PDI Management Discusses Q4 2013 Results - Earnings Call Transcript

Feb.27.14 | About: PDI, Inc. (PDII)

PDI (NASDAQ:PDII)

Q4 2013 Earnings Call

February 27, 2014 5:00 pm ET

Executives

Asher Dewhurst

Nancy S. Lurker - Chief Executive Officer and Director

Jeffrey E. Smith - Chief Financial Officer, Principal Accounting Officer, Executive Vice President of Finance and Treasurer

Analysts

Matt Bacso

Scott R. Henry - Roth Capital Partners, LLC, Research Division

Jack Wallace - Sidoti & Company, LLC

Operator

Good afternoon. My name is Ian, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter and Full Year 2013 Conference Call. And here is your representative Asher Dewhurst from Westwicke Partners. You may now begin your conference.

Asher Dewhurst

Good afternoon, everyone. This is Asher Dewhurst from Westwicke Partners. Thank you for participating in today's call. On the call this afternoon from PDI are Nancy Lurker, Chief Executive Officer; and Jeff Smith, Chief Financial Officer. Today, after the market closed, PDI released financial and operational results for the full year and fourth quarter ended December 31, 2013. If you have not received the news release and would like to be added to the company's distribution list, please call my office at (443) 213-0503.

Before we begin, I would like to caution that comments made during this conference call by management will contain forward-looking statements that involve risk, uncertainties regarding the operations and future results of PDI. I encourage you to review the company's filings with the Securities and Exchange Commission, including, without limitations, the company's 10-K and 10-Q forms, which identify specific risk factors that may cause actual results or events to materially differ from those described in the forward-looking statements.

In addition, certain non-GAAP financial measures, specifically adjusted EBITDA, which management uses to measure cash flow of ongoing business and adjusted operating income, a metric used by management to measure the profitability of ongoing business, will also be referenced on the call. The content of this conference call contain time-sensitive information that is accurate only as of today's date, February 27, 2014. The company undertakes no obligation to revise or update any statements to reflect the events or circumstances after the date of this conference call.

With that said, I'd now like to turn the call over to Nancy Lurker.

Nancy S. Lurker

Thank you, Asher, and welcome to everyone on the call. Thank you for participating. PDI executed well in 2013, within the context of a challenging CSO environment that we've been talking to you about during the year. That is lower gross margins than we had enjoyed in the recent past and overall, a somewhat leaner pipeline for new business.

During the year, we successfully completed our 3 strategic initiatives. We significantly upgraded internal systems in our CSO business, completed and launched our innovative new PD One software platform, and most importantly for the long-term success of PDI, began execution of our strategy through Interpace Diagnostics to be a commercialization partner for companies in the molecular diagnostics industry. As we enter 2014, we believe we remain very well-positioned in the CSO industry and we're excited about the long-term potential from our emerging Interpace Diagnostic and PD One initiatives.

Before updating you on these initiatives, I would like to share some financial highlights for the full year and fourth quarter 2013, before Jeff reviews the financial results in more detail. Revenues for the full year of $151 million showed an increase of 19% or over $24 million compared to 2012 results. The increase was driven by strong Sales Services revenues resulting from contracts signed in the second half of 2012 and the first part of 2013. As we have been discussing all year, and as anticipated, gross profit in dollars of almost $25 million and gross margin percentage of approximately 16% declined for the year compared to 2012, primarily as a result of competitive pressure in the Sales Services business.

Adjusted EBITDA for 2013 was a loss of about $1.1 million compared to a positive $2.8 million in 2012. The annual EBITDA decline was primarily due to strategic investments in our core infrastructure, molecular diagnostics and PD One. In fact, approximately $3 million was expensed in 2013 related to these 3 initiatives.

Turning to our results for the fourth quarter. Revenue of almost $37 million increased 2% or about $1 million from 2012. Revenue was roughly flat compared to last year as overall industry RFPs were down in 2013, particularly in the fourth quarter. Gross profit for the quarter in dollars and percentage is down consistent with the declines for the full year. Adjusted EBITDA in the quarter of a loss of $2.9 million compares to a positive $1.1 million in the fourth quarter of 2012. The year-over-year decline is primarily attributable to the fourth quarter operating loss, which in a large part was due to lower margins and spending on our initiatives. We continue to win within our fair share of new CSO contracts. However, as I mentioned earlier, the total value of RFPs put out by the biopharmaceutical industry was down in 2013, and we believe this figure will be lumpy given the continued unpredictability of drug approvals from the FDA, continued modest industry downsizing and specialty pharma consolidation.

Our digital pipeline, however, showed growth versus 2013 due to both PD One and eDetailing. Looking to 2014, we want to discuss financial guidance in 2 parts: Our core business and Interpace Diagnostics.

For our core business, we anticipate revenue in 2014 to be down slightly compared to 2013. While we fully expect higher revenue in Marketing Services from PD One and associated offerings, we expect modestly lower Sales Services revenue as a result of a lower level of business being carried over into 2014, resulting from the lower level of RFPs available and awarded in 2013.

Gross profit dollars are expected -- projected to be approximately flat compared to 2013. We anticipate profit from higher-margin offerings and continued improvements in cost of goods, offset most of the impact of lower revenue. Operating expenses are projected to be modestly lower than 2013, resulting in a projected annual operating loss being slightly better than 2013. Finally, full year 2014 adjusted EBITDA from the core business is projected to be slightly positive.

In terms of the 2014 financial outlook for Interpace Diagnostics, we are not in a position to project 2014 revenue at this time because we have not committed to Phase II for either of the current opportunities. We do not, however, foresee any material revenue in 2014. While we will fully leverage our existing infrastructure to support Interpace Diagnostics, we do intend to add a General Manager and select marketing support dedicated to this area. In addition, we anticipate the expenses to complete evaluation of Phase I for our current opportunities and amounts we are likely to incur on evaluating new opportunities. As a result, we estimate expenses of a minimum of $3 million for Interpace Diagnostics for 2014. Expenses could be higher if we move to Phase II of either of the current opportunities or we contract for new opportunities. As we've stated previously, we are fully committed to continuing to be a leading company in the CSO industry and plan to continue to maintain and grow our core business, including successfully ramping PD One. At the same time, leveraging this core business and infrastructure, we plan to be prudently but aggressively build a presence as a leading commercialization company for the molecular diagnostics industry.

Before I update you on our molecular diagnostic opportunities, I want to remind you all why we have targeted the molecular diagnostic space and why it is such a great fit for us. As we've discussed previously, our goal is for Interpace Diagnostics to become a leading commercialization company for the molecular diagnostic industry. We strongly believe that our existing capabilities and infrastructure can be leveraged to help bring new molecular diagnostic tests to the market in an innovative way. We believe this strategy will deliver more predictable, higher growth and higher margin revenue. We believe this is a very dynamic opportunity for our Interpace Diagnostics subsidiary for a number of reasons: First, the molecular diagnostic industry is a highly fragmented market with scores of strong science-based companies that have developed clinically important tests, which are ready or near ready for market. A vast majority of these companies has very limited experience bringing our product to market. And moreover, many of them don't have the capital to build an infrastructure to effectively commercialize their tests. The last several months of due diligence and discussions with companies in this space continue to validate these assumptions.

Second, molecular diagnostics tests are very different from traditional diagnostic tests. Due to their complexity, molecular diagnostic tests, in most cases, require a specialized go-to-market strategy, which include messaging to physicians and potentially patients, similar to launching of a new drug in the pharmaceutical market. Developing and delivering these kinds of messages, fully leveraging PDI's extensive commercial infrastructure in an impactful innovative and ROI-centric manner, is one of the strengths of PDI. While traditional diagnostic tests are aimed at measuring chemicals or enzymes linked to cholesterol or glucose levels using a straightforward known chemical analysis, molecular diagnostics are complexed, highly innovative tests that use DNA, RNA and other proteins to test for specific states of health or disease. These tests are on the forefront of personalized medicine and are used to diagnose disease, assess an individual's propensity for disease, suggest the best treatment once a disease is diagnosed or determine the effectiveness of drugs.

Many of these tests individually have the potential to either significantly improve patient care and outcomes and/or significantly improve overall healthcare costs. PDI is well-positioned to be the commercial arm for these types of companies through our Interpace Diagnostic subsidiary. We have tremendous experience in messaging communications with physicians and we have a proven track record of commercializing products. We are well-situated to leverage our experience and platform in delivering complicated, sophisticated messaging to healthcare providers that will benefit an inefficient diagnostic space, which struggles to effectively communicate its complex technology. We remain optimistic about the opportunities in the molecular diagnostic space and are seeing impressive deal flow. Since launching our initiative awareness, PDI's capabilities in the market has increased substantially and we have now received inbound calls leading to discussions with other molecular diagnostic test companies. Going forward, our strategy remains very focused. We will invest in tests with significant market potential, potentially add meaningful revenue and profit to PDI, add very targeted position groups and easily identifiable patient groups, and importantly, have clear clinical value. In other words, tests with results that are clearly actionable by the physician and have clear benefit to the patient.

Since we announced our strategy and entered into our first stage 1 opportunities, the reimbursement area continues to rapidly evolve. Traditional methods of billing for diagnostic tests no longer are valid under new rules issued by CMS. While final rules for reimbursement are still to be promulgated, what is clear is that tests that do not have strong and clear clinical value and do not have compelling benefit to the healthcare system, even if reimbursed in the past, will be in jeopardy in the future. With that as background, let me update you on the 2 opportunities we are involved with.

Regarding the deal with Transgenomics, we are still in the pilot test phase and continue to evaluate its progress on a weekly basis. We currently have a small number of reps deployed in test regions and while we are realizing uptake in utilization, this test, which is a pharmacogenomic assay panel, is one, that although reimbursed in the past, is under reevaluation by CMS. Very recently, CMS has signaled that they are evaluating reimbursement for pharmacogenomic assay panels in general. While we are encouraged by the uptake, reimbursement would need to be clear before we would move forward to Phase II. We will continue to keep you informed as the Phase I pilot progresses.

The second of our existing opportunities is in the oncology space. And for competitive reasons, we still are limited in the amount of information we can provide. That said, we are currently collaborating with our partner on a second, more robust validation study. As this is a cancer-based test, the goal is to ensure rigorous documentation of its effectiveness. The validation sample size has been set to provide a robust data believed, needed to ensure success. The current timeline is to complete the validation study and publishing results in the second half of 2014. If this validation study confirms the initial established accuracy of the test, this should be a compelling test to launch in a large market. As you may recall, this deal is structured in such a way that PDI put $1.5 million upfront with the right to retrieve up to $1 million if required milestones are not met. If the agreed milestones are met to PDI's satisfaction, however, PDI has the right to in-licensee test in its entirety. So far, the milestones are progressing as planned. We will continue to disclose more information on future calls. We expect we'll be prepared to make a decision as to whether or not we move into Phase II of this test by the third quarter of this year.

In summary, pursuing a path as a strong commercialization partner for companies in the molecular diagnostics market is a natural and logical way to leverage our core capabilities. Additionally, we are entering a rapidly growing market and doing so in a relatively low risk way. We believe that long term, the execution of this strategy can add significantly to revenue, margins, operating income and shareholder value.

I'll now turn the call over to Jeff for a more detailed review of the financials and then I'll provide an update on our recently launched PD One platform before opening the call to questions. Thank you. And Jeff?

Jeffrey E. Smith

Thank You, Nancy. I'd now like to take you all through a bit more detail of fourth quarter results and also highlight a few full year numbers. As Nancy summarized, 2013 full year revenue of $151 million was almost $24 million or 19% higher than 2012, driven by increases in Sales Services. 2013 fourth quarter revenue of almost $37 million was about $1 million or 2% higher than last year. Overall for the quarter, year-over-year increases in Sales Services and Product Commercialization was partially offset by a decrease in marketing services. Sales Services revenue for the quarter of almost $33 million was about $2 million or 7% higher than last year, as revenue from new contract wins more than offset the anticipated expiration of certain other contracts. Marketing Services revenue for the quarter of about $600,000 was about $1.5 million lower than last year. This decrease was primarily a result of fewer contract signings in Group DCA due to a contraction in the amount being spent by pharma. We do expect to see a turnaround in revenue in this segment in 2014 with the recent launch of PD One. Nancy will provide more color on this later in the call.

And Product Commercialization revenue for the quarter was about $3.1 million, about $200,000 more than last year. As anticipated, gross profit for the full year of a little over $24 million, or 16% of revenue was lower than last year's almost $27 million and 21% of revenue due to the competitive factors we've been discussing all year.

Fourth quarter gross profit was $4.4 million, a decrease of about $2.5 million compared to last year. At the same time, the gross profit percentage in the quarter decreased to 12% from 20% in the fourth quarter of last year, also in line with what we anticipated. We do not believe the gross profit percentage in the fourth quarter represents the -- I'm sorry, we do believe, the gross profit percentage in the fourth quarter represents the low point and will improve going forward.

Sales Services gross profit for the fourth quarter of $4.4 million was about $1.5 million lower than last year. The gross profit percentage in Sales Services as anticipated decreased to 13% from 19% last year due to the competitive factors previously discussed. Marketing services gross profit for the quarter was a negative $600,000 compared to a profit of $200,000 last year, due to lower revenue and costs associated with the launch of PD One. And Product Commercialization gross profit for the quarter of $600,000 was about $200,000 lower than last year. Relative to operating expenses, please note that full year and fourth quarter 2012 operating expenses include over $24 million of asset impairment and facilities realignment charges. Excluding these amounts from the comparison, full year 2013 operating expenses of $28.7 million or $800,000 higher than 2012's $27.9 million. For 2013, approximately $3 million was expensed in connection with the company's strategic initiatives. About $2.5 million of this $3 million was charged to operating expenses, the rest to cost of services. These expenses were partially offset by the company's ongoing cost savings initiatives.

For the fourth quarter of 2013 then, total operating expenses were $8 million compared to $6.7 million last year, excluding asset impairment and facilities realignment. This $1.3 million increase was primarily driven by costs associated with our strategic initiatives. The net impact of changes in revenue, gross profit and operating expenses is a net operating loss in 2013 of $4.3 million for the year and $3.6 million for the quarter. 2012 operating income or loss, excluding asset impairment and facilities realignment for the full year was a loss of $1 million and $300,000 profit for the quarter. Again, we point out that we expensed approximately $3 million in 2013 related to our strategic initiatives.

In terms of liquidity and cash flow, adjusted EBITDA, which as you know, is our non-GAAP measure of cash flow from operations, was a loss of $2.9 million for the fourth quarter and a loss of $1.1 million for the full year. Cash at year end totaled nearly $46 million, down approximately $7 million from last year end. The decrease in cash is primarily due to increases in working capital requirements and investments in our strategic initiatives.

And finally, as of December 31, 2013, the company's cash was predominantly invested in U.S. Treasury money market funds and the company had no commercial debt.

I'll now turn the call back over to Nancy.

Nancy S. Lurker

Thank you, Jeff. Before opening the call to questions, I want to share an update regarding the launch of PD One. We officially launched our new sales software platform in early January with a top 5 pharma company as our initial customer. The PD One rollout is going well so far and we have a number of additional opportunities that we're currently pursuing. While we're still in the early stages, we're very pleased with our progress and remain optimistic about where this new product can go. As with all new products, the ramp will take time, but we do anticipate that within 2 years, we can start to capture significant market share.

In addition to our subscription-based sales rep solution, our online resource for physicians, www.themedicalbag.com, continues to realize increased traffic and capture mind share of physicians. We are seeing month-over-month increased traffic to this site and continue to add new features as we grow and develop this important new platform.

That concludes our formal comments. And with that, I'll now open the call for your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of John Kreger.

Matt Bacso

This is Matt in for John. I just have -- my first question is on the diagnostics spend that you guys are anticipating, $3 million in minimum for next quarter. What is the incremental increase that you guys see if those tests do move into Phase II?

Nancy S. Lurker

Yes. Just a correction. The $3 million is for the year, not for the quarter. For next year, okay? And we are not in the position right now to highlight what we see this thing could be and why is that? Because it's too unpredictable at this point in time. We don't know if we will go into Phase II with CardioPredict or the oncology test, and in addition, as I mentioned, we are in discussions with several other companies. We do anticipate striking another deal this year. So depending on whether 1, 2 or 3 opportunities go forward has a wide variance in spend levels. We do anticipate that should we go forward into Phase II, we can be more transparent and more clear about what those costs may be.

Matt Bacso

And just a follow-up. On your core business, it says you guys expect reasonable business wins. Do you see, with a slightly lower revenues for the year, are you seeing lower RFPs this year and what is your hit rate?

Nancy S. Lurker

Our hit rate remains well-above, what we call our fair share. Basically, there is 4 major CSOs in the marketplace, so we remain north of 25%. Generally speaking, north of 30%. However, RFPs are down, so they're down slightly year-over-year both in number and in size.

Operator

And your next question comes from the line of Scott Henry.

Scott R. Henry - Roth Capital Partners, LLC, Research Division

And I apologize I've been juggling multiple calls, so I may have missed a little bit of this. But I think the first question was going to be on the base business, the year-over-year decline. My thought was why is that getting worse but it sounds like you think it's just an overall category issue but you are not losing shares, is that correct?

Nancy S. Lurker

Oh no. Scott. Let me be clear. We are not losing share. We continue to be very successful in -- when we win business on the RFP side. It is a macro trend that is going on. It's not something that is enormous but it is a modest downturn in the volume of RFPs. As I mentioned as well, just in terms of the size of the RFPs. Some of that is pipeline dependent. So if you think about it, the number of primary care products that are being approved by the FDA are much smaller, and what is being approved are more specialty products. Those don't require field forces that are nearly as large as primary care products. So that now gets reflected in RFPs.

Scott R. Henry - Roth Capital Partners, LLC, Research Division

That's helpful. And then, this is kind of a topic for discussion. I'm curious to hear your take. But you're no longer new management by any means, so what happens with the company is clearly on your watch and you've been there long enough to put your stamp on it. My issue is this molecular diagnostic venture, it kind of has the feel of we're learning it as we go along, and $1 million here, $1 million there, isn't real lost money. But I would argue that it is. And I would just kind of -- am I misinterpreting in this? But it sounds like these 2 deals you have today, they started to seem more complicated than they did originally. The thought of no revenues in 2014, I don't think that's what we heard the first time when they were announced. So talk to me, Nancy, why isn't the execution better on those deals?

Nancy S. Lurker

Well, okay. So let me answer it this way, Scott. First, I want to make it clear about a couple of things. The molecular diagnostic industry remains a very high-growth opportunity. However, it is a field that is in fairly large flux. What do I mean by that? As I mentioned, reimbursement is changing rather significantly. We could not have foreseen that. So I would take issue with your point about execution, it's not a matter of that we're executing poorly, it's a matter of the field is changing rather significantly. So as an example, as I mentioned in my script, the CMS is -- sent out draft guidelines from one of the macs [ph] proposing that pharmacogenomic reimbursement be significantly curtailed. We could not have foreseen that. That's an unforeseen event. So therefore, yes, we're going to not go forward until that gets resolved into Phase II. As for the oncology test, what is becoming clear is that, as the reimbursement landscape changes to get the type of reimbursement that you need, it's very important that you now have more robust data sets and information. That's just change in the last 4 to 6 months as more -- as CMS and other payers have become more clear about how and when they will reimburse. So -- and in addition, just like with the drug, we're learning more because the test is in the clinic. So you do start to learn more about the test and we need to be flexible with that. It's not -- Scott, I would say that it's not too dissimilar from developing a drug, but orders of magnitude less risky and orders of magnitude less in terms of the investment required.

Scott R. Henry - Roth Capital Partners, LLC, Research Division

Well, I mean, I agree with some of what you're saying but not all of it. I mean, at the end of the day, this is a bottom line business and if you can't anticipate the variables, then you have to try to price them into the purchase of the structure. So I mean, to some extent, unknowns that work against you, you have to take some ownership for that. You just can't call it unforeseeable. That's the nature of the business. Reimbursement is not new to health care, but we'll keep watching it and we'll see how it goes but I'd like to think on the future deals, some of the variables would come out in a positive direction.

Nancy S. Lurker

Well, first of all, yes. We all hope for that. I appreciate your comment, Scott. So I don't want to minimize that at all. But I also want to say this, this is inherently, there's always going to -- inherently, there are variables that we have to be responsive to. And we never yet -- we've never yet given any kind of revenue guidance for IDX.

Jeffrey E. Smith

Yes, and Scott, just for the record, you recall the reason we structured -- so you talked about either pricing or structure, we structured both of those deals to have a pilot phase and a collaboration phase, so that the variables that were on the table could be evaluated in a methodical and in a very kind of planned way. So both of those deals had built-in pilots that said they were going to last 6 months or 9 months, and validation work was going to be done and we would not go forward with the these things and make major commitments in terms of resources or milestone payments or any kind of other payments until the variables that were present when we signed were clarified.

Scott R. Henry - Roth Capital Partners, LLC, Research Division

Yes, I would agree, Jeff, that you did minimize the capital at risk versus, say, DCA. But we're still talking about losses, not -- at some point, we'd like to see some of the variables going in the opposite direction.

Nancy S. Lurker

Okay. Yes, we understand.

Operator

[Operator Instructions] Your next question comes from the line of Jack Wallace.

Jack Wallace - Sidoti & Company, LLC

Looking to dig a little deeper into the state of the book of contracts that you've got there. The comments were that -- both the dollar amount and the number of contracts were down year-over-year but we're seeing some of the margins pick up a little bit. Is that due to the type of contracts won? Or was that also partially due to or maybe mainly due to shake out to due to some of your competitors?

Jeffrey E. Smith

Well, the margin improvement, honestly, is things that we think we can improve in our cost of sales. And the contracts that are being awarded are at slightly, nothing dramatic, but slightly higher margins. So that's nothing dramatic and when you do your own math with your model, what you're going to find is the margins don't have to increase that much to get to the guidance that we're talking about. So let me stop there.

Jack Wallace - Sidoti & Company, LLC

Okay. And with PD One you mentioned as a group is going to -- excuse me, that revenue segment is going to be up a bit due to PD One. But can you quantify the expected impact for PD One explicitly for the year?

Nancy S. Lurker

No. We won't disclose that. But however, let me reiterate, we do expect, certainly, growth in that product. We are projecting growth for 2014. And of course, nice margins on that business since it's a Software-as-a-Service. And so far, it's doing well.

Jack Wallace - Sidoti & Company, LLC

And switching gears to the molecular test with the oncology test, should Phase II go successfully, should we anticipate, again, with that condition being met, for there to be some kind of material revenue with a green light in Q4?

Nancy S. Lurker

Not material revenue only because at this point, we want to be able to ensure that we do a -- we launch at the right time, so it depends on how you define material revenue. It's probably premature to start to project that at this point in time. I would expect that we could plan for probably more of a soft launch in the back half of 2014, and it all depends on the timing of when the study gets done. So if you sense hesitancy on my part, it is not due to the enthusiasm for what this test can do, it is due to more -- the validation study is dependent at this point in time on patient flow, as you can imagine, as with all patient-based clinical trials. So obviously, we've got all the parameters in place to move this along as quickly as possible, ensuring that we do a quality study. So it's only a matter of timing for when the study gets complete.

Jack Wallace - Sidoti & Company, LLC

Okay. And then lastly. I think in previous calls, you've been nice enough to give your risk-adjusted book of contract size. What is the state of the book of contracts?

Jeffrey E. Smith

Yes, I think the way we'd have to describe it is, it's in the ballpark of $100 million, maybe a little bit less than that right now compared to -- right around $100 million.

Operator

[Operator Instructions] And your next question comes from Andrew Fleming [ph].

Unknown Analyst

I just had a question on the marketing services segment. I know you're not providing guidance for revenue but I'm just curious, do we know what the breakeven point would be in terms of how much revenue we need to be gross profit breakeven?

Jeffrey E. Smith

Yes, but we're not in a position to get in that level of detail.

Unknown Analyst

Do we expect to be breakeven or positive?

Jeffrey E. Smith

I think we're pretty confident that if you're talking about gross profit, we're going to be gross profit positive for 2014. And the reason it was negative in the fourth quarter, was there was quite a bit of expenses related to the launch of PD One that wound up being expensed on the gross profit line as opposed to SG&A for a very kooky technical accounting reason.

Unknown Analyst

Okay. And then on the CSO side, I believe you said that you believe margins are troughing there. Can you just expand on that?

Nancy S. Lurker

Well -- go ahead, Jeff.

Jeffrey E. Smith

Yes, I'll start. I mean, the fourth quarter of 2013 is really dominated by a couple of contracts that were won in 2012, and that's where we talked a lot about the margin pressures. As we move forward, they will become less of the -- less of a percentage of that business, and as I said earlier, the newer business is being won at higher-margins than those particular contracts and there are some things that internally we're going to improve gross profit.

Unknown Analyst

Okay. So is mid to upper teens gross profit reasonable as we think about that segment going forward?

Jeffrey E. Smith

I don't want to get that specific but that's probably getting ahead of the numbers, I think, something that looks more like the average of this year is probably -- or the average of the second half is probably more likely.

Unknown Analyst

Okay. And then shifting to molecular testing. I know you said third quarter of '14 is when the decision will be made on the oncology product. But on the Transgenomic product, do you have any sense of when a decision will likely be made? Whether or not to go to Phase II?

Nancy S. Lurker

Most likely -- yes, yes. Most likely second quarter.

Unknown Analyst

Okay, great. And finally, just on your -- shifting to the balance sheet. Sans acquisition, do you have a projection of where the cash balance will end at the end of '14?

Jeffrey E. Smith

Well, if you take the guidance we gave you. So we said that cash adjusted EBITDA, which is operating income, adding back depreciation and noncash stock comp, we said would be positive from the core business. We then said we're going to have $3 million of expenses from IDX, so that should get you to a loss, a negative cash of somewhere between the positive of the base and the loss of $3 million. And then you should just add some normal working capital and a little bit for working capital, and that will get you close enough.

Operator

And there are no further questions.

Nancy S. Lurker

All right. Let me close by saying thank you for your questions and we remain very committed to our path forward. So with regards to the CSO business, well, as I mentioned, we do expect that, that's going to be slightly down. We remain very competitive in that space and continue to see and invest in that business as a very viable part of PDI. We also remain very committed to the molecular diagnostic space and to PD One and are quite enthusiastic about where this business can go. It will take some time and I just want to reiterate that to make sure that these launches, whether it's the molecular test or PD One go well, it's going to take us time and we're going to expect that we're going to invest to ensure that those get off to the right start. So far, we are doing well and I look forward to continuing to update you in the future. Thank you. Operator, I think that's all.

Operator

Thank you. And this concludes today's conference call. You may now disconnect.

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