchmark methods was predicted to result in referral rates of 20% to 33%, the actual referral rate in this study was 60% of all patients. OVA1 use was predicted to refer a roughly similar percentage of patients, 56%. This finding suggests that sensitive detection and specialist involvement may be achievable for the vast majority of ovarian malignancies without dramatically altering overall referral rates.

Finally, I wanted to update you on our strategic alliance with Quest Diagnostics. In May, we filed a notice of default under our exclusive commercialization agreement, citing a number of material violations, breaches, and failures to perform. The strategic alliance agreement states that if a party fails to cure material defaults within 90 days of the notice, the other party has the right to terminate the agreement.

On August 23, we sent Quest a notice of termination, with a proviso that Quest can continue to make OVA1 available to healthcare providers on the same financial terms following the termination, while negotiating in good faith towards an alternative business structure. Quest has disputed the effectiveness of the determination. I am not able to provide more detail at this time. When this matter is resolved, we plan to expand the addressable market for OVA1, both in the US and in rest of world markets.

On today's call, I wanted to focus on our second strategic initiative, the OVA1 platform migration program. This program is essential to expanding our customer base -- that is, the number of laboratories here in the US and worldwide that can run the OVA1 test. This initiative will also give Vermillion new options for the development of additional multi-marker products that use in vitro diagnostic biomarkers like OVA1.

The platform migration program is fully funded, staffed, and under way. We are currently in the design and planning phase of this program, and expect to move into development in the first quarter of 2014. In the current phase, several activities are in progress to build the foundation for our success. First, we have identified at least two of the top four IVD automation platforms which qualify for OVA1 development. The first targeted migration platform has been selected, the instrument is purchased, and it's being installed during the fourth quarter.

Second, working with our collaborators at the Hopkins Institute for Biomarker Translation and Research, we have completed feasibility studies to assess any potential technical obstacles to perform this platform migration. All five OVA1 analytes are already found on the instrument. The measuring ranges and other assay parameters are roughly comparable between the current and new platforms, and they span the range of clinical values found in our two pivotal trials. In our initial feasibility runs, small or negligible differences have been found in the biomarker values measured from the same samples on the two different systems, and our initial simulations and calculations support that reproducibility and precision are similar or better on the new platform. So, in summary, no show-stoppers have been identified, and the technical outlook for the next phase of formal development work is promising.

We are also pursuing additional collaborations to conduct external clinical validation, and for publication of the new assay performance results. Our collaboration partners will include academic and clinical institutes, preeminent cancer centers, and managed care organizations. Our objective is to concurrently produce evidence leading to coverage and healthcare models at the same time we are generating data for our FDA submission.

During October, we met with the FDA, and we expect to complete a formal FDA pre-submission meeting early in the first quarter of 2014. This feedback should help us finalize our plans and clear the way to enter the development phase. Based on our current knowledge, we remain optimistic that development can be completed in calendar year 2014, targeting launch of OVA1 on the new platform in early 2015. We expect to update you on our progress on our year-end earnings call.

In summary, Vermillion is making progress on its strategic objectives. We are establishing relationships that will support expanding the OVA1 commercial opportunity and position us to successfully introduce new tests into the women's health and gynecologic oncology markets.

There are many challenges for Vermillion and all diagnostic companies in terms of regulations, coverage and changes in healthcare delivery, and we cannot guarantee our success. But we will continue to take the steps necessary to address these risk areas and position Vermillion for long term success.

Operator, this concludes our remarks, and we are ready for questions.

Thank you. (Operator Instructions)

Our first question comes from the line of Debjit Chattopadhyay from Emerging Group Equities.

Hello, thank you for taking my question, and congratulations on the progress here.

Thanks, Debjit.

Just wondering if you could help me understand the distribution and ordering pattern here during the quarter. In terms of the 4,328 tests that were performed, what fraction was OB/GYN, and what fraction was the GYN/ONCs?

We don't have that split out at this time, Debjit, because we receive any information from Quest on a lag. So we won't have insight into the full quarter results until we are almost concluded with the fourth quarter.

Okay, fair enough. (multiple speakers)

I just want to stress -- one thing that I can stress with you, though, with the FDA labeled indication, the prescriber is gynecologist. So the driver of the majority of our testing, and it should be 100% of our testing, would be the gynecologist or generalist.

So if you go back a quarter, then, there are roughly between 35,000 and 38,000 OB/GYNs in the country, so what fraction have ordered so far, as of the end of the second quarter?

Historically, there are about 6,000 of those gynecologists who have ordered OVA1. Of that, today, 600 are frequent prescribers of the test. And what's important to understand in that, Debjit, is that among gynecologists, there is a subset of gynecologists who are becoming more actively engaged in gynecologic surgeries, specializing in that area. And so that is a factor that we are now considering in our commercialization efforts.

So when you say frequent prescribers, does this come two to three orders per quarter or per month? That's what the typical rate is, in terms of adnexal matters, which need surgery at roughly about two to three per month, so have they come to that level, or are they still in a one to -- two to three per quarter?

So our definition that we're using and continue to use at this point in our commercialization efforts are any physician who has prescribed four or more OVA1 tests in the preceding six months. Now obviously, there are physicians that prescribe more than that, but that is the criteria that we use for that number.

In the prepared remarks, you had mentioned that in the territories where you have active reps, you had a 15% year-over-year growth, right?

Yes.

How did that (multiple speakers) quarter over quarter?

More than 15%. That rate, that more than 15% growth in those territories is increasing as we go through the year. That is due to the factors that I outlined in my remarks.

That is now the targeting and the excellent work that our sales reps are doing. And in this new role of being the primary driver, they are becoming more and more skilled. The second is the positive effect of the SGO statement that came out in May of 2013. And adding to that, the positive value of new clinical evidence that is being published. And as you saw this week, that we continue to bring to publication working with our collaborators.

Now, what do you think the growth rate will be, given that you have potential challenges with CMS in getting OVA1 reinstated as the gap fill, hopefully? Does that impact the ordering patterns? Or -- I'm just trying to understand how that would impact the second half or the first half of next year.

Sure. So two things that are going to get us quickly to the point. In overall test volumes, Medicare patients in 2012 accounted for less than 15% of our test volumes, so that gives you a materiality context that I think is important for this conversation. The second is, I want to reiterate where we stand today.

Today, the test is performed in the Novitas jurisdiction. Novitas is one of the MACs, and the test is reimbursed under a miscellaneous code. And regardless of the outcome with CMS, Novitas has told us that we will continue to be reimbursed under that miscellaneous code. So we don't believe that this decision would have an immediate negative impact on our results, but we want a positive decision and a price set by gap fill, so that we have the opportunity as we go forward to have a single price for the test nationwide.

And one last question before I hop off.

Sure.

Could you update us on the economic benefit study that was started with the DOD? And do you think the data comes out some time this quarter, or it's more of a first half next year?

Sure. And Donald is here on that, so I'll ask Donald to give us an update there.

Sure. The short version of that is that there has been a delay. That's probably caused in part by sequestration and subsequent re-prioritization within the DOD. Now, having said that, we have other collaborations that really strike at the same question of OVA1 utility and economics, and we expect that we'll be able to announce some of those within the next one to two quarters.

All right, thank you so much, guys. We'll catch up later.

Thank you, Debjit.

(Operator Instructions)

Sir, there appear to be no further questions at present time.

Okay, great. Thank you very much. In closing, we've had a very active quarter, moving towards our goals and accomplishing many of the key actions we have laid out for the Company. We've encountered some headwinds at a national level, and we're taking steps to overcome those. In closing, on behalf of our Management team, we appreciate your interest in Vermillion, and we look forward to continuing to provide updates for you, our shareholders, in the future. Thank you. Have a good afternoon.

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 and uncertainties that could cause actual results and outcomes to be materially different. Risks and uncertainties that may affect the future results of the Company include, but are not limited to, the competitive environment, the speed of market adoption, changes in government regulations, payer reimbursement, relationships with our strategic partners, and other factors as described in the Vermillion 2012 Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K.

Now again, I would like to remind everyone this call will be available for replay through November 28, starting later this evening, via the link provided in today's press release as well as available in the investor section of the Company's website. Thank you, ladies and gentlemen, for joining us today for our presentation. You may now disconnect.