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VRML > SEC Filings for VRML > Form 10-Q on 14-Aug-2014All 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 after such date. Forward-looking statements are subject to risks, uncertainties and assumptions that are difficult to predict. Examples of language found in forward-looking statements include the following:

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

· intentions 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;

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

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

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

· plans with respect to ASPiRA LABS, Inc. ("ASPiRA LABS");

· expectations regarding existing and future collaborations and partnerships;

· 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 continued ability to comply with applicable governmental regulations;

· our continued 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;

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

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

· 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; and

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

Forward-looking statements are subject to significant risks and uncertainties, including those discussed in Part II, Item 1A "Risk Factors" of our quarterly report on Form 10-Q for the quarter ended March 31, 2014 and those discussed in Part I, Item 1A "Risk Factors" of our annual report on Form 10-K for the year ended December 31, 2013, that could cause actual results to differ materially from those projected in such forward-looking statements due to various factors, including increase the volume of OVA1 sales; our ability to market our test through sales channels other than Quest Diagnostics; uncertainty in how we recognize future revenue following termination of the Quest Diagnostics Strategic Alliance Agreement; failures by third-party payers to reimburse OVA1 or changes or variances in reimbursement rates; our ability to secure additional capital on acceptable terms to execute our business plan; our ability to commercialize OVA1 outside the United States; our ability to develop and commercialize additional diagnostic products and achieve market acceptance with respect to these products; our ability to compete successfully; our ability to obtain any regulatory approval for our future diagnostic products; our suppliers' ability to comply with FDA requirements for production, marketing and post market monitoring of our products; our ability to maintain sufficient or acceptable supplies of immunoassay kits from our suppliers; our ability to continue to develop, protect and promote our proprietary technologies; future litigation against us, including infringement of intellectual property and product liability exposure; our ability to retain key employees; business interruptions; legislative actions resulting in higher compliance costs; changes in healthcare policy; our ability to comply with environmental laws; uncertainty regarding our ability to generate sufficient demand for ASPiRA LABS' services to cover the laboratory's operating costs; uncertainty regarding our ability to comply with laws and regulations (including the additional laws and regulations that apply to us in connection with the operation of ASPiRA LABS) and the potential consequences of any failure to comply with such laws and regulations; the potentially low liquidity and trading volume of our common stock and concentration in the ownership of our common stock; volatility in the price of our common stock; actions of activist stockholders; and potential dilution caused by future sale of our common stock or other securities to meet our capital requirements. 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 drive the advancement of women's health by providing innovative methods to detect, monitor and manage the treatment of gynecologic cancers and other related diseases.

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 help guide decisions regarding patient

treatment, which may include decisions to refer patients to specialists, to perform additional testing, or to assist in the selection of therapy. A distinctive feature of our approach is to combine multiple markers into a single, reportable index score that has higher diagnostic accuracy than its constituents. We concentrate on our development of novel diagnostic tests in the fields of gynecologic oncology and women's health, with an 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 others through collaborations with leading academic and 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.

In April 2014, Vermillion announced the launch of ASPiRA LABS, which specializes in applying biomarker-based technologies to address critical needs in the management of gynecologic cancers. ASPiRA LABS provides expert diagnostic processing and results using a state-of-the-art biomarker-based diagnostic algorithm to inform clinical decision making and advance personalized treatment plans. In addition, ASPiRA LABS, a CLIA certified national lab based near Austin, Texas, serves as an educational and resource hub for healthcare professionals and women facing surgery for ovarian masses that are potentially cancer and related gynecologic conditions. The lab processes diagnostic tests and clinical decision aids for women's health in ovarian cancer and plans to expand to other gynecologic conditions with high unmet need. ASPiRA began accepting samples on June 23, 2014.

We are focused on the execution of four core strategic business drivers in ovarian cancer diagnostics to build long-term value for our investors:

· Maximizing the existing OVA1 opportunity in the United States ("US") by expanding our market reach beyond our business relationship with Quest Diagnostics and taking the lead in commercialization, payer coverage and medical guidelines. This includes the launch of a CLIA certified clinical laboratory, ASPiRA LABS in June 2014;

· Improve OVA1 performance by seeking FDA clearance of a potentially better performing bio-marker panel while migrating OVA1 to a global testing platform;

· Building an expanded patient base by seeking FDA approval and launching a next generation multi-marker ovarian cancer test to monitor patients at risk for ovarian cancer; and

· Expanding our product offerings by adding additional gynecological tests such as longitudinal CA 125II testing.

We believe that these business drivers will contribute significantly to addressing unmet medical needs for women faced with ovarian cancer and the continued development of our business.

Our lead product, OVA1, was cleared by the FDA in September 2009. OVA1 addresses a clear 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 pre-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. 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 University of California Irvine Healthcare. The study evaluated OVA1 diagnostic performance in a population of 494 evaluable patients who underwent surgery for an adnexal mass after enrollment by a non-gynecologic oncologist. In February 2013, the OVA500 study was published in the peer-reviewed journal Gynecologic Oncology, which enjoys the highest impact factor rating of any journal worldwide focused on gynecologic oncology. 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.

In addition to these pivotal studies, three follow-on studies have been published bringing the number of full research articles on OVA1 clinical performance to a total of five peer-reviewed publications. Together, we believe these data provide strong clinical evidence that OVA1 improves the pre-surgical detection of ovarian cancer, across all stages or subtypes, in patients undergoing surgery for a suspicious ovarian mass.

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

Dr. Bristow presented another study at the Society of Gynecological Oncology ("SGO") in March 2013 which was published in the journal Obstetrics & Gynecology (also known as 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.

In June 2013, the Society for Gynecologic Oncology ("SGO") issued a new position statement on OVA1. 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 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."

The position statement does two things:

· Lists as references the 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 June 2013 our collaborators from Johns Hopkins Biomarker Discovery and Translation Center presented data from "proof of concept" work to identify markers with high clinical specificity that may complement OVA1. These results were presented in a poster at the annual meeting of the American Society for Clinical Oncology ("ASCO") by Dr. Zhen Zhang and co-workers. The study 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 malignancy. The work will be submitted for publication in 2014.

We are in the process of identifying intended use(s) and establishing a regulatory or commercial pathway for a potential next-generation OVA product utilizing this or another new panel. Any actual product development will likely differ significantly depending on a number of technical and commercial factors.

A study published in July 2014 in The American Journal of Obstetrics & Gynecology, examined the relationship between two imaging methods, ultrasound and computed tomography, and the OVA1 test result in assessing the risk of ovarian cancer among patients planning surgery for an ovarian mass. Using data obtained from 1,100 ovarian mass surgery patients in two previous pivotal trials of OVA1's clinical performance, conducted in 2007 and 2012, the study found that adding OVA1 reduced the number of ovarian cancers missed with imaging alone by 85-90%. Specifically, ultrasound alone missed 23.3% of ovarian cancers that were presented but when OVA1 was added this decreased to 2.9%. When CT was used alone, 20.2% of ovarian cancers were missed but this rate fell to 2.9% when OVA1 was added. Additionally, the study found that the combination of ultrasound and OVA1 detected 95% of ovarian cancers in a subgroup of early-stage patients.

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

Novitas Solutions (formerly Highmark Medicare Services), a Medicare contractor, covers and reimburses for OVA1. In December 2013, the Centers for Medicare and Medicaid Services ("CMS") made its final determination and authorized Medicare contractors to set prices for Multianalyte Assays with Algorithmic Analyses ("MAAA") test Current Procedural Terminology ("CPT"®) codes when they determine it is payable. CMS also validated that an algorithm has unique value by specifying that the gap-fill process and not cross-walk should be used by contractors to price MAAA tests. We expect OVA1 to be priced using the gap-fill method. We will be engaged in that process in 2014 for pricing effective January 1, 2015. This decision also sets a precedent for recognizing the value of biomarker developed tests to clinical decision-making and healthcare efficiencies.

Independent BlueCross BlueShield plans representing approximately 8.0 million lives provide coverage for OVA1. In total, including Medicare and other private payers, approximately 55.5 million patients have access and coverage for OVA1.

Under the terms of our Strategic Alliance Agreement with Quest Diagnostics, which we terminated in August 2013, Quest Diagnostics was required to pay us a fixed payment of $50 per OVA1 test performed, as well as 33% of its "gross margin" from revenue from performing OVA1 tests 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 tests in its exclusive territory, which included 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 on the same terms and conditions. In August 2013, we sent Quest Diagnostics a notice of termination. Notwithstanding the termination, we agreed that Quest could continue to make OVA1 available to healthcare providers on the same financial terms following the termination while negotiating in good faith towards an alternative business structure. Quest Diagnostics has disputed the effectiveness of our notice of termination.

New Chief Executive Officer

On April 23, 2014, Vermillion's Board of Directors voted to appoint Vermillion's Chairman of the Board, James T. LaFrance, as the Company's President and Chief Executive Officer, effective as of April 23, 2014. Mr. LaFrance has had a highly successful track record that spans 30 years of diagnostic commercial experience, predominantly in sales, marketing and general management.

As a result of this change, Mr. LaFrance will no longer receive compensation for his role as Chairman of the Board.

Critical Accounting Policies and Estimates

There have been no material changes to our critical accounting policies and estimates as disclosed in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

Results of Operations - Three Months Ended June 30, 2014 Compared to Three
Months Ended June 30, 2013

The selected summary financial and operating data of Vermillion for the three
months ended June 30, 2014 and 2013 were as follows:

                                  Three Months Ended June 30,        Increase (Decrease)
(dollars in thousands)              2014               2013             Amount        %
Product                        $          211     $          210    $           1       0
License                                   113                113                 -       -
Total revenue                             324                323                1       0
Cost of revenue:
Product                                    88                 34               54     159
Total cost of revenue                      88                 34               54     159
Gross profit                              236                289              (53)    (18)
Operating expenses:
Research and development                1,057                554              503      91
Sales and marketing                     2,766                920            1,846     201
General and administrative              1,971                934            1,037     111
Total operating expenses                5,794              2,408            3,386     141
Loss from operations                   (5,558)            (2,119)          (3,439)    162
Interest income                            12                  6                6     100
Other expense, net                         (9)                (4)              (5)    125
Loss before income taxes               (5,555)            (2,117)          (3,438)    162
Income tax benefit (expense)                 -                  -                -       -
Net loss                       $       (5,555)    $       (2,117)   $      (3,438)    162

Product Revenue. Product revenue was $211,000 for the three months ended June 30, 2014 compared to $210,000 for the same period in 2013. We recognized product revenue for the sale of OVA1 only through Quest Diagnostics at the $50 fixed fee per test during both periods. The number of OVA1 tests performed was approximately 4,223 OVA1 tests during the three months ended June 30, 2014 compared to approximately 4,184 OVA1 tests for the same period in 2013. Product revenue was flat quarter over quarter. However, we expect the launch of ASPiRA LABS to increase product revenue in the second half of 2014 as supported by an expanded sales team. ASPiRA LABS began accepting test samples on June 23, 2014.

Cost of Revenue. Cost of product revenue increased $54,000 or 159% compared to the same period in 2013. Cost of product revenue for the three months ended June 30, 2014 includes $49,000 for costs of ASPiRA LABS incurred after the lab began accepting test samples on June 23, 2014 and includes non-recurring lab start-up costs. With the launch of ASPiRA LABS, we expect cost of revenue to increase significantly in future periods due to ongoing costs of operating ASPiRA LABS and performing the OVA1 test.

Research and Development Expenses. Research and development expenses represent costs incurred to develop our technology and carry out clinical studies, and include personnel-related expenses, regulatory costs, reagents and supplies used in research and development laboratory work, infrastructure expenses, contract services and other outside costs. Research and development expenses also include costs related to activities performed under contracts with our collaborators and strategic partners. Research and development expenses for the three months ended June 30, 2014 increased $503,000 or 91% compared to the same period in 2013. This increase was primarily due to increased efforts in the second quarter of 2014 associated with our collaboration with Johns Hopkins University School of Medicine advancing our platform migration and next-generation diagnostic test. In addition, we increased research and development headcount compared to the same period in 2013.

Sales and Marketing Expenses. Our sales and marketing expenses consist primarily of personnel-related expenses, education and promotional expenses, and infrastructure expenses. These expenses include the costs of educating physicians, laboratory personnel and other healthcare professionals regarding OVA1. Sales and marketing expenses also include the costs of sponsoring continuing medical education, medical meeting participation, and dissemination of scientific and health economic publications. Sales and marketing expenses increased $1,846,000 or 201%, for the three months ended June 30, 2014 compared to the same period in 2013. The increase was primarily due to increased personnel and personnel-related expenses from our sales force expansion in early April 2014 as well as costs incurred in the establishment and branding of ASPiRA LABS in 2014 compared to the same period in 2013. We also incurred expenses for health economic and outcomes studies during the three months ended June 30, 2014, while there were no such expenses in the comparable period in 2013.

General and Administrative Expenses. General and administrative expenses consist primarily of personnel-related expenses, professional fees and other costs, including legal, finance and accounting expenses and other infrastructure expenses. General and administrative expenses increased by $1,037,000 or 111%, for the three months ended June 30, 2014 compared to the

same period in 2013. The change was primarily due to a one-time $416,000 cost of severance for our former President and Chief Executive Officer and $433,000 of pre-opening costs incurred for ASPiRA LABS prior to June 23, 2014 (the opening date for ASPiRA LABS).

We expect general and administrative expenses to decrease in future periods as the one-time items incurred during the three months ended June 30, 2014 are not expected to recur.

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