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UPDATE: Vermillion Repays Quest $5.9M, Ending Companies' Credit Agreement

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This article has been updated from a version posted Oct. 12 to include additional information.

Vermillion said in a document filed last Friday with the US Securities and Exchange Commission that it has paid back the outstanding $5.9 million from its loan from Quest Diagnostics.

The repayment marks the end of a loan agreement between Quest and Vermillion that the companies first signed in 2005. Under the deal, Vermillion received a $10 million line of credit, forgivable upon the achievement of various milestones related to the development, regulatory approval, and commercialization of diagnostic tests.

The deal called for Vermillion to develop and commercialize three tests. The company received forgiveness of just over $4 million for test development milestones, including for the commercialization of its OVA1 ovarian cancer diagnostic. However, it had not yet hit forgiveness milestones for other tests in its pipeline such as its Vasclir test for peripheral artery disease or its second-generation ovarian cancer diagnostic, OVA2.

The $5.9 million payment represents a significant blow to Vermillion's bottom line. As of the end of the second quarter, the company had $18.3 million in cash and cash equivalents. The repayment brings this down to the $12 million range – enough for roughly three to four quarters of operations at Vermillion's current burn rate of $3 million to $4 million per quarter.

In its financial report for the second quarter of 2012, the company noted that in order to continue operations through 2013 and beyond it would need to raise additional capital. It added that it would "seek to raise capital through a variety of sources, which may include the public equity market, private equity financing, collaborative arrangements, licensing arrangements, and/or public or private debt" and that given the need for capital there was "substantial doubt about the company's ability to continue as a going concern."

Beyond the question of capital, the termination of the loan agreement reflects poorly on prospects for Vermillion's product pipeline. Quest has in the past negotiated extensions of the agreement, most recently in October 2009. Its decision not to extend the agreement this time suggests a lack of confidence in Vermillion's ongoing test development work.

The primary focus of Vermillion's test development efforts has been OVA2 and Vasclir. On an August conference call discussing the company's Q2 results, however, CEO Gail Page said that Vermillion had halted development of OVA2. Page suggested that the company was still pursuing additional opportunities in the ovarian cancer space, but she declined to offer specifics, citing "competitive reasons."

Vermillion had been developing OVA2 in collaboration with Zhen Zhang, a professor at Johns Hopkins University, and Daniel Chan, professor and director of the university's Biomarker Discovery Center. The company aimed to identify new biomarkers that could enhance the overall positive predictive value and specificity of the OVA1 ovarian cancer panel, potentially allowing it to move into broader fields of use such as screening of symptomatic and at-risk women.

Vermillion continues its work on Vasclir, which is the second test Quest selected for commercialization under the companies' strategic alliance agreement. Last year the firm released initial data from a 1,000-patient intended use study for the test (PM 10/7/2011). In June, at the Society for Vascular Medicine's annual meeting, researchers led by Stanford professor of medicine John Cooke presented results that showed Vasclir could identify PAD in at-risk patients with 85 percent sensitivity and 46 specificity (PM 6/22/2012).

Investor Angst

The end of the loan agreement has also raised the concerns of certain Vermillion investors, in particular three shareholders – George Bessenyei, Gregory Novack, and Robert Goggin, who this year launched an effort to replace Vermillion board members Gail Page and John Hamilton in the company's upcoming elections (PM 3/2/2012).

In a statement filed this week with the SEC, Bessenyei said the trio "believe the fact that Quest has insisted on repayment of their credit line demonstrates a lack of confidence in [Vermillion's] leadership," adding that "the fact that Quest, who is also Vermillion's largest shareholder, has chosen to not forgive or extend the loan indicates to us that Quest will no longer risk its capital on the James S. Burns led board of directors."

Bessenyei, Goggin, and Novack launched their effort to replace Page and Hamilton in February, asserting that the company has been "plagued by gross mismanagement," and noting that its stock price has declined by more than 90 percent in the past two years.

Since the group announced its intentions, Page has resigned from her seat on the board and announced that she will resign as CEO this fall. Upon Page's resignation from the board, Vermillion eliminated this seat, reducing the number of directors to six from seven and the number up for election at the 2012 meeting to one from two.

Asserting that this was a play by company management to retain control of the board in the face of their challenge, Bessenyei, Goggin, and Novack in June filed a complaint in the Court Chancery of the State of Delaware against the company seeking to void the bylaw amendment that eliminated the board seat and halt Vermillion's upcoming annual meeting until the number of seats up for election is determined (PM 6/15/2012).

The court granted a preliminary injunction stipulating that Vermillion not hold its annual meeting until at least 21 days after it rules on the plaintiffs' challenge of the amendment. It has heard the challenge, and the parties are now waiting to learn its ruling on the case.

Unmet Expectations

The termination of the Quest loan agreement is the latest in a series of setbacks for Vermillion since it emerged from bankruptcy in January 2010 and launched sales of OVA1 just over two months later.

High expectations surrounded the launch of OVA1, with Vermillion stock – which closed last week at $1.61 – peaking at just under $34 per share in March 2010. In a document filed with the SEC on Dec. 4, 2009, the company predicted $9.7 million in OVA1 revenues in 2010, a number that would have required it to sell roughly 97,000 tests. The company later put forth a guidance of between 8,000 and 10,000 test sales in 2010, subsequently lowering it to a range of 5,000 to 5,500 (PM 11/12/2010).

Ultimately, the company reported 6,155 OVA1 tests performed in 2010. This number rose to 15,225 in 2011, but was still well short of the roughly 65,000 tests per year the company needed to sell to break even, according to former Vermillion CFO Sandra Gardiner. Through the first half of 2012, OVA1 sales were essentially flat year-over-year, with the company on track to perform around 16,000 tests in the year.

And, even in the case of recorded sales, the company has struggled to obtain reimbursement, with Bessenyei asserting last year in a shareholder letter that Medicare had been denying OVA1 claims at a rate of more than 80 percent (PM 12/23/2011).

Since the launch of OVA1, Vermillion has succeeded in a number of objectives aimed at increasing adoption and reimbursement of the test, including publication of two peer-reviewed papers on the diagnostic in the journal Obstetrics & Gynecology (PM 5/13/2011) and obtaining a Category 1 Current Procedural Terminology code from the American Medical Association for the test (PM 3/9/2012).

Nonetheless, revenues have lagged well behind initial expectations, with some observers suggesting the test offers too little improvement in terms of performance over the protein marker CA125 – currently the gold standard for ovarian cancer protein markers – and is too expensive.

For instance, in a 2011 interview with ProteoMonitor, Laura Havrilesky, a gynecological oncologist at Duke University, said that the high sensitivity but low specificity of OVA1 indicates that while the test would catch more cancers, it would also result in more patients being sent to specialists unnecessarily.

This, she noted, could make physicians reluctant to embrace the product, as unnecessarily passing on patients to a gynecologic oncologist is undesirable in terms of both patient care and lost business for the referring gynecologist.

"If you're a gynecologist and you're sending every single patient who comes in the door with a problem out to a specialist, that's perhaps not financially good and also perhaps not really in the best interest of all your patients," she said. "Looking at [OVA1's specificity] numbers, if you were sitting in your general OB-GYN practice, they might be a little concerning – 'A lot of my benign cases are going to go out the door because I'm doing this test on everybody.'"

In another 2011 interview, Andrew Berchuck, director of gynecologic oncology at Duke University Medical Center and former president of the Society of Gynecologic Oncologists, told ProteoMonitor that the relatively high cost of OVA1 was one of his main issues with the test.

OVA1 "costs $650 compared to $50 for a CA125 [test]," he said. "And if one wants to add a second marker that complements CA125, they can order a [human epididymis protein 4, or HE4, test] for $50. So the OVA1 test is not a great value, especially since its value is not that much better than CA125 alone."

In fact, last year, diagnostics firm Fujirebio obtained 510(k) approval from the US Food and Drug Administration for use of a combination of HE4 and CA125 with the Risk of Ovarian Malignancy Algorithm, or ROMA (PM 9/9/2011). Fujirebio has not released sales figures for the test, but it is a direct competitor of OVA1, intended for use to determine the risk of ovarian cancer in pre- and post-menopausal women with a pelvic mass.

OVA1 could also face competition from upstart firm Mane Cancer Diagnostics, which has a deal underway to obtain OvPlex, an ovarian cancer diagnostic similar to OVA1 and ROMA, from its developer, Australian diagnostics firm Healthlinx (PM 8/31/2012).

Vermillion, however, has IP to proteins included in the OvPlex test through its purchase last year of the assets of defunct diagnostics firm Correlogic (PM 12/2/2011) – a fact that could cause difficulty for Mane as it seeks to commercialize OvPlex in the US.

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