Aspira Women's Health Inc (AWH) 2017 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Second Quarter 2017 Vermillion Earnings Conference Call. My name is Bethany, and I will be your coordinator for the call today. With me today are Valerie Palmieri, President and Chief Executive Officer; Dr. Marra Francis, Chief Medical Officer; and Eric Schoen, Senior Vice President of Finance and Chief Accounting Officer. This afternoon, they will discuss Vermillion's quarter 2 2017 performance. Before we get started, I would like to point out that there will be a replay of this conference call available via telephone and Internet. Please refer to today's press release for replay information.

This presentation contains and answers to today's questions may contain forward-looking statements, including statements regarding our business plans, plans and expectations with respect to ASPiRA IVD or pelvic mass data respiratory, our cloud web service platform and international commercial -- commercialization anticipated test volumes, our ability to expand pair coverage for our test and financial impacts, a scientific publication and study outcomes, anticipated cash utilization and anticipated revenue and the timing of the recognition thereof. 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, expect (sic) [except] as required by law. 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 factors as described in the Vermillion annual report on Form 10-K for 2016 and quarterly report on Form 10-Q for the first quarter of 2017. Following the Vermillion team's remarks, we will open up the call for your questions.

Now I would like to turn the call over to Ms. Palmieri.

Thank you, Bethany. Good afternoon, everyone, and thanks for joining us today. This afternoon, I'll provide you with highlights of the quarter, a review of the progress we have made towards implementing our strategy.

Vermillion has had a milestone organic growth quarter highlighted by year-over-year revenue growth of 55% improvement. Year-over-year, average per day volume increased 19% in territories with sales coverage. In addition, year-over-year gross margin improved from 5% to 50%. These improvements are a direct relationship to the strategic investments that we have made to enhance customer value through deeper customer relationships as well as focused sales efforts, personalized patient advocacy and a revenue cycle management improvement in capabilities.

This afternoon, we will discuss the details of our second quarter performance, the large market opportunity that remains for OVA1 and Overa and the investments we're making in the business to maximize our ability to capture that opportunity as well as progress on our strategic plan.

We are very proud of the impact OVA1 and Overa are having on patients' lives. Since OVA1 launched in 2010, OVA1 has impacted over 90,000 women with 0 safety or efficacy issues. And as we build our patient outcomes program, we should be able to better understand the number of cancers detected even at an early stage as well as the percentage of women with ovarian cancer who actually get to a GYN oncologist.

Keep in mind, over 60% of ovarian cancer is diagnosed late stage, and close to 66% of primary ovarian cancer patients do not have their initial surgery performed by a gynecologic oncologist. In addition to the majority of patients being benign, understanding the low-risk management care pathway is critical for a patient's peace of mind.

Today, OVA1 is FDA cleared, covered by Medicare and included in a major society guideline. It is covered or has positive medical policy for close to 30% of the population. And during the second quarter of 2017, we received payment on over 54% of the time versus less than 17% of the time in second quarter of 2016 for a nonpatient pay volume that would include Medicare, Medicaid, commercial insurance and client bill.

During Q2, we achieved a trajectory change in the business in terms of revenue, volume and cash collections, and we are confident in our prospects for long-term growth of the business. In spite of these gains, we did recently receive notice of a significant client bill account, which is no longer referring OVA1 to us, and as a result, we have begun servicing a portion of these customers directly. Eric will review the details in a few minutes.

Our goal is to change the standard of care by managing the 1 million-plus women with a pelvic mass. This will take time and require further investments in our people and our infrastructure.

To discuss our second quarter financial review, I'd like to introduce Eric Schoen, our Senior Vice President of Finance and Chief Accounting Officer.

Thanks, Valerie. Today, we press released our second quarter 2017 financial results, which is also available for download via the Investors section of our website at www.vermillion.com. We will also file our Form 10-Q with the Securities and Exchange Commission by August 14.

Product revenue in the second quarter of 2017 totaled $860,000 compared to $554,000 in the prior year quarter, representing a 55% year-over-year increase. ASPiRA IVD service revenue in the second quarter of 2017 totaled $38,000 compared to $155,000 in the prior year quarter and will vary from quarter-to-quarter based on the size of ongoing customer projects.

Total revenue in the second quarter of 2017 was $898,000 compared to $709,000 in the same year ago quarter, representing an increase of 27%. There were 2,418 OVA1 tests performed during the second quarter of 2017 compared to 2,345 OVA1 tests performed in the prior year quarter or a 3% increase.

We will discuss the breakout of volume between covered and noncovered territories in the sales review section of this call. However, in addition, revenue on a per test performed basis increased to $356 in the second quarter of 2017 compared to $236 in the second quarter of 2016, representing a 51% increase. This number compared to $296 in the first quarter of 2017 or a 20% increase sequentially.

Despite these strong metrics in the second quarter, we do note that we expect test volume and, to a lesser extent, product revenue to decrease in the third quarter of 2017 due to the loss of 1 client bill customer. We expect the direct volume loss from the client bill customer to be between 5% and 10% in the third quarter relative to volume in the second quarter of 2017. We also expect some additional volume loss due to summer seasonality and the July holiday calendar. We are working to mitigate the losses and have already begun to partially replace the volume loss with direct arrangements with hospital systems and groups.

Cost of product revenue for the second quarter of 2017 totaled $428,000, representing a 19% decrease from the prior year quarter due to lower consulting and personnel costs. Cost of ASPiRA IVD service revenue was $266,000 for the second quarter of 2017 compared to $60,000 for the same period in 2016. ASPiRA IVD did not commence operations until June 2016, and that's included only 1 month of expense in 2016 compared to a full quarter of expense in 2017.

Total operating expenses in the second quarter of 2017 decreased to $2.6 million compared to $3.9 million in the same year ago quarter, representing a decrease of 34%. The decrease was primarily due to commercial operating efficiencies as well as lower research and development costs, following expiration of our collaboration agreement with The Johns Hopkins University School of Medicine and the clearance of Overa in March 2016.

Net loss for the second quarter of 2017 was $2.4 million or $0.04 per share compared to a net loss of $3.7 million or $0.07 per share in the same year ago quarter.

Cash and cash equivalents at June 30, 2017, were $6 million. The company utilized $1.7 million in cash in the second quarter of 2017 after deducting the final payments related to expenses for the February 2017 common stock offering. We plan for cash utilization to remain under $2 million per quarter over the balance of 2017.

I'll now turn it back to Valerie.

Thanks, Eric. We will now review our core strategy. Our strategy has 3 phases: a rebuild phase, a transformation phase and a growth phase. We have completed the rebuild and transformation phase. In 2017, we have begun our growth phase with focusing on regional-specific sales efficiency, key payer publications in coverage and overall growth through our revenue diversification.

The 3 key objectives of the growth phase are as follows: first, the successful deployment of our domestic and international commercialization strategy based on focused clinical utility and health economics to drive sales, payer coverage as well as our continued momentum with guidelines; second is delivering key results from our new revenue channels, including international partnerships and ASPiRA IVD; and third, laying the foundation for the one-of-a-kind pelvic mass repository, which is intended to be the core of our big data engine and pelvic mass portfolio.

We will now review our first objective, which is the publication of a foundational peer-reviewed papers to support payer and guideline adoption. I would like to now hand the call over to Dr. Marra Francis, our Chief Medical Officer, to provide this update.

Thank you, Valerie. We continue to strive to maximize test coverage and clinical adoption, and this is directly driven by our core clinical utility and health economic publications. Currently, we have 1 study accepted for publication that is scheduled to be published in Q4 and 1 in review. Both addressed the benefits of choosing a Multivariate Index Assay such as OVA1 or Overa.

I will start with the paper that is currently in review. We have evaluated the benefit of our high negative predictive value, or NPV, for the management of low-risk OVA1 patients with adnexal masses. It is well established that an elevated OVA1 score benefits patients by having them either referred to or managed in consultation with a gynecologic oncologist.

While we know ovarian cancer is rare, it has been well proven that women ultimately diagnosed with ovarian cancer have a better survival outcome if their initial surgery is performed by a trained oncologic specialist. However, we had never focused on the benefit of truly understanding the care pathway of a patient who is not at elevated risk for ovarian cancer with a low-risk patient, and that is what this paper reviewed. The NPV of OVA1 when used in conjunction with clinical assessment and in ultrasound findings is 99%, meaning there is only a 1% likelihood that a mass is cancer if an OVA1 score is low risk.

There are several clinical and health economic benefits of knowing this information. First, the OB/GYN is reassured that any surgical management can safely be performed without the need for referral to a higher level of care. Second, the patient is not forced to leave the practice where she receives her routine care. Last, surgical management with an OB/GYN is less costly than the same benign procedures done with a gynecologic oncologist, something we will be outlining in detail in our paper planned for publication in Q4.

We believe that giving the physician useful information for both the elevated risk and low-risk OVA1 patients will have a wider impact on the overall care of women with adnexal masses.

Now moving on to our recently accepted and scheduled to be published in Q4 2017 paper titled, Economic Impact of Increased Utilization of Multivariate Index Assay Testing to Guide Treatment of Ovarian Cancer: A Payer Perspective. In this paper, we used both commercial and Medicare claims data from 62 million members, of which 37 million were Medicare and 25 million were commercial covered lives. We then constructed a budget-impact model to estimate the economic consequences of substituting OVA1 versus a single biomarker assay, CA125, in assessing the likelihood of pelvic mass malignancy in premenopausal and postmenopausal women. The results showed significant savings on both the Medicare and commercial sides, with the highest per member per month savings seen in the commercial side of up to $0.17 per member per month, translating to a monthly savings of $3.4 million for plans with $20 million covered lives. This model could be modified in the future to be applied to Overa as well.

Lastly, I want to conclude with an update on how we are increasing physician clinical awareness and knowledge surrounding OVA1. Our focus has been to educate providers and patients on the clinical usefulness of OVA1 for classifying women as either elevated risk of malignancy or low risk of malignancy before going to the operating room.

As discussed in the last earnings call, Vermillion had a strong presence at national ACOG this past May. Currently, we are focusing our efforts to be the first test the provider chooses in the workup of an adnexal mass by being present at regional programs where large numbers of women's health care providers attend to learn the latest updates in technology that impact their practice of medicine, the OMNIA programs. Since OMNIA began 11 years ago, they have educated over 37,000 women's health care providers in both live and online CME courses. Each live program educates approximately 475 providers in 1 day. Vermillion will be attending 9 live programs hosted by OMNIA for the remaining half of 2017, giving our sales team the opportunity to connect with approximately 3,300 providers.

Our local sales representatives will be attending the programs in their geographical areas, thus allowing them easy access to many providers all at once, maximizing their face-to-face time with both current and prospective new customers.

Moving forward, we will continue to focus our efforts in both education and our studies on the clinical usefulness of using OVA1 prior to any surgical management for an adnexal mass. Additionally, we will continue to educate women on the signs and symptoms that may be associated with pelvic mass disease by creating a patient portal for women to take a symptom index quiz, thus allowing them to have educated discussions with their health care providers.

I will now hand this back to Valerie.

Thank you, Marra. I will now give an update on our 3 revenue channels, domestic, international and ASPiRA IVD. On the domestic front, we believe that we can capture a significant market share over time. We've had significant year-over-year retention of customers due to our new and current customer retention programs. This increase in base customers is directly driven by our focus on increasing same-store growth, enhancing overall retention and also at active personalized patient advocacy program, which I'll go into a few minutes.

By embracing this shift, the team is driving increased adoption of OVA1 within our existing customer base. The new sales efforts and refocus are driving our change and paying dividends. Through the changes in our sales force, we grew our base of customers while increasing our specimens per M.D. by 33%. We are also seeing nice dividends already in our expanded sales force. These recent additions in key markets further reduce our noncovered territories, which have experienced 10% reductions in volume.

Converting top noncovered territories to covered territories is a priority while we train and demonstrate success with our initial expansions. We are confident that our new customers will continue to adopt OVA1 at a strong pace where we have sales force presence.

We have completed 2,418 tests during the second quarter. If you compare the growth in territories with field representatives versus territories with no field coverage, covered territories grew 19% per day year-over-year, while noncovered, low-touch areas decreased 10% year-over-year per day. For example, in our Michigan territory, we experienced 29% year-over-year growth per quarter, while our Maryland territory grew 47% year-over-year per quarter.

In addition to sales force expansion, we have also rolled out a new patient advocacy program. This program, which we piloted in Q2 and just expanded in late Q2 by increasing the investments into the program by 300%, is critical to the overall customer and patient experience. We now offer prior to the test being performed and estimate 2 patients with most commercial insurance plans that show their anticipated out-of-pocket cost. Providing this transparent cost information helps patients make informed financial decisions. So far, we have had a 90% test order rate with this program. This helps us to proactively manage patient concerns of their payer coverage.

In addition to organic sales force, we are focusing on expanding contract coverage, coupled with domestic regional partnerships. Our technology has documented strengths over alternative technology, such CA125 and ROMA, and agreements with the right strategic distribution partners in time are expected to help increase market share.

In addition to the launch of OVA1 and OVA1 plus, we have also launched our second-generation test Overa with our targeted launch program. Coupling publications volume and reimbursement strategy together is critical to the rollout. As you know, recently, we received our CPT code, PLA, 0003U for Overa, and we just recently attended the July 31 CMS meeting to support our reimbursement strategy for Overa. More information to come on this in future earnings calls.

Let's now turn to insurance coverage. The number of lives under positive medical policy increased to almost 96 million in the second quarter, which is about 30% of the lives in the U.S. Our market access team has performed well and is now focused on turning these positive coverage decisions into contracts, allowing patients to access OVA1 as an in-network benefit. We are waiting for credentialing for several plans with which we have entered into agreement. We expect to make continued steady progress on the expanding coverage of OVA1 in the remainder of 2017.

I'm now moving on to our other revenue channels, international and ASPiRA IVD. We continue to have discussions regarding 2 international business models, centralized and decentralized, designed to meet the unique needs for each country outside of the U.S. We expect to implement our web services platform in key countries in the near term, while we expect the impact of our initial international contracts to be minimal as we work through market regulatory payer issues in the local jurisdictions. But we expect sales outside of the U.S. to have a positive impact on volume and revenue in 2018 and beyond. In addition, we are developing protocols on studies in 2 strategic countries. More to come as we roll out.

We believe that Overa's proven diagnostic technology, coupled with the ability to utilize a Roche Cobas platform, will be a solid foundation for global commercialization, so women worldwide can more easily benefit from our technology. Keep in mind that about 90% of the ovarian cancers worldwide are outside of the U.S., and we have just started to enter that market.

I'm now moving on to ASPiRA IVD. ASPiRA IVD recently celebrated its 1 year anniversary and is now a fully functioning clinical trial testing site with the following accomplishments. We just landed our first companion diagnostic study partnership with a top 10 pharmaceutical company directly. The therapy under development is a monoclonal antibody whose target is PTK7 and is being administered to patients with ovarian cancer, triple negative breast cancer and nonsmall cell lung cancer.

We are also continuing the testing for the global DLL-3 companion diagnostic enrolling trial, sponsored by a major pharmaceutical company as well as an in vitro diagnostic company for patients with small cell lung cancer. As reported in the last earnings calls, we have continued to see studies focused on oncology therapies such as DLL-3 to have slower patient enrollment than previously budgeted. This represents a potential risk to Q3 revenue realization for ASPiRA IVD.

Our last objective is building a one-of-a-kind pelvic mass repository, which is intended to be the core of our big data engine and pelvic mass portfolio. The goal of this repository is to support the development of new products and predictive analytics in ovarian cancer as well as the differential diagnosis of benign pelvic conditions. We have a specimen repository in database that has close to 5,000 specimens with known pathology. In addition to that, we have added an IRB-approved protocol for specimen and data collection of 7,000-plus clinical laboratory specimens. This assessment is in process, and we plan to have a total of 12,000-plus specimens in the repository when it's completed.

To date, we are still seeing approximately 20% return rate on patient consents, which is much higher than we anticipated. Keep in mind, patient consent allows us to receive additional clinical and diagnostics data as well as pathology reports, which are the gold standard in diagnostics.

This will allow us to see how doctors truly manage low-risk as well as high-risk patients with our technology. Once we have enough data, we intended to publish on this as well. As we all know, ovarian cancer remains one of the most challenging diagnoses to make early in the disease process. We believe that harnessing this data will truly be key to understanding the origin, contributing factors, prevention and successful treatment of this disease through the development of future bioinformatics solutions. The end goal of our program is the incorporation of our data and specimens as well as the collaboration of top academic institutions to share clinical, epidemiological, genetic, proteomic data on various types of benign and malignant pelvic mass conditions.

In closing, we believe that the second quarter 2017 was another milestone quarter in terms of revenue, growth in specific regions and payer success to set the stage for the rest of 2017.

Through 2018, we plan to define our company's success using these 4 metrics: Number one is revenue growth. Revenue growth will be how we measure the effectiveness of our new integrated sales processes as well as leveraging partner laboratories in our decentralized platform. Number two is reimbursement expansion, including percent paid, average unit price and expansion of payer coverage. Number three is the continued development of scientific and clinical evidence, which may serve as a foundation for test adoptions, including the management of low-risk and high-risk patients, additional guideline inclusion and payer coverage policies. And number four is our profitability as we grow revenue and improve operating efficiency, with the eventual goal of profitability and continued investment back into the business.

We look forward to keeping you apprised of our progress during 2017. Our end in mind is to maximize share -- stockholder value by saving lives and saving money for the overall health care system.

We are now happy to answer your questions.

(Operator Instructions) And we will take our first question from [George Kefkarkou].

I've got a couple of questions, but I was very intrigued by the second half of the call. But firstly, let me just ask, if I could. The client -- the direct client bill customer we lost, just when and why and who are they going with? When do we lose them? When do we know? And why did they move away? And who are they using now?

Sure. So [George], I'll answer that. So we recently found out about it in the -- actually, a few weeks ago. And basically, they're our legacy client bill account from Quest. So typically, you would -- we go direct to the physicians, so they were a middleman between us and our physicians. And typically, client bill accounts are low-margin arrangements. They don't allow the diagnostic service company to have the relationship direct with the customers. So now the customers have the ability to send to us directly. In addition, we will own the complete customer experience with the doctors order to result delivery in the billing component. So it did come as a surprise, but we believe, again, we're -- we are going direct to the customers, and they are allowing us to go direct to the customers as well.

Okay. That's good. I mean, it's good that we'd go direct and the fact that they're legacy, I understand that perspective, and it's low margin. So longer term, that's probably a good thing, right? Although we'll probably take a small hit in the number of tests for Q3, right?

Yes. So as we reported, the -- Q3 is normally a soft quarter because of the summers. Unfortunately, women don't -- they have vacations because they're out of school. So it's a soft quarter, but there will be additional softness due to the loss of this legacy client bill account.

Okay. You mentioned we've entered into agreements. I think that was with relevance to potentially national payers. Is that -- did I hear that correct?

So we are -- so the payer process -- and to kind of go through it. The payer process, first, you are out of network, then you have positive medical policy, and then basically, you basically go to an agreement on contract. So we are in the process of credentialing, going through the contract stages with several plans right now. We'll have more on our next earnings call or maybe sooner, once we finished the process.

Yes. I know, predicting timing is always very difficult with these things. And if I can quote you from the last earnings call, it's not a question of if; it's question of when. So it appears we're making progress. You're confident, Valerie, that we're making progress, that we'll get one or more national payer committed to us this year, correct?

So what I'm saying, [George], is we have several -- we're going through the credentialing process with several payers. I can't say one or more nationals, but we are several payers we are in the credentialing process with. And we will have -- unfortunately, we don't have the news for this call, but there is more to come on that.

Okay. About -- any updates on partnerships, on partners either both domestic our international in terms of increasing, if you like, in effect our sales force?

So we are -- as we are looking at specific partnerships in regions where we have, what I consider, the payer puzzle worked out. So the partnerships, there's nothing I can announce on it. We are in discussions in several regional markets, but there's nothing that I want to announce on at this time. And then in international, I don't know whether you picked up on the review, but we have 2 strategic countries that we are moving forward with. And things don't, how can I say, get done as quickly as would like to them to get done, but we have 2 very key, I want to say, study protocols as well as potential partnerships that we will be giving more details on, on the next call.

Have we announced the countries at least or no?

No, we have not. We have not. But you've asked the process on that.

Yes. Okay, okay. I bet one of them have strange accents like I do. In any event, did I hear you mention -- and I was writing notes in a flurry towards the end? Did I hear PTK7 partnership...

Yes, you did.

PTK7 is ordinarily associated. It's a receptor that's associated ordinarily with colon carcinoma, right? And it's a gene, as I understand it. And I know Pfizer is targeting PTK7 for cancer by generating an antibody drug conjugate against the receptor. I'm kind of surprised that you mentioned PTK7. How does that relate to us as OVA1? I'm confused by that.

So...

Have I explained the question okay? Did you understand my confusion?

Yes. So let me -- so PTK7 is a -- basically, it's a therapy under development. It's a monoclonal antibody, so they're targeting the PTK7 in terms of monoclonal antibody and developing a companion diagnostic. So can't mention the pharma company just yet, but you're pretty good in terms of your detective work. And what they're looking at is PTK7 being used for ovarian cancer, triple negative breast cancer and nonsmall cell lung cancer. Our involvement is supporting the discovery work on this companion diagnostic through our IVD trial services. So it's our ability to access ovarian cancer specimens, helps us with that relationship, George.

So how did that happen? Did the big pharma company, though I think I know who it is, reach out to you? Or did you reach out to them? How did that play out? I'll be interested to find out. I think that's relevant.

Yes. So as you can imagine, we went into IVD. So IVD was a spawn of us leveraging our specimen bank and our database as well as there's a lot of disruption in the IVD trials business because of Covance being bought by LabCorp and Quest and Quintiles. So we are taking advantage of some of the disruptions and building relationships directly with pharma.

You must be excited by that, right?

We're very excited, yes. Yes. It's a milestone for us.

We haven't announced any news on that, right, before this call?

No, we have not. No.

(Operator Instructions) And we will take our next question from [Jacques Villafranc].

I had a question with regard to what you're doing with respect to patient advocacy programs, and whether you could give us some more detail on that.

Sure. Thank you, [Jacques]. Good afternoon. So our patient advocacy program and it's something that it really is tailored to improve the patient experience from twofold. One is, as you know, these patients who have a mass are anxious, and when a doctor tells you, you have a mass, the patient is halfway listening. So patient advocacy program allows us to also not only discuss with them their deductibles with their insurance, and so they can understand the out of patient -- their out-of-pocket costs, but also, it allows us to have an education session with them and why their doctor ordered an OVA1. So it does twofold, is it helps us with education because there -- they may or not be listening to the doctor but also better understand what's the significance of the test the doctor has ordered. And in addition to that, what will be their out-of-pocket cost depending on the insurance company. So it's a program that is -- had huge success, and it's -- I think it's going to pay a huge dividends in terms of bridging the time between our current payer coverage until we get to 100% of the covered lives in the U.S. as well as it's a great form to educate the patients on OVA1 and pelvic masses, in general.

(Operator Instructions) And there are no further questions at this time. I would like to turn call back over to management for any closing or additional remarks.

Thank you, Bethany. To conclude, we are executing on our plan to change the course of pelvic mass patient management in the U.S. as well as worldwide. We are focused on our growth phase, which includes sales and payer adoption while diversifying our revenue channels with international and ASPiRA IVD. In parallel, we have laid the foundation for our one-of-a-kind pelvic mass repository, which is intended to be the core of our big data engine and pelvic mass portfolio. You have already seen some of the fruits of this with our risk of malignancy report, which combines the OVA1 result with ultrasound, and we plan to incorporate the Symptom Index online product into our offering soon.

As we build upon our database, we plan to build upon our existing platform to not only change the way ovarian cancer is managed but also push early detection upstream and build a proprietary portfolio to manage the pelvic mass conditions, which impact 1 out of every 5 women in the U.S. Our end goal is to serve a global market with strong proprietary science, coupled with a platform, which will drive profitability and overall shareholder value.

Thank you for joining us today, and thank you for your interest in Vermillion. We look forward to seeing you at the upcoming medical meetings and investor conferences.

And ladies and gentlemen, this does conclude today's conference. We thank you for your participation. You may now disconnect.