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VRML > SEC Filings for VRML > Form 10-Q on 14-Nov-2013All Recent SEC Filings

Show all filings for VERMILLION, INC.

Form 10-Q for VERMILLION, INC.


Quarterly Report

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks and uncertainties. Words such as "may," "expects," "intends," "anticipates," "believes," "estimates," "plans," "seeks," "could," "should," "continue," "will," "potential," "projects" and similar expressions are intended to identify such forward-looking statements. Readers are cautioned that these forward-looking statements speak only as of the date on which this report is filed with the SEC, and the Company does not assume any obligation to update, amend or clarify them to reflect events, new information or circumstances occurring after such date. Examples of language found in forward-looking statements include the following:

· projections of our future revenue, results of operations and financial condition;

· anticipated efficacy of our products, product development activities and product innovations;

· our ability to consolidate the five OVA1 immunoassays on a single mainstream integrated diagnostic automation platform;

· competition and consolidation in the markets in which we compete;

· existing and future collaborations and partnerships;

· the utility of biomarker discoveries;

· our belief that particular biomarker discoveries may have diagnostic and/or therapeutic utility;

· achieving milestones in product development, future regulatory or scientific submissions and presentations;

· our ability to comply with applicable government regulations;

· our ability to expand and protect our intellectual property portfolio;

· anticipated future losses;

· expected levels of expenditures;

· expected market adoption of our diagnostic tests, including OVA1;

· results of clinical trials, post-market studies required by FDA, and publications on OVA1;

· resolution of any outstanding amount under the secured line of credit with Quest Diagnostics;

· commercialization of tests through and recognition of revenue under our agreement with Quest Diagnostics;

· the ability to expand the market to other clinical laboratories in addition to Quest Diagnostics;

· the amount of financing required to fund our planned operations;

· the potential loss of expected funding in the event that the warrants issued by us on May 13, 2013 are not exercised;

· our prospects for obtaining support of medical or professional societies (e.g., Society for Gynecologic Oncology ("SGO"), National Comprehensive Cancer Network
("NCCN") and American Congress of Obstetricians and Gynecologists ("ACOG")) through "guidelines", "position statements" and the like;

· the financial or market share projections which could result from positive guidelines or position statements

· the consolidation of holdings of our common stock in the hands of fewer investors; and

· our expected reimbursement for our products, and our ability to obtain such reimbursement, from third party payers such as private insurance companies and government insurance plans.

Such statements are subject to significant risks and uncertainties, including those identified under in Part II, Item 1A of our Quarterly Report on Form 10-Q for the three months ended March 31, 2013, that could cause actual results to differ materially from those projected in such forward-looking statements due to various factors, including our ability to generate sales after completing development of diagnostic products; our ability to manage our operating expenses and cash resources consistently with our plans; our ability to secure adequate funds on acceptable terms to execute our business plan; our ability to develop and commercialize diagnostic products using both our internal and external research and development resources; our ability to obtain market acceptance of OVA1 or future diagnostic products, including the risk that our products will not be competitive with products offered by other companies, or that our products may not receive support from various professional and medical societies, or that users will not be entitled to receive adequate reimbursement for our products from third party payers such as private insurance companies and government insurance plans; our ability to successfully license or otherwise successfully partner with third parties to commercialize our products; our ability to obtain any regulatory approval for our future diagnostic products; our ability to maintain sufficient or acceptable supplies of immunoassay kits from our suppliers; our success in achieving development milestones, achieving desired results in clinical trials or

FDA-mandated studies; and our ability to protect and promote our proprietary technologies. We believe it is important to communicate our expectations to our investors. However, there may be events in the future that we are not able to accurately predict or that we do not fully control that could cause actual results to differ materially from those expressed or implied in our forward-looking statements.


Our vision is to become a recognized leader in the advancement of women's health by providing innovative methods that detect, monitor and manage the treatment of gynecologic cancers.

We are dedicated to the discovery, development and commercialization of novel high-value diagnostic tests that help physicians diagnose, treat and improve outcomes for patients. Our tests are intended to detect, diagnose and stage disease, and to help guide decisions regarding prognosis and patient treatment. These may include decisions to refer patients to specialists, to perform additional testing, or to assist in the selection or monitoring of therapy and disease progression. A distinctive feature of our approach is to combine multiple biomarkers into a single, reportable index score that has higher diagnostic effectiveness than its constituents.

We concentrate our development of novel diagnostic tests in the fields of gynecologic oncology and women's health, with the initial focus on ovarian cancer. We also intend to address clinical questions related to early disease detection, treatment response, monitoring of disease progression, prognosis and other issues in the fields of oncology and women's health through collaborations with leading academic and clinical research institutions.

Our lead product, OVA1, an ovarian cancer blood test, was cleared by the United States Food and Drug Administration ("FDA") in September 2009.

We are focused on the execution of three core strategic business drivers to build long term value for our investors:

· Maximizing the existing OVA1 opportunity by taking the leadership role in expanding commercialization, payer coverage and inclusion in guidelines

· Expanding our customer base by migrating OVA1 to a platform available globally

· Expanding our patient base by launching a next generation ovarian cancer test to monitor at risk patients

We believe that these business drivers are critical elements in the continued development of our business.

OVA1 addresses a clear unmet clinical need, namely the pre-surgical identification of women who are at high risk of having a malignant ovarian tumor. Numerous studies have documented the benefit of referral of these women to gynecologic oncologists for their initial surgery. Prior to the clearance of OVA1, no blood test had been cleared by the FDA for physicians to use in the pre-surgical management of ovarian adnexal masses. OVA1 is a qualitative serum test that utilizes five well-established biomarkers and proprietary FDA-cleared software to determine the likelihood of malignancy in women over age 18 with a pelvic mass for whom surgery is planned. OVA1 was developed through large clinical studies in collaboration with numerous academic medical centers encompassing over 2,500 clinical samples. OVA1 was fully validated in a prospective multi-center clinical trial encompassing 27 sites reflective of the diverse nature of the clinical centers at which ovarian adnexal masses are evaluated. This work was published in two articles in the journal Obstetrics & Gynecology (also known as the Green Journal). The results of the pivotal study demonstrated that in a cohort of 516 patients, OVA1, in conjunction with clinical evaluation, was able to identify 95.7% (154/161) of the malignant ovarian tumors overall, and to rule out malignancy with a negative predictive value ("NPV") of 94.6% (123/130). At the 2010 International Gynecologic Cancer Society Meeting, data were presented demonstrating the high sensitivity of OVA1 for epithelial ovarian cancers; OVA1 detected 95/96 epithelial ovarian cancer cases for a sensitivity of 99.0%, including 40/41 stage I and stage II epithelial ovarian cancers, for an overall sensitivity of 97.6% for early stage epithelial ovarian cancers, as compared to 65.9% for CA125 using the American College of Obstetricians and Gynecologists ("ACOG") cutoffs. The improvement in sensitivity was even greater among premenopausal women; for OVA1, sensitivity for early stage epithelial ovarian cancer was 92.9% and for CA125, sensitivity was 35.7%. Overall, OVA1 detected 76% of malignancies missed by CA125, including all advanced stage malignancies. OVA1 is not indicated for use as a screening or stand-alone diagnostic assay.

The American Medical Association (AMA) Current Procedural Terminology (CPT®) Panel approved a Category I CPT code (81503) for OVA1, which became effective January 1, 2013.

In 2012, we completed a second pivotal clinical study of OVA1, called the "OVA500 study" and led by Dr. Robert E. Bristow, Director of Gynecologic Oncology Services with UC Irvine Healthcare. The study evaluated OVA1 performance in a population of 494 patients who underwent surgery for an adnexal mass after enrollment by a non-gynecologic oncologist, the intended use population for routine OVA1 testing. In the new study, of the 27 sites used in each study, only 10 were common to both. Collectively, the clinical trial and the OVA500 study evaluated 1,110 eligible subjects at a total of 44 sites. Despite the difference in population between the two studies, and the large number of differing sites, the sensitivity of OVA1 added to clinical impression (also called OVA1 dual assessment) was identical, at 95.7% (88/92). In addition, overall NPV of OVA1 dual assessment was 98.1% (204/208), higher than the 94.6% NPV found in the earlier validation study. In premenopausal surgery patients, OVA1 dual assessment sensitivity was 93.5% (29/31), NPV was 98.6% (145/147) and specificity was 58.9% (145/246) when combined with clinical assessment. OVA1 also showed strong performance in detecting early stage malignancies. OVA1 correctly stratified 91.4% (32/35) of early stage cancers and 89.3% (25/28) of stage I cancers as high risk, respectively. In comparison, CA125-II sensitivity was

65.7% (23/35) for early stage and 64.3% (18/28) for stage I malignancies. Overall, the results strongly and independently confirmed the clinical performance of OVA1 in presurgical triage of adnexal mass patients, including premenopausal and early stage cancers.

The OVA500 study was published in February 2013 in the peer-reviewed journal Gynecologic Oncology, which enjoys the highest impact factor rating of any journal worldwide focused on gynecologic oncology. The results have also been incorporated into an updated medical education presentation, as well as our marketing and reimbursement collateral. Since many professional medical societies stress the importance of multiple independent clinical trials as so-called "evidence levels", we also believe that the OVA500 study contributes to a higher evidence level relative to OVA1's utility in the medical management of adnexal masses.

Dr. Bristow presented another study at the Society of Gynecological Oncology ("SGO") in March 2013 which was published in the Green Journal in June 2013. It was based on the medical records of 13,321 women with epithelial cancer, the most common type of ovarian cancer, diagnosed from 1999 to 2006 in California. Only 37 percent of these patients received treatment that adhered to guidelines set by the NCCN, an alliance of 23 major cancer centers with expert panels that analyze, research and recommend cancer treatments.

The study found that surgeons who operated on 10 or more women a year for ovarian cancer, and hospitals that treated 20 or more a year, were more likely to adhere to NCCN guidelines and their patients lived longer. Among women with advanced disease - the stage at which ovarian cancer is usually first found - 35 percent survived at least five years if their care met the guidelines, compared with 25 percent of those whose care fell short.

This study was featured on the front page of the New York Times under the headline, "Widespread Flaws Found in Ovarian Cancer Treatment." According to Dr. Bristow, principal investigator of the study, "If we could just make sure that women get to the people who are trained to take care of them, the impact would be much greater than that of any new chemotherapy drug or biological agent." (NY Times, March 11, 2013, Denise Grady)

On April 17, 2013, we announced the signing of a cooperative research and development agreement (CRADA) with the U.S. Army Medical Research and Materiel Command (USAMRMC). The agreement marks the launch of a project titled, "Cost Reduction Using OVA1 in a Treatment Algorithm for Adnexal Masses in Women," and follows the January 2012 decision by the U.S. Department of Defense to add OVA1 to its testing portfolio. The two-phase study will investigate the cost-benefit profile of OVA1 testing as a presurgical standard of care in women with pelvic masses, and assess OVA1 clinical utility in a managed care setting.

Phase 1 will retrospectively assess medical outcomes and total cost of care to establish historical benchmarks and estimate potential benefits of OVA1 utilization. Phase 2 will involve a multi-center prospective clinical study within the Western Regional Command to assess OVA1 as a standard of care across a large sector of the U.S. Armed Forces. We believe the project will further support our reimbursement efforts, by gathering data on the real-world impact of OVA1 on medical and health economic outcomes compared with accurate and holistic benchmarks.

On May 6, 2013, we received notification that platform support for one of the five immunoassay component kits that are used in OVA1 is to be discontinued effective December 2014. As part of our existing strategic product roadmap, we had planned on consolidating the five OVA1 immunoassays on a single mainstream integrated diagnostic automation platform, and as part of the consolidation we expect to validate a new immunoassay method to replace the discontinued method. We are required to submit these changes pursuant to a 510k submission with the FDA. We consider consolidating the immunoassay components on a single platform to be a strategic step toward allowing OVA1 broader market access, including potential commercialization outside the United States. As of the date of filing this quarterly report on Form 10Q, we anticipate this project will be completed without material business interruption. However, no assurances can be made that the FDA will clear our expected 510(k) submission.

In June 2013, OVA1 received a new position statement on OVA1 use issued by the SGO. The statement, titled "Multiplex Serum Testing for Women with Pelvic Mass", reads:

"Blood levels of five proteins in women with a known ovarian mass have been reported to change when ovarian cancer is present. Tests measuring these proteins may be useful in identifying women who should be referred to a gynecologic oncologist. Recent data have suggested that such tests, along with physician clinical assessment, may improve detection rates of malignancies among women with pelvic masses planning surgery. [1],[2] Results from such tests should not be interpreted independently, nor be used in place of a physician's clinical assessment. Physicians are strongly encouraged to reference the American Congress of Obstetricians and Gynecologists' 2011 Committee Opinion "The Role of the Obstetrician-Gynecologist in the Early Detection of Epithelial Ovarian Cancer" to determine an appropriate care plan for their patients. It is important to note that no such test has been evaluated for use as, nor cleared by, the FDA as a screening tool for ovarian cancer. SGO does not formally endorse or promote any specific products or brands.

[1] Bristow RE, Smith A, Zhang Z, Chan DW, Crutcher G, Fung ET, et al. Ovarian malignancy risk stratification of the adnexal mass using a multivariate index assay. Gynecol Oncol 2013;128: 252-259.

[2] Ueland FR, Desimone CP, Seamon LG, Miller RA, Goodrich S, Podzielinski I, et al. Effectiveness of a multivariate index assay in the preoperative assessment of ovarian tumors. Obstet Gynecol 2011;117:1289-1297."

This second SGO statement on OVA1 since its FDA clearance in 2009 represents another significant step toward acceptance of OVA1 as the standard of care for pre-surgically evaluating the risk of ovarian cancer in women with adnexal masses.

The new statement does two things:

· Refers to publications of OVA1's two pivotal clinical studies, comprised of the original FDA validation study published in June 2011 and the OVA500 "intended use" study published in 2013. Together, this offers an extensive, peer-reviewed proof source for physicians and payers to assess OVA1's clinical performance and comparative medical benefits versus today's standard of care.

· Places OVA1 use in the context of current ACOG practice guidelines, where CA125 has been used off-label for many years to predict malignancy before surgery, although with inferior performance.

In another program, we have completed "proof of concept" work which was intended to identify markers with high clinical specificity that may complement OVA1. Preliminary results were presented on June 3, 2013, in a poster at the annual meeting of the American Society for Clinical Oncology (ASCO) by Dr. Zhen Zhang (Johns Hopkins University) and co-workers. The studies identified a set of 5 biomarkers (CA125, prealbumin, IGFBP2, IL6, and FSH) which optimally reduced false positives among a targeted set of OVA1-positive benign patients. This panel was subsequently tested in a 50/50 cross-validation strategy against a sampling of OVA500 patients (N=384), to evaluate specificity and other diagnostic parameters. At a fixed sensitivity of 90%, the median specificity of models using the new panel in testing was 80.6%. The mean and median absolute improvements over that of OVA1 were 18.6% and 20.3%, respectively. The new panel demonstrated the possibility to improve specificity over that of the existing OVA1 algorithm, while maintaining a high sensitivity in pre-surgical assessment of adnexal masses for risk of malignancy. The work has been submitted to a peer-reviewed journal for publication later this year or early in 2014.

These experiments are early stage and preliminary in nature as they have not yet been submitted for publication in a peer-reviewed journal, though submission is expected within the next two quarters. Any actual product development, if pursued, will likely differ significantly depending on a number of technical and commercial factors. We have yet to identify one or more intended uses, or establish a regulatory or commercial pathway for a potential next-generation OVA product utilizing this or another new panel.

On November 12, 2013, we announced that a new study of OVA1 clinical performance in the presurgical detection of ovarian cancer, entitled "Clinical Performance of a Multivariate Index Assay For Detecting Early-Stage Ovarian Cancer" was published in The American Journal of Obstetrics & Gynecology. Co-authored by Dr. Robert E. Bristow (UC Irvine Healthcare) and Dr. Frederick R. Ueland (U. Kentucky), the new analysis focused on presurgical detection of early-stage ovarian cancer among 1,016 ovarian mass surgery patients in two previous pivotal trials conducted in 2007 and 2012. The study compared OVA1 performance in early-stage ovarian cancer to commonly used cancer risk assessment protocols:
overall clinical assessment, the CA125 biomarker or modified-American College of Obstetricians and Gynecologists (mod-ACOG) guidelines for evaluation of suspicious pelvic masses. The findings were previously presented at the Annual Meeting of the Western Association of Gynecologic Oncologists in Seattle in June 2013.

In a statement regarding this new study, Dr. Bristow stated, "Early-stage ovarian cancer constitutes an important opportunity to improve survival and care for this most deadly gynecologic cancer. However, as evidenced by recent studies, most ovarian cancer patients fail to be referred to the doctors and hospitals best equipped to treat them, resulting in unfortunate consequences. Our new study demonstrates OVA1's ability to detect the majority of all early-stage ovarian cancers prior to surgery and thereby aid in appropriately involving a gynecologic oncologist in their care. Even among premenopausal patients where primary ovarian cancer prevalence was just 15%, clinical assessment with OVA1 detected stage I ovarian cancer with almost 90% sensitivity. This is a very encouraging development for the diagnosis and treatment of ovarian cancer."

Also on November 12, 2013, we announced that a new clinical study published in The American Journal of Obstetrics & Gynecology has reported superior sensitivity of OVA1 for presurgical triage of ovarian cancer, compared with commonly used risk assessment methods. The new study compared OVA1 performance to benchmark triage methods, within a combined cohort of 770 ovarian mass surgery patients (including 164 malignancies) from two independent but related OVA1 pivotal trials conducted in 2007 and 2012. The study also compared the actual rate of patient referral from non-specialist physicians to gynecologic oncologists (GO's) with rates predicted from clinical assessment, OVA1, CA125 or from the modified-American College of Obstetricians and Gynecologists (mod-ACOG) guidelines. We also reported the findings on the same day at the AAGL (or American Association of Gynecologic Laparoscopists) "42nd Global Congress of Minimally Invasive Gynecology."

Current and former academic and research institutions that we have or have had collaborations with include the Johns Hopkins University School of Medicine; the University of Texas M.D. Anderson Cancer Center; University College London; the University of Texas Medical Branch; the Katholieke Universiteit Leuven; Clinic of Gynecology and Clinic of Oncology, Rigshospitalet, Copenhagen University Hospital; The Ohio State University Office of Sponsored Programs; Stanford University; the University of Kentucky, and the University of California at Irvine.

In October 2013, we amended our existing collaboration agreement with the Johns Hopkins University School of Medicine, and we agreed to pay approximately $1.6 million through June 2015 for assistance with (1) the migration of the existing OVA1 test to a new platform and (2) the development, submission and launch of a next-generation ovarian cancer diagnostic.

Novitas Solutions (formerly Highmark Medicare Services), a Medicare contractor, covers and reimburses for OVA1.

We received favorable coverage decisions from 28 Blue Cross Blue Shield ("BCBS") plans following the launch of OVA1. This was based in part on reviews from the BCBS Association's Medical Policy Panel in 2010 and 2011. However, in April 2013, the

BCBS Technical Evaluation Center ("TEC") classified OVA1 as experimental/investigational and thus it did not meet the TEC's criteria for coverage. Based on that assessment, 14 BCBS plans have reversed their coverage decisions for OVA1or announced an intention to do so, adversely impacting our number of covered lives. Two additional plans have recently retired their coverage decisions meaning that claims going forward will be evaluated on a case by case basis.

We believe the TEC assessment classifying OVA1 as experimental/investigational is flawed and rebuttable on multiple points. Most notably, the TEC assessment was conducted during 2012 and did not consider the OVA500 study published in February 2013, the updated Society for Gynecological Oncology statement on the use of OVA1 issued in May 2013 and the June 2013 publication of a comprehensive study on widespread flaws in the care of women with ovarian cancer that can be addressed in large part with the use of diagnostics such as OVA1.

We are actively undertaking an effort to address the TEC assessment with BCBS plans that still maintain favorable coverage decisions and those that have reversed coverage decisions. We are providing the peer reviewed studies that have been published since 2012 and we also plan to request that TEC rescind the April 2013 decision on OVA1. When Quest Diagnostics provides us with information, we are also actively appealing decisions where coverage for OVA1 is denied. We believe our cumulative efforts to increase test volumes will more than offset any negative impact from the TEC assessment. However, there can be no guarantee that we will be successful in our appeals of coverage decisions or our rescission request, or that if we are successful, it will have a positive impact on the level of reimbursement or our revenue.

There are currently 12 independent BlueCross BlueShield plans, representing approximately 19.1 million lives, which provide coverage for OVA1. In total, including Medicare and other private payers, approximately 65.6 million patients have access and coverage for OVA1.

In January 2012, the Department of Defense added OVA1 to their Quest Diagnostics lab services contract, giving more than 45 military medical centers in the U.S. and numerous military medical clinics and facilities around the world access to OVA1 for the first time. In 2013, a smaller non-multi-year contract modification for laboratory testing services for all military members and dependents was awarded Sept 6, 2013 to Quest Diagnostics (contract # W81K04-12-D-0013) by The U.S. Army Medical Command - Contracting Center, Fort Sam Houston, Texas. As a result, uniformed military service members still have access to OVA1. Approximately 1.4 million uniformed service members have access to OVA1 through the Department of Defense, bringing the covered lives total to an estimated 67.0 million.

Under the terms of our Strategic Alliance Agreement with Quest Diagnostics, which we terminated on August 23, 2013, Quest Diagnostics was required to pay us a fixed payment of $50 per OVA1 performed, as well as 33% of its "gross margin" from revenue from performing OVA1 domestically, as that term is defined in the Strategic Alliance Agreement. Prior to the termination of the agreement, Quest Diagnostics had the right to be the exclusive clinical reference laboratory marketplace provider of OVA1 in its exclusive territory, which includes the US, Mexico, the United Kingdom and India through September 11, 2014. Quest Diagnostics had the right to extend its exclusivity period for an additional year beyond September 11, 2014 on the same terms and conditions. On May 23, 2013, we sent Quest Diagnostics a notice of default under the Strategic Alliance Agreement relating to a number of material violations, breaches and failures to perform under the Strategic Alliance Agreement. The Strategic Alliance Agreement states that if a party fails to cure material defaults within 90 days of the date of the notice of default, the other party has the right to terminate the Strategic Alliance Agreement. Quest Diagnostics has disputed the effectiveness . . .

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