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Vermillion's Q2 Revenues Flat at $323,000 as Firm Confronts Reimbursement Challenges

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Vermillion reported this week that its second quarter revenues were essentially flat year over year at $323,000 versus $321,000 in Q2 2012.

The company posted product revenue of $210,000, up 1 percent from $208,000 year over year. That revenue was based on 4,184 OVA1 ovarian cancer tests performed in Q2 2013 versus 4,150 tests performed in the year-ago period.

The 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. In 2012, the payment from Quest provided Vermillion with $816,000 in revenue, or an additional $60 per test.

The firm's license revenue in Q2 was flat at $113,000.

In a statement accompanying the release of the results, Vermillion CEO Thomas McLain said that the company had faced "significant challenges from the changing regulatory and reimbursement environments in the US," noting, in particular, an April ruling by BlueCross BlueShield's Technical Evaluation Center that classified OVA1 as "experimental/investigational," meaning that it did not meet their criteria for coverage.

This ruling led to 10 BCBS plans reversing their positive coverage decisions for OVA1. And, while the company said that these reversals did not impact OVA1 sales in the quarter, it "has created market uncertainty," McLain said.

The company said it has "implemented a multi-front approach to address" the ruling, and noted that the opinion was "based on data published through 2012 and did not consider several important 2013 developments including publication of results from a second large confirmatory clinical trial of OVA1."

One initiative launched during the quarter with the aim of bolstering support for OVA1 is a cooperative research and development agreement Vermillion signed with the US Army Medical Research and Materiel Command to assess health and economic benefits of OVA1. Signed in April, that agreement "is the first in a series of outcome and economic studies that will demonstrate the value of OVA1 and establish its benefit in improving health system efficiency," McLain said.

Beyond the BCBS ruling, McLain also raised concerns about how the current Centers for Medicare and Medicaid Services rate-setting process might affect reimbursement for the test. During a conference call following release of the Q2 results, he noted that Vermillion had been advised that CMS was planning to suggest a crosswalk methodology for pricing Multi-Analyte Assays with Algorithmic Analyses, or MAAAs, like OVA1.

Under the crosswalk methodology, OVA1 would be reimbursed according to the price of the individual assays that compose the test – a formulation that McLain said would not recognize the test's algorithm and could therefore result in lower payment for the test.

"In the 2012 process, the preliminary CMS recommendation for all MAAAs including OVA1 was cross-walked," McLain said, adding that "in part, through our follow-up efforts, including [key opinion leader] comments, input from professional societies, members of Congress and others, that blanket decision was reversed to consider each product on its own merits."

He noted that Vermillion now planned to repeat these efforts in light of the expected CMS recommendation.

McLain also discussed the company's efforts to extricate itself from its licensing deal with Quest as part of a larger initiative to take a more active role in driving sales of OVA1. Ending the Quest agreement, he said, would help Vermillion expand "the addressable market for OVA1 in the [US]" by allowing the company to offer the test through other reference and clinical labs.

As McLain noted, Vermillion in May filed a notice of default with Quest alleging "material violations, breaches, and failures to perform" by Quest under the companies' agreement (PM 5/24/2013). Under the terms of the agreement, McLain said, if a party fails to cure material defaults within 90 days of the notice, the other party can end the agreement.

Vermillion sent the notice on May 23, making August 21 the 90-day deadline. Quest has disputed Vermillion's assertions, McLain said. He declined to provide further details on the dispute.

Also key to Vermillion's efforts to expand the OVA1 customer base is its plan to migrate OVA1 to an automated platform. The company has targeted early 2015 for launch of an automated test, which will require US Food and Drug Administration 510(k) clearance, and the firm has evaluated four major IVD platforms for this purpose, McLain said.

"Our plan is to migrate the OVA1 algorithm to one or two of these platforms initially using their existing reagents with a revised version of our OvaCalc software," he said, adding that the company was working on the initial stages of the project with collaborators at Johns Hopkins University and planned to significantly ramp up the effort in the fourth quarter of this year.

McLain also provided an update on the company's efforts to develop a next-generation OVA1, noting that in a proof-of-concept study presented at the American Society for Clinical Oncology annual meeting in June, the addition of five complementary protein markers to OVA1 improved the test's specificity by roughly 20 percent. Such an improvement could prove significant for Vermillion's commercialization efforts as, in the past, some clinicians have cited OVA1's relatively low specificity as a reason doctors may be hesitant to use the test (PM 5/13/2011).

According to McLain the company plans to submit this work for publication in a peer-reviewed journal either later this year or in early 2014 and could make a 510(k) submission for a next-generation OVA1 test as soon as the end of 2015.

Vermillion's net loss for the quarter was $2.1 million, or $0.11 per share, compared to a net loss of $2.0 million, or $0.13 per share, in Q2 2012.

The company's R&D expenses for Q2 were $554,000, down 45 percent from $1.0 million in Q2 2012. Its SG&A expenses were $1.9 million, down 37 percent from $3.0 million in the same period last year.

According to the company, the drop in operating expenses was due primarily to one-time items in 2012, including post-marketing study start-up costs, proxy contest and related litigation expenses, and CEO severance — items not repeated in Q2 2013.

Eric Schoen, Vermillion's chief accounting officer and vice president of finance, said that the company expected to spend $1.8 million to $2.3 million in cash on operations in the third quarter.

As of June 30, Vermillion had cash and cash equivalents totaling $16.4 million.

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