Valerie Palmieri - President and CEO Bob Beechey - CFO

Good afternoon, ladies and gentlemen, and welcome to Vermillion's Third Quarter Earnings 2018 Conference Call. My name is Lauren, and I will be your coordinator for the call today. At this time all participants are in a listen-only mode. Following managements 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 Relations section of the Vermillion website at www.vermillion.com. Leading the call today are Valerie Palmieri, President and Chief Executive Officer; and Bob Beechey, Chief Financial Officer. Valerie will provide our corporate update, and Bob 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 statements made during this call, including the Q&A session, relating to Vermillion's expected future performance, future business prospects or future events or plan, including with respect to Vermillion's universal platform OVA1 plus offering, new commercial team increasing percent pay performance, comparison with the CA125 and expansion of Vermillion's portfolio are forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Although, the company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, actual outcomes and results are subject to risks and uncertainties and could differ materially from those forecasts due to the impact of many factors beyond the control of Vermillion. Vermillion is providing this information as of the data of this conference call and does not undertake any obligation to update or supplement any forward-looking statements, whether as a result of new information, future events or otherwise. Participants are directed to the cautionary note set forth in today's press release as well as the risk factors set forth in Vermillion's annual report on Form 10-K for 2017 and quarterly report on Form 10-Q for the second quarter of 2018. As 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, Lauren. Good afternoon, everyone and thank you for joining us today. On this call, we will start by reviewing our Q3 results with a core focus on leading commercialization indicators and then Bob will follow up more details on our quarterly performance. We will close with our Q4 2018 priorities as we ramp our commercial strategy. Today, 39 women die each day of ovarian cancer, and we are very proud of the impact OVA1/Overa are having on patients lives. Since OVA1 launched and has made a difference in the lives of over 109,000 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 for all ages, stages and ethnicities. OVA1 is the only FDA cleared ovarian cancer risk assessment solution, which is ACOG endorsed has positive physician statements with NCCN and SGO and is covered by Medicare as well as Medicaid on a region-by-region or state-by-state basis. It is now covered or has positive medical policy with now over 40% of the U.S. population. Given now that we have 131 million covered lives in a 112 million contracted. This is a 2 million increase in covered lives over Q2, which we will discuss in detail shortly. I am now going to review the core foundation blocks of our commercialization strategy as well as some of the high level leading indicators of success. The first foundation block is top line growth via our organic sales force, alternative revenue channels, including international and ASPiRA IVD. The second foundation block is obtaining additional regional and national payers, which drives adoption we'll clinical education, clinical utility and strong healthy economic publications. The third foundation block is continuing to build and leverage the utilization of our one-of-a-kind public mass data and specimen repository. We have an update from our data analysis, which we believe will support OVA1 and diminish the CA125 as held for 30 plus years in assessing ovarian cancer risk for all women and all ethnic groups. And last but not least, the fourth foundation block is portfolio expansion beyond ovarian cancer, which we are in active assessment of new technologies as well. Starting with the first foundation block. In order to drive significant top line growth, we needed to build the foundation for OVA1 adoption. This foundation includes 4 core components: number one, a platform upgrade to facilitate distribution in the U.S. as well as worldwide; number two, offering OVA1 plus, a new offering upgrade that offset the specificity gap that OVA1 had with an OVA1 plus Overa Reflex; number three is our core investment in leading commercial experts to drive adoption as the provider, super group and health care system level; and number four, is increasing our person pay performance to be discussed later in our reimbursement section. I will now review the first 3 components in detail. Number one, in terms of the platform upgrade, as you know, healthcare delivery has converted from a fee-for-service environment to a value-based environment. Forcing consolidation and the creation of large GYN super groups in health care system. We've been working over the last 12 to 18 months to align the OVA1 distribution platform with this shift and to convert OVA1/Overa to universal platform where it could be formed at the local level. As of Q4 2018, we are now offering both technologies on the same platform. This not only improves our internal efficiencies, but allows us to decentralize our FDA clear technologies direct to health care systems in super groups. I'm now moving on to number 2. An addition launching a universal platform, we're also simultaneously upgraded our offering treated OVA1 plus. One of the key features of OVA1 has always set its gap specificity. A sensitivity for stage 1 and stage 2 cancers is 92% versus the competitive product CA125 being approximately 63%. Our second generation product Overa maintains high early-stage sensitivity at 89% but increases of overall specifically from 54% in OVA1 to 69%. By performing OVA1 and Overa in a reflex product, we are able to give providers a test that combines the high early stage sensitivity of both OVA1 Overa, while decreasing the falsely elevated risk by approximately 40%. This truly allows providers to access best-in-class ACOG endorsed technology at the local level. In terms of some early indicators since October 1, approximately 30% to 40% of our OVA1s have converted to OVA1 plus, and we're pleased with the transition thus far. And lastly our reviewing detail our core investment in commercial and some of the early indicators of success. In Q3, we just completed the building of a high quality commercial team with deep institutional knowledge of the gynecology market, healthcare systems in super groups. Leading this team is Chris Goulart, Senior Vice President of Commercial Operations. The timing of bringing Chris onboard was based on having a critical mass of payers, new platform launch and OVA1 plus. We are now ready to leverage the skills Chris and his team bring to the company to increase adoption and build upon our platform of high-value women's health offering. The strategy behind the team's deployment is focused on 3 key areas. One is territory coverage or footprint, which is really reinforced the existing footprint. Second is the team's skill set of the sales leader and lastly is the product and its decentralized platform enabling physicians at the local level. In terms of coverage, our sales territories now cover 175 million lives or 60% of the population versus a fraction of that before. Our direct sales team is currently deployed over 12 sales territories with some doubling up within high ROI markets. If you compare that to last year, our deployment was 5 full-time sales territories with a total of 10 FTEs dedicated to commercial activities. With our full commercial launch post guidelines in impaired tractions, I'm happy to report that we now have a 20 FTEs dedicated to commercial activities. This effectively doubles the commercial team year-over-year. This enhanced sales team is also further entrenched in key markets as well. For instance, the New York Metro area, we have gone from one territory to 3. In Florida, we have gone from 1 territory to 2. We believe this will help us better penetrate market that serve population at an increase risk for ovarian cancer as well as markets that are more progressive clinically. In addition to our footprint, we have also upgraded our sales team skill set to drive larger deals with integrated delivery systems known as IDNs, super groups and large regional labs. This newly rolled out regional count director role consist of sales leaders who have more than 10 plus years of experience in women's health. The vast majority of these new hires have been regional sales directors in their prior roles with steep experience in launching novel as a task to women's health, coupled with deep existing administrative relationships within the IT and the super groups, which is critical to an efficient sales process. And lastly, I will update you on the new decentralization model, where we have generated significant interest. We continue to have discussions with 20 plus partners and are working through the natural sales cycle. We have entered into the contracting phase of our previously discussed letter of intent partners, which is significant as a typical sales type cycle for large complex fields are usually 12 to 18 months, and we completed these in 5 plus months. Each of these deals represent a large audience base of greater than 200 OB/GYNs, and we continue to work through other partnerships and will have more updates on future calls. The volume increases from this newly launched decentralize model will be seen in the first half of 2019. We believe, this model will drive wider adoption of OVA1 plus and these partners will become influencers within the payer community as well. The reason this is so significant is that now we have ability to distribute an ACOG endorsed technology on a globally distributed platform. Our increased reach to patients through decentralization and testing will allow more of the population in these markets to serve an access OVA1. In addition, local testing in these institutions will accelerate adoption and to further drive a millions drive to make OVA1 a standard of care for pelvic mass management. I'm not going to discuss in greater detail our key target and the OB/GYN market consolidation, which includes GYN super groups, integrated delivery networks and hospital systems. There are approximately 60 super groups, roughly 10 super groups account for the vast majority of these patients. Our team is in active discussion with all 10. We are also in discussions with large IDNs and hospital networks throughout the country, targeting our 12 core territories. Our decentralized model coupled with our health economics data fits in well with these value-based medicine models. We are in the early stages of sales cycle with many of these large targets and more to come in our next earnings call. In terms of units, while we upgraded our rep and add a new territories, we actually experienced an increase of 5% quarter-over-quarter in Q2 versus Q3. We usually see a 5% decline from Q2 to Q3 due to summer seasonality. This represents early indicator of adoption with the newly revamped sales team that started the end of Q3 and is gaining traction. Typically it takes a couple of quarters for new sales folks to gain traction and drive unit growth but these early signs are promising. To stay in line with our previous quarters review of covered and uncovered territories, we can continued to grow cover territories year-over-year, and we have finally offset the loss of the Q3 legacy customer volume, which is approximately 13% of total volume on average. Our uncovered territory volume decreased to 8% year-over-year on a per day basis. Compared to 48% year-over-year for Q2, which is where the majority of the quest legacy customer falls occurred. And in fact, quarter-over-quarter, we are seeing modest uncovered territory volume growth for the first time since the quest transition. Now that we have a critical mass of the sales team members, 23% of our volume is uncovered versus an average of 31% for 2017. This mix have been trending in this direction since Q4 2017. We believe the uncovered territories have stabilized and will no longer represent a headwind on sales growth. 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. For ASPiRA IVD, the majority of the revenue is 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 now have 131 million lives covered, a 40% of the total population. This includes additional Blues and Medicaid contracts in significant states. In terms of price optimization, our overall price is improving with the reduction of client will, increase in Medicare, third-party contracts and patient pay price. On the Medicare front, the new payment price of 8 97 went in effect on January 1, 2018, and we are seeing better-than-expected results. The average rate teed the third quarter of 2018 was $795 per sample compared to $144 for the quarter of 2017 and $760 in Q2, '18. In addition, our overall percent paid has been improving and improve from 61% in Q3, 2017 to 65% in Q3, 2018. I am now moving on to the third foundation block, which is continuing to build and leverage the utilization of our one-of-a-kind pelvic mass data and specimen repository. As reported on the last earnings call, we have a landmark analysis, which we recently discovered. A recent review literature as well as our internal data, we have identified a market trend that there is lower production of CA125 in non-Caucasian versus Caucasian women. We have confirmed that lower CA125 in our own database of women with pelvic mass and malignancy. And specifically comparing African-American groups, OVA1 is up to two times better than CA125 at a testing all ovarian malignancies. And for the primary ovarian malignancies, it's up to four times better than CA125 using the ACOG recommended cut off. Thus, we believe CA125 should not be used as a diagnostic aide in non-Caucasian woman due to ineffectiveness for cancer detection. I am also happy to report that our abstract was accepted and presented at mid-Atlantic Gynecologic Society meeting on October 26. In general, the feedbacks from the meeting was that this was "new information" and they did not realize the shortcomings of CA125 for non-Caucasian women. A meeting abstract has also been submitted to a National Society and the manuscript has been submitted to a nationally renowned journal, and we are waiting to hear, it's been accepted. In addition, we are looking to embark on additional studies with leading institutions to demonstrate the ineffectiveness of CA125 with non-Caucasian women on larger scale. We believe these studies will establish OVA1 as the most reliable laboratory test to assess the risk of cancer in women with the pelvic mass and will greatly diminish the CA125 has helped for 30 years in assessing ovarian cancer risk. In terms of medical education at the local level, we have also changed the profile of the target KOL to be active working thought leaders in large metro markets. These targeted KOLs are referrals experts to these health care systems in super groups. We currently have five KOLs onboard or in the queue, including New York, Philadelphia, Illinois, Florida and California. And they will be instrumental in driving OVA1 plus option. I'm now moving on to our international studies update. We are primarily focused on prospective studies to validate Overa on these specific populations. The two countries we are focused on is a Philippines and Israel. And the Philippines, we recently cleared the midpoint of a two year prospective Overa study with data on 170 of 380 patients needed for the study or 45%. We believe this prospective outcome study will be a significant contributor towards payer coverage in the U.S. as well. When it's completing late in 2019 and published in 2020. The end goal of the Philippine study is twofold, adoption of Overa into Fillipino health care system protocol and second, a prospective outcome study that can be used worldwide. In Israel, we just signed a payer coverage agreement with Clalit Health Services in Israel. Clalit Health Services is Israel's largest HMO and health provider with approximately 3.8 million insured members or about half of the insured population. OVA1 is being offered as part of the Clalit Mushlam coverage. Clalit Mushlam provides wider access to medical services that members can purchase above and beyond the minimum level of medical services provided under Israel's National Insurance laws. The testing in Israel will be distributed via our distributing partner ProGenetics. We also just signed an initiative to comprehensive study agreement with Clalit Health Services to validate OVA1 Overa and OVA1 plus on the Israeli population. Our technology will be started on the high-risk BRCA population to determine if an earlier stage disease can be diagnosed and this time of surgical treatment can be expedited for improved surgical outcomes for patients with adnexal mass. In Israel, nearly half of 6.5 million Jewish population is of Ashkenazi Jewish descent. The Ashkenazi Jewish population has about 150 or 2% chance of inheriting the BRCA mutation. The lifetime ovarian cancer risk for woman with BRCA1 is estimated to be 35% to 70%. And for woman with BRCA2 mutation, the risk is estimated to be 10% to 30% by 870. Use of OVA1 Overa and OVA1 plus will be studied to determine if earlier stage disease can be diagnosed and if the time to surgical treatment can be expedited. And lastly, we're in the process of finalizing a U.S. BRCA study, which were in discussions in expanding this to Israel as well. We are using OVA1 Overa and OVA1 plus instead of CA125 for routine monitoring of high-risk ovarian cancer patients due to the BRCA mutation. As mentioned previously, 1 in 50 women in Israel are BRCA carriers versus 1 in 400 in the U.S. Understanding how OVA1 Overa and OVA1 plus performance cohort a woman at the highest risk of developing ovarian cancer is crucial to expanding the clinical applications of our test. I would like to now turn the call over to Bob for our financial review. Bob?

Thank you, Valerie. Our total revenue in the third quarter of 2018 was $774,000 compared to $699,000 in the same year ago quarter, an 11% increase. The third quarter 2018 revenue, included $739,000 from product sales of OVA1 and $35,000 of service revenue from ASPiRA IVD. Product revenue increased 12% in the third quarter of 2018 compared to the prior year quarter. 1,981 OVA1 tests were performed versus 1,954 OVA1 tests performed in the prior year quarter, essentially flat. As Valerie discussed, these volumes represent a combination of reduction in uncovered territories and growth in covered territories. We also have our last quarter with an adverse year-on-year compare regarding the legacy customer we have referred to in prior quarters. This customer bottomed out in the third quarter of 2017. We reported declines in revenue, the last 3 reported quarters, and we believe the headwinds of uncovered territory declines and the loss of the legacy client are behind us. Revenues increased from $708,000 in the second quarter of 2018 to $774,000 in the third quarter of '18, representing sequential growth of 9%. This was driven by a 5% increase in OVA1 volume and a 12% increase in price, offset by a small decline in the ASPiRA IVD revenue. Revenue on a per test performed basis was $373 in the third quarter of 2018, which compares favorably to the Q2 reported price of $332 per test performed, a 12% sequential increase. This was driven primarily by a pair contracts being converted to attractive pricing in 2018 as well as a sufficient payment history to enable us to estimate price realization. Total operating expenses in the third quarter of 2018 increased to $2.6 million compared to $2.4 million in the same year ago quarter, representing an increase of 9%. The increase was attributable to the increase investment in sales and marketing resources. Net loss attributable to common shareholders for the third quarter of 2018 was $2.7 million or $0.04 loss per share as compared to net loss of $3.5 million or $0.06 a share loss per share after giving effect of the deemed dividend in the same year ago quarter. Cash and cash equivalents since September 30, 2018 were $11.8 million. The company utilized approximately $2.4 million in cash in the third quarter of 2018. With that, I'll turn it back to Valerie.

Thank you, Bob. Before we open up the call for Q&A, let me emphasize our optimism for building our company for success. In looking back, acquired a Quest transition our key gaps were specificity, platform and go-to-market strategy. And the last 2 to 3 years, we have methodically kicked all barriers down from specificity platform, go-to-market guideline and payers. We are now well through success for the OVA1 plus offering to centralized platforms and now our data to displace CA125. We have timings innovation with a significant investment on our commercial team, and we are now ready to breakout. We look forward to closing the year strong and setting the stage for growth in 2019. Our end goal is to enhance shareholder value by saving lives and saving money for the overall health care system. We are now happy to answer your questions.

Thank you, Lauren. In closing, we believe, we have laid a strong organic commercial foundation in 2018, which will set the stage for a fourth quarter and full year 2019. We are ready to leverage our guideline inclusion 40% of the U.S. population under coverage and had set the stage to drive growth and profitability in time. Coupling this with our decentralized data platform, which will offer OVA1 plus in addition to other disruptive technology in the future, we have created an engine and portfolio platform, which can truly serve the end-user directly and allows realtime impact the patient care. Our end goal is to several large global market with the platform coupled with proprietary science and data tools, 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.

And that does conclude today's conference. We thank you for your participation. You may now disconnect.