This post has been updated to include comments from an industry analyst.

By Kirell Lakhman

Does Vermillion's plummeting stock price presage a buy-out move by its partner and part-owner Quest Diagnostics?

Shares of Vermillion have sunk 77 percent since the beginning of the year despite the launch of its ballyhooed OVA1 ovarian cancer assay and the fact that it is developing a next-generation OVA2 test and other assays for different indications.

The decline, together with its potential repercussions — renegotiated revenue-sharing agreements with Quest (which are reportedly underway already) or even an outright acquisition of Vermillion by the reference lab giant — may hold some lessons for CLIA labs that market the tests they develop and perform in-house.

As I reported last month, Vermillion's $9.7 million OVA1 sales target for 2010 is looking like a moon shot after the company recorded just $344,000 in total revenue during the second quarter, of which only $45,000 came from 342 OVA1 runs.

Investors appear to be asking the same question that I raised at the time: Does OVA1 have the legs to generate $9.28 million in revenue over the next six months to meet Vermillion's humongous 2010 sales target?

But the shares' implosion can't be blamed on poor penetrance projections alone. "I think shareholders are very upset with [Vermillion] management [because] the company did a pretty poor job as far as managing expectations," according to a buy-side analyst who spoke with me this afternoon on the condition that I not name him.

"There was a lot of silence for a long time [from Vermillion], and no one knew how the launch was going, even though they were saying that Quest is happy and pleased" with the test and its commercialization and market penetration prospects, he added.

And as for the company's $9.7 million forecast, the analyst, who is long on Vermillion, said "it's totally off and not achievable." He suggested that one reason behind this could be that "Quest didn't do a good job marketing [OVA1] out of the gate."

Since then, both companies have been trying to regain ground by hiring additional sales staff.

Even during the two weeks in May following the firm's first-quarter earnings report — which happened to coincide with my disclosure that Vermillion was developing an OVA2 test and other assays — shares in the company lost more than 41 percent of their value.

To be fair, Vermillion is currently grappling with efforts to increase OVA1's market penetration. It hopes to grow revenue by launching the assay internationally in 2011 beginning with the UK, India, and Mexico, followed by debuts in Asia, South America, and elsewhere in Europe.

Also, OB-GYNs by and large are slowly showing interest in the test and, as I had already reported, there is the possibility that some might consider using OVA1 off-label as a screening test, which would sharply increase the market for the assay.

As for me, I still stand behind the prediction I made in November 2009 that Quest will eventually buy Vermillion; at six bucks a share it's a bargain, and a world away from the $15 million Quest paid in 2005 for a 17-percent stake in the company.

At that time, shares of Vermillion, still known as Ciphergen Biosystems, were trading at $20 apiece.

The buy-side analyst agreed, saying that acquiring Vermillion outright to get a full share of OVA1's revenue "would make a nice accretion to Quest's numbers." Quest has a three-year exclusive supply agreement with Vermillion that requires it to give Quest 5 percent of all revenue generated by sales of OVA1.

"In my mind it does make sense for Quest to take advantage of [Vermillion's stock] situation," he said, referring to a possible acquisition. "I would think this is a great time [for Quest] to strike. This is the ideal time."

A Vermillion spokesperson was not immediately available for comment. Quest does not discuss merger or acquisition speculation.

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