Aspira Women's Health Inc (AWH) 2014 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, 2014. Joining us today are Jim LaFrance, the Chairman, President, and Chief Executive Officer of Vermillion; Eric Schoen, the Company's Vice President of Finance and Chief Accounting Officer; and Dr. Donald Munroe, Senior Vice President/Chief Scientific Officer. Following their remarks, we will open up the call for your questions. Then, before we conclude today's call, I will 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 27, 2014, starting later this evening, via the link provided in today's press release as well as the Company's website.

Now I would like to turn the call over to Mr. LaFrance.

Thank you, Roxy. Good afternoon, everyone, and thank you for joining us. I would like to start by providing a sense for where we are in our journey and where we are headed. I want to do this by summarizing our new vision and then outline three distinct phases that span from now through 2016. The three phases are a rebuild phase, which is occurring now in the second half of 2014; a transformation phase, which will span 2015; and the third phase, a market expansion and growth phase, which will begin in 2016.

For the last six months, Vermillion has been actively rebuilding its team and its growth strategy. Great progress has been made on both fronts. We have assessed market opportunities; we have assessed our capabilities, our strengths, and weaknesses; and have developed a strategy and operational plan that we believe will result in difference-making solutions for patients and customers and strong returns for our shareholders.

Vermillion has begun the process of transforming itself into a bio-analytic solutions Company focused on gynecologic disease. To date, Vermillion has focused narrowly on one leg of a clinical decision tree that begins with hundreds of thousands of women presenting at their OB/GYN office or primary care doctor with nonspecific symptoms of pain or vaginal bleeding. The issue viewed narrowly is which of these patients will require surgery with the suspicion of ovarian cancer.

The issue viewed more broadly is how does a frontline clinician appropriately triage these women into effective and cost-efficient treatment pathways for both malignant and benign gynecologic disease. The former, helping identify malignant ovarian cancer, is where we have focused historically. The latter, aiding clinicians in the differential diagnosis of women presenting with pelvic masses and other gynecologic symptoms, is our expanded market opportunity focus. This larger focus includes endometriosis, polycystic ovarian syndrome, fibroids, and other gynecologic diseases.

I said a minute ago that Vermillion was in the process of transforming itself into a bio-analytics Company focused on gynecologic disease. I just spoke about the market expansion transformation, but now let me talk about the bio-analytics transformation and what that means. Today, we have a good set of tools: protein biomarkers and a multi-variant algorithm. With the launch of our OVA2 product in 2015, this toolset should improve, but the toolbox needs to be expanded. To find and mine for gold, you need a variety of tools. To find the gold we are looking for, predictive tools which identify and parse malignant and benign conditions, we will need a variety of new things in our Vermillion discovery toolbox.

The challenge is both finding disease, largely defined by sensitivity, and separating one disease type from another, largely defined by specificity. Biomarkers are very good at the first and challenged on the latter, particularly when prevalence is low. So when we plan to expand -- so we plan to expand beyond biomarkers in pure diagnostic measurement to include other modalities, such as imaging, clinical risk factors, and patient data in our sorting calculus. This new range of tools should boost specificity, allowing us to better sort patients through known correlations and newly discovered ones.

Vermillion also plans to build its own gynecologic disease sample and data registry. A database will accelerate our innovation by allowing us to mine correlations retrospectively and validate new correlations prospectively. This patient data registry is a significant, multi-year investment for the Company, but we believe it will bear fruit multiple times in the years to come and set Vermillion apart as a women's health leader, collaborator, and innovator.

This is our expanded Company vision, from ovarian cancer to gynecologic disease. And from biomarkers and an algorithm as a foundation to the additional horsepower of added modalities, clinical risk factors, and patient data to create differential diagnosis correlations.

That's the strategic side and what we have accomplished in the last few months. Let me now circle back to the operational phases, setting out how we will achieve our vision. Again, there are three operational phases: rebuild, transform, and market expansion and growth. The first phase, the rebuild phase, spans the second half of this year, 2014. In this phase, we have rebuilt the management team with a new head of sales and managed markets from Perkin-Elmer, a new head of marketing from Myriad, a new head of operations from Dianon-LabCorp, and a new Chief Medical Officer from Bayer-MD Anderson. These new hires joined a strong core of leaders we retained in technology, regulatory, and finance.

This new team rebuilt the strategy and vision, as we discussed, rebuilt our commercial strategy, reestablished our medical and advisory support, rebuilt our patient advocacy strategy, and established for the first time a billing system and payer strategy outside of the Quest relationship. So much needed foundational work has been achieved in the last quarter and into this quarter, a solid footing on which to build the future.

We also, very importantly, stayed on track with our OVA2 development project. Most recently, we passed a major milestone on this project, graduating from the internal verification phase to the external validation phase. We plan to submit to the FDA for 510(k) clearance in January, keeping us on course for launch in the second half of 2015. Donald Munroe, our Chief Scientific Officer, will address our progress on OVA2 more completely in a minute.

The second phase of our operational plan is the transformation phase, which signifies that there are prerequisites that must happen before we go into the full-growth stage that we all anticipate. What are those things that need to happen? The first prerequisite is full national licensure of ASPiRA LABS. We currently serve the vast majority of the lower 48 states, but some of the missing states are big ones, including New York, Florida, and Pennsylvania. These states collectively make up a sizable portion of your total OVA1 volume.

Until we have full licensure, we expect to continue to use Quest Diagnostics as a producer and commercial partner for OVA1. It is largely guesswork to determine when the state of New York, for example, will approve our licensure, but based on where we are in the process and their past history, we anticipate reaching full national licensure by mid-year 2015.

The second prerequisite of the transformation phase is establishing our own payer coverage. Up until ASPiRA launched, Quest was the sole-source provider of OVA1 and largely the only contractor with payers, both public and private, national and regional. And while Vermillion can rely on Medicare coverage under [81 503] and a small number of positive medical policies OVA1 has received, we must dramatically build up our medical policy and covered lives base with newly established payer relationships and newly established price points. This is a large challenge that will take some time but also is a major opportunity.

Today, Vermillion on average yields $125 per test from Quest, while Quest receives a net $330 for the test after all discounts and denials. So Vermillion has the opportunity to significantly increase its revenue per test upon conversion to ASPiRA from $125 to $330, if we do as well as Quest or better, if we are able to make a better case to payers.

The third prerequisite in the transformation stage is the launch of OVA2. OVA2, with substantially enhanced performance, should provide strong health economic arguments, a new round of publications, and the next ramp of customer uptake and acceptance in the marketplace.

As mentioned, OVA2 is tracking a submission with the FDA as planned, with their review period beginning in early 2015. Our best prediction on clearance, predicated on published averages for 510(k) submissions, is 166 calendar days, just short of six months. So when you line up these prerequisites -- one, two, and three -- national licensure for ASPiRA, establishing new payer contracting, and OVA2 launch -- things start to align about quarter three of 2015. We plan to be in a position to do a complete commercial relaunch and rebrand of ASPiRA and our OVA franchise at that time.

Also, by the end of 2015, we plan to demonstrate proof of concept for a lab-developed test product series, which we refer to internally as OVA-X. The OVA-X series is our beyond-biomarkers approach with additional elements, like clinical risk factors and patient history data, to boost predictive value that I discussed in our strategy outlined earlier. This rapid follow-on LDT offering brings into view how much we believe our innovation cycle can be sped up over time. Rather than follow our historical path of launching an IBD product every four to five years, we plan to introduce an innovation cycle half of what it has been.

The third phase of our commercial operational plan is market expansion and growth beginning in 2016. By this time, we expect to have met all of our prerequisites -- full national licensure of ASPiRA. We expect to have established a track record for price level and payer acceptance. We plan to have fully exercised regional commercial strategies and begun to scale them to a full national posture. We expect to have launched OVA2 and demonstrated OVA-X proof of concept with an LDT product. We plan to have begun to build out our sample and patient data registry and begun mining for new disease correlation to feed and expand our product pipeline.

To be clear, although I call for this growth phase in 2016, we plan to have substantial revenue growth in 2015 but expect to reach an inflection point the following year. By 2016, we expect to have largely transformed ourselves into a bio-analytics solutions Company focused on gynecologic disease and begun reaping the benefits of this transformation.

I would now like to turn to Eric Schoen, our VP of Finance, for a rundown of our quarter-three financials.

Thanks, Jim. Today we filed our third-quarter 2014 financial results in a press release and our Form 10-Q with the Securities and Exchange Commission, which is available for download via the investor section of our website at www.Vermillion.com.

Total revenue for the third quarter of 2014 was $323,000, comprised of $209,000 from product sales of OVA1 and $114,000 from license revenue. Total revenue for the nine months ended September 30, 2014, was $952,000: $611,000 from product sales of OVA1 and $341,000 from license revenue.

Third-quarter 2014 product revenue was derived from 4,325 OVA1 tests performed, which is consistent with the year-ago quarter. This volume includes tests performed at ASPiRA LABS. We do expect to see a modest increase in test volumes in the fourth quarter of 2014 compared to third-quarter levels.

OVA1 revenue in 2014 included only the $50 fixed portion of revenue per test from the OVA1 tests performed by Quest Diagnostics. 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.

For ASPiRA LABS, we have not yet established sufficient payment history with insurance companies or private payers for the tests performed, and are thus recognizing revenue on a cash basis. We also expect there will be a lengthy lag period between performance of the test and ultimate cash collection due to the denial and appeal process. Once we establish a reliable payment history, we plan to return to a normal accrual revenue recognition methodology.

ASPiRA test volumes have been growing steadily month over month, and we will begin to break out test volumes separately from the Quest Diagnostics volumes once levels become meaningful, which is expected in the fourth quarter of 2014.

Cost of revenue for the three months ended September 30, 2014, totaled $606,000, of which $575,000 related to ASPiRA LABS. We estimate approximately $200,000 incurred for ASPiRA in the third quarter to be nonrecurring costs, which will diminish in the fourth quarter of 2014.

In the third quarter, we made substantial investments in building our laboratory infrastructure. This investment should set up the organization for high margins and scalability. This investment included the integration of a versatile laboratory information system and implementing a cloud-based billing system. The laboratory information system is planned to include a physician Web portal for ordering and reviewing reports, as well as a smart phone application in the near future.

Operating expenses for the three and nine months ended September 30, 2014, were approximately $5.3 million and $15.3 million, respectively. Operating expenses included approximately $0.4 million of non-cash stock-based compensation expense in the third quarter and $0.9 million in the first nine months of 2014. This compares with operating expenses of $2.6 million and $7.9 million for the same three- and nine-month periods of 2013. Operating expenses in the prior year included just $0.1 million and $0.3 million of non-cash stock-based compensation expense in the same three- and nine-month periods. The year-over-year increases are due to our continued investment in our sales force, as well as research and development efforts to complete development of our OVA2 test.

We are looking forward to realizing the benefits of some of these investments by hitting our near-term milestones, including our FDA submission planned for early January 2015, and release of the validation study data by mid-2015. We also remain committed to publishing initial health economic data in the first half of 2015.

Net loss for the second quarter was $5.6 million, or $0.16 per share on weighted average shares outstanding of 35.9 million. Total net loss for the nine months ended September 30, 2014, was approximately $15.1 million, or $0.42 per share based on weighted average shares outstanding of 35.9 million. Our total shares outstanding at September 30, 2014, were 36 million.

Cash and cash equivalents at September 30, 2014, were $16.8 million. The Company utilized $5.4 million in cash in the third quarter, our expected high watermark for cash utilization as previously disclosed. We expect $4.5 million to $5 million of cash to be utilized in the fourth quarter of 2014, which still includes some nonrecurring ASPiRA LABS and other costs.

Now I will turn it back to Jim.

Thanks, Eric. On our third-quarter performance, specifically the lack of anticipated growth versus the prior quarter, we said in prior calls that we had anticipated growth in the third quarter on OVA1 sales based on having the expanded sales force in place. We did not achieve our internal goals, but there were several points of learning about how to approach the market going forward. Let me address some of those.

Payer strategy. Sales and payer strategies need to be tightly coordinated. Not only do you ultimately need to get medical policy coverage at a fair price, but clinicians need to be comfortable and often participate with your appeals process and with your patient pay program while you're working out coverage with insurers. These processes are in place now but were not fully in place in quarter three.

Call points. We are still appraising the optimal call point. With a very fragmented OB/GYN market of 35,000 clinicians, you cannot call on everyone, even if you have a very large sales force. Going forward, we plan to focus on a limited number of markets where we have identified opportunities to leverage key opinion leaders, payers, and a broader network of influencers in ACOs and health systems.

Consistency of approach in messaging. Not only do you need a talented sales team directed at the most influential customers, but you need an effective sales process, which positions our products appropriately and ultimately changes current clinical practice by including OVA1 on a routine basis. Our new marketing team started in early September. We look forward to their influence on our sales team and sales processes beginning with the fourth quarter.

Finally, I briefly wish to address our transition status with Quest Diagnostics. We have been in active discussions with them for some time on both settling out our old contract and creating a new, go-forward relationship. We are hopeful that we will reach a negotiated settlement by year end.

Let's now turn our attention to our development progress and discuss some of our achievements in the quarter. I'm going to turn it over to Donald Munroe, our Chief Scientific Officer. Donald?

Thanks, Jim. Regarding the OVA2 update, we successfully completed development last quarter, locking the design for subsequent verification and validation. The revised test design includes three of the five OVA1 biomarkers, along with two new substitutions. We plan to disclose the five-marker OVA2 panel in a future publication so as not to compromise embargo rules. The changes were designed to improve specificity and positive predictive value, or PPV, relative to OVA1 without giving up key advantages of OVA1: its very high sensitivity; negative predictive value, or NPV; plus early-stage performance and broad range of subtypes detected.

With this design in hand, we also undertook and completed verification of OVA2. The exercise ran the new product through a wide variety of performance tests to rigorously assess every aspect of the design prior to undertaking a double-blind validation with help from external lab partners. The data from this exercise generated over 200 tables and figures, and successfully met all the criteria for advancement. As a result, the team received a green light to move forward into product validation, which should begin this month.

While the nature of validation means we cannot predict success with certainty, we are optimistic based on the verification results. Work at the external labs should be completed in the next two months, followed by submission of a 510(k) package to FDA early in 2015, targeting OVA2 product launch in the second half of 2015. We also expect to present and publish several pieces of work around the design, validation, and independent evaluation of OVA2 in 2015. As these publications progress, we look forward to sharing more information about the changes to the biomarker panel and the design and the performance improvements we've been able to achieve.

Back to you, Jim.

Thanks, Donald. That concludes our presentation, and we're ready to take your questions.

(Operator Instructions). Adam Evertts, LifeSci Capital.

I just have two questions regarding ASPiRA LABS. The first is what is the current turnaround time from sample collection to results, and how does that compare to what's been done with Quest?

Hi, this is Valerie Palmieri. The current turnaround time from collection to results is 24 to 48 hours, and it's about 24-hours improvement over the current Quest standard.

Great. Second question is, given all of the changes in the business and the planned launch of OVA2 in 2015, do you see any need for additional investment in order to handle the projected volume increases?

No, actually the majority of the investment occurred in 2014. So in 2015 and 2016, we will be leveraging our fixed and variable costs. In addition to that increase in operating efficiency, we also have invested in a truly personalized service and experience for the physician, the payer, and most importantly the patient.

Great. Thank you.

(Operator Instructions). Jack Fraser, Seamark Capital.

I'm wondering, Jim, if you could -- and maybe I missed this -- if you could spell out for us or give us at least a sense for the volume that was handled specifically by ASPiRA LABS. And then with regard to the receipt and collection cycle, if you could give us a sense of where we are in the aging of those accounts thus far, and what your initial assumptions are about what is likely to be the experience for aging of accounts receivable leading to collections. Thanks.

Thanks, Jack.

Hey, Jack, this is Eric Schoen. So, what I said in the prepared remarks is we aren't going to disclose exact ASPiRA volumes at this point, but you can get the general sense that they are below 5% of our total volume. We expect that to go above 5% next quarter, and we'll begin to break that out so people will be able to take the metrics and growth rates from it. The volume has been growing month over month, but, until it's at a meaningful level, giving percentages just doesn't mean anything for anybody.

We've begun billing for ASPiRA. We've begun collecting money, but there is a lag time, because without significant payer contracts or medical policy, we anticipate getting denials and having to appeal those denials. So, the piece that I will say at this point is that it will be a several-month lag between running a test and collecting for a test. And again, our revenue recognition is on the cash basis at this point.

Okay, good. That's helpful. Thanks. And then one other quick question. In your envisioned timeline for OVA2, should we all be thinking that OVA1 will effectively migrate off of the offering menu of the Company at that time?

Yes.

So, a year from today, all things being equal and if things go according to plan, this is going to be purely -- that piece of the business will be purely an OVA2 franchise?

Correct. But as we tried to lay out, the future will look different. With the introduction of an emphasis on LDT products after OVA2, after you approve of OVA2 with the introduction of the OVA-X series, you'll have multiple products going forward. And then you'll ultimately see us introduce things beyond the ovarian care path onto endometriosis and other offerings. But definitely, even in the midterm, we'll move beyond being a single-product Company.

That's helpful. Thanks very much.

(Operator Instructions). Mike Seebeck, Ladder 31 Investments.

Thanks for the update on the call. I was wondering if you could basically give a little more color, expand on the expectations for the fourth-quarter volume improvements now that you've had an expanded sales force in place and have little better understanding of how to approach the market.

Yes, Mike. We said in the prepared remarks that we do expect a modest increase, so certainly above Q3 levels and the year ago Q4 levels. But we're not at this point giving specific guidance.

Okay.

I think we also said, to bridge some of our comments, that we're in the process of changing our coverage model a bit to be more regional in the emphasis, so more of a concentrated approach. So there is a bit of that going on that will be going on in the fourth quarter and be completed in the first quarter. So we have a bit of a shuffling of roles and geography concentration, if you will, going on over the next quarter. But that said, we still anticipate a modest increase in OVA1 test volume.

Okay. I was wondering, can you maybe even give me a little more information about how much more regional activity you plan to have going through the fourth quarter and then into the start of next year? How many more salespeople? How many more regions? I know a lot of the work you're probably doing out in the field is to support areas where you have approval for ASPiRA LABS, which would make sense.

Yes, the overall level of salespeople will not change. It will remain roughly in the -- I think we've said before, in the mid-20s. But what will change is sort of the -- some of our roles will change. We are sort of, I would say, elevating our call points to call on more of, at the ACL level, the health system level, and trying to, frankly, gain leverage on the marketplace as we try to install OVA1 into care pathways as they get established by organizations who manage their business in that way, manage risk in that way. So we have a rotation of roles and an elevation of roles. So the overall number is not changing, but maybe the type of salesperson and the skill sets we're employing in the field are -- through our learnings, we're elevating them.

Fair enough. Thank you very much.

This concludes our question-and-answer session. I would like to now turn the conference back over to Mr. LaFrance. Mr. LaFrance, please proceed.

Thank you, Roxy. To conclude, we are on a journey at Vermillion. We have our eyes set on establishing ourselves as a leader in bio-analytics solutions focused on gynecologic disease. Strategically, we plan to expand our market beyond the ovarian cancer pathway to a broader set of gynecologic diseases, and we plan to expand our mining capabilities to a broader set of information and broader set of correlation tools.

Operationally, we have three near-term focuses: building out our payer base for ASPiRA and establishing a high-value price point for the OVA product line; continuing to hone our sales and marketing approach to drive market uptake and acceptance of our products; and lastly, transitioning the Quest volume to ASPiRA in the first half of 2015 to prepare for a corporate relaunch in the second half of 2015 with our OVA2 product. Thank you.

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 the market adoption, changes in government regulations, payer reimbursement, relationships with our strategic partners, and other factors as described in the Vermillion 2013 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 27, 2014, 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.