Edited Transcript of VRML earnings conference call or presentation 26-Mar-20 8:30pm GMT

The lab operations requires on-site essential employees. That being said, we have stratified the team in such that if an infection incurred, it would be localized and not impacting entire workforce, thus, the lab could continue to operate. In addition, we have 3 to 6 months of reagents in stock, depending on the volume.

We are also in conversations with the manufacturer to ensure consistent supply over the 6-month time frame as well. And one last point, we are proactively managing the employee base with all employees check-in Zoom video calls to ensure we are not just taking care of the physical aspects of the business but also the mental well-being of all.

Number two, cash preservation and liquidity management. We are naturally reducing all travel, entertainment and discretionary spend as well as deferring these investments, where possible, as an offset to expected reductions in revenue.

We are also maintaining our commitment to critical product development while reducing spend on higher risk research. In regards to capital management, Bob will review our strategy with respect to federal and local loans, which we intend to fully take advantage of.

The third part of our plan is maximizing productive use of employee time and emerging from the crisis stronger. Our commercial team is focused on maintaining relationships with existing customers remotely and ensuring we resume our trajectory upon return to normalcy. We are also developing virtual territory management through a number of tools, including virtual sales rep visits, digital marketing, social media and a provider/patient ordering portal.

For new prospects, remote learning sessions are being developed to continue to expand our customer base during this pandemic. Our billing and collections teams are optimizing their scripts as well and spending more time on collections of AR and appeals of denied claims to ensure maximum collection efforts.

And the last part of our plan, number four, is continuing to work on our product development pipeline and planning for recovery. While we reduced our longer-term investment in discovery, we are capitalizing on this time to focus our efforts in the development of OVANEX and ENDOCHECK. These studies will initially be prospective and retrospective, and we are continuing all activities to get these studies completed.

I am now turning to the fundamentals in the business, as we continue to be pleased with our trajectory prior to COVID. We disclosed in our earnings release today 3 significant developments: Number one, Cigna has executed preferred and network contract agreement with us, finally. This in-network agreement adds another 16 million lives to our contracted plan, and it includes not only OVA1 but Overa and our ovarian and carrier genetic testing panels as well. This was a nice win. The pricing will be effective April 1, 2020. While we do not disclose specific contract pricing, we are pleased with the final prices to which we agreed.

Number two, we are fast-track revising our State of Connecticut’s Department of Economic Community Development Financing. Prior to the COVID-19 event, we recently concluded an amendment to our agreement with the State of Connecticut relative to target employment levels. As you recall in the past, we announced a $4 million loan, of which we received $2 million in 2016. The additional $2 million is based on revenue and the revised employment milestone, which we view as achievable.

And lastly, on the payer front, we have made considerable advances in our state Medicaid coverage. We have added a total of 9 state Medicaid plans to our positive coverage list, with major states being New Mexico and South Carolina, which are expansion territories for our team. We have also have many more on the way. Having this coverage in place is critical to managing this underserved population as we believe OVA1 is the only technology available today that has adequate sensitivity for early-stage ovarian cancer detection, and specifically African-American women.

Chris will cover Vermillion’s commercial momentum in detail, but I just want to summarize the impact of our investment in commercialization. We have had 4 consecutive quarters of strong growth, from Q1 to Q4 2019. Our OVA1Plus volume grew year-over-year, 27% in Q1, 66% in Q2, 82% in Q3. And in Q4, we recorded year-over-year growth of 93%. We actually were running much higher early in Q4, but we did have some holiday impacts in late November and December 2019 which tempered growth, which Chris will discuss in detail. We did resume our trajectory post the holidays in Q1.

One last comment before we move on to the commercial update. The growth curve, which we have experienced through the last 6 months post hiring of the second phase of sales reps, has now surpassed the volume per day driven by Quest at the height of OVA1 adoption. We believe this is mainly driven by the adoption of our second-generation technology, Overa, as part of OVA1Plus, and we have truly solved for the specificity gap. And we are still in the early innings of changing the standard of care in the U.S.

At this point, I’d like to turn the call over to Chris to share our commercialization results in the fourth quarter as well as discuss our innovation pipeline. Chris?

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Chris Goulart, Vermillion, Inc. – SVP of Commercial Operations [3]

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Thank you, Valerie. I’m pleased to provide an update on our commercial efforts. We believe our two-pronged approach with the decentralized platform channel and the direct sales channel is the right strategy to drive adoption. The decentralized arrangements should help to drive test adoption as well as integrate into the care pathway of the respective institutions and super group. These large deals have a significant lead time, and some were very close. But we are uncertain at this point if the deals we are working on will lose some momentum due to the COVID-19 pandemic.

We will continue to work in this model as we seek to drive wider adoption of OVA1Plus and our expanded product portfolio.

Moving on to our direct sales channel. Our sales force is another quarter further entrenched in their respective territories. I am pleased to report that OVA1Plus continues to gain traction in the marketplace. In Q4, this fully staffed sales force made considerable gains, with 8% quarter-over-quarter volume versus Q3 and 93% growth year-over-year.

Please note the sequencing of the holidays on the calendar in late Q4 gave rise to the 3 weeks, which were outliers in the quarter. We have provided an earnings deck with the graph of weekly sales trend line, and one could clearly see Thanksgiving and Christmas/New Year holidays as outliers from the trend line. We also continue to see momentum in Q1 2020. But as we discussed earlier, it is too early to conclude where we stand in these early days of this pandemic.

In terms of total ordering physicians, 2,629 physicians ordered OVA1Plus in the fourth quarter, an increase of 1,189 from Q4 2018, which had a total physician count of 1,440, a growth of 83% year-over-year. As compared to Q3 2019, we grew customers 66% year-over-year. We actually increased our overall customer growth year-over-year in Q4.

With regards to new physicians, I’m pleased to report that we continue to see growth in new physician additions. During Q4 2019, we added 524 new physicians compared to 326 during the same period in 2018, an increase of 61%. We will be focused on maintaining these customers through the pandemic and believe we will resume the growth trajectory and accelerate it with new product introductions.

I would also like to provide an update on our upcoming products and enhancements. First, we are closing the disparity gap on ovarian detection with 2 published papers. And in December, we initiated a study with Einstein Medical Center, the largest independent academic medical center in Philadelphia. The goal of this study is to review the disparity in African-American women as well as other ethnicities. Based on our published data, OVA1 is 2.38x more sensitive since CA125 in African-American women, 79.2% versus 33.3% sensitivity using the 2007 ACOG cutoff.

Second, I would like to update everyone on our third generation ovarian cancer risk assessment test, which is now branded as OVANEX. We have developed IRB-approved prospective and retrospective studies to interrogate the sensitivity and specificity in the Watch and Wait cohort. As discussed on prior calls, OVANEX is designed to address the Watch and Wait population, which is monitored 2 to 4x per year per patient. We believe that this test will help clinicians and patients to better understand the risk of malignancy and if surgery can be delayed.

We also discussed on prior calls our future test, which is an aid in the detection of endometriosis. The brand name for this test is ENDOCHECK. This is a large unmet need in the OB/GYN community as endometriosis is treated based on symptoms and is unable to be detected without a surgical biopsy. ENDOCHECK will address the patient population with the TAM in the U.S. of roughly $6 million to $7 million. We will provide further updates on future calls as to the anticipated launch date of our prospective trials.

Lastly, we have another test in the pipeline, which is now branded as OvaInherit. It is based on our 7 protein biomarkers interrogated by a new machine learning algorithm to monitor those who are genetically predisposed with genes such as BRCA 1 and 2. OvaInherit will have an algorithm trained for this asymptomatic high-risk population.

Currently, clinicians can order CA125 in conjunction with ultrasound to assess risk. We feel that our algorithm will outperform this current standard of care and provide better early detection.

Moving on to our genetics offering, our growth continues. We recently made changes to our panels and our service offering to prepare for our expanded offering of OVA1Plus risk assessment in conjunction with hereditary breast and ovarian cancer panels. We are planning to launch in 2020 a combined report, which will allow clinicians for the first time to see OVA1Plus results along with HBOC status on the same report with an interpretation. This will give clinicians an opportunity to evaluate protein and genetics in the evaluation and management of patients for ovarian risk of malignancy.

Coupling our OVA technology with genetic predisposition is essential for proactive patient management using a multi-modality approach. Despite COVID-19, we anticipate making progress on our portfolio development, and we are very excited about the formal rollout of our product pipeline.

Our new products will impact the entire patient life cycle, from the age of puberty with ENDOCHECK to Watch and Wait with OVANEX, a high restraining with OvaInherit to surgical risk assessment with OVA1Plus. Please see our new investor and earnings deck at vermillion.com.

At this point, I would like to turn the call over to Bob for a review of our financial results. Bob?

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Robert Harry Beechey, Vermillion, Inc. – CFO [4]

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Thank you, Chris. Chris and Valerie have articulated the continued volume growth in the fourth quarter of 2019 and first quarter of 2020. I would like to comment on our profitability trends, cash preservation and liquidity strategy as well as NASDAQ listing status.

The trend in profitability has been strong with gross profit on OVA1Plus in the fourth quarter at 48% as compared to the prior year fourth quarter of 36%. The increased year-on-year gross margin percentage was primarily driven by volume leverage offset by a decline in price. Sequentially, gross profit margin was down from Q3 to Q4 from 53% to 48% driven by an increased investment in kits as we expand the customer base.

Our average unit price was $333 in the fourth quarter versus $366 in the fourth quarter of 2018. The main driver of the year-on-year decline was payer mix, with substantial increase in patient direct out-of-pocket payment in specific geographies.

The $333 in the fourth quarter is down slightly from the third quarter AUP of $345, as we had some revenue catch up in the third quarter from prior periods, which did not recur in the fourth quarter. We’ve been refining our estimates to be more accurate over time as we gain more experience with payers.

As Valerie mentioned, we’ve made progress on the Cigna contract as well as Medicaid credentialing to improve our price over time. We’re also driving insurance submissions, thus allowing patients to pay out of pocket.

In addition, CMS recently extended the PAM price update process from 2021 to 2022 for the $897 Medicare price. The maximum downward adjustment allowed is 10%, so we have limited downside in that element of our pricing.

Our cash utilization for the fourth quarter was $2.9 million, which continued our downward trend. Our cash balance at December 31, 2019, was $11.7 million.

As we announced today, we successfully amended the terms of our State of Connecticut’s financing with respect to the target employment levels in the state. The revised employment milestones are such that we anticipate achieving them in 2020.

We’re also closely monitoring government loans and grants at the state and federal levels as the regulations and legislation gets finalized. We’ll take full advantage of all such assistance to maintain our assembled workforce to avoid a start over of our commercial operations post COVID-19.

Regarding our NASDAQ listing status, as we disclosed in January, the NASDAQ granted us an extension to regain compliance with the minimum $1 bid price by July 27, 2020. Our intention is to achieve a compliant above $1 trading price prior to the deadline primarily driven by significant strategic partnership announcements. We are, nevertheless, closely monitoring NASDAQ’s position on if they will consider issuing extensions due to the pandemic. At this time, they’ve made no formal changes, but they have indicated they are continuing to evaluate the situation.

We previously announced the wind down of our IVD business, which was completed in the fourth quarter. We elected not to present the business as discontinued operations as the closure did not represent a strategic shift. Our primary motive was to allow full focus on our core ovarian business and not allow the IVD business to distract from those efforts. In addition, the IVD results of operations are separately disclosed in the financials, enabling appropriate analysis of the impact of the closure.

I’ll now turn it back to Valerie.

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Valerie Barber Palmieri, Vermillion, Inc. – CEO, President & Director [5]

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Thank you, Bob. Before we open up the call for Q&A, let me restate our optimism for building the company for sustainable growth for the near-term and long term. We are all adhering to the government guidance to bend the curve on the spread of COVID-19 and are hopeful this will come to a swift conclusion as soon as possible. We are striving to strengthen our position during the restrictions we are all experiencing in order to come out of this much stronger in the end.

In parallel, we are executing quickly on our larger mission to serve the 20 million women in the U.S., starting with ovarian cancer risk assessment, serial pelvic mass monitoring and eventually tackling the largest disease, endometriosis.

Keep in mind, the hereditary ovarian cancer monitoring test, OvaInherit, is incremental to this market, and this product will be for women with and without a mass. Ovarian cancer accounts for more deaths than any other cancer of the female reproductive system and is the only gender-specific cancer with greater than a 50% mortality rate.

Our work in products are at the forefront of changing the standards of care and the detection of ovarian malignancies. We believe we are helping close the gap in detection and, more importantly, survival for women.

For 2019, we set out with 4 major goals: Number one, driving continued test adoption and volume growth. We posted Q4 year-over-year volume growth of 93%; number two, increased growth of our customer base. We finished the year with Q4 year-over-year growth of 83%, with the majority of reps having only 6 to 9 months in the field through Q4; number three, increased innovation with evidence development, which resulted in 5 new publications and 5 new patents; and lastly, leveraging our overall infrastructure to drive margin expansion. And we have seen OVA1Plus gross margin expand from 26% versus 46% full year year-over-year.

In terms of Q2 2020 goals for volume, customer growth and profitability, we will be able to give more clarity as COVID-19 progresses. In the near term, we believe OVA1Plus, coupled with our disparity differentiation and genetics, will become the standard of care in pelvic mass risk assessment for ovarian cancer.

For the longer term, we are also moving forward on our planned launch of our OVANEX Watch and Wait, ENDOCHECK for endometriosis, and lastly, OvaInherit for high-risk genetic predisposition monitoring.

Our end goal is the incorporation of protein, gene and other modalities to detect gynecologic disease, which cannot be detected via traditional biopsy. In time, our goal is to become the liquid biopsy standard for all of these diseases, inclusive of all ages, stages and, most of all, all ethnicities. It is now time that all women of every socioeconomic background receive the best possible care, and we are proud and excited to make that happen.

We are now happy to open the call for Q&A and answer any of your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Jeb Terry with Aberdeen Investment Management.

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Jeb Terry, [2]

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Valerie? Hello?

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Robert Harry Beechey, Vermillion, Inc. – CFO [3]

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We can hear you, Jeb. This is Bob.

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Valerie Barber Palmieri, Vermillion, Inc. – CEO, President & Director [4]

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I’m sorry, Jeff. I’m here. I just saw my phone on mute. Hope all is well.

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Jeb Terry, [5]

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Hope all is well there as well. So can you refresh what your headcount is in total and then what’s your headcount in your sales force is? And how you view that going forward? It sounds like you’ll be able to retain everybody.

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Valerie Barber Palmieri, Vermillion, Inc. – CEO, President & Director [6]

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Yes. So right now, today, we have 20 reps in the field. And we have — as we talked about some of the expansion territories, so it’s not necessarily additional headcount right now. When you look at some territories because of i.e. adding Cigna and actually getting Cigna priced, we have some of the territories that are now in expansion. So the headcount total is 20, and we intend to keep it at 20.

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Robert Harry Beechey, Vermillion, Inc. – CFO [7]

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That’s 20 sales force, and it’s low 50s overall. I think 53 precisely, Jeb.

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Jeb Terry, [8]

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Okay. And so relative to the current situation, I gather then virtually all of your reps have succeeded in winning business. And can you give us a sense of how the year started out on — following the strong fourth quarter? I know we wouldn’t — all bets are off as far as what this quarter is like. I’m just kind of curious, if you could comment on what the early momentum might have told you about acceptance?

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Valerie Barber Palmieri, Vermillion, Inc. – CEO, President & Director [9]

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Yes. No, I would say that early momentum was very strong. So we mentioned that we had the — we had some hiccups during the holidays. What happened during the holidays were because Christmas and New Years was a Wednesday, we found doctors were taking the entire weeks off. So it’s almost like we lost a couple of weeks. And you can see a chart, actually, we have an earnings deck chart. We’re doing something different this — as of this earnings call is a deck chart just to show you the picture of those weeks, and you can see the trend lines. So we were trending and this is actually in the chart. We are on an annualized run rate of 16,000 to 17,000 as we were leaving the year. And we’ve continued that trajectory in Q1 as well.

And we have, up to last week, we saw the volume was continuing. And then we’ve seen last week, we’ve seen some fall off. And I think it’s pockets. I think the falloff that we’re seeing, of course, due to COVID is in certain hotspots. Offices are closed. Other parts of the country are not moving as fast as, let’s say, New York City. So I do think that there is going to be a transition over time as this wave of COVID goes over the country. But so far in Q1, we were very excited about the momentum coming into Q1.

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Jeb Terry, [10]

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So as we speak then, there are still tests being performed and doctors are still seeing patients to — lesser, but still relevant for business. Is that…

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Valerie Barber Palmieri, Vermillion, Inc. – CEO, President & Director [11]

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Yes, that’s correct. I have to say, depending on the day, the volume could be down depending on the day. But part of the problem is we don’t understand which percentage of the population we were testing were acute versus how many had chronic pain. So the acute patients probably are getting the blood test versus chronic pain, maybe they’re dealing with it. And there’s going to be volume in the future. Also, we don’t understand what percentage of the specimens were collected via annual exam.

So it’s some of the — we’re still early in this. So I don’t want to make any conclusions just yet. But I’d say that our test is a little bit different than annual exam screening test. But we do know in certain areas of the country, too, that elective surgeries are being delayed. So I think time will tell when we’ll get more information. But going into COVID, we were very pleased. And even coming out of COVID, a week into COVID, we’re sort of in a watch-and-see mode.

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Jeb Terry, [12]

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Okay. And then could you — again, I know you get tired of these questions about reimbursement. But just to help us understand where you are now that Cigna’s on board and you fortunately added some more — got some more state approvals

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Valerie Barber Palmieri, Vermillion, Inc. – CEO, President & Director [13]

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Yes. So 2 things. One, as you know, we were looking forward to this getting Cigna contracts completed for a while. And getting this done — the guys have done before COVID to — in contracts has gone crazy right now. But getting this done is a big win for us, but — it’s not only a win for OVA, as we pointed out in the earnings call. It’s a win for Overa, which is our second-generation test as well as, more importantly, is the genetics panel.

So we now are in contracts with Cigna on genetics and in contracts with Cigna for our OVA technology. And those will have — as I said, at April 1, we’re going to begin billing Cigna directly, and that will have — that current volume — right now, the pricing for that volume is most — that’s a patient price, right, which is the lower price. So that volume immediately flips to a Cigna price.

And then the second part of your question is the Medicaid. Medicaid is, I believe, a huge opportunity for us from twofold. One is, it’s a population that’s been underserved, number one. Number two is, we know the technology that’s been — that we compete against is the 40-year old standard of care, and we do know that technology is — has subpar performance with African-American women and even in our studies in Asian women, in Philippines. So we do believe that Medicaid could be, quite frankly, a large opportunity for us. And I would assume, too, with COVID, there’s going to be some demand that’s lower now, but then we’ll pent-up once everyone can get out of their houses and go see their doctors or go to the clinics.

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Jeb Terry, [14]

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Very good. For some reason, I’m thinking Cigna revenue per case could be over $500. Is that — am I recalling that correctly? I bet you know that.

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Valerie Barber Palmieri, Vermillion, Inc. – CEO, President & Director [15]

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We don’t usually disclose pricing, but yes, so I would say it’s definitely north of $500. And I would say, too, on the Medicaid side — well, I didn’t mention the pricing on that, but the Medicaid is also priced very well. And you know where our Medicare price is. It’s at $897.

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Operator [16]

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Our next question comes from the line of Jack Fraser with Seamark Capital.

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Jack Fraser, [17]

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Valerie, I just want to make sure I heard you correctly. So you’re suggesting that you’re seeing disparities confirmed in the Philippine population. Did I hear that right?

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Valerie Barber Palmieri, Vermillion, Inc. – CEO, President & Director [18]

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Yes.

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Jack Fraser, [19]

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And do you feel those disparities, in order of magnitude — it’s kind of early days to call it out, obviously. But do you feel those disparities are in the neighborhood of the disparities we’ve seen in the African-American population? Or do you feel that they are a bit muted from that but still significant?

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Valerie Barber Palmieri, Vermillion, Inc. – CEO, President & Director [20]

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I think it’s in that neighborhood, in that ZIP code. It’s a little bit different, without going to details. But yes, the Philippine data was, quite frankly, how we started to really understand this, and we will be having more details regarding the Philippines. So it’s not a public domain right now. But that study will be coming to close very soon, the end of this year. And so we will be — so there may be multiple papers coming out of this instead of just a prospective study with our generation 2 tests. There will be multiple papers coming out of the Philippine data.

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Operator [21]

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There are no further questions in the queue. I’d like to hand the call back to Valerie for closing remarks.

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Valerie Barber Palmieri, Vermillion, Inc. – CEO, President & Director [22]

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Thank you. In closing, with the fluid COVID situation, we are doing the right things to drive sustainability and growth. With our commercial footprint, a guideline endorsed and differentiated test — a differentiated portfolio of tests within the same call point and substantial payer coverage, we believe we are in a position to support continued growth and profitability. Our end goal is to serve a large global pelvic mass population and overall women’s health market with a platform, coupled with proprietary science and data tools, which will drive better health and well-being to each patient we serve. Thank you for joining us today, and we appreciate your support and interest in Vermillion.

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Operator [23]

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Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.