Valerie Palmieri - President and CEO Bob Beechey - CFO

Good afternoon, ladies and gentlemen, and welcome to Vermillion Second Quarter 2018 Conference Call. My name is Kareena, and I will be your coordinator for the call today. At this time all participants are in listen-only mode. Following management's prepared remarks we will open the call for your Questions. As a reminder, this conference is being recorded today and is being webcast live on the Investor Relation section of the Vermillion website at www.vermillion.com. Beginning the call today is Valerie Palmieri, President and Chief Executive Officer; and Bob Beechey, Chief Financial Officer. Valerie will provide a corporate update and reviewing upcoming milestones and Robert will summarize the company's financial results. After the prepared remarks we will open the call for Q&A. Before we begin I would like to remind everyone that the statements made during this call including the Q&A session relating to Vermillion's expected future performance, future business prospects, or future events or plans are forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Although the company believes that the expectations just like forward-looking statements are based upon reasonable assumptions actual outcomes and results are subject to risks and uncertainties and could differ materially from those forecast due to the impact of many factors beyond the control of Vermillion. The company assumes no obligation to update or supplement any forward-looking statement whether as a result of new information, future events or otherwise. Participants are directed to the cautionary notes set forth in today's press release as well as the risk factors set forth in Vermillion's annual report filed with the SEC for factors that could cause actual results to differ materially from those anticipated in the forward looking statements. At this time I would like to turn the call over to Valerie Palmieri, President and Chief Executive Officer. Valerie?

Thank you Kareena. Good afternoon everyone, and thank you for joining us today. On this call, we will be reviewing our Q2 results with a core focus on leading commercialization indicators, and then Bob will follow with more details on our quarterly performance. We will close with our Q3-Q4 2018 priorities as we embark on the most transformative year since OVA1 was launched. To date, 39 women die 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 107,000 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 tubes. Our goal is to truly change that. OVA1 is the only FDA-cleared Ovarian Cancer Risk Assessment Solution which is ACOG-endorsed with positive physician statements with NCCN and SGO and is covered by Medicare as well as Medicaid on a state-by-state basis. It is now covered and/or has positive medical policy with over 40% of the U.S. population as we now have 129 million covered lives with 80% contracted. This is a 4 million increase over Q1 which we will discuss in detail shortly. While we are still in the initial stages of our commercial investments with many of the fundamentals in place we are confident that the growth is poised for acceleration. I am now going to review in detail the core four foundation blocks of our commercialization strategy as well as some of the high-value leading indicators of success. The first foundation block is top-line growth via organic sales force, channel partners, and alternative revenue channels including international and ASPiRA IVD. The second foundation block is obtaining additional regional and national payers which is driven by clinical education, clinical utility, as well as strong health economic publications. The third is continuing to build and leverage the utilization of our one-of-a-kind pelvic mass data specimen repository. We have an update on data analysis which we believe will support OVA1 and diminish CA125 is held for 30 plus years and assessing ovarian cancer risk for all women in all ethnic groups. And last but not least number four which is portfolio expansion beyond ovarian cancer which we are in active assessment of several new technologies. I am going to now begin with number one. We have completed the building of a high quality team surrounding OVA1 and Overa in the marketing sales and sales operations. As part of this we recently welcome Chris Goulart to our senior management team as SVP of commercial operations. This is a newly created position which we added when we reached critical mass in all core foundational areas. We needed a leader with deep experience in commercial operations including sales, business development, manage market and technology transfer. Chris brings tremendous strength in all areas. He has been here for just over a month and he has contributed to bringing insights to our vision and plan. As part of Chris joining the team we are also very excited to announce a new program that we've been working on for months. It is a new platform and cloud service tool for OVA1 which the brand name will be announced at a later date. This tool in conjunction with the OvaCalc will allow hospital systems, IDN, regional lab, and large OB GYN supergroups to OVA1 at the local level on a decentralized platform. This strategy will allow for a better patient experience and position Vermilion for mass rapid growth in otherwise close systems. We are in turn sheet discussions with two partners currently and have five additional partners in the pipeline. The reason this is so significant as we now have the ability to distribute an ACOG-endorsed technology on a globally distributed platform. Our increased reach to patients through decentralization of the testing site will allow more of the population in the markets we serve to access OVA1. In addition local testing in these institutions will accelerate adoption and further Vermilion's strive to make over one the standard of care for pelvic mass management. I am now moving on to the commercial team expansion. We have expanded our sales force with newly created positions known as regional account director versus market development manager. The regional account director role will predominately sell our new platform program to hospital system, IDNs, regional labs and large OB GYN supergroups. This newly created role will initially roll out to five territories; Southwest, Midwest, Mid-Atlantic, New York City boroughs and Long Island. We feel that these new hires will rapidly drive adoption of this new model. Now moving on to the market development managers performance which called directly on positions. We have continued to grow covered territories year-over-year and we have finally offset the loss of the Q3 legacy customer volume which is 15% of our total volume. Our uncovered territory volume decreased 54% year-over-year on a per day basis which is where the majority of the Quest legacy customer fall-off occurred. Now that we have a critical mass of sales team members only 20% of our volume is now uncovered versus 40% in Q1 of 2017. In the first half of 2018 covered territories grew 6% Q1 ‘18 versus Q2 ‘18 and our uncovered territories grew 5% quarter-over-quarter. This is the first quarter since the Quest transition were uncovered territories have actually grown versus retracted. In terms of driving into some specific territories where we have new rep and pair coverage we are seeing early indicators with meaningful results. In New York Metro prior to coverage the territory was running at 143 specimens per quarter. In Q1 we predicted the New York territory would be running at approximately 200 per quarter and it finished at 199 per quarter. This is a 40% increase in six months. The Philadelphia territory increased from 39 to 71 specimens Q4 2017 to Q2 2018 an 82% increase. And our Dallas-Fort Worth territory increased from 12 to 37 specimens from Q4 2017 to Q2 2018; a [308%] increase off a very small base. With this product launch as well as enhancement to the current portfolio and new team members we will be hosting a national sales meeting in the third week of September. This meeting will largely focus on the several new strategies and products which we are taking to market. In addition to the new platform we are also launching our new reflex clinical care pathway for OVA1, Overa being used in combination. The OVA1, Overa reflex will increase specificity and provide a better clinician patient experience. We will discuss that further in the update. In terms of additional revenue channels international revenue is modest but as you know international is a work in progress with studies in the queue which we will discuss in a bit. For ASPiRA IVD the majority of the revenue occurring in the back half of the year due to the timing of studies. I am now moving on to the second foundation block which is obtaining additional regional and national payers while maximizing our contract agreements and value. We have added a total of 4 million lives in Q2. The majority of those lives were in Illinois with a total of 3.1 million Medicaid lives taken our Medicaid life total to 5.5 million. In the quarter we also added some additional Blue's contracts and significant states and secured a final contract with a large North East Benefits Fund. Overall now we have 129 million lives covered or close to 40% of the population. In terms of price optimization our overall price is improving with the reduction of client bill, increase in Medicare, third-party contracts and patient pay price. On the Medicare front the new PM array of 897 went into effect January 01, 2018 and we are seeing better than expected results. The average rate paid in the first quarter – of second quarter of 2018 with $741 per specimen compared to $151 for the second quarter 2017; a four-fold increase. This is being driven by the price increase and percent paid. The percentage paid was 72% in the first quarter of 2017 versus 86% percent in Q2 2018. Overall percent paid has increased from 56% in Q2, 2017 to 60% in Q2 2018. The majority of this improvement was driven by the improvement in Medicare rate, third-party contracts, and patient pay rate. Over 40% of our volume is also handled by our patient advocacy program now. This service allows us to brand and educate [indiscernible] patients as well as facilitate payment and proactive insurance benefit checks. On the payment front all fronts are moving in a positive direction. Keep in mind with the new revenue recognition rules our price improvement will take a few quarters of price patterns to factor into our average unit price due to contract pricing lag and pricing history being established. I'm now moving on to our third block which is continuing to build and leverage the utilization of our one-of-a-kind pelvic mass data and specimen repository. We have a landmark analysis which we recently discovered. Our recent review of the literature as well as our internal data we have identified a market trend which there is lower production of CA125 and non-Caucasian vs Caucasian women. We have confirmed the lower serum CA125 in our own database of women with pelvic mass and malignancy. In these ethnic groups OVA1 is up to 2 times better than CA125 at detecting cancer. Thus we believe CA125 should not be used as a diagnostic aid in non-Caucasian women due to its ineffectiveness for cancer detection. An abstract is in process of being submitted to a National Society and a publication is being prepared as well as additional studies are underway to demonstrate the ineffectiveness of serum CA125 as a diagnostic aid for ovarian cancer. We believe these studies will establish OVA1 as the most reliable laboratory test to assess the risk of cancer in women with pelvic mass and it will greatly diminish the CA125 is held for 30 plus years and assessing ovarian cancer risk for all ages and all races. In addition to CA125 ethnic disparity publication we are also rolling out a combined profile using OVA1, Overa reflex due to our new platform improvement. The OVA1, Overa reflex is designed to take advantage of both product strengths. It will benefit from OVA1 sensitivity and Overa specificity. The OVA1, Overa reflex will reduce falsely elevated risks by almost 40%. This can also be offered in a decentralized structure as well with improved economics. In terms of medical education at the local level we have implemented a new regional key opinion leader program which will educate and spread awareness in the metro hub. We currently have four key opinion leaders on board or in the queue including New York, Philadelphia, Illinois and California. Having active working thought leaders in these large metro areas is paramount to a large healthcare system and supergroup buying as well as this will facilitate OVA1 adoption. I'm now moving on to our international study update. We are primarily focused on two prospective studies to validate Overa on those specific populations. The two countries we are focused on is the Philippines and Israel. In the Philippines we are nearing the midpoint of the two-year study. Currently we have enrolled 151 of the 380 patients needed or about 40%. We believe this prospective outcome study will be a significant contributor towards critical mass payer coverage in the U.S. for Overa when it's completed in 2019 and published in 2020. In addition, our Philippine distributor of macro health is poised to distribute Overa to their national client base over that time. The end goal of the Philippine study is two-fold. Number one the adoption of Overa into the Filipino healthcare system protocol and number two a perspective of Overa outcome study which can be used worldwide. In the Israel we have one validation study which is about to commence. This study will include both OVA1 and Overa. It will be completed – it will be completing a 240 patient validation study estimated to take one year on the local population Israel which is a necessary step for long term commercial success in the Israeli healthcare market. And lastly we are in the final process of kicking off a U.S.[process] study which we are in discussions on expanding this to Israel as well. We are using OVA1 and Overa instead of CA125 for the routine monitoring a high risk ovarian cancer patients due to BRCA mutation. Approximately, 1 in 40 women in Israel are BRCA carriers versus 1 in 400 in the U.S. Understanding how OVA1, Overa performs this cohort at the highest risk of developing ovarian cancer is crucial to expand in the clinical application for our tests in the U.S. and ex-U.S. I would like to now turn the call over to Bob for a review of our financial results. Bob?

Thank you Valerie. Let me begin with a summary of the results for the quarter. Our total revenue in the second quarter of 2018 was $708,000 compared to $898,000 in the same year ago quarter; a 21% decrease. The second quarter of 2018 revenue included $627,000 from product sales of OVA1 and $81,000 from service revenue from ASPiRA IVD. Product revenue decrease 21% in the second quarter of 2018 compared to the prior year quarter. 1884 OVA1 tests were performed versus 2418 OVA1 tests performed in the prior year quarter. The volume decrease was attributable to the loss of a significant client build customer which we previously disclosed which transpired in Q3 of 2017 as well as reductions in volume in uncovered territories. Q2 2017 was the high point of the legacy customer revenue with the relationship having been dissolved in Q3 of 2017. We would note relative to the uncovered territory decrease that our expectation is Q3 of 2018 will represent the inflection point where our covered territory growth overtakes the decline in uncovered territories. Despite these reductions revenue associated with Medicare increased more than five-fold driven by 20% increase in volume and 440% increase in price. Revenue on a per test performed basis in Q2, 2018 was $333 dollars in the second quarter. The price protests on a comparable GAAP basis would have been $287 in the second quarter of 2017 representing a 15% increase year-on-year. Cost of product revenue for the second quarter of 2018 total $528,000 representing a 23% increase from the comparable prior year quarter. The increase was due to [indiscernible] and posted associated with delivery to physicians, non-recurring lab supply costs for our new offerings and clinical validations as well as the Quest project management fee which commenced in 2018 and did not exist in 2017. Total operating expenses in the second quarter of 2018 increased to $2.9 million compared to $2.6 million in the same quarter a year ago representing an increase to 15%. This increase was primarily due to one-time costs for severance and consulting costs as well as increased investments in sales resources slightly offset by reduction in R&D expenditures in the prior year, relative to the prior year. Net loss for the second quarter of 2018 was $3 million or a loss of $0.04 per share as compared to a net loss of $2.4 million in 2017 second quarter also $0.04 loss per share. There were 75.3 million common shares outstanding at June 30, 2018 which is after the offering, the equity offering and the conversion of preferred stock to common stock that transpired in Q2. Cash and cash equivalents at June 30, 2018 were 14.1 million representing five quarters of cash looking forward all things being equal in terms of volume and cost. The company will utilize 2.5 billion in cash in the second quarter of 2018 excluding the 13.5 billion received from the April public offering net of issuance costs. I'll now turn it back to Valerie.

Thank you Bob. Before we open the call for Q&A let me emphasize our optimism for building our company for success. Our key catalysts will be our new decentralized platform offering, our new expanded portfolio including OVA1, Overa reflex and finally price improvement with our Medicare rate being the base case for contract negotiations going forward. Vermilion is uniquely positioned to create value and the early accurate risk assessment of ovarian cancer for all ethnic groups. Our focused growth in large practices in healthcare systems, transformative payer success, coupled with our new platform has set the stage for scaling our volume and revenue via direct and indirect channels in 2018-2019. We look forward to keeping you apprised of our progress during 2018. Our end goal is to enhance shareholder value by saving lives and saving money for the overall healthcare systems. We are now happy to answer your Questions.

In closing we have laid a strong organic commercial foundation in the first half which will set the stage for a strong second half of 2018 and full year 2019. During the past 24 months the quarter foundry work including guidelines 40% of the U.S. population under coverage and the forex increase in CMS pricing have set the stage to drive growth and profitability in time. Lastly, we have laid the foundation for an expandable decentralized data platform which will offer expanded portfolio of disruptive technology to women's health providers. 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.

Once again that does conclude today's conference. Thank you for your participation. You may now disconnect.