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Edited Transcript of VRML earnings conference call or presentation 12-Nov-19 9:30pm GMT

Q3 2019 Vermillion Inc Earnings Call

AUSTIN Dec 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Vermillion Inc earnings conference call or presentation Tuesday, November 12, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chris Goulart

Vermillion, Inc. - SVP of Commercial Operations

* Robert Harry Beechey

Vermillion, Inc. - CFO

* Valerie Barber Palmieri

Vermillion, Inc. - CEO, President & Director

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen and welcome to Vermillion's Third Quarter 2019 Conference Call. My name is Stacy, and I will be your coordinator for the call today. (Operator Instructions) As a reminder, this conference is being recorded today.

Leading the call today are Valerie Palmieri, President and Chief Executive Officer; Bob Beechey, Chief Financial Officer; and Chris Goulart, Senior Vice President of Commercial Operations. 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 plans 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 these anticipated due to the impact of many factors beyond the control of Vermillion. The company assumes no 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 and second quarter 10-Q filed with the SEC for factors that cause actual results to differ materially for 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?

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Valerie Barber Palmieri, Vermillion, Inc. - CEO, President & Director [2]

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Thank you, operator. Good afternoon, everyone, and thank you for joining us today. This afternoon, we will review our third quarter accomplishments, financial performance as well as provide updates on our fourth quarter developments and plans. Our core mission is to transform the state of women's health globally, starting with ovarian cancer. We aim to ensure that women of all ages, stages and ethnicities have the best solutions available to assess their personalized risk of cancer, especially at the earliest stage when it matters most. 39 women die daily in the U.S., and over 400 women die daily worldwide of ovarian cancer, truly a tragedy.

We are working very hard to change these statistics now. We had 4 major goals for the quarter: number one, continuing commercial momentum with OVA1Plus, with all leading indicators pointing to a vast improvement year-over-year; number two, 3 earned media publications of our CA125 disparity data with the core focus on improving the detection of ovarian cancer in African-American women, a much-needed improvement as socioeconomic variables already give these women inferior chances to survive; number three, progress on the pipeline, specifically our serial monitoring Watch and Wait product. This product has a total available market of 0.5 million to 1 million women who are monitored 2 to 4 times per year. This product's value proposition has the opportunity to have even greater clinical and economic impact as only 1 in 10 masses result in cancer and the goal is to find the patients that can actively be managed without surgery. And lastly, updating our payer dossier with the CA125 disparity data, and hitting the annual cycle review from managed care and medical society reviews. Chris will cover Vermillion's commercial momentum in detail, but I just want to summarize the impact of our investment in commercialization.

We have had 3 consecutive quarters of strong growth. In Q1, our volume of OVA1 grew 27% year-over-year. In Q2, it grew 66% year-over-year. And in Q3, we are posting growth of 82% year-over-year. And in Q4, we expect to continue to grow and we have even surpassed the Quest volumes per day with 20 reps having 6 months in the field. Our prior guidance for Q4 2019 via our 8-K on October 15 was 95% growth year-over-year. We are actually going to increase that to north of 100% growth year-over-year. Truly an accomplishment, which, we believe, is directly due to the centralized adoption of second-generation technology, Overa, as part of OVA1Plus, our patient transparency program and payer traction.

I am now moving on to earned media. I'm happy to report that our 2 clinical publications highlighting the disparity of ovarian cancer risk assessment in African-American women between OVA1 and CA125 as well as ROMA have earned significant media results. The earned media coverage began with a Medscape article in July, a Reuters Health article in September, and in the last 2 weeks, National Ovarian Cancer Coalition and BlackDoctor.org both released publications. The number of subscribers we touched are estimated to be 3.6 million, 55 million, 1.5 million and 19 million, respectively, not including social media. We have a few other media outlets in the queue as well. We are just beginning to spread the news, and we are fast-tracking the large African-American study, which is being led by Albert Einstein Medical College in Philadelphia as well. We will be enrolling patients shortly, and we are also launching the study at 6 additional health care systems and key academic sites that have significant interest in exploring and correcting the disparities in ovarian cancer detection in African-American women. More to come as things progress.

I would also like to report some updates on the international front. On the global front, our outcome study in the Philippines is going very well. This 380-patient study is at its 26th month, and we anticipate the study's data collection to be completed by June 2020 with the full study completed in January 2021. This is the first study to review the long-term clinical outcomes of our OVA technology to truly see the impact it can make.

Regarding Israel, I recently met with the study's principal investigator, who is the Head of G1 Oncology at one of the hospitals in Israel's largest health care system, Clalit. This study in 240 patients is in its 14th month and Clalit is willing to add additional sites to the study as well as expand it to include our third-generation technology. In Israel, there is a sizable need to proactively manage patients at a high-risk for ovarian cancer, which includes family history, genetic predisposition and adnexal mass, as 1 in 40 women carry a BRCA variant, which carries up to a 60% lifetime risk of ovarian cancer. We are very pleased with the progress on both studies.

To recap, we are in the early innings of fully commercializing OVA1Plus in the U.S. with our organic sales force. Our second-generation technology, coupled with our data on disparities demonstrating superior performance of ovarian cancer detection in African-American women, is beginning to be impactful. Our end goal is to become the standard-of-care risk assessment tool for all predominant ethnicities globally. We believe 2019 is a major inflection point for Vermillion, with increased commercialization of our new second-generation product, increased media coverage of our disparity data, portfolio expansion and continued traction on payer adoption. At this point, I'd like to turn the call over to Chris to share our commercialization results of the third quarter. Chris?

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Chris Goulart, Vermillion, Inc. - SVP of Commercial Operations [3]

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Thank you, Valerie. I'm pleased to provide an update on our commercial efforts. We believe our two-pronged approach with the decentralized platform channel and the direct sales channel is the right strategy to drive adoption. The decentralized arrangement should help to drive test adoption as well as integrate into the care pathway of the respective institutions in super groups. We will continue to work on this model as we seek to drive wider adoption of OVA1Plus and our expanded portfolio.

Moving on to our direct sales channel. Our sales force is another quarter further entrenched in their respective territory. I am pleased to report that OVA1Plus continues to gain traction in the marketplace. In Q3, the fully staffed sales force made considerable gains with 15% volume growth of tests performed over Q2, an 82% growth year-over-year. We continue to see strong growth in Q4 2019 as well. As you are aware, the summer months generally see a drop-off due to summer vacation. October 2019 continue to gain momentum with 28% month-over-month growth for September. And in October, we are north of 100% year-over-year growth. We expect to see continued growth from our direct sales channel, as new accounts are being opened on a daily basis. Our physician additions continue to grow as they did in Q2. We ended Q2 with an average of 728 physicians ordering per month. During Q3, that comparable number was 808, representing a roughly 11% increase. We continue to add new physicians and the total of ordering physicians in October was 983. October was our high watermark for the year.

In Q3, we are adding a total of 540 first-time attending physicians, which shows that we continue to add new customers. We continue to improve our KOL network in our territory. We have 40 active KOLs. This KOL network, mostly comprised of gynecologic oncologists, has been extremely receptive to our OVA1Plus test. OVA1Plus launched in Q4 2018 and has been largely driven the interest of our KOL community. We feel, at this point, having a couple of KOLs per territory is the correct number and we will add KOLs now on a case-by-case basis. We have also expanded our visibility and footprint at local and national conferences.

This year, we have attended and presented at national conferences, such as ACOG and SGO. We have also begun attending and presenting at many more regional conferences, such as ACOG District Meeting, the U.S. Women's Health Alliance Biannual Meeting, Overcoming Cancer, multiple local OB/GYN society meetings and the Omnia Meeting. We feel that expanding reps, KOLs and conference attendance and participation is a 3-pronged approach to increase awareness and adoption of OVA1Plus.

Now I would like to give more updates on our new products and future products introduction. Number one, as we've talked about on our last call, over 20% of all ovarian cancers are due to a genetic predisposition. The hereditary breast and ovarian cancer panel currently is offered in a stand-alone fashion. We plan to begin incorporating hereditary breast and ovarian cancer onto our OVA1Plus reports in the coming quarters. Furthermore, we believe that we can refine the risk assessment of ovarian cancer by incorporating HBOC into the calculation. We plan to commence studies in 2020 to prove this theory.

Moving on to our OVA portfolio. Last call, we talked about a solution for suspected benign pelvic mass patients, who are in surveillance and are not planned for surgery based on clinical assessment and imaging assessment. Today, approximately 0.5 million to 1 million women in the U.S. have a pelvic mass, which is either monitored for a period of time prior to surgery or the patient does not move forward with surgery. We have developed an algorithm based on 7 protein markers with rule-out and rule-in algorithm. We plan to commence further studies on serial Watch and Wait patient. Typically, this cohort is monitored 2 to 4 times a year with ultrasound and CA125 off-label, which could significantly add to the total available market opportunity per year.

Early indications from our single-use validation of the assay has demonstrated increased sensitivity and specificity for OVA1Plus. Keep in mind, this test will be used for a different population and will complement OVA1Plus. Due to this product now being launched as a serial monitoring test, we need to perform a perspective serial monitoring study to take advantage of this new market opportunity. Hence, we will wait to launch this application after our 2020 study concludes.

In terms of publications on this third-generation product, our abstract was presented last week at the European Society of Gynecologic Oncology in Greece, and we have recently submitted a retrospective 596-patient study on this new product. More to come on the results of the study once published. I would also like to talk about another indication for this new algorithm. We will also be commencing several studies in 2020 to interrogate the HBOC-positive asymptomatic population. The current standard of care utilizes CA125 and a transvaginal ultrasound to monitor these patients every 6 months per the ACOG guidelines. We believe that our 7-protein biomarker capital demonstrates sensitivity and specificity within this cohort, even though this would be tailored to a focused population. We plan to start more population-based studies once we demonstrate proof-of-concept in the HBOC-positive cohort.

And lastly, we are in the planning stages of a large global study to apply a multifactorial assessment of evaluating protein, inherited DNA variances, expression profiling and small fragmented DNA from developing tumors all associated with ovarian cancer in a single sampling method. The goal of this study is to build a more precise molecular profile of ovarian cancer development and risk in asymptomatic women as an early screening measurement for breast and ovarian cancer risk. More to come as we get the study underway. I would like to turn the call over to Bob for a review of our financial results. Bob?

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Robert Harry Beechey, Vermillion, Inc. - CFO [4]

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Thank you, Chris. Let me first state our team is very disappointed with the performance of our stock this year. We'd like to hit 3 major issues upfront, specifically, our cash burn, our stock price and our NASDAQ delisting notice. In terms of cash utilization, we have eliminated the onetime expenses of the second quarter and improved our sales efficiency. The company utilized approximately $3.381 million in cash in the third quarter of 2019 as compared to $3.8 million in the second quarter. The cash utilization for the third quarter includes approximately $200,000 of investment and start-up costs for the launch of the genetics offering. These costs consist primarily of personnel, IT set-up costs as well as legal fees.

Cash and cash equivalents at September 30, 2019 were $14.6 million. As the commercial team continues to gain traction and as we launch new products, we expect our cash utilization to decline as our sales increase and we get returns on the investments we are making. Our focus is to impact the stock price through continued growth and the related compression in cash utilization. We are also driving stock value by building awareness. We are actively performing non-deal roadshows and participating in conferences to educate potential investors on the opportunity facing the company. Our team is committed to driving shareholder value, and we believe the stock price will reflect that over time as we continue to deliver growth.

Regarding our NASDAQ delisting risk, we received the deficiency letter on August 2 from NASDAQ, noting the closing bid price for Vermillion common stock was below the minimum $1 per share requirement for continued inclusion on the NASDAQ. As provided in the NASDAQ Rules, we have 180 calendar days or until January 29, 2020, to regain compliance. We may achieve compliance during this period if the closing bid price of Vermillion's common stock is at least $1 per share for a minimum of 10 consecutive business days. If we fail to regain compliance on or prior to January 22, 2020, we may be eligible for an additional 180-calendar day compliance period. We are seeking to cure this deficiency through improved fundamentals in the coming quarters.

We're taking a number of actions to enhance profitability. Consistent with our core strategy of focusing on early ovarian cancer detection, we are exiting our IVD business. Our offering is too narrow and the business would require a significant investment to expand the offering. We are no longer accepting any new assignments in the IVD business, and we'll finalize all IVD contractual customer commitments in the fourth quarter. Our IVD operations have generally had negative margins, specifically IVD work resulted in a year-to-date negative margin of $493,000 through September 30, 2019. We will be reporting the business as discontinued operations in our year-end financials. More important than eliminating the margin drag is shifting away from IVD work will enable our management team to focus exclusively on growing the ovarian business.

Turning to our financial results. Product revenue in the third quarter of 2019 was $1.24 million, a 68% increase from 2018. Revenue on a per test performed basis was $345 in the third quarter of 2019, a modest sequential decline as compared to $352 in the second quarter of 2019. The decrease was driven by an increase in our mix of patient pay revenue in specific geographies. We have seen the percentage of patient pay stabilize and level off over the last few months. In the third quarter, the percentage of patient pay was 41%, client bill was 8%, Medicare and Medicare Advantage was 17% and all commercial insurers 34%. The patient mix is a bridging strategy as we drive more payer positive policy and contracting. The key here is utilization. The number of OVA1 tests performed during the third quarter of 2019 increased 82% to 3,602 units compared to 1,981 units in the third quarter of 2018. Our gross profit for OVA1 in the third quarter was 53% compared to 36% in the prior year and 45% in the second quarter of 2019.

Gross profit on product revenue was $653,000 for the third quarter 2019 compared to $263,000 for the same period in 2018, a 50% increase in the rate and a more than doubling in absolute value. We expect the gross margin to continue to expand as we ramp-up volume and achieve scale. We have the adequate capacity to scale up to meet demand to support significant growth with little or minimal fixed or semi-variable costs added. We do not expect to need any facility or equipment expansion in the near future. Total operating expenses for the third quarter of 2019 were $4.186 million compared to $4.539 million in the preceding quarter. The sequential decline from the second quarter of $356,000 was primarily a function of the absence of the onetime nonrecurring costs noted in the second quarter.

I would like to reiterate our confidence that we will continue to compress our cash utilization and that our team is committed to achieving cash flow breakeven and ultimately meaningful profitability. I'll now turn it to Valerie.

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Valerie Barber Palmieri, Vermillion, Inc. - CEO, President & Director [5]

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Thank you, Bob. Before we open the call for Q&A, let me reiterate our optimism for building the company for sustainable growth, leveraging our infrastructure and driving profitability. We are also executing quickly on product development for our larger mission, which is to serve the 20 million women in the U.S. with pelvic masses. Starting with ovarian cancer risk assessment, serial pelvic mass monitoring and eventually tackling the largest disease, endometriosis. Keep in mind, the HBOC monitoring market is incremental to this market, and this product will be for women with and without a mass.

Ovarian cancer accounts for more deaths than any other cancer of the female reproductive system and is the only gender-specific cancer with greater than a 50% mortality rate. Our work and products are at the forefront of changing the standards of care and detection of ovarian malignancies. We believe we are helping close the gap in detection, and more importantly, improve survival for women.

For Q3, we set out with 4 major goals: number one, continued commercial momentum with OVA1Plus with all leading indicators improving vastly year-over-year; number two, earned media of our CA125 disparity data; number three, building a pipeline portfolio, which includes the platform to expand in a decentralized fashion; and number four, lastly, driving payer adoption as we have quite a few items in the queue. We have accomplished all 4.

In terms of 2020 guidance, we are focused on 4 key objectives: Number one, building upon our unit ramp and revenue ramp with driving awareness of our second-generation technology and new disparity data; number two, innovation with evidence development of our third-generation algorithm for our Watch and Wait product, HBOC monitoring and OVA360 screening studies, very large market opportunities; number three, leveraging our overall infrastructure to drive profitability; and lastly, continued financial discipline to get to cash flow positive. In the near term, we believe OVA1Plus coupled with our new disparity data and genetics will become the standard of care in pelvic mass risk assessment for ovarian cancer. For the longer term, we believe OVA360, including genetics and proteins and other modalities, will be the state-of-the-art risk assessment for gynecologic disease, which cannot be assessed via traditional biopsy.

In time, our goal is to become the liquid biopsy standard for these diseases, inclusive of all ages, stages and ethnicities. It is now time that all women of every socioeconomic background receive the best possible care, and we are proud and excited to make that happen. We are now happy to open up the call for Q&A and answer any of your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from [Carter Worth].

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Unidentified Analyst, [2]

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Appreciate all the efforts. Two questions, if you would be so kind. With your current cash position and your operational trajectory, do you anticipate the need to raise capital again?

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Valerie Barber Palmieri, Vermillion, Inc. - CEO, President & Director [3]

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Thank you, [Carter]. Thank you for attending, and thank you for the question. I would say that where we are right now in terms of growing our top line and improving our bottom line, that is not in our foreseeable future. We are continuing to make headway with utilization as you see and we've actually increased our guidance for Q4. So that is our plan.

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Unidentified Analyst, [4]

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Okay. And then you mentioned breakeven, if you're able to say or when would you anticipate as close as you can when that might occur? And what assumptions are implicit in the answer?

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Valerie Barber Palmieri, Vermillion, Inc. - CEO, President & Director [5]

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Sure. Well, I think 2 things. One is, is that we're on a ramp that we're 6 months in the field with the current sales force in terms of them having 2 quarters of education and experience. So October is actually -- the ramp in October has been greater than we anticipated. So I would say that in terms of breakeven, a lot of that, again, goes back to top line and bottom line. We want to get into the ZIP Code of, if you kind of just do the run rates on where we are in October and you kind of say where are we right now, run rate-wise, let's just say, we're in that 16,000 range or so, 16,000 to 17,000 range. We want to get closer to the 20,000 to 25,000 to breakeven. But that also is, I would say, affected by also the genetics. Keep in mind, genetics is accretive to our business in a sense of we're at the same call point. And our end goal is to get our customers to order both OVA and genetics. So genetics could actually quicken the breakeven. If it's OVA1 only, it's in that ZIP Code directionally.

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Operator [6]

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Our next question comes from [Greg Venit].

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Unidentified Analyst, [7]

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It looks like you guys are doing a lot better. I'm trying to understand, is it 25,000 tests of OVA1 per month to breakeven?

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Valerie Barber Palmieri, Vermillion, Inc. - CEO, President & Director [8]

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No, no, no. So we want to get to an annualized basis of the 20,000 to 25,000, somewhere in that ZIP Code. Also depends on our price. So we are directionally shooting for and if it's OVA1 only, again, probably closer to the 25,000, we add in genetics. It helps us tremendously. So that's directionally where we're aiming for.

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Unidentified Analyst, [9]

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And I'm trying to remember the run rate that you were in October, you announced in your scripted remarks was -- what was it, 6,000?

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Valerie Barber Palmieri, Vermillion, Inc. - CEO, President & Director [10]

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No. We actually -- in our run rate in October -- so we did 2 things. On October 15, we said that we were actually running -- Q3, we did 82% year-over-year and in October, we had 95%. We're -- and that was by the middle of October. Now we're considerably north of 100%. So a lot of this is driven by -- we're still in an active, I would say, fast-growing process. So I do think that sometimes Q4 tends to be with deductibles and things, people tend to go to the doctors more. So it could be a function of seasonality as well. But October is heading north of 100%.

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Unidentified Analyst, [11]

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Yes. I don't want percent. What was the number? You said, to breakeven cash flow, you need 20,000 annual, 20,000 to 25,000.

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Valerie Barber Palmieri, Vermillion, Inc. - CEO, President & Director [12]

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Right. 20,000 to 25,000 -- closer to 25,000 if it's OVA1 only. If we add in genetics, it's going to be higher. I mean lower. The number will be lower.

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Unidentified Analyst, [13]

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The number of OVA1 tests that you did in October were how many?

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Valerie Barber Palmieri, Vermillion, Inc. - CEO, President & Director [14]

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We didn't state the actual number, Greg. We just basically gave a direction in terms of growth.

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Unidentified Analyst, [15]

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What was the number of OVA1 tests you did in September?

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Valerie Barber Palmieri, Vermillion, Inc. - CEO, President & Director [16]

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Well, what I could do is I could tell you what the number of OVA1 tests we did last October to give you a sense. So the number of OVA1 tests we did last October was 689. And the number that we did in September...

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Unidentified Analyst, [17]

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689?

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Valerie Barber Palmieri, Vermillion, Inc. - CEO, President & Director [18]

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689, yes.

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Unidentified Analyst, [19]

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And the number that you did this past September was how many?

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Valerie Barber Palmieri, Vermillion, Inc. - CEO, President & Director [20]

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We haven't broken it out by month, but I will tell you that for the quarter, it's 3,602 and for the month, we're looking at 1,187 for the month of September.

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Unidentified Analyst, [21]

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Okay. So you -- in September, you're at a run rate of roughly 12 -- a little bit over 13,000 tests a year on an annualized basis.

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Valerie Barber Palmieri, Vermillion, Inc. - CEO, President & Director [22]

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Yes.

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Unidentified Analyst, [23]

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So you need 100% growth before you -- you need 100% growth or you're going to run out of cash. You...

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Valerie Barber Palmieri, Vermillion, Inc. - CEO, President & Director [24]

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Yes. So right now, we're on a run rate of about 16,000, let's just say, of annual run rate, and we want to get, depending on the mix of genetics and OVA, that will -- we will get to breakeven. So if we get more genetics that OVA1 number can be lower. If we do not get, we're currently just -- we just started marketing genetics in Q3. So -- but if you just get OVA1 only, then that number is closer to 25,000. And just to give you a -- if you kind of say, okay, what does that look like per quarter, you're looking at -- if you kind of just say we have 4 even quarters, you're looking at about 6,000 a quarter or so. So yes. So we're doing -- it's a -- and we got to continue the growth trajectory, but we're right now in the ZIP Code of about 16,000 right now.

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Unidentified Analyst, [25]

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Okay. So you need to continue the percentage growth rate. If you continue that in the next year, you might make it?

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Valerie Barber Palmieri, Vermillion, Inc. - CEO, President & Director [26]

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Yes. Yes. Correct.

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Unidentified Analyst, [27]

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Is there any other competitor out there that's offering something similar? What's the landscape look like?

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Valerie Barber Palmieri, Vermillion, Inc. - CEO, President & Director [28]

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No. So the landscape, just to give you some background, so there's 2 competitor products, CA125, which is the standard, which we are replacing, the 40-year old standard. And then there's another competitor product, which is called ROMA. And ROMA is very similar to CA125, and that is a tumor marker. So it really does not perform much differently than CA125 and picks up later stage and also picks up more epithelial cancers than non-epithelial cancers, which impact non-Caucasian women. So really, in terms of competition, it's really CA125. ROMA has very little market. It's extremely small. So it's really building awareness, is really our key goal and making people aware that there is a better test.

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Unidentified Analyst, [29]

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So on previous calls in the past or previous press releases, there's always been talk about trying to get insurance coverage for the test. Is this test now covered by all insurance companies?

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Valerie Barber Palmieri, Vermillion, Inc. - CEO, President & Director [30]

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Yes. So we have about 51% of the population, 167 million lives covered. And we want to get to the mark of about 200 million. So that's something that we're actively pursuing. But we have about 167 million lives covered right now. So it's -- we've made considerable headway in terms of the last 24 months.

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Operator [31]

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Valerie, there are no further questions at this time.

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Valerie Barber Palmieri, Vermillion, Inc. - CEO, President & Director [32]

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Okay. Thank you, Stacy. In closing, we now have a strong commercial foundation in place, and we are very excited about our future. With a sizable commercial footprint, a guideline-endorsed and differentiated test, a complementary portfolio of tests within the same call point, and over 50% of the lives under coverage, we believe we are in a position to support continued growth and profitability. Our end goal is to serve a large global pelvic mass population and overall women's health market with a platform coupled with proprietary science and data tools, which will drive better health and well-being to each patient we serve.

Thank you for joining us today, and thank you for your support and interest in Vermillion.

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Operator [33]

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This concludes today's conference. Thank you for your participation.