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Vermillion Posts 8 Percent Increase in OVA1 Sales, Announces Shift in Commercialization Strategy

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Vermillion reported this week that its first-quarter revenues rose 5 percent to $328,000 from $312,000 in Q1 2012, beating the consensus Wall Street estimate of $300,000.

The company posted product revenue of $214,000, up 8 percent from $198,000 year over year. That revenue was based on 4,274 OVA1 ovarian cancer tests performed in Q1 versus 3,952 tests performed in the year-ago period.

These revenue figures, the company noted, do not include the additional royalty component of revenue based on 33 percent of Quest Diagnostics' gross margin, which Vermillion receives once a year under the two parties' licensing agreement for OVA1.

License revenue in Q1 was flat at $114,000.

On a conference call following the release of the results, Vermillion CEO Thomas McLain laid out a shift in the company's OVA1 sales approach, announcing that Vermillion would be taking over from Quest Diagnostics as leader of OVA1 commercialization efforts.

The change, McLain said, is motivated by the firm's belief that the sales force of a large clinical reference lab is 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."

As part of this shift in strategy, Vermillion plans to migrate the OVA1 test to a widely available, automated clinical testing platform, McLain said, noting that such a move could improve access to the test.

"Currently, the test is run on two older platforms with limited availability," he said. "This project will expand access to the test to more facilities and hospitals across the US market. It is designed to also provide a scalable and reliable way to deliver OVA1 to non-US markets together with suitable commercialization partners."

Migration of the test to a new platform will require new validation studies and US Food and Drug Administration 510(k) clearance, he noted, adding that Vermillion hopes to complete this process by the end of 2014.

"Since the markers in some cases are already available, it's a matter of optimizing the algorithm and then producing the validation data and the package for submission to the FDA," said Donald Munroe, Vermillion's CSO and senior VP of business development. "And so we see that that's very doable in the timeframe that we've articulated."

On a related note, Vermillion said in its 10-Q report filed this week with the US Securities and Exchange Commission, that it learned this month that one of the five immunoassay kits comprising the current OVA1 test is to be discontinued effective December 2014. This, the company said, was an additional driver of its decision to move the test to a newer automated platform.

McLain also said during the call that the company planned to adopt a more targeted approach under its new sales strategy, using historical sales data to focus on areas with "favorable coverage [of the test], a significant population, and repeat testing with OVA1."

Currently, McLain said, there are 515 accounts that order OVA1 four or more times per year, accounting for 61 percent of the test's sales volume.

"Our 2013 sales efforts are focused on assuring test levels in these accounts are maintained or increased, solidifying that business for the long term," he said, adding that Vermillion added 362 new accounts in Q1.

Citing this shift to a more targeted approach, McLain declined to give guidance for Q2 OVA1 sales, saying that the company expects to begin to see results from this change in strategy toward the end of the year.

McLain also provided an update on Vermillion's efforts to develop a second-generation ovarian cancer test, saying that it aims to launch such a product in 2015. The company is working with researchers at Johns Hopkins University on a test that retains the sensitivity levels of OVA1 while upping that test's relatively low specificity – which has proven a concern for some physicians (PM 8/5/2011). The Johns Hopkins researchers will present an abstract on the second-generation test this month at the American Society of Clinical Oncology annual meeting, McLain said.

Vermillion's net loss for the first quarter was $2.6 million, or $0.17 per share, above Wall Street projections of $0.15 per share, compared to a net loss of $1.8 million, or $0.12 per share, in Q1 2012.

The company's R&D expenses for Q1 were $484,000, up 7 percent from $452,000 in Q1 2012. Its SG&A expenses were $2.4 million, up 20 percent from $2.0 million in the same period last year.

This increase in expenses was due primarily to "one-time items, including costs related to the delayed 2012 annual shareholder meeting held in March 2013, a proxy contest, and CEO transition," Vermillion said.

On the quarterly call, Vermillion Chief Accounting Officer Eric Schoen said the company was raising its guidance regarding 2013 operating expenses to between $12 million and $13 million. It had previously projected operating expenses for the year of between $9.5 million and $10 million.

The increased spending will use funds from a private placement Vermillion completed this week, Schoen said. Investors including Oracle Investment Management, Jack W. Schuler, and Matthew W. Strobeck, purchased 8 million shares of Vermillion common stock for $13.2 million, with the company's net proceeds totaling $11.8 million after expenses. Vermillion also issued these investors 12.5 million warrants with a strike price of $1.46, from which the company could realize an additional $18.3 million.

As of March 31, 2013, the company had cash and cash equivalents totaling $5.8 million. Following the completion of its recent private placement, it had approximately $16.6 million in cash and equivalents.

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