Valerie Palmieri - President and CEO Bob Beechey - CFO

Max Masucci - Canaccord Genuity Peter Van Roden - Manatuck Hill Partners

Good afternoon, ladies and gentlemen, and welcome to the First Quarter 2018 Vermillion Earnings Conference Call. My name is Vicky, and I will be your coordinator for the call today. With me today are Valerie Palmieri, President and Chief Executive Officer; and Bob Beechey, Chief Financial Officer. This afternoon, they will discuss Vermillion's Q1 2018 performance. Before we get started, I would like to point out that there will be a replay of this conference call available. Please refer to today's press release for replay information. This presentation contains and answers to today's questions may contain forward-looking statements, including statements regarding Vermillion's business plans with respect to ASPiRA IVD and Vermillion's sales strategy, payer coverage, scientific studies, Vermillion's patient portal, and Vermillion's sales and research strategy outside the U.S. You are cautioned not to place undue reliance on forward-looking statements. Vermillion is providing this information as of the date of this conference call and does not undertake any obligation to update any forward-looking statements contained on this call as a result of new information, future events or otherwise, except as required by law. Forward-looking statements reflect management's current estimates, projections, expectations or beliefs, and involve risks and uncertainties that could cause actual results and outcomes to be materially different. Risks and uncertainties that may affect the future results of the company include, but are not limited to, the factors as described in the Vermillion annual report on Form 10-K for 2018. Following the Vermillion team's remarks, we will open-up the call for your questions. Now, I'd like to turn the call over to Ms. Palmieri.

Thank you, Vicky. Good afternoon everyone, and thank you for joining us today. On this call, we will be reviewing our Q1 results with a core focus on leading commercialization indicators, and we will close with our Q2 to Q4 2018 priorities as we embark on the most transformative year since OVA1 was launched. To date, 39 women died each day of ovarian cancer. And we are very proud of the impact that OVA1 and Overa is having on patients' lives. Since OVA1 launched, it has made a difference in the lives of over 105,000 patients with zero safety or efficacy issues. Currently ovarian cancer is the only sex-specific cancer with greater than a 50% mortality rate. And today, 85% of all ovarian cancers are diagnosed when the cancer is beyond the ovaries or fallopian tube. Our goal is to truly change that. OVA1 is FDA-cleared ACOG-endorsed with positive physician statements by NCCN and SGO and also covered by Medicare nationwide as well as Medicaid on a state-by-state basis. It is now covered and or has positive medical policy for over 40% of the US population. Our ultimate goal is to truly change the standard of care for managing both high risk and low risk pelvic mass patients as one in five women have a pelvic mass in their lifetime. We believe we now have the core foundation blocks behind us, which include guidelines, coverage insights as we have started to ramp our organic commercialization investments in the first-half with the goal of impactful results in the second-half of 2018. To discuss our first quarter financial review, I'd like to introduce Bob Beechey, our Chief Financial Officer.

Thank you, Valerie. Today, we furnished our first quarter 2018 financial results in a press release and filed our Form 10-K with the Securities and Exchange Commission, which is available for download via the Investor Overview section of our website at www.vermillion.com. Total revenue for the first quarter of 2018 was $649,000 compared to $726,000 in the same period a year ago. There were 1,818 OVA1 tests performed during the first quarter of 2018, compared to the 2,293 OVA1 tests performed in the prior year quarter, or a 21% decrease. The majority of the decrease was associated with the loss legacy customers discussed during our third quarter 2017 earnings call. Product revenue in the first quarter of 2018 totaled $613,000 compared to $678,000 in the prior year quarter, representing a 9.5% year-over-year decrease. The decrease was driven by the volume loss associated with the legacy customer. Revenue associated with the lost client was $71,000 in the first quarter of 2017. In addition, revenue on a per-test-performed basis increased to $337 per test in the first quarter of 2018, compared to $296 in the first quarter of 2017, representing a 14% increase. ASPiRA IVD’s service revenue for the first quarter of 2017 totaled $36,000, and was a decrease of $12,000 compared to the prior year quarter. At the end of the first quarter, as of March 31, 2018, we had backlog of $490,000, which is scheduled for completion in 2018. Normally ASPiRA IVD revenue will vary by quarter based on the stage of ongoing customer projects. Total operating expenses in the first quarter of 2018 was $2.7 million compared to $2.7 million in the same year-ago quarter, essentially flat. Within operating expenses, we increased sales and marketing approximately $200,000, with a corresponding decrease in research and development and general and administrative expenses. Net loss for the first quarter of 2018 was $2.85 million as compared to a net loss of $2.67 million in the first quarter of 2017. Our net loss per common share was flat year-on-year for the first quarter, at negative $0.05. Cash and cash equivalents at March 31, 2018 were $3.1 million. The company utilized $2.4 million in cash in the first quarter of 2018. We completed a capital raise in the second quarter which returns us to a position of adequate liquidity for the foreseeable future. I'll now turn it back to Valerie.

Thanks, Bob. We will now discuss in detail our 2018 priorities, which include leveraging guidelines, critical mass of payers, and price to drive organic investment and commercialization, as well as key channel and portfolio expansion partnership. In terms of investing in this growth phase, it will include four core components: number one, top line growth via organic sales force, channel partners, and alternative revenue channels including international and ASPiRA IVD; number two, obtaining additional regional and national payers to drive adoption driven with clinical education, clinical utility, as well as strong health economics; number three, to continue to [indiscernible] the utilization of our one-of-a-kind pelvic mass repository; and number four, portfolio expansion into other pelvic mass conditions. Moving on to our number one priority, which is to maximize our growth via guidelines payers and with our price, leverage our ability to profit share with channel partners, coupled with a core investment in our commercial infrastructure. We increased our sales presence from five reps on average in 2017, to nine reps in Q1 2018. With our new reps and 50% of our team being in training, we continue to grow covered territories' year-over-year volume by 15%, including the loss of the Q3 legacy customer volume which was 15% of total volume on average. Our uncovered territory volume decreased 36% year-over-year, which is the majority of the Quest legacy customer falls occurred. We have also reorganized our uncovered territories, so only 20% of our volume is uncovered, versus last year it was 40% in Q1 2017. In terms of leading indicators in Q1 with our expanding field sales team, we brought on 345 new physicians, and OVA1 test kit Q1 year-over-year increased from 6,469 to 8,562, a 25% increase year-over-year. Regarding the new rep and payer coverage, our early indicators continue to show meaningful results. We have three new territories which I will highlight. In New York Metro, prior to coverage the territory was at a run rate of 143 specimens per quarter. After a few months in the field in Q1 2018 we were up to 165 per quarter, and in Q2 the territories running at 200 per quarter, or an increase of 40%. The Philadelphia territory increased from 39 to 58 specimens from Q4 to Q1, a 49% increase, and our Dallas-Fort Worth territory increased from 12 to 37 specimens from Q4 to Q1, a 208% increase of a very small base. All three of these new territories are showing market growth. Beyond strategic investment in our sales force, we are also focused on key strategic domestic partnerships with channel partners and healthcare systems. I am very happy to announce we just added one regional channel partner in April, and completed the sales training as of May 7. And we are in discussions with several others. Now that we have improved economics and have reached critical mass in covered lives, we now have the ability to use distribution sales forces to reach the 38,000 GYNs in the U.S. Keep in mind we are the only ovarian cancer risk assessment test with established and growing coverage with commercial payers and continued support from recent industry publications like up-to-date, ACOG guidelines and positive specimens statements from NCCN and STO as opposed to competitive products such as Roma which remained experimental and investigational to-date. I am now moving on to our other revenue channels International and ASPiRA IVD. For international our push is primarily prospective studies in specific countries to validate aware on that population. Once validated the goal to incorporate our technology into their major health care system our payer network. This approach is actually very similar to how genomic health integrated their products in these countries via similar distributors. Keep in mind, these studies will be wrapping up in 2019 and published in 2020. One highlight to report is that during Q1 we did receive our first specimens from Israel, so getting this implemented the reporting systems in place is a true milestone, although we expect the top line impact of international partnerships to be minimal in the short-term. These studies could be transformative for the business from a perspective outcome basis, negative predictive value and BRCA focus. It's important to note that about 90% of ovarian cancers worldwide are outside the U.S. and aware just starting to be utilized in that global market. Moving on to ASPiRA IVD, we have two updates. Number one we secured multiple projects with bio outsourcing company which in addition to being a new revenue source with significantly increased our overall IT testing menu. Number two are well for the global DLL-3 companion diagnostic and rolling trial for small cell lung cancer was expanded in Q1 to simply testing for compassionate use separate safety study for this therapy. I am now moving on to our goal number two, which is Subtane additional regional national cares and drive adoption with the creation of the deployment of foundational per reviewed papers and programs to support clinical education, clinical utility as well as health economics. Regarding clinical education we recently attended the American College of Obstetricians and Gynecologists national meeting. We had strong boot traffic but in general many physicians thought OVA1 was no longer available since no longer off of its head, so building awareness is critical as we embark on our channel partner strategy which we will discuss shortly. An addition to national ACOG we will also be participating in regional ACOG and OMNIA programs over 2018. Regarding building awareness be a national continuing medical education program OVA1 was included in the OMNIA CME title best practices for the work up of the adnexal mass which we announced in February. In 60 days we reached 7,614 healthcare providers with 714 completing the program for CME credit. At this point we exceeded our goal reaching our three month fall in 60 days which demonstrates that awareness is needed and an active educational provider is key. Additional awareness programs are in the planning stages right now but will be surgically deployed to ensure maximum return on investment. In addition to awareness be conferences in third party continue medical education. I am also happy to report that OVA1 was just highlighted in the most recent up-to-date publication. In the up-to-date article entitled Serum Biomarkers for the Evaluation of the Adnexal Mass for Epithelial Carcinoma of Ovary Fallopian Tube and Peritoneum published in the March 2018 issue. Authors Frederick Rand Ueland and Andrew John Li noted based on our publications that physicians using the OVA1 test in conjunction with the American College of Obstetricians and Gynecologists criteria identified more ovarian cancers than physicians using the ACOG criteria alone. Up-to-date as an evidence-based physician author and clinical support resource used by physicians to make point of care decision and is read by over 1.3 million clinicians and over a 180 countries. Regarding additional studies to drive care, we have four study plans in the works. Number one, OVA1 negative predictive value study to demonstrate the value of OVA1s 98% negative predictive value and ensuring the nine patients which are the majority are managed sufficiently and effectively at the GYN and our primary care referral level versus being referred to several specialists. Number two, OVA1 early detection versus CA125 study plan is in the works to identifying the ability of OVA1 to probably identify the risk of cancer in women, ultimately diagnosed with ovarian cancer when CA125 they also alert the provider that a significant risk existed. Number three, on the Overa front, we have two studies underway or in the planning stages. We have launched the perspective of Overa study in the Philippines, which currently have enrolled 109 of 380 patients needed are 29% which is ahead of schedule. We believe this respective study will be significant contributor towards critical mass payer coverage in the U.S. when it's completed in late 2019 and published in 2020. In addition, our Philippine distributor, Macro Health is poised to distribute Overa to their national client base over time. The end goal is adoption of Overa to the Filipino Healthcare System protocol, but the major value here as a perspective Overa outcome study, which can be used worldwide. We are also finalizing our validation study at Overa in Israel. Completing a validation study is necessary to set the stage for successful commercialization there. Also, we are looking to begin a study on using OVA1, Overa instead of CA125 the routine monitoring of high risk ovarian cancer patients due to the BRCA mutation. Approximately one in 40 women in Israel are BRCA carriers versus one in 400 year in the U.S. Understanding how OVA1, Overa perform this cohort of women is at the highest risk of developing ovarian cancer is crucial to expand the clinical utility of our tests. Lastly, we are building awareness of the grassroots level via educating women on the signs and symptoms that may be associated with the pelvic mass disease. We are launching this month a new quiz are nopelvicmass.com known as Dr. Barbara Goff symptom index. Dr. Barbara Goff is a nationally renowned gynecologic oncologist from the University of Washington who has published several publications on the real symptoms of ovarian cancer. We are pleased to put her to on our website for all women to use. In addition, we will be providing tools such as that to providers to use in their adnexal mass work up. We believe that having both providers and patient top of mind knowledge of symptom using an objective vehicle can increase awareness and potentially early detection. We are also looking to mobilize this via portal application. I'm now moving on to national and regional payers. Our publications are continuing to make headway with payers. We have close to 40% as a live covered in the U.S. and we're focused on the other 60%, which include the other nationals and regional players. Contract agreement live increased 26% Q1 of 2017, versus Q1 of 2018, including a very key Northeast Benefit Fund. Positive medical policy lives increased 47% from Q1, 2017 versus Q1, 2018. Our total covered life under contract is 86% to-date. Keep in mind we tried the other nationals is competitive pressure as well. And today, we now have 55% of the Blue Cross Blue Shields lives under policy and it's directly related to the 60% to 80% of the covered lives in the territories we have field representation. Causing a tipping point in these markets is key and now with our new coverage going live in Q1, we believe we are close. We are also continuing to have active dialogue with the top national payers, more to come on the next earnings call. I am now moving on to publications and data drive payers, but obtaining contract base and value of OVA1 brings the healthcare system is critical. Regarding those that we already have contracts list, we are active discussions with many of them to move those rates in the current price to the new PM array based on the National Clinical lab fee schedule. We are not seeing much pushback and in fact we are seeing PAMA prices, PAMA plus pricing in some cases. On the Medicare front as we reported on the last call, we have confirmed that Medicare is paid in process 2018 claims at the new PAMA rate of 897. Keep in mind, this pricing is in place for three years. The new PAMA price of 897 would in fact as January 1, 2018. The average rate paid in the first quarter of 2018 was $721 per sample compared to a $127 for the first quarter of 2017. The percentage paid was 81% in the first quarter of 2018 compared to 60% in the year ago period. I'm now moving on to our third initiative for 2018 with this expanding and mining our one-of-the-kind public mass depositary, which is intended to be the core of our Big Data engine and public mass portfolio. The goal to depositary to support the development of new products and predictive analytics in ovarian cancer as well the differential diagnoses of benign public mass conditions, today we are seeing approximately a 19% return rate which is consistent with last quarter. We have also received 301-patient consent to date and we intend to publish this data in time. This data allows to see our doctors truly manage low risk and high risk patients with our technology. As we all know, ovarian cancer remains one of the most challenging diagnoses to make early disease process. We believe that harnessing the stage will be key to truly understand the origin, contributing factors, prevention and successful treatment of this disease to the development of future bioinformatics solutions. Our fourth and final goal is incorporation of our data in specimens for complementing technology partners. We are in active discussions with technology and partners to increase the applications for OVA1, Overa as well as increase our overall best offering and portfolio. Due to ovarian cancer being a rare disease, many of these potential partners are not focused on ovarian cancer. So Vermillion is an attractive partner, given our specimen and data bank. Our goal is to manage high risk and low risk patients over their entire care pathway from diagnosis to treatment and cure. In closing, thank you for joining us today and as we discuss that the performance against our 2018 priorities for Vermillion is uniquely positioned to create value in the early accurate risk assessment of ovarian cancer. Our focused growth in specific regions and transformative payer success has set the stage for scaling our revenues with direct and indirect channels in 2018 and 2019. We look forward to keeping you apprised of our progress during 2018. Our end goal is to hand shareholder value by saving lives and saving money for the overall healthcare system. We are now happy to answer your questions.

Thank you [Operator Instructions] And we will go first to Mark Massaro with Canaccord Genuity.

Hi, this is Max Masucci on for Mark.

Hi.

Hi. So you'll be lapping the loss of the legacy customer in, I believe, Q3. So given that we won't have lapped that event in Q2, should we expect a sequential volume decline in Q2, and then a return to year-over-year growth starting in Q3? And then also, can you just call out any seasonal factors in play for Q2.

Yes. So in terms of Q2, yes, so the legacy customer was still active in Q2. So until Q3, you will be seeing, I would say, sequential growth and substantial growth because of the investment in commercial, but coupled with, in Q3, that legacy customer is no longer in our run rate. So you're absolutely correct. In terms of seasonality with Q2, we don't anticipate it. We did have some seasonality in Q1 with [indiscernible], but we didn't even get into that, but in terms of Q2, no. Q3 is where we see some seasonality on average, Max, because it's summer month.

Great. And congratulations on strengthening your balance sheet, now with just over $13 million in net proceeds. Could you parse out more specifically your plans for using the proceeds? Are you going to keep your sales force at nine for the rest of 2018 given the addition of the distributor?

We are staying at that general level. The only thing in supplement to the nine is a couple of in-house sales people which we believe helps to make the in-the-field people more effective and to cover some of the uncovered territories as well. So that's modestly increasing above the nine.

And just to piggyback on that too, Max, is that we are also investing in marketing brand and awareness. So we have a -- there's a huge clinical problem. OVA1 is a product that is farther along than any other competitive product, and there's an awareness curve as noticed at the latest national ACOG meeting. So we will be investing in awareness. And that will come via several channels by being very surgically focused on that awareness then.

Great. And how long will it take for your new direct sales reps and also your new distributor to begin contributing meaningfully? And also, how are you strategically choosing the geographical areas you'd like to target?

So, that's a two-part question. So in terms of the sales reps, we're already seeing early indicators. We highlighted the three new growth territories. I mean, some of those reps started in earlier Q1, some of them were mid Q1 but, as you can see, all three territories extremely fertile in terms of growth. In terms of channel partners we've just initiated the sales training, so I would think that there's going to be somewhat of a learning curve there, but we will be doing four-legged sales call with them. And then in terms of where we choose to place reps it's really based on our payers. So our reps are in territories where we have anywhere from seven out of 10 lives covered. Ideally we want to be in the seven or eight range. And we have territories we're up to nine out of 10 lives covered, but it's where we have the payer coverage is where we can see the large growth.

Great, that's helpful. And one more if I can. How are things going with your patient advocacy program? Do you see it gaining traction? I think you had 1,500 patients had used the program as of Q4. Do you have an idea of where that number stands now?

I'll talk to that. So, basically, we didn't comment it in the earnings, and we probably should've, because it's going really, really well. What we are seeing, and as two-fold, one is it's an education process for the patients because they have map. The doctors have limited time with some of the patients, so it's an education process. As well it helps them even understanding what EOBs are and how to manage the insurance system. So we are seeing rapid growth in that area. And we will be continuing to use that service. And then, I would say, another side note is it also allows us to get follow-up for the patients. The patients really get connected to us. I don't want to say it's a Nordstrom approach, but it's really a Nordstrom approach, but it's really a white club service in terms of managing the patients through this very critical timeframe. Getting them to the, whether it's the Quest PSE, getting the OVA1 drawn, and then afterwards they actually will call our customer service team and let them know how they made out with their experience. So you'll be seeing more patient testimonials on our Web site.

Great, that's all for me, and congratulations on the new panel price.

Thank you, Max.

[Operator Instructions] And we'll go next to Peter Van Roden with Manatuck Hill Partners.

Hi, guys.

Hi, Peter. How are you? Good afternoon.

I'm -- just, I guess, one question. Can you help us to understand, I guess, net pricing per test was only up kind of 14% year-over-year? Then there's at the top of the earnings announcement you're going to talk about the increase in the step of pay grade jumped 7X in Q1 '18 versus Q1 '17. So I guess when should we start to see that type of price increase in the reported numbers?

So, you got a couple of things coming into play here. One is you still have -- so work that we actually have in Q1 is specimens that were received in Q4, so you have a timing issue. And you also have mix. So right now our Medicare volume is tracking, I want to say, in the 12% to 15% range. And we have not called on Medicare per say as we were getting paid at a very low rate, as you noticed, by the -- a year ago. So, we do anticipate increased growth for what you have at the transformation this year, Peter, until we can get the contract up to the PAMA rate, an increase in the number of Medicare as a percentage of our volume, and then also the timing of the carryover from back quarter to this quarter. So, as you move into the back-half of the year, you will see more of that price appreciation and expansion than in the first-half of the year.

Okay, that's very helpful. And then just in terms of -- I don't know if you talked about this, I missed the first couple of minutes, but it sounds like you expect quarter-over-quarter volume growth, maybe you could help us understand how that will play out and when we will really start to see an acceleration in volumes?

Yes. So I would say that the first-half of the year as we guided on the last call and this call, because of our investment in sales we are seeing those -- kind of pick out our new territories, they're growing, with some of them to seeing them straight for 60 days. So I would say that with towards things, one of our -- what I want to say, our new sales team members are getting up to speed as well as Q2 numbers of last year still contain that legacy customer, which is 15% of our volume. So Q3 is where we are going to see -- where I believe is the inflection point on top line and on volume.

Okay. That's all I had. Thanks, guys.

Thank you.

.:

Thank you, Vicky. In closing, we have made a strong organic commercial foundation in Q1, which will set the stage for a strong second-half of 2018 and a full-year 2019. During the past 24 months, core foundry work, including guidelines, 40% of the U.S. population under coverage and a 4x increase in CMS pricing have set the stage to drive growth and profitability in time. Lastly, we have laid the foundation for our one-of-a-kind public mass repository, which is intended to be the core of our Big Data engine and pelvic mass portfolio extension with complementing technologies. Our engine mind is a development of a portfolio to push early detection upstream and build proprietary science to manage all types of pelvic mass conditions, which impact one out of every five women in the U.S. over their lifetime. Our end goal is to serve a large global market with a platform coupled with strong science, which will drive profitability and overall shareholder value. Thank you for joining us today and thank you for your interest in Vermillion. We look forward to seeing you at the upcoming medical meetings and investor conferences.

Again, I would like to remind everyone that this call will be available for replay through May 28, 2018, starting later this evening. Use the link provided in today's press release, as well as available on the Investor section of the company's Web site. Thank you, ladies and gentlemen for joining us today for our presentation. You may now disconnect.