NeoGenomics' CEO Discusses Q4 2012 Results - Earnings Call Transcript

| About: NeoGenomics Inc. (NEO)

NeoGenomics, Inc. (NASDAQ:NEO)

Q4 2012 Earnings Call

February 14, 2013 11:00 am ET


Doug VanOort - Chairman & CEO

Steve Jones - EVP, Finance


Matt Hewitt - Craig-Hallum Capital Group

Kevin DeGeeter - Ladenburg Thalmann

Mark Zinsky - 21st Century Equities


[Call Starts Abruptly]

Doug VanOort

…ROS1 gene rearrangement for non-small cell lung cancer. In addition, we recently introduced the NeoARRAY SNP/Cytogenetic profile as a molecular carrier type that extends conventional cytogenetics and FISH testing for both hematologic and solid tumor cancers. We are just one of a few commercial labs offering this test today. Many of these products were introduced in the second half of 2012 or in the fourth quarter and we, therefore, expect revenue gains to build as we move further into 2013.

While remaining cost conscious we have significantly increased our investment in innovation as a strategic initiative for NeoGenomics. In 2012, we increased our spending on R&D by about four times the 2011 level to approximately $2.3 million. That’s a large increase for our company, but our R&D team is extremely efficient and has been very productive. We believe that constant innovation is important and we will continue to invest in exciting new products.

In today’s healthcare environment being a lost cost provider is also important. To accomplish this we have invested in quality management, process management, lab automation, information technology and in our people. By providing outstanding quality and service at the low cost we believe we can continue to retail clients and drive incremental profit with volume growth. These investments in quality and process improvements are already beginning to pay off. Cost per test was down a 11% in the fourth quarter compared with last year and is at its lowest level in our history.

The number of test processed per employee increased by 15% from last year’s fourth quarter to its highest level in our history and tests sent out to other laboratories have been virtually eliminated.

The productivity of our sales team increased dramatically such that 18 sales representatives generated $16 million of growth for 2012 and achieved the highest level in our history. And our service levels improved or remained at industry leading levels based on our measurements of turnaround time and client feedback.

Similar to innovation we believe that constant investment in process improvements, quality and cost reduction initiatives are important, and we made progress toward our goal of being a low cost provider in each of our key testing labs.

Let’s move now from a look back to look ahead to our plans for 2013. There are three primary areas of focus for our company in this coming year, growth, productivity and innovation. On the growth side, we enjoyed results from a very productive sales team in 2012 with about two-thirds of our team above their quotas and we intend to continue to drive excellent sales results with great productivity from the team in 2013. In addition, we’re investing in our sales and marketing capabilities and have already added four experienced professionals to the team in the first quarter.

We will leverage our one-stop shop capability to strengthen our strategic partnerships with pathology practices and hospitals across the country. We are focused on helping clients to grow and prosper in their local markets with our comprehensive menu. Our goal is to make it easier for clients to do business with just one cancer genetics lab and allow NeoGenomics to gain a larger share of their business as a result. In addition to the pathology market, we are also selectively targeting physician practices either with our pathology clients or directly depending on local market dynamics.

Our success here is due to the flexibility of our PC based business model and enabled by our Laboratory Information System. We also are focused on generating growth from all the new products we introduced in 2012. We intend to realize significant revenue in 2013 from products that we’ve launched over the last two years and have detailed commercialization plans for each of those new products.

Lastly, we believe that all of the recent changes in reimbursement in our industry may serve to accelerate the consolidation that’s happening in our industry, and we have begun to take a more active approach to exploring acquisition opportunities.

Despite the continued pressure on reimbursement we aim to increase our gross margins from their current post TC Grandfather level of about 43% this year. Certainly continued volume growth will help, but we have plans to continue to increase productivity and lower our overall cost per test. Our efforts to implement bar coding and scanning technology will begin to bear fruit this year. We also have numerous IT enhancements that will help us to process more work without significant additions to our workforce.

Our best practice teams are poised to launch process and quality initiatives including implementation of Lean process initiatives to even more aggressively drive down the cost of testing.

To execute those plans we’re investing in our quality processes and particularly in information technology. In IT specifically we will add four physicians to the team in this very first quarter.

Our continuing investment in R&D will result in additional new products for 2013. We already launched four new molecular tests so far this year and are working on launching next generation sequencing tests for a variety of cancers. As such, we expect to have a next generation sequencing product on the market by the end of Quarter 3. We also are about to introduce a new and improved genetic test for melanoma, and this test has improved characteristics for performance compared with our existing test.

And last but not least, we are also continuing our development of a proprietary test for prostate cancer on plasma and urine. So far, we've completed the trial with about 120 patient samples to validate the promise of this test and we hope to publish our results in the coming months. The early results are promising and there is still much work to be done.

In our opinion, NeoGenomics is increasingly becoming a leader in the growing cancer genetic testing market here in America. Our rapid growth shows that we are gaining share and the market is recognizing our progress.

We are making excellent progress building and developing our company even in a difficult environment for the laboratory industry in general. We believe our key laboratory disciplines of cytogenetics, FISH, flow cytometry, IHC and molecular testing are in fact among the very best in America, and we continue to invest to make them even better.

Our investments in R&D have already resulted in new test coming to market and are positioning us to drive growth in the future periods.

We remain very pleased and proud of our company’s quality and service levels and we believe our consistently strong service levels help to differentiate us in this industry. And we are intensely focused on maintaining our profitability. We believe that a combination of continued volume growth, productivity gains and cost reductions will helps us to achieve profitability again. Our teams are excited about the company as prospects and we are intensely focused on continuing our growth momentum.

So, I’ll turn it over to Steve now to comment more fully on our financial results.

Steve Jones

Thanks Doug. I’ll start by reviewing some of our financial and operating metrics for the fourth quarter, and then I want to briefly touch on the significant highlights of our full year 2012 results and review our guidance for 2013, and we want to open it up for questions.

Q4 2012 revenue grew by 16% to $14.9 million on 35% test volume growth. As a result of the TC Grandfather exploration and certain mix changes, average revenue per test declined by almost 15% from Q4 2011, which is why revenue growth in keep pace with the volume growth. As we have discussed extensively on previous calls, the expiration of the TC Grandfather Clause on June 30 impacted about 18% of total revenue which resulted in about a $1.3 million per quarter reduction in revenue beginning in Q3. Incidentally, the 2.7% sequential drop in our average revenue per test to $488 in Q4 $502 in Q3 has more to do with a larger mix of clinical trial tests from our CRO division in Q4 than anything else.

The number of clinical trial tests included in our Q4 results is usually greater than other quarters because there is always a mad rush at the end of the each year by pharma companies to finish off the CRO projects to use up the budgets they were allocated. Indeed, low priced CRO test were responsible for approximately 60% of the sequential decrease in AUP in Q4 from Q3. The remaining 40% of this decrease was largely due to the fact that molecular testing revenue remains the fastest growing component of our revenue and molecular AUP is significantly lower than our overall corporate average.

The real story for us in Q4 was the volume growth and operating leverage we were able to achieve. Our 35% volume growth remains the fastest in the country of the labs that have reported results so far. It is extremely gratifying that we continue to gain market share.

On the operating leverage side, the numbers speak for themselves. Despite the 15% decrease in average unit price we grew our adjusted EBITDA at a rate that was faster than our volume growth and more than twice our revenue growth rate. We did this by unlocking further productivity gains, managing our costs, keeping the growth in our SG&A in check.

Productivity as measured by the average number of tests completed for laboratory FTE actually increased by 15% versus Q4 2011. This is on top of the 10% year-over-year improvement in productivity recorded in Q3, the 15% reported in Q2, and the 28% reported in Q1 2012. These are strong productivity growth numbers in comparison to many larger companies that get just 2 to 3% annual improvements in productivity.

The productivity and process improvement resulted in a gross margin of 43.2% for the quarter which is just 2 percentage points below the 45.2% gross margin reported in Q4 2011. To only have a 200 basis point decrease in gross margin in the face of a 14.6% decrease in average unit price is truly a significant accomplishment. Sequentially, the improvement in gross margin was 170 basis points from the Q3 2012 number which is ahead of where we thought we’d be at this time.

As we discussed on the Q3 call, we expect we can fully absorb the TC Grandfather expiration impact to our margin within a few quarters by continuing to focus on productivity and process improvements.

As Doug mentioned, we have created a number of best practice teams to really go after incremental cost savings and we believe we can reduce our overall average cost of goods sold per test by at least another 5% to 10% from the level of reporting Q4 of 2012 by the end of Q4 2013.

For those of you that have visited our offices you know that we measure everything in the NeoGenomics and the entire company is focused on achieving 15 to 16 new goals relating to critical success factors each year and that everyone in the company has incentives tied to meeting these objectives. “NeoGenomics way" of managing our laboratory operations works and works well and we expect to continue to unlock a lot more productivity and process improvements in 2013 and beyond.

Turning now to SG&A, total sales and marketing expenses actually decreased by $109,000 or 6% versus Q4 last year despite the $2 million increase in revenue. Now that we have our sales and marketing process working well, we've begun adding experienced sales professionals to our sales and marketing team. We finished 2012 with 18 reps and we have already hired four more thus far in 2013.

R&D expenses in the fourth quarter increased by $320,000 or 251% versus Q4 of 2011. This increase in R&D spending is directly related to the significant increase in our molecular test expansion activities and the new product development initiatives associated with our licensing agreement with Health Discovery Corp.

As we discussed in the press release, we launched a number of new tests in 2012 and we expect these new tests to drive growth in 2013.

The remaining general administrative expenses increased by $567,000 or 16% from Q4 last year primarily as a result of increases in personnel and incremental depreciation expense versus last year. In addition, SG&A expenses included approximately $85,000 of one-time expenses associated with our uplisting to the NASDAQ stock market.

Net loss for the quarter was negative $113,000 or $0.0 a share compared to net income of $152,000 or $0.0 a share in Q4 of 2011. This decrease in profitability is due entirely to the loss of approximately $1.3 million of revenue from the unit price decreases that accompany the TC Grandfather expiration.

Depreciation and amortization was $1.1 million in the fourth quarter and non-cash stock based compensation was $99,000 which resulted in adjusted EBITDA of $1.4 million or 36% increase over the $1.1 million reported in Q4 of 2011. Thus although net income was down in Q4, adjusted EBITDA saw a nice increase year over year.

We finished the third quarter with 268 full time equivalent employees and contract doctors as compared to 265 at September 30 and 238 at December 31 the last year. Our accounts receivable balance net of the allowance for doubtful accounts was $14 million at December 31, up approximately $2 million from the balance at September 30.

Our AR balance expressed in terms of day sales outstanding was 87 days as of December 31, up 9 days from the level reported at September 30. The increase in DSO was mostly due to the expiration of the TC Grandfather Clause. As we have discussed before, we now have “client bill” our hospital clients for the test impacted by this regulatory change when we typically are only able to bill our hospital clients once per month. In contrast, we bill Medicare everyday and clean claims are typically paid in four weeks. This has added approximtely45 to 60 days for the collection process for the approximately 18% of our revenue impacted by this regulatory change and added considerably to our total average DSO.

The Q4 DSO was also impacted by the elimination of the Blue Card program by Blue Cross Blue Shield which means we now to have to bill all Blue Cross Blue Shield claims for the Blue Cross Blue Shield plan in which the patient is actually enrolled, whereas previously we were able to build a plan in the state where the laboratory work was performed under the Blue Card program. There are 43 different Blue Cross Blue Shield plans throughout the country; in many cases we now have to bill as an out of network provider. This is resulting in additional complexity in our billing process that we are working through, but I can report that we are typically getting paid on these claims.

To address the recent increase in DSO, we amended our bank line in January to open up another $1 million of availability on our accounts receivable facility.

I want to turn now briefly to our full year 2012 results before I discuss the guidance we issued this morning. We are very pleased to have achieved 38% revenue growth on 50% volume growth despite the impacts of the TC Grandfather expiration. We’re just so proud of the way our team handled this major regulatory change which was literally imposed on us with no notice in late February after all the budgets and plans had been finalized and approved for the year.

We’re proud that we were able to suffer an unexpected 8.4% decrease in the overall average unit price during the year and still increase our gross margin albeit modestly in that same year. That’s right; our gross margin actually increased 44.8% in 2012 from 44.7% in 2011 despite the 8.4% decrease in prices. Perhaps even more important, however, is that we achieved 181% increase in adjusted EBITDA by unlocking the leverage in our business model.

To put that into context our team was able to grow adjusted EBITDA almost five times faster than revenue growth in a year when we suffered an 8.4% decrease in average unit price which took $2.6 million of revenue off the top-line for the year. We estimate that the impact to our bottom line in cash flow was 90 plus percent on this revenue decrease which translates into about $2.3 million of impact to earnings in cash flow or about $0.05 per share of EPS impact. Yet, we were still able to post our first full year of positive net income in our corporate history.

If you recall in our Q4 2011 conference call last February which occurred just prior to the legislation being enacted the sunset of the TC Grandfather Clause, we issued our initially guidance for 2012 of $54 million to $59 million in revenue with $0.02 to $0.04 per share of earnings. Even after losing $2.6 million in revenue to the regulatory change we beat the top end of our initial revenue guidance for the year and the impact of our bottom line was nowhere near the $0.05 per share that you would have otherwise expected.

I'd like to turn now to the outlook that we issued this morning in terms of Q1 and 2013 guidance. For the full year, we’re expecting $68 million to $73 million of revenue and $0.03 to $0.05 per share of net income even as we continue to fund certain growth initiatives. As stated in the press release, this guidance is predicated on the assumption that there will be no more material hiccups in reimbursement in 2013.

For the first quarter of 2013, we expect revenue of $15.3 million to $16 million and $0.0 to $0.01 per share of net income.

We’ve begun to hire additional personnel so we expect that d our SG&A expenses are going to go up largely from Q4 levels. Investors should not expect that we will drop anywhere close to the same percentage of incremental revenue to the bottom-line that we did from Q3 to Q4; that was an anomaly. However, we do expect to return to profitability in Q1.

In addition, investors need to remember that our Q4 2011 and Q1 2012 numbers had a test volume turbo charger on them because one of our larger customers was integrating a number of additional practices they had purchased into their mix, and so we received a significant bump in volume during that time. Also the reduction in unit prices as a result of the TC Grandfather expiration is going to be a headwind to year-over-year revenue growth for the next two quarters.

At this point, I'd like to close down our formal remarks and open it up for questions. Incidentally, if you are listening to this conference call via webcast only and would like to submit a question, please feel to email us at during the Q&A session, and we will address your questions at the end if the subject matter hasn't already been addressed by our call-in listeners.

Operator, you may now open up the call for questions.

Question-and-Answer Session


(Operator Instructions). Your first question comes from the line of Matt Hewitt. Your line is open.

Matt Hewitt - Craig-Hallum Capital Group

Good morning gentlemen. Thanks for taking my questions. Steve, first off, congratulations on the very strong pipeline that you were able to launch new products out of last year. I am curious if you could give us a little bit more color about your expectations for this year. You've provided some information on the few other tests, but do you except to launch a similar number of tests here in '13?

Doug VanOort

Well, I guess I would say two things in response to that. First, one of our focus areas this year is to commercialize the test that we launched in 2012 because that was a very productive year for our R&D team. And so, we are very intent on capitalizing on the 10-color flow cytometry, the molecular test, the immunohistochemistry and image analysis test, the Barrett's test and so forth, and that is a key area focus for us.

In terms of new products in 2013, as I mentioned in my remarks, we have already introduced four new molecular tests. I am not sure that we'll introduce 29 but we are certainly going to introduce a number of medically necessary important molecular tests this year and as well as panels. We have a very, very good process for assay development in our company, which we are very proud of. And I think you will see us to be quite productive in that area.

The other thing that we are working on is a couple of exciting areas. One is next generation sequencing, which is the next step in what we currently do. We currently use Bi-directional Sanger sequencing for a lot of our testing. And well, we expect to have panels, next generation sequencing panels for a lung, colon, gastric, breast and other tumors. And I think there will be a lot of leverage also that happens with volume with next generation sequencing for us. We are also developing and working very hard on some of these tests like prostate cancer. So, I think you will see some exciting tests launched by NeoGenomics in 2013.

Matt Hewitt - Craig-Hallum Capital Group

Doug, that is great color and thank you for that. Something that has come up here recently and you touched on it briefly in the prepared remarks, the Palmetto MDX codes that were released here recently. Obviously, there is still a lot of questions about that, but the work that you have done since they were announced, what kind of a head-wind do they represent, if any? And are there leverage that you could pull to work around those new codes?

Doug VanOort

It is a great question. And I want to emphasize that this is a rapidly evolving very current topic and that we are still trying to get clarification from Palmetto on some of the guidance. The rates were a little lower than we expected. But there is a lot of question about whether they include ancillary services like microdissection, which are typically performed as part of the test, or whether microdissection will continue to be reimbursed separate from the test.

Some of the rates they published just do not make any sense at all, the R&D expected to include that. So, we are working with a group of very, very competent billing consultants to work with Palmetto to get those questions answered.

I would say generally speaking, our view is that molecular testing is going to be going more and more toward panels over the next 12 to 24 months, and that as we get more and more into doing molecular panels any decrease in the average revenue for a given test is probably more than made up for adding medically necessary tests to the panels that are being offered. Net-net, we think there will be a small headwind on this this year but overtime we think this is kind of a blip on the radar screen. And keep in mind that we have more volume in molecular and we are considerably more profitable. And so, we are probably in the unique place of multiple labs out there. And there are molecular labs already soundly profitable and we expect that they continue to get even more profitable.

Matt Hewitt - Craig-Hallum Capital Group

Okay. Thanks. May be one more and then I will jump back in the queue. You mentioned also in your prepared remarks about the Blue Card elimination. With the 43 different plans, is there an opportunity for you to get in network or are you kind of stuck out of network indefinitely there?

Doug VanOort

There is an opportunity and we have just a really, really comprehensive managed care program at Neo. We have already gotten in network now and I think we have 10 Blue Cross plans total up from four, when this was announced last year. There is handful more that are still in process. There are some plans that have stayed and they are not letting anymore labs and they have just been very tough about that.

We have found the receptivity that NeoGenomics is considerably different that it was when we first went around and visited these folks five years go because we now can show them how our tests have saved the healthcare system money. And people are very interested in creating enough of a competitive landscape so that the big labs cannot just dictate pricing to them. And so, I would say that we have done better than I thought we would do in a shorter amount of time so far. But the low hanging fruit is coming to the end year and the rest is going to be a slog through the mud.

The real surprise, the pleasant surprise in our case is that we have been able to collective and have a network there, in some cases more that what we are getting under the Blue Card Program. There are one or two states that are paying the patient and so we got to go chase the patient, that is a giant pain in the neck. But we are working through it, and this is one of those things that is going to be a process not an event.

And I would say overall, we are probably a little further ahead of where I thought we would be at this point in time, but I do not believe this is going to have a material impact our financials.


Your next question comes from the line of Kevin DeGeeter. Your line is open.

Kevin DeGeeter - Ladenburg Thalmann

Congratulations on a really nice fourth quarter, very clean. Couple of things, I was just hoping for a little more clarity on. Could you just talk about the four sales folks that you added sort of geographically where they tend to fallout, how do we think about that in the context of sales force expansion over say the next 24 to 36 months?

Doug VanOort

Yeah. So, one of the things that we have decided to do strategically is to focus little bit more on the hematology/oncology physician group generally. And so, we -- you know that we are largely a hematopoietic based company. What we are trying to do is to add to our sales team experts in hematology/oncology who can help our sales folks around the country sell through pathology practices that are our clients or in areas that we do not have a pathology client presence directly to the Hem/Onc groups.

I think we have mentioned before that we believe that we have a pretty powerful business model, and the business model is enabled by our ability to perform a technical component, the professional component or both in a variety of different methodologies. And this is increasingly important as physician groups, hematology/oncology groups consider growth and they are consolidating themselves, and the size of these groups is enabling them to think of about internalizing some testing. And so, these are more complex sales. And so, the people that we have brought on board are capable of more consultative sales and helping our existing team to penetrate this hematology/oncology market more forcefully.

And so, we have added a person in each region. We have three regions of our country, as we have broken down the sales force, and we will continue to add in that area as we look forward. Now, we add to our sales team pretty deliberately. So, we are not trying to go out hire 10 people all at once. We brought on four. We are going to train those people. We have a way of doing things in our sales force. And once we feel that those people are acculturized to our way of doing business and productive then we will consider adding more.

Kevin DeGeeter - Ladenburg Thalmann

Okay. And on different note, Doug, you commented in the call that you are thinking proactively about business development strictly in the context of involving landscape in the industry. Can you kind of sketch out for us certain parameters as to what types of businesses and assets are of higher interest and perhaps what type of assets and businesses would not be the right fit for NeoGenomics?

Doug VanOort

Yeah, sure, Kevin. Well, I would say, first of all, that I think that at this point we have the management team and the infrastructure and processes in place to be able to integrate acquisitions. And I would say that we probably weren’t there before, but I feel like we are now.

So, in terms of the most exciting acquisition candidates, I would say that one where we would derive a lot of cost synergies would be high on our priority list. Along with that some geographic expansion, some cost synergies as well as geographic expansion, and adding to our geographic density would be important to us.

Another area that would be important is a company that provides an opportunity for us to leverage the new products that we’re introducing. So, some of these new products are targeted to physician groups or areas that we don’t have a lot of sales presence. So that would be interesting to us as well.

What you probably won't see us doing is investing in a company in which their product line or portfolio takes a long time to commercialize or is dependant on some reimbursement coverage decisions that are yet to come or that reimbursement is in question.

So, we’re very practical about this and we believe that there are opportunities for our company to grow profitably through acquisitions, but there aren’t a lot out there that are available -- but we’re now beginning to work more aggressively.

Kevin DeGeeter - Ladenburg Thalmann

And maybe one more quick one from me then I’ll hop back in the queue as well. Can you just maybe walk us through some of the more identifiable features that may cause revenue for 2013 to be at the higher or the lower end of the range? Are there one or two primary leverage that we should be thinking about or that you are thinking about when you constructed the guidance?

Steve Jones

So, obviously on the downside reimbursement is the thing that we always live in fear of. I think we all as an industry learned that congress can and will do whatever they want, and in the entire TC Grandfather legislation from first conception to being signed by the President took eight days last year, literally health staffer added two sentences into a pending bill unbeknownst to the lab industry and it was signed in the law after passing in the house and senate in eight days.

So that’s obviously something I will say that the industry has resin and created a human cry an organized and much greater and more deliberate law being presence than perhaps we have before, and I believe that most of the key healthcare staffers on the Hill are very aware that they cant keep taking it out of the labs hide. And so, the only good that's come out of this is we're a lot more organized as an industry than we used to.

On the upside where we are is that our sales force is working well. We had two thirds of our reps meet or beat quota last year which is pretty stunning number and that we believe that our productivity numbers are directly related to our ability to continue to launch new and innovative products. And so, we just launched a whole bunch of new products. Obviously, we have always tried to be rationale and realistic in our guidance numbers, I think you don’t get much credit for having really rosy guidance out there but you do get a lot of credit for being disciplined. And as Doug mentioned, we have consistently at least met the guidance or beat the guidance in most of the last, I don’t know, for eight quarters now.

And so, we’re pretty deliberate in our process; we don’t want to get over our skis and we don’t want expectations to get over our skis. All the analysts on this call should not put anything other than something in our guidance range in their reports because that’s the prudent thing to do. Doug, do you want to add anything to that?

Doug VanOort

No, I think that’s good, Steve. I think that the two things I would say that could accelerate our progress are success with some of the new products that we've launched over and above what we currently expect. And the second thing is our ability to maybe penetrate some of these large Hem/Onc practices that we might be after, but I think those are the upside opportunities for us.


And your next question comes from the line of [Derrick Keirstead]. Your line is open.

Unidentified Analyst

Hi guys, thanks for taking the question. So just curious on the guidance, the revenue guidance, what types of assumptions are built in there high versus the low end?

Steve Jones

Well, we have a general idea of how our business is going to unfold this year; we have a budget that’s going to run by our board of directors. We believe that our growth assumptions within that budget are reasonable.

I would tell you one of the things we made an assumption on in building our budget and our guidance is that there would not be any further material changes in reimbursement. I believe we’re going to operate in the, call it the, 485 to 495 average revenue per test here for the balance of the year absent any huge changes in mix.

I think that we did dial in a few more sales forces heads that Dough talked about; we've already hired four so far this year. But you need to keep in mind that it takes a full year to unlock the real productivity for a new sales force hire. Even the experienced reps that come from other companies they have to learn our products and our processes and go out and saturate the accounts and what not. And so, the new reps won't be anywhere near as productive as the older reps. And then, you have to make some sort of assumption about how much revenue you’ll get from new products that were launched. Again, the sales folks are selling whatever the clients want.

So if they’re selling the new products generally I mean they won't be scaling as much as the old products and so its not a additive process. So, its the new products will take away from some of the other revenue that they would have otherwise been selling. So, it's unfortunately not the case where you can just say okay we’re going to $10 million or revenue from new product and that going to be additive to what they otherwise would have done. There is some element of the additive nature of that but it’s not one-for-one. Dough, do you want to add anything to that?

Doug VanOort

No, I think that’s well said, Steve. I would say that we try and I think in 2012, as Steve said, we try to meet or beat guidance every quarter. We try to do what we say we’ll do as part of our company culture, and obviously would help to exceed expectations, but we think that our guidance is reasonable given where we are.


Great, that makes sense. And then, with respect to the strategic move to sell through to the Hem/Onc and some areas, I was just curious how are you going to be differentiated versus Genoptix and others that may have already been there for quite a while?

Doug VanOort

Yeah, we’re not pursuing that same strategy at all. So, we are pursuing a strategy which leverages the strengths of NeoGenomics. And the strengths include a comprehensive menu and we think as every bit is comprehensive or more so that our competition. But what differentiates us in many ways is the business model that allows us to perform various components of the testing or anything on the physician fee schedule so both cytometry, histochemistry and FISH and so forth, and potentially even molecular in the future.

And so, what we do and are pursuing different than those companies is we can go to a large Hem/Onc and say to them look if you want to perform some of the technical component testing in some of the “easier areas” that’s fine, we’ll actually help you with that in exchange for a commitment to send the other testing to NeoGenomics. And there is not a lot of players that have had success in our opinion doing that yet and we think that there is some opportunity for us, and those are -- they tend to be partnership kinds of deals. So, NeoGenomics is a partnership kind of company. So we partner with our pathologists; we don’t go in and buy them lunch and get a couple of bone marrows here and there and then make do something else with another competitor. We develop long-term, good, sustainable partnerships; that’s our goal, and that’s our goal with the Hem/Onc groups as well.


Your next question comes from the line of (inaudible). Your line is open.

Unidentified Analyst

Congratulations on the great execution once again. I just want to start up -- continue on this revenue theme here. So, at the bottom end of your guidance I mean $68 million $0.03 a share so basically you assume may be another 300 to 400 bps in gross margin increase, and if this gross margin increase do you then, the average revenue per test does that go up or its purely productivity driven going to the bottom line?

Doug VanOort

It's all productivity. I mean, you should not assume in any of your models in this industry that average revenue per test ever goes up absent of mix change.

Unidentified Analyst

Okay. And in terms of feedback from reimbursement, you’re launching a number of new arrays or you’ve already launched well quite a few of them, lab developed versus FDA approved panels, is there a reimbursement challenge there that we should worry about or it’s just that the FDA approved panel to take such a long time that there isn't anything in the market right now?

Doug VanOort

Just so you know we get this question a lot, there’s a lot of confusion in our industry. NeoGenomics today gets about 11% to 12% of its revenue from FDA approved tests. Typically, it’s the UroVysion bladder cancer FISH test, the Path Vision breast cancer FISH test, the ALK lung cancer FISH test, there’s a couple of molecular tests that are FDA approved test kits. 88 plus percent of our revenue is from laboratory developed tests. We use established codes for FISH flow cytometry, immunohistochemistry. The only noise in that whole thing is the new molecular codes that went into effect this year.

There’s quite a debate raging in the industry whether FDA approved tests will get their own molecular codes to compensate the people who bring those tests forward for the extra cost of doing FDA approved test. I will tell you though there is probably a more prevalent feeling that CMS is making it much more difficult to unlock economics by going through the FDA approval process. So, we think laboratory developed tests are here to stay and will be for a long time. They’ve been around for 30 or 40 years. They're not going anywhere.

The codes that we bill at NeoGenomics with the exception of the new molecular codes are all well established, great reimbursement. Reimbursement for flow cytometry additional markers went up 8% on average in Florida and California this year. Morphology went up about 7%. FISH went down a little bit but it wasn’t really a material change, and so these are not codes that are sort of in the cross hairs, generally speaking.

Unidentified Analyst

The four reps that you mentioned was being added on to the team focusing primarily on the Hem/Onc segment, so should we take it as kind of focusing on Hem/Onc because the margins of Hem/Onc are so much better than going off the solid tumors or are you kind of ceding a little of ground to in solid tumors to the likes of Clariant and stuff?

Doug VanOort

So we’re focused on Hem/Onc because that’s us. We are a Hem/Onc sort of company. We do a lot of hematopoietic disease testing. So, we’re leveraging our strengths. Now, what’s interesting is that we are moving more into the solid tumor cancers, and we’ve made a major push into that area with molecular testing, and we’ve got a lot of very exciting molecular and multi-methodology panels for the solid tumors right now and we’re going to pursue solid tumor testing. We’re not ceding that to anyone.

Unidentified Analyst

Fair enough. And one last question before I hop on. The revenue constitution, you have a pretty significant chunk of your revenue coming from one particular client. I mean, is that going to -- is that client kind of maxed out at this point, or in other words how are you trying to diversify your risks in case something goes wrong with the client, or are you thinking of adding or the probability of adding something similar this year or the next?

Doug VanOort

So I think you’re referring to some disclosures we’ve put in our recent SEC filings. This particular client has actually started life as a client with us in 2003 with three of eight offices. Today, this particular client has close to 40 different offices. They’ve probably doubled their size in the last two years alone. And so, we have been a huge beneficiary of the fact that the Hem/Onc industry is rolling up pretty quickly, its consolidating very quickly. The larger practices are adding smaller practices to them left and right, and it’s really a good trend for us. We have an established with an important client and they start acquiring other practices. It results in large incremental bumps in volume for us and I actually -- this was what I was referencing in my remarks about the growth rate.

We had in Q4 2011 and in Q1 2012 we saw outsize bumps in volume because of the integration of some large chunks of practices into that client. I think that they have been operating around 13% or so of our revenue. Their growth has kind of kept pace with our growth through acquisition. We would expect their percentage of our revenue to actually start to trend down here as we continue to grow. So, I don't actually see that getting to be more concentrated. But then again this was a very savvy group of individuals and they are pretty good at acquiring other practices. So, who knows.

Unidentified Analyst

Well, thanks, and just one more clarification. You mentioned the -- you guys are working on a prostate cancer, potential prostate cancer test, plasma urine based. I mean, urine based it's been the Holy Grail. I mean, lots of people have tried it. So what's your secret sauce that makes you confident?

Doug VanOort

Well, we're just reporting that we had -- we're working on this. We have Dr. Albitar and a team of people who are fantastic, and they're doing some great work here and it's early, but we've had some success in our early studies. And we think that if can unlock the power of what we're currently seeing, this could be exciting for us.


Your next question comes from the line of [Frederick Koepke]. Your line is open

Unidentified Analyst

Thank you, great call, very pleased with the results, and was just wondering if you could speak at all about how successful or if you're pleased with some of the technology you've licensed now from Health Discovery Corp? Thank you.

Steve Jones

So, we have not really talked at length about this. We're in the process of developing or trying to develop several tests. We believe that the core SVM technology is a solid technology or we wouldn't have spent what would be equivalent about $3 million to license it. We believe it offers as much promise for us in making existing testing platforms more efficient as it does for launching new tests. But we're not a place where we can make any unequivocal statements about what we're going to have five new tests available in X amount of time. We're working through it. We're spending real money on trial. Doug mentioned that we'd run 120 different patient samples as part of our prostate stuff. But that's really all the -- at a place where we we're uncomfortable talking about at this point in time.


Your next question comes from the line of Mark Zinsky. Your line is open.

Mark Zinsky - 21st Century Equities

I guess my questions have been answered, thanks.

Doug VanOort

Operator, I think we're going to have to end this call. Are there other questions in the queue?


There are two more people that are queued up, yes.

Doug VanOort

Well let's limit it to five minutes here because we've got something else starting in five minutes.


Okay, (inaudible). Your line is open.

Unidentified Analyst

Congratulations on last quarter and the full year result. I have more questions related to the gross margins. When I look at the gross margin for Quarter 4, it increased from Quarter 3 after TC Grandfather Clause expiration. Now talking to that, what's your expectation for the year of '13 (inaudible)? Are you expecting an increase of gross margin in the future?

Steve Jones

Yes, we expect to see gradual increases in gross margin as the year progresses. Doug mentioned that we believe we can get another three or four points in gross margin by the end of the year. So that would put us at the 46%-47% by Q4, and that’s consistent with the productivity improvements that we've been having.


Just one final question from Matt Hewitt. Your line is open

Matt Hewitt - Craig-Hallum Capital Group

Quick follow-up in the Barrett's esophagus test that you launched last quarter, I'm curios what type of traction or feedback you've gotten from customers on that test?

Doug VanOort

Well, the feedback in very positive, but we just launched this test and we would just say that it takes time to get some traction with this test because the test is performed on esophageal, sub-esophageal brushing, and although that’s -- it's not a biopsy. It's less invasive for patients, which is great, and it is a very good test. But it's going to take some time to change behavior and to train physicians to take brushings. And so, so far so good, but it's early


There are no further questions at this time.

Doug VanOort

Well, thank you, and as we end the call I would like to recognize all 274 current full time NeoGenomics team members around the country for their dedication and commitment to building a world class cancer genetics testing program. And on behalf of our whole team I want to thank you all for your time in joining us this morning for Quarter 4, 2012 earnings call, and let you know that our Quarter 1, 2013 earnings call will be held on or around April 25 of this year. And for those of you who are listening, that are investors or thinking about investing in NeoGenomics, we thank you for the interest in our company. Goodbye.


This concludes today conference call. You may now disconnect.

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