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Vermillion Posts 45 Percent Jump in Q4 Revenues as OVA1 Reimbursement Improves but Volume Stays Flat

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Vermillion this week reported that its fourth quarter revenues grew 45 percent year over year, driven by an increase in revenues from its OVA1 ovarian cancer test.

The company recorded $1.6 million in total revenues in Q4 2013, up from $1.1 million in the year-ago period. Product revenues, comprised of OVA1 sales, rose to $1.5 million from $1.0 million, while licensing revenues were flat at $113,000.

OVA1 revenues in both Q4 2013 and Q4 2012 included variable royalty payments from the full years of OVA1 sales owed Vermillion through its licensing deal with Quest Diagnostics. Under this agreement, Vermillion receives an upfront fee of $50 for every OVA1 test performed plus a royalty payment of 33 percent of Quest's gross profit. This latter portion Quest pays to Vermillion once per year.

In Q4 2013, Vermillion's product revenue consisted of $211,000 from 4,218 OVA1 tests performed at a fixed price of $50 per test, and $1.3 million from the 33 percent royalty on 16,745 OVA1 tests that Quest determined to be "resolved," meaning that their payment status – whether reimbursed or non-reimbursed – was considered final.

This compares to Q4 2012 product revenue of $213,000 from 4,260 OVA1 tests performed at the fixed $50 per test price, and $816,000 from the 33 percent royalty on 13,700 OVA1 tests Quests deemed resolved in 2012.

For full year 2013, Vermillion posted $2.6 million in total revenues, up 23 percent from $2.1 million in 2012. Full year product revenues, again comprised of OVA1 sales, rose to $2.1 million from $1.6 million. In 2013, 17,004 OVA1 tests were performed, up 3 percent from 16,460 tests performed in 2012.

The results paint something of a mixed picture for Vermillion. The company's royalty revenues suggest improved success in obtaining reimbursement for OVA1 – an area where it has struggled in the past. Quest paid Vermillion an average royalty of $75 per test in 2013, compared to an average of $60 per test in 2012. On the company's conference call following release of its financial results this week, Vermillion Chief Accounting Officer Eric Schoen noted that Quest reported for the first time that "realized revenue per test was in excess of 50 percent of the $650 list price for OVA1 in 2013."

This improvement in reimbursement came in spite of a ruling last year by BlueCross BlueShield's Technical Evaluation Center that classified OVA1 as "experimental/investigational," meaning that the test did not meet their criteria for coverage. This ruling led to 10 BCBS plans reversing their positive coverage decisions for OVA1.

On the other hand, OVA1 test volumes remained essentially flat year over year and, in fact, declined slightly in Q4 2013 compared to Q4 2012.

This is despite Vermillion's efforts in 2013 to refocus its own internal efforts on driving OVA1 adoption. For instance, on a May conference call following release of the company's Q1 2013 earnings, President and CEO Thomas McLain announced that Vermillion would be taking over from Quest leadership of OVA1 commercialization efforts, a shift that he said was motivated by the firm's belief that the sales force of a large clinical reference lab was not necessarily best-suited to driving commercialization of a single specialty diagnostic like OVA1.

"As a high-value diagnostic, retaining current users and expanding into new accounts requires a specialty sales skill set," McLain said. "Coverage is also a significant factor in driving increased use of the test. That is not core to a high-volume reference laboratory business model."

A week later, Vermillion sent Quest Diagnostics a notice of default under the companies' Strategic Alliance Agreement relating to Vermillion's OVA1 and Vasclir diagnostic tests, asserting "a number of material violations, breaches, and failures to perform by Quest Diagnostics under the strategic alliance agreement."

The move appeared to be an attempt by Vermillion to extricate itself from the agreement with Quest, which could allow it to market OVA1 through additional clinical reference laboratories as well as retain a larger percentage of revenues from the test.

In August, Vermillion terminated the Quest deal, at the same time offering Quest the opportunity to continue to make the test available to healthcare providers on the same terms as the original deal. Quest has disputed this notice of termination.

The company did not explicitly address the status of the Quest deal during its earnings call this week, though McLain did note that "Quest Diagnostics continues to be an important partner in making the test widely available."

According to Schoen, in 2013 the company did see a more than 15 percent uptick year over year in OVA1 test volumes in territories covered by Vermillion field sales representatives. However, he noted, "this growth was mostly offset by volume declines in areas not covered by our field sales team."

McLain said the company was now focusing on "a tactical US commercial relaunch of OVA1 in 2014," with plans to increase its sales force, medical education events, and visibility at hospitals and hospital systems.

McLain also discussed on the call the final Clinical Lab Fee Schedule determination issued by the Centers for Medicare and Medicaid Services in late 2013, which authorizes Medicare contractors to price OVA1 using a gap-fill method, as opposed to a crosswalk method.

This decision represented a reversal of CMS's earlier indication to Vermillion that it would crosswalk payment for OVA1. Under the crosswalk methodology, OVA1 would be reimbursed simply according to the price of the individual assays that compose the test without taking into account any additional value provided by the test's algorithm, which integrates the values of these individual assays to deliver the final diagnostic score.

The move to a gap-fill pricing methodology for OVA1 represents "a significant change from external expectations and it sets a precedent for CMS recognizing the value of biomarker-developed tests and linking how they are priced to the value they bring to clinical decision-making and healthcare efficiencies," McLain said. Vermillion will pursue a gap-fill price for OVA1 in 2014, he added.

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