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Unable to Find Necessary Additional Funding, Vermillion Files for Chapter 11 Bankruptcy

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This story has been updated from a previous version

Vermillion this week filed for chapter 11 bankruptcy, citing a "global liquidity crisis" that has made it impossible for it to identify and raise necessary sources of capital.

The company continues to do business, however, and is manned by a skeleton crew of three employees and four consultants who will be used on an as-needed basis. The company is continuing in its effort to seek approval for its ovarian tumor triage diagnostic from the US Food and Drug Administration, it said in its filing with the US Bankruptcy Court in Delaware.

As a result of the bankruptcy proceedings, filed March 30, virtually all of Vermillion's management team and board have resigned, including Gail Page, who was asked to resign as president and CEO of the firm. Page was elected as executive chair of the board, however, replacing James Rathmann, who resigned from that post on March 25. James Burns and John Hamilton are the other remaining board members.

Under chapter 11 bankruptcy, Vermillion will be given the chance to reorganize its operations without the imminent threat of being shut down due to a lack of funds. However, the company will be subject to the oversight and jurisdiction of bankruptcy court.

According to court documents, through the first nine months of 2008, the company posted receipts of $124,000 and a net loss of more than $14 million. Assets totaled $7.15 million while liabilities were slightly more than $32 million as of Sept. 30, 2008.

Page told ProteoMonitor that the company plans to issue a statement either today or tomorrow and declined to comment until afterward.

But in the filing, Page attributed the move to the company's inability to access capital needed to fund its operations. The company had previously relied on debt and capital markets for funding, but seeing the need for additional capital, it last summer hired investment bank ThinkPanmure to explore other alternatives [See PM 07/17/08].

"Unfortunately, substantially as a result of the current global liquidity crisis, no additional sources of capital could be identified," Page said in Vermillion's filing.

During the past year, she added, the company took cost-cutting measures, reducing the number of employees from 30 at the start of 2008 to seven in March 2009 and focused its work on "those areas of business closest to commercialization."

"Notwithstanding Vermillion's diligent efforts, the continued deterioration in the capital markets and limited available cash have caused Vermillion" to file for chapter 11 protection, which will allow the firm to "address its liquidity problem" and continue trying to get FDA approval for its ovarian cancer test, "and in turn maximize the value of its assets," Page said.

According to court documents, Vermillion's largest unsecured creditor is New York- based hedge fund Highbridge International, which holds $11.1 million in 7 percent convertible senior notes.

Oaktree Capital Management holds $2.4 million in 4.5 percent convertible senior notes, and Bruce Fund holds $1.8 million in 7 percent convertible senior notes.

Representatives at the three firms either declined to comment or did not respond to requests for comment.

Vermillion, in the Red

Vermillion's chapter 11 filing is the latest development in the gradual decline of a company once on the forefront of proteomics technology development but which more recently has tried to fight off insolvency.

The company, originally called Abiotic Systems when it was founded in December 1993, was borne on the promise of proteomics and in large part fell when its lead proteomics technology, the SELDI platform, lost favor among researchers and became a marginalized research tool.

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In 2006, when it was called Ciphergen Biosystems, the company sold the platform to Bio-Rad Laboratories for $20 million, completing its transformation from a technology development firm to a diagnostics shop.

Though the sale provided Vermillion much needed cash, it also left the company without a revenue source and ultimately failed to improve the company's financial outlook.

Shortly after the sale, an independent auditor, PricewaterhouseCoopers, questioned whether Vermillion could remain in business when it gave Vermillion a "going concern" qualification on the company's 2006 annual report. In it, the company alluded to its own fragile state saying that it might have to find additional funding through the issuance of equity or debt securities, or both, in the public or private markets, "in order to continue operations." [See PM 04/12/07]

In a document filed with the US Securities and Exchange Commission detailing its earnings for the first quarter of 2007, company officials further warned of its teetering finances, saying, "We believe that our current cash balances may not be sufficient to fund planned expenditures. This raises substantial doubt about our ability to continue as a going concern." [See PM 05/17/07]

In late 2007, a diagnostic for thrombotic thrombocytopenic purpura developed in conjunction with Ohio State University became Vermillion's first to reach market when the university began offering it as a lab-based test. Vermillion licenses the assay to OSU.

While it provided Vermillion with an important revenue stream, the amount generated fell far short of what was needed to keep the company running. According to the most recent publicly available information, Vermillion posted just $10,000 in product revenue through the first nine months of 2008, most if not all of it from the TTP test.

In late August 2007, the company said it had raised $20.6 million in a private placement of common stock. Nevertheless, that didn't stop the problems from amassing. That same summer, the Nasdaq warned Vermillion twice that it faced delisting actions for failing to meet two separate requirements. The first was that it didn't meet a requirement that it have at least $2.5 million in stockholders' equity; $35 million market cap; or $500,000 of net income from continuing operations for the most recently completed fiscal year, or two of the three most recently completed fiscal years. The second was that the company's share price had fallen below $1 for at least 30 consecutive business days.

Through most of 2008, company officials tried to stave off delisting, meeting with Nasdaq officials to explain their plans to bolster their finances and doing a reverse stock split to beef up the firm's stock price [See PM 01/10/08].

Last September, however, unable to satisfy Nasdaq demands, Vermillion's stock was delisted and began trading on the Pink Sheets before moving to the Over-the-Counter Bulletin Board.

Along with the TTP test and ovarian cancer diagnostic, the company is developing a test for peripheral artery disease in collaboration with Stanford University.

The company's future, though, is most closely tied to its ovarian cancer test, called OVA1, which the company says has a specificity of 95 percent and sensitivity of 90 percent for the detection of malignant ovarian tumors. The company submitted a 510(k) pre-market notification with the FDA in June and is awaiting a decision from the agency.

If and when approval is given, "Vermillion would then seek to move forward, including with a strategic alliance partner, a major clinical laboratory, to bring the OVA1 test to market," Page said in the chapter 11 filing.

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