Seeking Alpha
Research analyst, CFA, biotech, small-cap
Profile| Send Message|
( followers)  

Another Strong Quarter Post TC Grandfather Clause Expiration

On February 14, NeoGenomics (NASDAQ:NEO) reported financial results for fiscal 4Q12 and full year ended December 31, 2012.

Revenue for the fourth quarter 2012 was $14.9 million, a $2.0 million or a 16% increase over fourth quarter 2011 revenue, and a 5% increase over 3Q12. 4Q12 revenue of $14.9 million also beat our estimate of $14.5 million.

As a result of the expiration of the Medicare Technical Component [TC] Grandfather Clause on June 30th, the average price per test declined 15% from 4Q11 and 3% sequentially from 3Q12, in-line with the Company's previous guidance on this issue. The Company estimates that this regulatory change resulted in a reduction in revenue of approximately $1.3 million during the quarter.

Although average price per test declined, test volume increased 35% in 4Q12 compared to that in 4Q11.Gross profit in 4Q12 increased to $6.5 million, a 10% increase from the 4Q11. Gross margin declined to 43.2% in 4Q12, compared to 45.2% in 4Q11, but increased compared to 41.5% in 3Q12.

Total operating expenses in 4Q12 increased by $780,000 (14%) from 4Q11, primarily as a result of a $320,000 increase in R&D expenditures related to new test development and increased personnel and depreciation expense. Net loss for the quarter was ($113,000), or ($0.00) per share, versus net income of 152,000, or $0.00 per share in 4Q11. Adjusted EBITDA improved 36% to $1.4 million versus $1.1 million in the prior year.

Revenue for the full year 2012 was $59.9 million, a $16.4 million or a 38% increase over 2011 revenue of $43.5 million on test volume growth of 50%.

Average revenue-per-test decreased by 8% as a result of the expiration of the TC Grandfather Clause on June 30th, which resulted in the loss of approximately $2.6 million of revenue in the second half of the year. Despite this major regulatory change, gross margin improved slightly to 44.8% on a full-year basis from 44.7% in 2011.

Total operating expenses increased by 29% from 2011, primarily as a result of a $1.7 million increase in R&D expenditures related to new test development, as well as increased personnel, depreciation and bad debt expense associated with the revenue growth. As a percentage of revenue, operating expenses improved to 42.8% in 2012 from 45.6% in 2011.

Net income for 2012 was $65,000 or $0.00 per share versus a net loss of $1.2 million or ($0.03) per share in 2011. Adjusted EBITDA for the year improved by $3.9 million or 181% to $6.0 million from $2.1 million in 2011.

We are pleased with Neo's full-year 2012 results. The Company's test volume increased 50% in 2012, and in this area, it is the industry leader. The Company is gaining market share. Although the TC Grandfather expiration reduced revenue by $2.6 million in the second half of the year, the Company was still able to increase revenue by $16 million or 38% versus 2011. This is more significant if we think of the fact that the Company has only 18 sales representatives. Just as importantly, productivity and process improvements allowed the Company to grow adjusted EBITDA by 181% versus 2011, which is almost five times the revenue growth rate, and the Company posted a modest profit for the year.

Management is doing a Great Job to Minimize the Impact of TC Grandfather Clause Expiration

We are very pleased to see another strong quarter by NeoGenomics, especially under the negative impact of the TC Grandfather Clause during the quarter.

As a reminder, the Medicare Technical Component Grandfather Clause expired on June 30th, 2012. Effective as of July 1st, NeoGenomics is required to bill hospitals for the technical component of certain tests performed on behalf of Medicare in-patients and out-patients, whereas previously, the Company was allowed to bill Medicare directly for such services if they were provided to hospitals that were "grandfathered" under the regulations.

About 80% of NeoGenomics' lab tests are billed off the physician fee schedule, with the remainder billed off the clinical lab fee schedule. Lab tests billed off the physician fee schedule usually have two separable billing components: the technical component consisting of sample treatment and testing, and the professional component for interpretation of the test results.

As a result of the TC Grandfather Clause expiration, the average price per test in 3Q12 and 4Q12 declined 12% and 15% respectively compared to those in 3Q11 and 4Q12. However, despite the negative impact, total revenue in 3Q12 and 4Q12 still increased 26% and 16% year over year respectively. These were achieved by 42% and 35% increases in test volume in 3Q12 and 4Q12 respectively. Both revenue and test volume growth were achieved when the Company had to redirect the focus of its sales force over the last few months to prepare clients for the expiration of the TC Grandfather Clause on July 1st rather than acquiring new clients.

NeoGenomics also continued to make substantial improvements in lab productivity and operating efficiency in the quarter, and came very close to returning to quarterly profitability. Lab productivity increased by 15% and Adjusted EBITDA grew by 36% in 4Q12 from last year's fourth quarter. The improvements were also significant compared with Quarter 3, 2012 as Neo reduced its net loss by $800,000 with only a $700,000 increase in revenue.

With this distraction now behind, the Company has returned its full focus to growth and performance in 2013. NeoGenomics expects to overcome the impact from this regulatory change within a few quarters through aggressive cost savings, productivity improvements, new product introductions, and continued growth in each of its core laboratories.

Summary of Quarterly Performance

($, 000's)

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

Total Revenue

8,805

10,466

11,320

12,893

15,160

15,611

14,202

14,893

% Growth

4.6%

23.3%

30.0%

47.3%

72.2%

49.2%

25.5%

15.5%

Gross Margin

43.9%

44.5%

44.8%

45.2%

47.1%

47.2%

41.5%

43.2%

SG&A as a % of Revenue

52.0%

45.6%

44.5%

42.3%

38.2%

38.4%

40.6%

38.9%

Net Income (Loss)

($893.0)

($293.0)

($143.0)

$152.0

$603.0

$839.0

($975.0)

($113.0)

Diluted EPS

($0.02)

($0.01)

($0.00)

$0.00

$0.01

$0.01

($0.02)

$0.00

Adjusted EBITDA

$29.0

$483.0

$693.0

$1,055.0

$1,775.0

$1,943.0

$842.0

$1,439.0

Test Volume

15,396

18,358

19,978

22,557

26,932

28,846

28,315

30,513

% Growth

9.6%

26.9%

38.0%

57.2%

74.9%

57.1%

41.7%

35.3%

Average Price/Test

572.00

570.00

567.00

571.59

562.89

541.20

501.58

488.09

% Growth

-4.7%

-2.9%

-5.8%

-6.3%

-1.6%

-5.1%

-11.5%

-14.6%

Summary of Annual Performance

$, 000's

2008

2009

2010

2011

2012

2013E

2014E

2015E

Total Revenue

20,015

29,469

34,371

43,484

59,866

70,000

85,000

110,000

% Growth

74.0%

47.2%

16.6%

26.5%

37.7%

16.9%

21.4%

29.4%

Gross Margin

53.3%

51.6%

45.9%

44.7%

44.8%

45.1%

44.5%

44.5%

SG&A as a % of Revenue

57.7%

57.5%

54.5%

45.6%

39.0%

37.1%

35.3%

31.8%

Net Income (Loss)

(1,383.0)

(2,243.0)

(3,303.0)

(1,177.0)

66.0

1,900.0

4,250.0

10,150.0

Diluted EPS

(0.04)

(0.06)

(0.09)

(0.03)

0.00

0.04

0.08

0.18

Adjusted EBITDA

809.0

103.0

(566.0)

2,134.0

5,999.0

3,400.0

5,750.0

11,650.0

Annual Test Volume Growth

56.4%

39.1%

25.5%

33.1%

50.2%

45.0%

40.0%

37.0%

Balance Sheet Boosted by New Financing

Early today (Feb. 28, 2013), NEO announced that it has priced an underwritten public offering of 3.15 million shares of common stock at a price to the public of $3.00 per share.

Of the shares offered, NeoGenomics is selling 2.85 million shares and a selling stockholder, The Mary S. Dent Gifting Trust, is selling 300,000 shares. The transaction is expected to close on March 5, 2013 and will result in gross proceeds to NeoGenomics of $8.6 million. The net proceeds to the Company, after deducting the underwriter's discounts and other estimated offering expenses, will be approximately $7.8 million.

The Company plans to use the net proceeds to pay down certain indebtedness and for general corporate and operating purposes. NeoGenomics has granted the underwriters a 30-day option to purchase up to an additional 472,500 shares of common stock to cover over-allotments, if any. We are pleased that NEO has landed this new financing with favorable terms. The offering price is close to the market price, and no other strings added to the common stock.

This financing greatly boosts the Company's balance sheet. As of December 31, 2012, NeoGenomics had $1.9 million in cash with little debt. With net proceeds of $7.8 million, the Company should have cash of about $9.2 million at the end of first quarter. The Company was close to breakeven in 4Q12, and will return to profitability in first quarter of 2013. With the current cash, NEO will be able to focus on its long term growth strategy without concern about short term cash strain.

With all this in mind, we believe the Company is poised to grow dramatically in 2013 and beyond.

Source: NeoGenomics: Poised To Grow Further In 2013 And Beyond