Genoptix, Inc. Q1 2009 Earnings Call Transcript

May. 4.09 | About: Novartis AG (NVS)

Genoptix, Inc. (GXDX) Q1 2009 Earnings Call April 30, 2009 5:00 PM ET

Executives

Marcy Graham - Senior Director, IR

Tina Nova Ph.D., President, CEO and Co-Founder

Dough Schuling - EVP and CFO

Sam Riccitelli - EVP and COO

Analysts

Adam Feinstein - Barclays Capital

Scott Gleason - Stephens

Charles Rhyee - Oppenheimer

Robert Willoughby - Bank of America

Zarak Khurshid - Caris & Company

David MacDonald - SunTrust

Brendan Strong - Barclays Capital

Amanda Murphy - William Blair

Operator

Good day, ladies and gentlemen and welcome to the First Quarter 2009 Genoptix Incorporated Earnings Call. My name is Melanie and I’ll be your coordinator today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session at the end of this conference. (Operator Instructions). As a reminder, today’s call is being recorded for replay purposes. I would now like to turn the call over to Ms. Marcy Graham, Senior Director, Investor Relations. Please proceed.

Marcy Graham

Thank you. Welcome to the Genoptix quarterly conference call to discuss operating results for the first quarter 2009. Joining me on today’s call is Dr. Tina Nova, Genoptix’s President and CEO; Doug Schuling, EVP and CFO; and Sam Riccitelli, EVP and COO. This call is also being broadcast live over the web, and will be available for replay through Thursday, May 7, 2009, on the Investor section of our website at www.genoptix.com.

Before we begin, please note that statements made today, including statements about guidance, expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. Forward-looking statements are not guarantees of performance. They involve known and unknown risks, uncertainties and assumptions that may cause actual results, levels of activity, performance or achievements to differ materially from those expressed or implied by any forward-looking statement. Any non-GAAP financial measures presented during today’s call should be considered in addition to and not as a substitute for the information provided in accordance with Generally Accepted Accounting Principles.

For reconciliation of GAAP to non-GAAP financial measures discussed today, please access the GAAP reconciliation and supplemental material page of the Investor section of our website. For information about the risks and uncertainties that Genoptix faces, please refer to the Risk Factors section of the Genoptix Form 10-K for the year ended December 31, 2008, filed with the Securities and Exchange Commission on February 26, 2009, and the Genoptix Form 10-Q for the quarter ended March 31, 2009 filed with the SEC earlier today as well as any subsequent filings with the SEC.

Genoptix assumes no obligation and expressly disclaims any duty to update any forward-looking statements to reflect events or circumstances after today’s call or to reflect the occurrence of unanticipated events. And lastly, we would like to make note of the technical difficulties experienced on our fourth quarter full year conference call held in February, which was cut short prematurely ending prior to the completion of the Q&A portion of our call. Our apologies for any inconvenience this may have caused our listeners or those who were disconnected while waiting in the queue.

And now I’d like to turn the call over to Dr. Tina Nova, President and CEO of Genoptix. Tina?

Tina S. Nova, Ph.D

Thank you, Marcy. Good afternoon, everyone, and thank you for joining us today, to discuss operational and financial results for the first quarter of 2009. We had another outstanding quarter of performance, led by the continued expansion of our customer base, which grew to a record 1200 sufficient customers at the end of the first quarter, up sequentially from 1000 in the fourth quarter and approximately 800 in the first quarter of 2008.

Kids’ volumes also increased, as we managed approximately 13,000 patient cases in the first quarter, a 65% increase year-over-year. Our revenues increased by approximately 76% from one year ago to 39.2 million for the first quarter of 2009, including 2 million in other period revenues recognized in the quarter. This level of growth is a testament to the fact that Genoptix is committed to facilitating personalized medicines, by both delivering clinically relevant action above results to our physician clients, which help them assign patients to the appropriate treatment regime and by providing these results with a high degree of quality and reliability, through an exceptional level of service.

In the first quarter, we launched K-RAS Mutational Analysis and EGFR Amplification Analysis, two new solid tumor assays for patients with colorectal cancer and certain types of lung cancer. These tests have become essential in identifying appropriate candidates for EGFR inhibitors, which are very expensive drugs that work only with a small subset of these patients. By identifying those, we’re more likely to respond to these treatments. We’re able to promote more cost effective personalized therapy. To ensure the level of quality in K-RAS testing is consistent with our COMPASS and CHART offerings, we employ physician directed analysis, a process in which a hematopathologist personally reviews the tissue slides to identify tumor rich regions and works interactively with our technologists prior to analysis.

Through our comprehensive approach, we provide actionable results with the potential to immediately effect patient treatment decisions. Excellence and efficiency in our diagnostic approach are the drivers of the success of our quality offerings as we seek to provide our physician customers with the best combination of value and service possible.

To illustrate this point, consider our quantitative JAK2 Mutation Analysis offering. The appropriate assessment of the mutation status of JAK2 is a guideline recommended by the World Health Organization when diagnosing myeloproliferative tumors. The results of JAK2 testing provide molecular confirmation of specific markers and determine the percentage of mutant cells present in the sample. Since our introduction of this test in 2007, recent publications and internal data have shown that nearly half of the patients identified as positive for JAK2 have been between 1% and 10% of mutant cells present in a sample. This is a significant finding, given that many commercial laboratories set their cut-off criteria for identification of this disorder at the upper limit of the range at approximately 10%. Because greater sensitivity allows for a more effective diagnosis, Genoptix uses a 1% sensitivity threshold for JAK2 testing, consistent with ASH, the American Society of Hematology recommendations, further evidence of our commitment to quality testing and comprehensive diagnosis.

Our focus on growing our core business and on servicing the needs of physicians tasked with treating patients suffering from hematomalignancies goes beyond testing. Our goal is to be viewed as a trusted and reliable partner in their business and an educational resource to physicians and office staff.

In April we launched a new web-based service to provide added value for our customers which we refer to as Client Lounge. The site features dynamic content including case reviews, journal articles, continuing education and more. With regular content updates, Client Lounge is also expected to increase the usage of eCOMPASS, our client portal, which provides secure web-based access to Genoptix’s comprehensive lab reports. Through access, education and a more thorough differentiated case management platform, we are committed to providing excellence in patient diagnosis and expanding our support to our physician customers.

I’ll now turn the call over to our CFO, Doug Schuling to discuss financial results for the first quarter. Doug?

Dough Schuling

Thanks, Tina. Our performance during the first quarter of 2009 was strong as revenues continued to grow and our collection efforts once again resulted in out-of-period revenue recognition that flowed through to the bottom line. Revenues for the first quarter were $39.2 million, including a $2 million benefit from changes in accounting estimates relating to prior periods. This is up approximately 76% from revenues of $22.3 million during the same period in 2008, which included a $651,000 benefit from changes in accounting estimates. The positive changes in accounting estimates related to the differences between actual amounts collected primarily from non-contracted payers and our original revenue estimates for services rendered in prior periods.

We expect the amount of out of period revenue recognized in each period to continue to decrease in the coming quarters as we gain familiarity with our payers over time. Our average revenue per case of approximately $3,000 for this quarter was flat sequentially, but increased by 7% over the same period in 2008 due in part to the contribution from changes in accounting estimates in combination with the net increase in Medicare reimbursement rates put in place throughout 2008 and at the first of the year.

Gross profit for the first quarter was $23.8 million or 60.6% of revenues, an increase from $13.1 million or 58.9% during the same period in 2008. Gross margins for the first quarter were elevated due to the recognition of out-of-period revenues, which added 2.1% to gross margins. We expect gross margins to settle in the upper 50th percent range for the remainder of 2009, reflecting the planned investments in facilities, additional hematopathologists and laboratory personnel throughout the year.

Operating expenses increased $4.7 million in the first quarter of 2009 as compared to the same period one year earlier. Specifically, sales and marketing costs grew $2.7 million year-over-year, while G&A expense increased by $2 million during the same period. Despite a 15% increase in sequential quarterly revenue, both the fourth quarter of 2008 and the first quarter of 2009 operating expenses as a percentage of revenue remained constant at 35%. The investments in mid-level managers and other sales personnel at the end of 2008 drove our Q1 sales and marketing expense to a high of $7 million or 17.8% of revenue compared to $5.5 million or 16.3% in Q4 of 2008.

Operating expenses for the quarter include a more modest increase in general and administrative expense sequentially, as we gained leverage from our past investments. Going forward, we expect overall operating expenses to remain constant as a percentage of sales, as we continue the expansion of our sales and marketing organization. Stock-based compensation expense for the first quarter was $2.3 million, approximately 33% of which was included in cost of revenues, with the remainder included in operating expenses. We expect total stock-based compensation costs of approximately $9 million in 2009, an increase of approximately $2 million over 2008 primarily related to the addition of personnel to support our growth.

Operating margins were 25.9% of revenues for the first quarter, an improvement due in part to the benefit of revenues collected from prior periods, up from operating margins of 18.6% of revenue in the first quarter of 2008. Investment in our facilities and infrastructure, including the addition of mid-level management personnel in all functional areas of the company throughout this year and the additional stock-based compensation is expected to keep operating margins in the lower 20% range in 2009.

Our tax rate of 44.2% for the first quarter resulted in net income of $5.9 million, compared to net income of $5 million in the first quarter of 2008, when we were taxed at a rate of 2.1%. In the first quarter of 2009, the company operated as a fully taxed corporation, following the recognition of the remaining available deferred tax assets in the last half of 2008. Diluted earnings per share or EPS for the first quarter of 2009 was $0.33, based on 17.8 million weighted average common shares outstanding. This compares to EPS of $0.29 for the first quarter of 2008, which would have been reduced by approximately $0.13, if taxed at the current rate.

At the end of the first quarter of 2009, the company’s total cash, cash equivalents and investment securities were $111.5 million, up from $107.1 million at the end of the year. The increase was primarily generated from cash from operations for the quarter of $5.3 million. Accounts receivables increased to $24.6 million at the end of Q1, up from $15.6 million at the end of 2008. This increase was also reflected in the growth of our DSO, and was primarily attributable to policy changes by our Medicare administrative contractor and CMS, which had the net effect of delaying payments for services covered by both Local Coverage Determinations, and Medically Unlikely Edits, more commonly known as LCDs and MUEs.

We ended the quarter with DSOs of 67 days, down from 71 days at the end of the first quarter in 2008. We also ended the quarter with a bad debt provision of approximately 3% of revenues. Purchases of capital equipment during the quarter totaled $1.6 million and related primarily to purchases of laboratory equipment, facility expansion initiatives, and technology necessary to support our accelerated hiring and continued growth.

For more detail on our operational results, I’d like to turn the call over to Head of Operations, Chief Operating Officer, Sam Riccitelli. Sam?

Sam Riccitelli

Thanks, Doug. Our differentiated service offering and expanding customer base are central to our success in capturing market share, which has grown to approximately 7% of the overall bone marrow testing market. We believe the most effective way to continue this trend is to move into new territories, while deepening our coverage in current markets. To that end, we added new members to our sales force in the first quarter of 2009, increasing the size of our sales team to 62 field sales representatives, up from 55 at the end of 2008.

We expect to have approximately 85 sales representatives in the field by the close of 2009, and we’ll continue to add supporting and managerial roles to strengthen the sales organization as we grow. We will also add structure to our operational functions, as we scale to manage increasing case volumes and will continue to hire additional laboratory personnel, customer service representatives, clinical service coordinators, billing and reimbursement personnel and hematopathologists throughout the year.

We continue to put solid infrastructure in place to support our growth initiatives. Most recently, we executed on this plan by adding a layer of management to Cartesian, assigning a team of new leaders to manage this large and growing group of specialized physicians. Each of our hempaths team under the leadership of one of our senior hempaths is responsible for a specific aspect of the practice from our internal quality assurance program and case review processes to developing and documenting the Genoptix practice guidelines organized by hematomalignancy disease type, complete with all the latest scientific literature citations to support our approach for each disease category.

We ended the first quarter of 2009 with 26 hematopathologists on staff, with Cartesian Medical Group. We have accepted commitments from several others who will start later in the year, most during the active summer hiring season and believe we are on target to reach our goal of housing approximately 37 hempaths by the end of 2009.

As we consider our performance in the coming year, we are revising our expectations to incorporate our results in the first quarter. We now expect revenues of approximately 170 to $175 million for all of 2009, up from our initial guidance of approximately $170 million. Our improved performance outlook is due in part to the additional out-of-period revenues recognized during the first quarter, and the expectation that this trend will continue, although these collection amounts are anticipated to diminish over time, as we gain familiarity with the payment practices of our payors going forward. Our growth is expected to result in net income of approximately $22 million for 2009, up from a prior estimate of $21 million, which assumes a tax rate of approximately 45% for all of 2009.

Diluted earnings per share are expected to be between $1.20 and $1.25 for the year, up from approximately $1.15 as previously estimated on an approximately 18.1 million shares outstanding. We also plan to continue laboratory expansion efforts associated with our California-based operations toward the end of this year. This decision comes after great consideration of locations locally and in other geographies. Based on the efficiencies in our business and the knowledge gained while managing rapid growth during the past two years, we believe expanding the functionality of our Carlsbad facility is the most economical and efficient method of increasing our operational capacity.

We will finalize our selection of additional lease space for this expansion in the coming months, likely in the area adjacent to our current facility. With this in mind, we are forecasting capital expenditures of approximately $8 million for the full year 2009, including approximately $4.5 million in maintenance capital. This will be used primarily for costs associated with supporting operations in our expanded lab facility, including new equipment as required to reach our goals for the years ahead.

And with that, I’ll turn the call back over to Tina.

Tina S. Nova, Ph.D

Thank you, Sam. This was another quarter of solid performance, and we are pleased with the results we’ve achieved. Thanks to the efforts of our growing team, we continue to provide the best customized diagnostic solutions and quality integrated services for our customers. We are now ready to take questions. Operator, please open the line.

Question-and-Answer Section

Operator

Thank you. (Operator Instructions). And our first question comes from the line of Adam Feinstein with Barclays Capital. Go ahead.

Adam Feinstein - Barclays Capital

Okay. Thank you. Very strong quarter. Maybe just to start, can you just talk a little bit about the competitive landscape? Have you seen any changes? Some of the other companies have talked a little bit more about a bigger push for your business. So, just curious what you guys are seeing from a competitive landscape?

Tina Nova

Sure. Thanks, Adam. The competitive landscape has been there from the very beginning. It’s been very competitive. We’ve had to fight for everything we’ve done in the field from day one square one. And in the beginning, they didn’t know who we are, and now they know who we are. So, there’s no question that it has increased awareness of our company. But overall, I would say that the competition has been stiff from the beginning and has never changed.

Adam Feinstein - Barclays Capital

Okay. And I guess the second question is just on the MUEs, Doug, you were talking about that earlier. Can you provide a little bit more clarity about that and should we think of that as a one-time issue, and I guess, what was the impact you talked about, but I didn’t hear a specific dollar number.

Dough Schuling

Sure. Adam, both LCDs and MUEs, both impacted us from a revenue recognition standpoint to a small degree, and certainly from a cash collection standpoint from a larger degree. Our accounts receivable went up quarter-over-quarter by about $9 million. A significant portion of that was related to these two issues and Medicare in particular. The LCDs which limit the number of markers, for instance, that we are reimbursed for on flow cytometry, and also limited the number of diagnosis codes that were available to us when you run both Cytogenetics and Flow. Anyway, that activity or that LCD, if you will, was ultimately reviewed by the medical directors at Palmetto our MAC and it was retroactively retired as of February 5.

So, it was a pure case issue. And on the MUE side of it or medically, unlikely edits, on January 1, that was put in place by CMS, and I know other laboratories have spoken about this as well here over the last few weeks. And it fundamentally would also limit, if you will, the number of procedures or the number of markers in which they would reimburse. That also was temporarily suspended as of April 1. So we don’t know where that will go going forward. It could impact re-implemented MUEs, if you will, but fundamentally, those two issues are what caused is primarily a cash receipts issue. And as I said, LCDs were automatically being reprocessed on a retroactive basis and the MUEs were in the process of re-billing those and expect that to basically take care of itself and here in the second quarter we should be back to the mid 50s for DSOs.

Adam Feinstein - Barclays Capital

Okay, great. It’s very helpful. And just a final question and I’ll get back in the queue. Maybe just on the guidance, it’s a pretty wide range; can you just help us think about what would be some of the swing factors that would get it to the high end relative to the low end?

Dough Schuling

From a revenue standpoint, we feel very, very good about that. And as we’ve said earlier, we are contemplating everything that we know to this point as it relates to reimbursements rates. We continue to work down that change in accounting estimates as we grow the company. So revenue we feel really good about the guidance we’ve given there. From an expense standpoint, again we would remind everyone that we are a growth company.

We’re going to continue to invest in people and in particular as we look to mid-year here, the kind of the hiring season for hematopathologists, we’ll be aggressively growing that organization, as well as across the entire organization. The sales and marketing team will continue to grow that organization as we said, trying to grow it to at least 85 reps by the end of the year. So those investments are going to continue. And then in addition to that, as Sam pointed out earlier, our facility expansion in ongoing and we expect to continue big things here towards the end of the year 2009.

Sam Riccitelli

Adam, this is Sam. Probably, this is the single biggest item though that swings the needle one way or the other in our range has to do with changes in estimates as I’ve already pointed out. I think we would probably earmark that as maybe the single largest item.

Operator

Our next question comes from the line of Scott Gleason with Stephens. Go ahead.

Scott Gleason - Stephens

Tina, Doug, Sam, congratulations on a very strong quarter. Just to start off with, I’m just looking at the number of hempaths in the quarter. It looks like it was kind of flattish from the fourth quarter. Can you guys talk a little bit about maybe the number of committed hires that you have kind of going into the mid-year here?

Tina Nova

We have quite a few doctors already hired who will be coming in, in the next few months. And with physicians, as you know, when you interview a physician, they can’t just join new in a week or two, because of their commitments of where they are, and so it takes a little bit longer time from the time you hire them till they’re on board. And there is also a seasonality if you will, associated with when physicians tend to change position, and that tends to be in the summertime, in the July-August timeframe, and also when a lot of the physicians get out of their fellowship. So that tends to be when hiring, there’s a little bit hire of physicians at that timeframe. And we expect that same increase in the summer.

Scott Gleason - Stephens

Great. Tina and Sam, would you guys be willing to break out the K-RAS and EGFR case number in the quarter or what the revenue contribution was there? And I guess is that included in the total 13,000 case number?

Sam Riccitelli

Yes, this is Sam. Those cases are included in the total. At this point in time, we don’t think it makes a lot of sense to break that out, maybe just to provide everyone with a bit more color. It is running a bit ahead of our expectations. I have to say we’re all very, very pleased with how the new products have been received especially by our ongoing customer base. Really, I think the thought I want to leave you with is that it’s doing well and it’s a bit ahead of our expectations.

Scott Gleason - Stephens

Okay, great. And then, just one other last case mix question. Is 60-40 still a good assumption for the kind of bone marrow to blood-based cases?

Sam Riccitelli

When you separate out thinking about hematomalignancies specifically, that’s still roughly about what we are doing.

Operator

Our next question comes from the line of Charles Rhyee with Oppenheimer. Go ahead.

Charles Rhyee - Oppenheimer

Yes, thanks for taking the question. You know, really just kind of getting back to the guidance, I think Sam, you mentioned when you’re talking about the revenues, obviously that takes into account the adjustment payment here in the March quarter, but you kind of suggested it also makes some assumptions in terms of future adjustment payments. When do you think that and you’ve mentioned that I think now, a couple of quarters, that you expect those numbers to kind of subside, but you were still kind of hanging on the 2 million range. When do you think we should see less of that? And then secondly, in addition to that, given the fact that this kind of revenue kind of all falls to the bottom line, wouldn’t we expect our EPS to be higher then?

Dough Schuling

This is Doug. We clearly expect these to continue to decline over time and again, these are all related to prior periods, and as as we move one quarter to the next quarter as I think I’ve mentioned in previous calls, our practice is to reassess all of our fee schedules in a very active and routine basis, and we’re looking at it weekly and monthly and certainly resetting fee schedules. So, just by virtue of the process that we undergo, we’re always going to have a little bit of conservatism as we move out, especially with a new pair, not knowing exactly how we will be treated in an out-of-network relationship.

As we gain that experience, if it’s appropriate, we will tune those fee schedules up, and there are certainly fee schedules that we tune down as well, to be clear. And as that process continues going forward, it’s just natural that we would expect the amount of changes to diminish as we get more and more experience. So, certainly as we look at Q2 to the end of the year, we are moving our fee schedules up so that the revenue is more accurately reflected in the period in which we provide the service. And so, by virtue of that, we do expect it to decline.

Charles Rhyee - Oppenheimer

You know, Doug, you made an initial point that you talked about as you get new payors and experience with them, but wouldn’t by definition as you expand into new territories, you are going to be coming across new payors that you have no experience with, and would likely then take sort of a conservative stance in terms of what you’d like to recognize at least at the beginning until you get that experience. So, in that sense, wouldn’t it be possible, we’ll continue to see these sort of adjustment from prior periods as we move forward continue to stay, I don’t know – I don’t want to say sizable, but it is still meaningful enough that we notice it every quarter?

Dough Schuling

I expect we are going to have them going forward, but to be clear, we do get revenue from 48 states today. So we are participating across the country. It’s just as the intensity and the focus in these new regions that we are moving into is going to grow. So you are spot on. That is how our model works, but as we continue to grow, it’s not going to be the same number of new payors each quarter that we’ve certainly experienced in the past. So again, just by virtue of that, I do expect them to diminish a little bit.

Operator

Our next question comes from the line of Robert Willoughby with Bank of America. Go ahead.

Robert Willoughby - Bank of America

Congrats on eeking out some upside here on the quarter. Revenue per case has trended lower sequentially. Is that just mix issues from your perspective?

Dough Schuling

This is Doug. When we look at our revenue per case, kind of the way I look at it is, if I pull out my changes in accounting estimates and at least if I look sequentially quarter-over-quarter, we are about 2,900 in Q3, 2,829 in Q4 and 2,884 here in Q1. So we had about almost a 2% bump in case ASP in Q1 2009, primarily reflecting the increase in Medicare on January 1.

Robert Willoughby - Bank of America

Okay. Can you point to anything that would result in a lower case per sales rep going forward? I mean, what’s the critical mass a sales rep can ultimately get to?

Dough Schuling

As far as volume?

Robert Willoughby - Bank of America

Yes.

Dough Schuling

Well, we are striving to continue to move the ratio of FTE revenue back into that closer to $2 million range. That is a long term goal, and as we’ve expressed a number of times I think, our ultimate view is that we are going to need a little over 100 or so FTEs in the sales organization in order to really cover the country. So, right now it’s running between 2 and 2.5 million per FTE. Obviously the last quarter it’s at the high end of that range, but it is our aim to get that down closer to 2 million.

Tina Nova

And that’s about after 18 months on the job for a rep in that range.

Robert Willoughby - Bank of America

I’m looking at kind of cases per average sales representative well north of 200 on a quarterly basis. I mean, would we ever drop below that? Could your hiring plans be so dramatic that we would fall below that metric, or?

Dough Schuling

Maybe not too far.

Robert Willoughby - Bank of America

Okay. And then maybe just broadly, top three challenges you see for reimbursement going forward, be it managed care contracting or some pressure for the government, what do you guys have in your radar screen?

Tina Nova

We have really good relationships with our payors both contracted, non-contracted to-date. And we are very happy about the service that we offer and there’s obviously no penalty to the patients, whether they are in or out of network from our billing policy. We want to continue to deepen those relationships with our third party payors, and we look forward to being a preferred laboratory provider with their networks. There are some gains for us there. Having access to their full subscriber base, we can get some efficiencies in our billing process, we can simplify cash collections, and we just don’t have any idea what the timing will be on that, but we welcome that opportunity.

Dough Schuling

And clearly we’re watching the government. I mean there’s been early hearing in 2009 with the new administration there was talk of some pretty significant cuts on a physician fee schedule. So that probably would be right up there as number one perhaps, Bob. And at one point in time I think 20 plus percent cuts, and I think that’s been real way back.

I think most folks are saying that’s unlikely to happen and we are hopeful that that will not happen, and obviously not only cutting the reimbursement that we would get but physicians across the country. So we are watching that very closely because 41% of our business now is Medicare. So that would be a significant issue to us. And as Tina said, the other payors, whether they be the larger national payors, if you will, and then there’s a lot of smaller IPAs for example especially here in California. We work with all of them and we continue to be open and take initiative with those communications. And at some point in time we hope to strengthen that relationship which in fact would likely mean a contract.

Robert Willoughby - Bank of America

Okay. And can you remind me, where did you guys hide the bad debt? Is it in the cost of goods sold or is that in operating?

Dough Schuling

Bad debt would be in administrative expenses, and running about 3% of revenue.

Operator

(Operator Instructions). And your next question comes from the line of Zarak Khurshid with Caris & Company. Go ahead.

Zarak Khurshid - Caris & Company

Good afternoon, everyone. Thanks for taking my questions, great quarter by the way. I think you may have addressed most of this, but again, can you talk to us a little bit about the gross margins here and how sustainable these levels are for the remainder of the year. And then along those lines, could you describe kind of the infrastructure, the personnel and facility wise, what have you built to offer this EGFR panel and how did the costs of those tests kind of compare to the bone marrow workup?

Dough Schuling

Great. Thanks for the question. And first of all on gross margins, again we’re extremely pleased with our performance here in Q1 at a little over 60%. When you take out the changes of accounting estimates, it’s at 58.5% and as we look going forward here, relating to gross margins as we said earlier at the first part of the call, we like to think of our business as being in the high 50s from a gross margin standpoint.

Again, when you look at the costs that we’re bringing in, the hematopathologist, additional facility costs, those types of things, those are the levers that kind of keep us right there at that high 50% level. As it relates to kind of setup in -- from the laboratory standpoint on the formal fixed test, I’ll let Sam speak to that.

Sam Riccitelli

Yes, I can give you a little more color on that. I think the one thing to remind everybody about is that we did a pretty significant lab expansion last year. That’s resulted in about $2.2 million of additional facility expense that we’re absorbing here in 2009 versus 2008. And part of doing that facility expansion allowed us to create space in the laboratory to take on the formalin-fixed, paraffin-embedded tissue work that we’re doing. So that’s somewhat encompassed in that lab expansion space.

We we announced this here obviously in the call today again, that we’re going to be expanding facilities once again towards the end of this year, hoping to have a laboratory – new laboratory up and running at the beginning part of 2010. Right now we’re earmarking around $3.5 million or so for that facility expansion to be spent in 2009. So hopefully that gives you a little more color about what we’re up to.

Zarak Khurshid - Caris & Company

Sure. Along those lines, can you just describe what you’re targeting then for the full year CapEx?

Sam Riccitelli

Full year CapEx is targeted at $8 million.

Zarak Khurshid - Caris & Company

8 million. Thank you.

Operator

Our next question comes from the line of David MacDonald with SunTrust. Go ahead.

David MacDonald - SunTrust

Good afternoon. Just I guess, a couple of housekeeping questions first. Doug, can you give us any sense, do you have some type of estimate in terms of what you guys think the rest of the year prior period adjustments will be, just so we can kind of think about that from a modeling standpoint? I know you’ve said you expect it to come down, but any sense for the balance of the year, ballpark number, what that would be?

Sam Riccitelli

Yes, this is Sam. We really put very, very modest assumptions in place for that for the remaining part of year. The issue that we face is it’s somewhat of a logic disconnect for us. If we can anticipate what our changes in estimates will be on our revenue line, then we would actually bake them into our fee schedule and recognize the revenue in the period that has occurred, then we wouldn’t have the changes in estimate.

So it’s really hard to stand here and look at each other with a straight face and say, well we think we are missing it by this much and that’s how much we’re going to bake into the rest of the year’s forecast. So on the other hand we have to acknowledge that it has been occurring quarter-after-quarter here and that there’s going to be some amount of it going forward, but we really think it’s a modest amount. It’s not really anything we are going to talk openly about at this point.

David MacDonald - SunTrust

Okay.

Sam Riccitelli

Anything we say today is going to be wrong.

David MacDonald - SunTrust

Any additional areas when we think about the next 12 to 24 months, additional areas of cancer where we should think about, you know, maybe you guys expand into other opportunities, just kind of a lay of the land in terms of strategically where we could see it go over the next year or two?

Tina Nova

I think the one thing we don’t want to do is change our customer. So we are not looking to go into urology or go into OB/GYN or anything like that. We want to offer more for our current customer. We really understand the community-based hematologist/oncologist. We understand their problems. We want to get them more solutions to their medical dilemmas and so we are really going to focus on that area. So that would just be all related to oncology.

Operator

Our next question comes from the line of Brendan Strong with Barclays Capital. Go ahead.

Brendan Strong - Barclays Capital

Hey, good evening, thanks for taking the questions here. Maybe just to start off, just to confirm, Tina. Basically it sounds like you haven’t entered into any managed care contracts, new ones at this point, is that correct?

Dough Schuling

That’s correct. We entered into one small IPA, small contract, if you will, in Northern California, but other than that we have not entered into any.

Brendan Strong - Barclays Capital

And in that situation, I mean how did the pricing compare to, for example, your out-of-network rates?

Dough Schuling

We don’t disclose the details of the contract.

Brendan Strong - Barclays Capital

Okay. And then maybe just going back, I wanted to get into some of the details here on the prior period revenue adjustments. First of all, in the quarter here, a $2 million adjustment, does that include some of the benefit of Palmetto going back and looking at anything that was rejected since September or is that kind of yet to come?

Dough Schuling

It does include a little bit, Brendan. Of the $2 million, about $500,000 approximately is related to the Palmetto action and the reprocessing retroactively of the LCD that was retired.

Brendan Strong - Barclays Capital

Okay. And so we probably won’t see any more of that because you’ve already caught all that in this quarter?

Dough Schuling

I think we’ve caught primarily all of it, there may be a few stragglers, but for the most part I think we’ve hit a majority of that.

Brendan Strong - Barclays Capital

On the flow cytometry work you guys do, how many markers do you tend to test for?

Sam Riccitelli

Brendan, this is Sam. That’s not something we like to disclose.

Brendan Strong - Barclays Capital

Okay. Then, on the revenue recognition side, how many are you recording revenue on?

Sam Riccitelli

Well, you obviously --

Brendan Strong - Barclays Capital

On Medicare, specifically.

Sam Riccitelli

Again, this is Sam, Brendan. You obviously know a great deal about the topic. I think you probably are aware that the LCD limited the number of markers to 20. So that probably gives you a pretty good hint at what our revenue recognition policy is.

Brendan Strong - Barclays Capital

Okay. The reason I was asking is, I thought there were situations where you’re doing more than that for good medical reasons, and were you able to get reimbursed for more than that? That’s why I was curious.

Dough Schuling

That’s absolutely the case. You’re spot on, Brendan. And even with CMS suspending, if you will, temporarily suspending that MUE on April 1; they’ve not really indicated whether they are going to increase, if you will, the number of markers that they are going to reimburse for. So, back to your original question, how do we recognize revenue in Q1 as it relates to flow markers? Again, I’m not going to step out and assume a significant number above and beyond what we’ve been reimbursed for in the past. So, it is pretty consistent there quarter-over-quarter as we have been thinking about flow cytometry.

Brendan Strong - Barclays Capital

Okay. In terms of the cash balance, I mean it just continues to grow. Any new plans there of acquisitions or anything around that?

Tina Nova

We’re spending a lot of time, from a business development and corporate strategy standpoint, looking at opportunities. Again, to what I said earlier, we will be very opportunistic about anything that fits in with our current customer and helps them answer those medical dilemmas. And we will continue to be very active in that area.

Operator

Our next question comes from the line of Amanda Murphy with William Blair. Go ahead.

Amanda Murphy - William Blair

In terms of guidance, it looks like you also increased margin expectations and also sounds like a lot of that’s coming from the out-of-period contractual adjustments. Was there anything else in the business in the first quarter that surprised you that led to that increase in guidance?

Sam Riccitelli

No, Amanda, this is Sam. That was really all due to the changes in estimates.

Amanda Murphy - William Blair

Okay.

Sam Riccitelli

You hit it right on the head.

Amanda Murphy - William Blair

Right, also, if you look at, and I think someone was asking something similar earlier, but if you look at sales reps and their productivity, whether that’s number of docs per sales rep or number of new cases per sales rep. It seems like that ticked up sequentially pretty significantly, and also you added quite a few docs sequentially to more so than we’ve seen over the past few quarters. How do we think about that going through the year? I mean, obviously you hired a lot of sales reps last year. So they are becoming more productive, but how should we think about the productivity of the sales force going forward?

Sam Riccitelli

This is Sam again. Again, we talked about it a second ago, and it is our hope to get the revenue per rep down closer to $2 million, because we think that’s the right size for our business to allow our sales representatives to spend a good deal of time with our customers to make sure we’re always meeting all of their needs. That’s what our service model is all about. So that still remains what we are after, what we are striving for.

Amanda Murphy - William Blair

Okay. All right. A couple of more here, revenue per case, is there seasonality in that metric? In other words, should we not take the fourth quarter number and then grow that based on the Medicare increase?

Sam Riccitelli

What we do, at least on our side here, Amanda, and how we kind of think about it and would maybe encourage you to think about this way too is, looking at the case ASP without the changes in accounting estimates, and you kind of trend that. And if you do that for Q4, as I said earlier, it would be at $2,829. And it went up to 2,884, or about a 2% increase. When you look at the Medicare increase, that’s right around the area that it should have been --

Amanda Murphy - William Blair

Okay.

Sam Riccitelli

And maybe not quite as much, but any shortfall to that would have been, payor mix and test mix issues which are pretty immaterial.

Amanda Murphy - William Blair

So that, if you sort of exclude the Medicare piece, the revenue per case on the other business is pretty stable?

Sam Riccitelli

Yes.

Amanda Murphy - William Blair

Okay.

Sam Riccitelli

Certainly from a sequential standpoint. Yes.

Amanda Murphy - William Blair

Can you remind us what percentage of your tests you are outsourcing if any at this point?

Sam Riccitelli

I’m not sure I understand the question. Say that one more time.

Amanda Murphy - William Blair

I’m curious. Do you perform all of the tests in your facilities or do you send anything out at this point?

Sam Riccitelli

Well, we do have partner labs that help us with portions of a couple of the assays that we perform. But at the end of the day, it’s our physicians who are accountable for the results. There are some more esoteric kinds of molecular tests that are run extremely infrequently and don’t warrant our bringing those kinds of things in-house, and that’s a fraction of a percent to maybe a percent of the tests. From a revenue standpoint it would almost be an immaterial amount of revenue because those things are so poorly reimbursed. So I think that pretty much covers the question, but at the end of the day, we do the work that’s required to answer the clinical question that our customers are asking us to answer for them. And again at the end of the day it’s our physicians who are overseeing this entire case, who are involved at every step of the case, who make sure that we are answering the clinical question. So it’s Genoptix that is providing these results.

Tina Nova

And our physicians sign off on the case, Amanda.

Sam Riccitelli

On every test.

Tina Nova

On every test.

Sam Riccitelli

That’s another point that I’m glad Tina brought up. Even tests that we outsource, we make sure our physicians review those data before it goes to our customer. Nothing leaves this company without one of our hematopathologists reviewing the results. So in that case, you might say that a 100% of what we do is done in-house.

Operator

Ladies and gentlemen, I show no further questions. I’d like to turn the call back over to management for any closing remarks.

Marcy Graham

Actually, thank you, it’s Marcy Graham. Thank you for joining us today on the call and any of your continued interest, please give me a call if you have any questions afterward at 7609-307-127 at my office direct, thanks.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. That does conclude the presentation, you may disconnect. Have a wonderful day.

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