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Vermillion Awaits Decision by Bankruptcy Court After Filing Chapter 11 Reorganization Plan

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This story originally ran on Dec. 1 and has been updated to include additional comments.

By Tony Fong

Moving one step closer to regaining solvency, Vermillion last week filed a plan of reorganization that would allow it to emerge from bankruptcy.

A hearing on the disclosure statement is set for Dec. 8, and a confirmation hearing on the plan is scheduled for Jan. 7, 2010, before Judge Christopher Sontchi of the US Bankruptcy Court in Delaware.

The plan calls for Vermillion to pay all claims in full and to reinstate all equity interests, and the company said it "believes [its reorganization plan] will be supported by all creditor constituencies."

If approved, the plan would allow Vermillion to concentrate on commercializing its OVA1 ovarian cancer diagnostic panel recently approved by the US Food and Drug Administration, and restore credibility to a company that in recent years has been on the verge of financial collapse.

As part of the plan, Quest Diagnostics, which is partnering with Vermillion to commercialize the OVA1 test, would be paid back its $6 million in secured claims, plus accrued and unpaid interest.

Because Quest is considered unimpaired by the reorganization plan, "each holder of an allowed Quest secured claim is conclusively presumed to have accepted the Plan," and does not have any voting rights on the plan, Vermillion said.

Among those who can vote to accept or reject Vermillion's plan are holders of 4.5 percent unsecured claims, who have a combined claim of almost $2.4 million; holders of 7 percent notes unsecured claims, with about $12.1 million in claims; holders of general unsecured claims, who have about $2 million in claims; and holders of notes interest claims, with between $1 million and $1.5 million in claims.

If the court rejects the plan, alternatives include an alternative Chapter 11 plan of reorganization and a Chapter 7 liquidation of the company's assets. According to Vermillion, though, the plan filed with the court is the best option because it would offer creditors the best value.

Chapter 7 liquidation "would result in smaller distributions being made to creditors and equity investors than those proved for in" its reorganization plan, the company said, citing four reasons for its assertion: Firstly, if it were forced into a Chapter 7 firesale, Vermillion said, it would likely result in the sale or disposal of its assets in a "less orderly fashion over a shorter period of time." Such a liquidation would also lead to the loss of Vermillion employees, who are critical to its operations.

Third, because a trustee would have to be appointed to oversee such a procedure, it also would incur additional administrative costs. And lastly, Vermillion said that a Chapter 7 liquidation would result in other additional expenses and costs, "some of which would be entitled to priority that would be generated during the liquidation and from the rejection of leases and other executory contracts in connection with a cessation of [Vermillion's] operations."

While it could design another reorganization plan if the current one is rejected, the firm said that it has explored "various alternatives in connection with the formulation and development" of the current plan, but believes the one before the court "enables creditors and equity holders to realize the most value under the circumstances."

Vermillion's assets could also be liquidated under Chapter 11 rules, but while that could allow the recovery of greater value to creditors and equity holders than under Chapter 7 liquidation, Vermillion said that its reorganization plan would still provide a greater return.

In an interview with ProteoMonitor, Gail Page, executive chairperson of Vermillion's board, would not say that she expects the plan to be approved by the court but said, "We really feel confident that we will emerge in January as a much stronger and well-positioned company."

Page was the CEO of Vermillion before it filed for Chapter 11 bankruptcy and said she could possibly resume that post eventually.

On the Rebound

Last week's development marks what could be a pivotal step in Vermillion's ongoing comeback from imminent failure to corporate solvency.

When the Fremont, Calif.-based firm filed for Chapter 11 protection on March 30, it looked for all intents and purposes that another company dabbling in proteomics was being readied for burial.

Since selling its SELDI technology to Bio-Rad Laboratories in 2006, Vermillion was left with virtually no revenue stream as it turned its attention to the diagnostics market and developing tests for three disease areas: ovarian cancer, thrombotic thrombocytopenic purpura, and peripheral artery disease.

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At the same time, investors increasingly grew pessimistic about the company, and in September 2008, after repeated warnings from the Nasdaq that Vermillion did not meet minimum listing requirements — and despite efforts by the firm to raise its share price and market value — the Nasdaq delisted its stock [See PM 09/25/08].

When it filed for Chapter 11, Vermillion reported total assets of almost $7.2 million and liabilities of more than $32 million as of Sept. 30, 2008, its most recent financials at the time [See PM 04/02/09].

The company is in the process of filing information with the bankruptcy court that projects its cash flow for the next year and beyond. According to the most recent financial information filed with the court, Vermillion said it ended July with $175,666 in cash and cash equivalents, had total assets of $9.6 million, and total liabilities of $33.6 million.

In its reorganization plan, Vermillion reported about $31.5 million in outstanding debt as of November.

Vermillion's fortunes flipped on Sept. 11, however, when it accomplished what every protein-diagnostic firm drools over but almost never realizes: getting FDA approval [See PM 09/17/09]. According to Leigh Anderson, founder and CEO of the Plasma Proteome Institute, before the FDA gave the nod to Vermillion's OVA1 test, just 109 proteins had ever been approved by the agency for use as biomarker-based tests.

Vermillion filed its 510(k) application for the test with the FDA in June 2008, and according to the firm, the OVA1 test, an in vitro diagnostic multivariate index assay, is the first FDA-cleared laboratory test that can indicate the likelihood of ovarian cancer with high sensitivity before a biopsy or exploratory surgery. It can detect cancer when radiological tests cannot, the firm added.

Developed in collaboration with Quest, OVA1 is a panel of five biomarkers licensed from Johns Hopkins University — transthyretin; apoliprotein A-1; beta2-microglobulin; transferrin; and cancer antigen 125. The test uses an algorithm to determine a numerical score indicating a patient's likelihood of malignancy.

Vermillion had originally faced a July 28 deadline for filing its reorganization plan, but requested an extension on the deadline until the FDA rendered a decision on the OVA1 test. In making the request, Vermillion said its success as a company would ultimately "hinge on the FDA's approval of OVA1. … With such a significant contingency standing between [Vermillion] and the successful formulation and implementation of a plan, [Vermillion] submits that seeking approval of a plan and disclosure statement without FDA approval of OVA1 would be premature." [See PM 08/06/09]

The court granted the extension.

In another positive development for the company, last month the US Patent and Trademark Office issued a patent covering the test.

Originally, Vermillion and Quest had targeted the final quarter of 2009 for commercialization of the test. In its plan filed with bankruptcy court, Vermillion pushed that back to the first quarter of 2010.

After receiving FDA approval for OVA1, Page told ProteoMonitor that the initial launch will be in the US, but the company will be looking to bring the test to Europe and Japan eventually.

She also said that after filing its reorganization plan, the company would look at raising funds. "We will look at partnerships; we will certainly entertain any offers from the industry," she said.

She declined to comment on those plans this week, but said that development of diagnostics for TTP and PAD would be restarted if and when its reorganization plan is approved. Vermillion suspended those programs as it worked its way through Chapter 11.

"These are very viable programs that we plan to resurrect," she said. The FDA approval of OVA1 was validation not only of that single test, Page added, but "validated our pipeline."

Bullish on Wall Street

With relative good news starting to emerge from Vermillion, investors have begun to embrace the company. On the day Vermillion filed for Chapter 11, its share price was $0.35 and its stock traded as low as $0.04 in the days leading up to the day it received FDA approval of the OVA1 test. Most recently, the stock has fetched around $20 per share and risen as high as $23.70.

ProteoMonitor's sister publication The Sample also recently reported that some Wall Street analysts believe Quest may be maneuvering to buy Vermillion after the reference laboratory disclosed it is “currently considering the potential cash acquisition of a diagnostics testing business.”

Whether that will ever become more than speculation is unknown, but for now, Vermillion expressed optimism about its immediate future.

"After several months of extensive and arms' length negotiations and discussions, [Vermillion] is one step closer to achieving its goal — a confirmed Chapter 11 plan of reorganization that memorializes a restructuring that will preserve the value of [Vermillion] for its claim holders and equity interests and enable [Vermillion] to operate efficiently and effectively in a competitive marketplace," it said in its reorganization plan.

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