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VRML > SEC Filings for VRML > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for VERMILLION, INC.

Form 10-Q for VERMILLION, INC.


Quarterly Report


Forward Looking Statements

The Company has made statements in this Quarterly Report on Form 10-Q that are deemed forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. The Company claims the protection of such safe harbor, and disclaims any intent or obligation to update any forward-looking statement. You can identify these statements by forward-looking words such as "may," "expect," "intend," "anticipate," "believe," "estimate," "plan," "could," "should" and "continue" or the negative of such terms or other similar words. These forward-looking statements may also use different phrases. The Company has based these forward-looking statements on management's (for purposes of this Item 2, "we", "us" or "our") current expectations and projections about future events. Examples of forward-looking statements include the following statements:

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

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

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

• existing and future collaborations and partnerships;

• the utility of biomarker discoveries;

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

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

• our plans to develop and commercialize diagnostic tests through our Strategic Alliance with Quest Diagnostics;

• 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;

• our ability to obtain reimbursement from third party payers for our diagnostic tests, including OVA1;

• forgiveness of the outstanding principal amounts of the secured line of credit by Quest Diagnostics;

• recognition of revenue under our agreement with Quest Diagnostics;

• the period of time for which our financial resources will be sufficient to enable us to maintain current and planned operations; and

• market risk of our investments.

These statements are subject to significant risks and uncertainties, including those identified in Part II Item 1A, "Risk Factors", 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 new diagnostic products; our ability to manage the Company's operating expenses and cash resources that is consistent 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 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

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third parties to commercialize our products; our ability to obtain any regulatory approval for our future diagnostic products; 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 the Company's forward-looking statements.


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 biomarkers into a single, reportable index score that has higher diagnostic accuracy than its constituents.

We concentrate our development of novel diagnostic tests in the fields of oncology, vascular medicine 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, was cleared by the FDA on September 11, 2009 and is currently being offered through Quest Diagnostics. 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. The results of the clinical trial demonstrated that in a clinical cohort of 516 patients, OVA1, in conjunction with clinical evaluation, was able to identify 95.6% (154/161) of the malignant ovarian tumors overall, and to rule out malignancy with a negative predictive value 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 Congress of Obstetricians and Gynecologists 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.

In addition to OVA1, we have development programs in other clinical aspects of ovarian cancer as well as in peripheral arterial disease ("PAD"). In the field of PAD, we have identified candidate biomarkers that may help to identify individuals at high risk for a decreased ankle-brachial index score, which is indicative of the likely presence of PAD. In 2011, we completed an intended-use study to develop and validate a multi-marker algorithm for the assessment of individuals at risk for PAD.

The intended use study was a prospective, double-blinded multi-center study of approximately 1,000 subjects who met specific inclusion criteria for being at increased risk of having PAD, including smokers and diabetics age 50 or above and elderly age 70 or above. The study was conducted in conjunction with CPC Clinical Research, led by William R. Hiatt, MD, who is currently the Novartis Foundation endowed professor for cardiovascular research in the Department of Medicine, University of Colorado School of Medicine appointed in cardiology and a clinical focus in vascular medicine.

In October 2011, we announced positive top-line results from the intended use study for the detection of PAD. The goals of the study were to validate the markers described in earlier publications (Circulation, 2007 and Vascular Medicine, 2008) and to develop and validate a biomarker panel applicable to the intended use population. A poster with study results was presented at the Society for Vascular Medicine's 23rd Annual Scientific Sessions, in Minneapolis, Minnesota in June 2012. In addition, a peer-reviewed manuscript titled "A Validated Biomarker Panel To Identify Peripheral Artery Disease" has now been published in Vascular Medicine, a premier, international journal featuring primary research articles and reviews on vascular disease, diagnosis, and treatment. The 1,025 patient study validated earlier biomarker discovery results in an intended use population, by identifying 85% (17 of 20) of PAD patients missed by the Framingham Risk Score's high-risk cutoff.

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We also continue research aimed at expanding our ovarian cancer franchise. These efforts continue on two fronts. First, our testing of biomarkers for inclusion in ovarian cancer panels continues with our academic partners at The Johns Hopkins School of Medicine. These efforts have been aided by the intellectual property and samples acquired in December 2011 from Correlogic Systems, Inc., adding to our expanding portfolio of proprietary, patented biomarkers for ovarian cancer. Second, we conducted a productive focus group with over a dozen gynecologic oncologists during the SGO Annual Meeting held in Austin in March 2012. Their creative and insightful feedback will assist in assessing numerous options for new ovarian cancer product line extensions, targeting patient segments not included in current OVA1 claims. These are expected to feed our pipeline and expand the ovarian cancer franchise in which we already enjoy a leadership position.

Current and former academic and research institutions that we have or have had collaborations with include The Johns Hopkins 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; and the University of Kentucky.

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. Approximately 1.4 million uniformed service members now have access to OVA1 through the Quest Diagnostics lab services contract with the Department of Defense.

The Medicare contractor Highmark Medicare Services has been covering OVA1 in its reimbursement program since March 2010. There are currently twenty-seven independent BlueCross BlueShield plans, representing approximately 47 million lives, provide coverage for OVA1. In total, including Medicare, the Department of Defense and other private payers, approximately 95 million patients have access and coverage for OVA1. The Company and Quest Diagnostics are pursuing coverage from additional payers.

Under the terms of our Strategic Alliance Agreement with Quest Diagnostics, Quest Diagnostics is 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 as amended. Quest Diagnostics is 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. OVA1 was CE-marked in September 2010, a requirement for marketing the test in the European Union. OVA1 was launched in India in May 2011. Quest Diagnostics has the right to extend its exclusivity period for an additional year beyond September 11, 2014 on the same terms and conditions.

In January 2012, we announced a restructuring plan to streamline our organization and reduce our cash expenditures compared to 2011. This plan included eliminating the positions of Chief Financial Officer and Vice President of Corporate Strategy as well as a reduction in our Territory Development and sales management personnel.

On February 9, 2012, we entered into a Settlement Agreement with Oppenheimer & Co., Inc. related to losses on our short and long-term investments in previous years. Under the terms of the Settlement Agreement, the total settlement before legal fees and costs was $1,000,000; $535,000 was paid in March 2012 ($379,000 net received by the Company) and $465,000 ($331,000 net received by the Company) was paid in August 2012. We recorded the net amounts when realized as a component of non-operating income.

On March 6, 2012, the American Medical Association (AMA) Current Procedural Terminology (CPT®) Panel voted to approve an application for a Category I CPT code for OVA1, in a new class of tests called Multianalyte Assays with Algorithmic Analyses (MAAA). OVA1 was one of the first three Category I codes granted under this new category. The code, which comes into effect January 1, 2013, is expected to help standardize billing and streamline reimbursement of OVA1. We continue to work with the AMA and the Centers for Medicare and Medicaid Services on the CPT pricing schedule to support and fair and reasonable value for the OVA1 CPT code.

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On May 15, 2012, we announced our CEO succession plan beginning the process of identifying a successor to Gail S. Page, president and CEO. Our Board of Directors formed a search committee and as part of the leadership succession plan, Ms. Page resigned from the Board of Directors.

On July 30, 2012, we announced positive results from a new prospective, multi-center clinical study of our ovarian cancer diagnostic OVA1®. The study, referred to as OVA500, was led by Dr. Robert E. Bristow, director of Gynecologic Oncology Services at University of California Irvine Healthcare in Orange, California, and deputy editor of the journal Gynecologic Oncology.

The OVA500 study confirms and extends the pioneering work of Dr. Fred Ueland published last year. It was a prospective, multi-institutional, blinded study with a new cohort of 494 patients representing the intended use population for OVA1: female patients who were scheduled to undergo surgery for an adnexal mass, enrolled from non-gynecologic oncology practices via 27 study coordination centers.

All adnexal tumor types were included in the statistical analysis of test performance. The primary objective was to assess the performance of OVA1 in the intended use population with a focus on two particularly challenging subgroups:
women with early-stage ovarian cancer, where approximately half of patients have a normal CA125 level, and pre-menopausal women, where the incidence of ovarian cancer is low and incidence of benign cysts is high.

Top-line data from the study are as follows:

Overall Performance of OVA1

• Negative predictive value was reported at 98%

• Sensitivity was reported at 96%

• Specificity was reported at 51%

Performance in the Pre-menopausal Population

• Sensitivity was reported at 94%

Performance for Early-Stage Ovarian Cancer (I and II)

• Sensitivity was reported at 91%

OVA1 as a Risk Stratification Test (OVA1 score versus cutoff, independent of physician assessment)

• Sensitivity was reported at 92% overall:

• 91% for early-stage disease

• 94% for pre-menopausal patients

• 91% for stage I and II in pre-menopausal women with a specificity of 61%

On October 12, 2012, we announced the payment to Quest Diagnostics of approximately $5,901,000, which we believe represents payment in full of all outstanding principal and interest under the Secured Line of Credit Agreement dated as of July 22, 2005 between the Company and Quest Diagnostics. The payoff incorporated $1,000,000 in additional principal forgiveness under the terms of the Strategic Alliance and $106,000 in previous principal curtailment payments. However, Quest Diagnostics has not acknowledged that such milestone forgiveness was achieved or principal curtailment was made.

Critical Accounting Policies and Significant Estimates

We have made no significant changes in our critical accounting policies and significant estimates from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed with the SEC on March 27, 2012, as amended by our Amendment No. 1 to Annual Report on Form 10-K/A filed with the SEC on April 27, 2012 and Amendment No. 2 to Annual Report on Form 10-K/A filed with the SEC on May 30, 2012.

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Recent Accounting Pronouncements

Comprehensive Income - In June 2011, the FASB issued new guidance on the presentation of comprehensive income. Specifically, the new guidance allows an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220) - Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05, which defers the effective date of those changes in ASU 2011-05 that relate to the presentation of reclassification adjustments. We adopted these pronouncements in the first quarter of 2012, and it did not effect on our financial position or results of operations but impacted the way we present comprehensive income.

Results of Operations - Three Months Ended September 30, 2012 Compared to Three
Months Ended September 30, 2011

The selected summary financial and operating data of Vermillion for the three
months ended September 30, 2012 and 2011 were as follows:

                                            Three Months Ended September 30,              Increase (Decrease)
(dollars in thousands)                        2012                    2011                Amount             %
Product                                  $           205         $           206       $         (1 )         (0 )
License                                              114                     114                 -            -

Total revenue                                        319                     320                 (1 )         (0 )
Cost of revenue:
Product                                               33                      26                  7           27

Total cost of revenue                                 33                      26                  7           27

Gross profit                                         286                     294                 (8 )         (3 )
Operating expenses:
Research and development                             429                   1,370               (941 )        (69 )
Sales and marketing                                1,082                   1,499               (417 )        (28 )
General and administrative                         1,073                   1,952               (879 )        (45 )

Total operating expenses                           2,584                   4,821             (2,237 )        (46 )
Loss from operations                              (2,298 )                (4,527 )            2,229          (49 )

Interest income                                        7                      18                (11 )        (61 )
Interest expense                                     (66 )                  (100 )               34          (34 )
Gain on sale of instrument business                   50                      -                  50           -
Gain on litigation settlement, net                   331                      -                 331           -
Change in fair value of warrants                      -                       32                (32 )         -
Reorganization items                                  -                      (42 )               42           -
Other expense, net                                   (45 )                   (32 )              (13 )         41

Loss before income taxes                          (2,021 )                (4,651 )            2,630          (57 )
Income tax benefit (expense)                          -                       -                  -            -

Net loss                                 $        (2,021 )       $        (4,651 )     $      2,630          (57 )

Product Revenue. Product revenue was $205,000 for the three months ended September 30, 2012 compared to $206,000 for the same period in 2011. We recognized product revenue for the three months ended

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September 30, 2012 for the sale of OVA1 through Quest Diagnostics. Quest Diagnostics performed approximately 4,100 OVA1 tests during the three months ended September 30, 2012 compared to approximately 4,108 tests for the same period in 2011. We commercially launched OVA1 on March 9, 2010 and product revenue for the three months ended September 30, 2012 was substantially derived from domestic sales of OVA1.

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 decreased by $941,000, or 69%, for the three months ended September 30, 2012 compared to the same period in 2011. This decrease was due primarily to a $839,000 decrease in clinical trial costs for the ongoing development of our ovarian cancer franchise and our PAD program as our PAD intended use study was completed in 2011. In addition, stock compensation costs decreased $156,000 compared to the same period in 2011.

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. Our personnel-related expenses include the cost of our territory development managers, the subject matter experts responsible for market development and the coordination of interactions with the Quest Diagnostics' sales team. Sales and marketing expenses decreased by $417,000, or 28%, for the three months ended September 30, 2012 compared to the same period in 2011. The decrease was primarily due to $260,000 decrease in personnel and personnel-related expenses due to a lower headcount in 2012 than in 2011. In addition, advertising, medical education and trade show expenses decreased $113,000 compared to the same period in 2011 due to decreased print advertising compared to 2011 and fewer events being sponsored in 2012.

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 decreased by $879,000, or 45%, for the three months ended September 30, 2012 compared to the same period in 2011. The decrease was due primarily to a $543,000 decrease in legal expense compared to the same period in 2011 as legal expense during the three months ended September 30, 2012 was recorded net of legal fees incurred which have been or are anticipated to be covered and paid directly by our insurance carrier. In addition, personnel and personnel-related costs decreased $194,000 due to lower headcount compared to the same period in 2011.

Gain on sale of instrument business. Gain on sale of instrument business was $50,000 for the three months ended September 30, 2012. This gain was derived from the return in September 2012 of funds held in escrow from our 2006 sale of the instrument business to Bio-Rad.

Gain on litigation settlement, net. On February 9, 2012, we entered into a Settlement Agreement with Oppenheimer & Co., Inc. related to losses on our short and long-term investments in previous years. Under the terms of the Settlement Agreement, the total settlement was $1,000,000; $535,000 ($379,000 net after legal fees and costs) was paid in March 2012 and $465,000 ($331,000 net after legal fees and costs) was paid on September 1, 2012. The gain on litigation settlement represents the net proceeds received from the September 2012 payment.

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Results of Operations - Nine Months Ended September 30, 2012 Compared to Nine
Months Ended September 30, 2011

The selected summary financial and operating data of Vermillion for the nine
months ended September 30, 2012 and 2011 were as follows:

                                             Nine Months Ended September 30,            Increase (Decrease)
(dollars in thousands)                        2012                    2011              Amount            %
Product                                  $          611         $            714      $      (103 )        (14 )
License                                             341                      341               -            -

Total revenue                                       952                    1,055             (103 )        (10 )
Cost of revenue:
Product                                              99                      105               (6 )         (6 )

Total cost of revenue                                99                      105               (6 )         (6 )

Gross profit                                        853                      950              (97 )        (10 )
. . .
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