Cancer Genetics, Inc. (NASDAQ:CGIX)
Q4 2013 Earnings Conference Call
March 26, 2014 04:30 PM ET
Panna Sharma - President and Chief Executive Officer
Elizabeth Czerepak - Chief Financial Officer
Edward Sitar - Incoming CFO and Treasurer
Ram Selvaraju - Aegis Capital
Ben Haynor - Feltl and Company
Brooks O'Neil - Dougherty & Company
Greetings and welcome to the Cancer Genetics’ Fourth Quarter and Full Year 2013 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.
I would now like to turn the conference over to Mr. [Michael Wood] Managing Director at [LifeSci Advisors]. Thank you Mr. Wood, you may begin.
Unidentified Company Representative
Hello. And thank you for joining us for Cancer Genetics fourth quarter and full year 2013 financial results conference call. On the call today are Panna Sharma, the company’s President and Chief Executive Officer; Elizabeth Czerepak, Chief Financial Officer; and Edward Sitar, the new incoming CFO and Treasurer as of April 1, 2014.
Cancer Genetics issued a new release today after the market detailing its fourth quarter and full year 2013 financial results and business progress. Following the Safe Harbor Statement, Panna will provide an overview of the business progress and trends and Elizabeth will then provide a summary of the financial results and introduce the incoming CFO, Edward Sitar.
Finally, Panna will discuss commercial and developmental updates before we open up the call for question-and-answer.
Before we get underway, I would like to ask everyone to take a note of the Safe Harbor statement paragraph that appears at the end of the news release issued today covering the company’s financial results. This paragraph states that any forward-looking statements that we make speak only as of the date made are subject to inherent risks and uncertainties including those described in the company’s most recently filed SEC statements and should not be unduly relied upon.
Except as otherwise required by the Federal Securities Laws, we disclaim any obligation or undertaking to publicly release to any updates or revisions to any forward-looking statement contained herein or elsewhere to reflect any change in our expectations with regard to any changes in events, conditions or circumstances on which any such statement is based.
Our earnings press release for the fourth quarter and full year ended December 31, 2013 crossed the wire while ago after the market closed and it’s now available on the Investor Relations section of our website at www.cancergenetics.com.
It is now my pleasure to introduce Cancer Genetics’ President and CEO, Panna Sharma.
Thank you, Michael. Hello and good afternoon everyone. Thank you for joining us today for our fourth quarter and 2013 year-end conference call. In recent quarters, we’ve had an opportunity to meet with and talk with many of you in one-on-one discussions in order to talk about our unique portfolio of genomic tests, the milestones we are achieving at the company, and our unique business model that serves both the clinical and biopharma community.
We are excited about the continued progress we are making in developing a long-term sustainable genomics business that will impact the diagnostics and treatment of cancer. This past year, our company delivered results of nearly 10,800 tests, up 63% from 2012 and this represents only a small portion of what we estimate to be a $6 billion U.S. testing market alone.
We are one of a handful of companies in cancer diagnostics that takes a comprehensive and disease-specific approach to biomarker based testing; one that we feel delivers actionable information into the hands of cancer centers, pathologists and oncologists.
Our most recent quarter built upon our globally leading franchise in test in blood-borne cancers and started to develop the ground work for entry into the renal and cervical cancer markets. We are very encouraged by the enthusiasm and the interest by oncologists, pathologists and leading research teams in the biotech and pharma companies. They are all seeking the comprehensive and disease focused information that our test in laboratory provides them.
The management in cost effective and efficient treatment of cancer relies not only on diagnosis, but also increasingly on prognosis, predicting outcome and also on theranosis, which is helping decide on therapeutic options.
This comprehensive approach is the backbone of our business and positions us very uniquely in the oncology ecosystem with both cancer centers that are looking to provide more value to their patients and also with the biopharma companies.
During 2013, our portfolio of targeted genomic tests expanded significantly into the urogenital cancers, namely renal and cervical. The renal cancer market has approximately 60,000 new cases a year, with approximately 25% to 30% of these cases that are not diagnosable from traditional pathology from fine needle aspirate. Our unique and IP protected test helps to diagnose and predict outcome for renal cancer and we validated this test now in two large scale studies at Sloan-Kettering and with the Cleveland Clinic.
We are extremely encouraged with the results of the latest study that was highlighted at USCAP, it was a study validated in over 188 patients and provided us the data to suggest that our assay shows over 93% diagnostic accuracy and 99% sensitivity. In fact, we are quite excited about this renal cancer test. Later this week, our company will be live Twitting the results of how this renal cancer assay actually works and you can follow the results of how this test works on our Twitter feed.
In addition, we have also launched and made available our FHACT test for cervical cancer triaging which is now available as a laboratory developed test and we have gained some significant early adaptors, both among OB/GYN practices and also leading side of pathology facilities that are looking to increase accuracy of their cervical cancer related diagnosis but also increase the value and insight taken -- sorry, increase the value and insight of the data they are gaining from the routine Pap samples that are taken.
The beauty of our FHACT product is in the design that it works directly from the left over Pap sample and looks at very specific genomic biomarkers and these biomarkers can be reflexed and run directly from the Pap samples that are abnormal or high risk HPV. We can then distinguish if there is cervical cancer and assess the risk for further cancer development without having to take additional time and visits from the woman or the clinician.
It’s a large market, nearly 1.5 million abnormal Pap results in the U.S. that are referred on for colposcopy and our test can obviate the need for 80% to 90% of these cases. At the same time, it provides a more accurate genomic based diagnosis that also can be monitored over time. We expect accelerated traction for this test, both in the U.S. market and with our partners outside the U.S. over the next several quarters and years.
We are also now in development and validation for this technology as a diagnostic for HPV related head and neck and anal cancers. This is a growing epidemic and the availability of a routine genomic test to diagnose these cancers is becoming a critical issue. We expect to have our FHACT test available for these indications, which are significantly large and unmet today later this year.
Beyond our new launches in renal and cervical cancer, we continue to invest time on our existing knowledge and understanding on the biology of leukemias and lymphomas and we are now taking this into next generation sequencing.
We are now in the middle of finalizing our first panel for the lymphoid malignancies and plan on launching this on the Illumina platform as a unique panel in late Q2. This test will be able to provide prognostic information for CLL risk stratification and will involve all the major current genes involved in CLL with a higher degree of sensitivity and significantly more depth of coverage than any existing test or panel in the market today.
For this panel, we are already in advanced discussions for clinical implementation with a number of centers and also with the biopharma customers. We will be providing more information on our targeted lymphoid malignancy panel, the value this test has, and the clinical opportunity in the coming weeks prior to a more detailed press release at AACR.
Additionally, our R&D team has begun development on a number of unique targeted panels that we plan on implementing into the clinical setting over the next several quarters. These panels not only build upon our relationships with leading biopharma partners, but also leverage our unique insight in the blood-borne and urogenital cancers where we have significant IP. We’ll be providing analysts and investors a detailed R&D roadmap and update along with update on our joint venture OncoSpire Genomics in the late Q2 of this year.
Having great technology and targeted genomic insight is only part of our strategy. Having a seasoned and focused commercial team is critical and is needed to drive adoption in the field. During Q4 and into this quarter, we accelerated the development of a sales and marketing team that has a national footprint. Our focus has been to attract, recruit and deploy amongst in the most talented commercial minds in oncology and leverage them to inform and educate community hospitals and oncologists about our unique portfolio and our common sense pragmatic approach toward delivering genomic content.
During the past few months, we’ve increased our commercial team to over 16 people that are now able to deliver the CGI story into the field and help drive value for patients, physicians and payers.
Lately, as many of you had seen, we've had a welcome addition to our team Edward Sitar, who you will meet later on this call; Ed comes to us from Healthagen, which is an Aetna company focused on technology where he was most recently the CFO of New Business. Ed has significant public company experience both in the reporting, as well as operational finance side. We’re very excited to have Ed join us and guide us in our growth going forward.
In addition to Ed joining our company, we also added Dr. Paul Rothman from Johns Hopkins as a Board member. Dr. Rothman served as a CEO of Johns Hopkins’ Medicine and Dean of the Medical Faculty. And as many of you’ve noticed, John Pappajohn was also made Chairman of CGI as we increasingly turned our attention now to the commercialization and scale up of our unique business.
Our biopharma partnerships, most notably with Gilead Sciences and Roche have been central to our success, validation and growth of the past year, and we have also uniquely been able to diversify our business away from the gyrations of the reimbursement environment.
Recently, we expanded our relationship with Roche and signed a multiyear deal with them which is a testament to quality, focus and real world impact we’re making on personalizing treatment not only here in the U.S., but also in other countries.
We also entered into a partnership where we’ll become a center of excellence for lung cancer testing on the cobas platform, which is a highly sensitive FDA approved platform; and this will serve for us the launching point into other cancer categories for CGI.
At Gilead, which continues to be an important client, we’re very pleased that the relationship continues to expand into additional studies and trials and we fully expect ongoing additional growth throughout the year.
I’d like to turn to some of the select highlights of our operational results. I’m pleased to report that revenue grew 72% from the fourth quarter of 2013 over the same period last year and our total revenues for the year 2013 increased by 54% over 2012. Test volumes also increased significantly with total test volume increasing 63% year-over-year.
We also continue to make significant improvements in gross margin with approximately three-fold increase to 26% for this full year, up from 8.7% during 2012. You may see slight changes quarter-to-quarter in gross margin as we ramp and scale the business, but we’re experiencing strong momentum in sales and cash usage, proprietary test sales and average reimbursement.
We closed the year with approximately $50 million in cash. And I’ll have Elizabeth, our CFO elaborate on additional operational and financial highlights; and she will also introduce you to Ed Sitar.
Now, I’ll turn the call over to Elizabeth and I also like to note that Elizabeth has been an absolute pleasure to work with over the past several years; I’ve gotten to really enjoy getting to know Elizabeth. Elizabeth?
Thank you, Panna. Total revenue in fourth quarter 2013 was $1.9 million compared with $1.1 million in fourth quarter 2012 for an increase of 72% year-over-year. Revenue for fourth quarter excluding grant was up 67% over fourth quarter 2012. Fourth quarter test volumes increased by 64% year-over-year from 1,673 tests in fourth quarter to 2,736 tests in fourth quarter 2013. Cost of sales was $1.4 million in fourth quarter compared to $1.0 million in the same period last year. This increase was the result of increased labor and supply cost related to higher volumes.
Gross margin in fourth quarter was 26% compared to 3% in the comparable period last year. The improvement in gross margin was driven by higher revenues that offset increased labor and supply cost.
R&D expenses in fourth quarter were $806,000 compared with $560,000 in the comparable period last year for an increase of 44%. The increase was primarily the result of higher supply cost.
G&A expenses were $1.9 million in fourth quarter compared to $1.0 million in the same period last year for an increase of 81%. The increase was principally due to higher compensation cost and increased professional fees and insurance cost. Sales and marketing expenses were $567,000 in fourth quarter, up from $349,000 reported last year, a 63% increase. The increase was due to increased headcount and related cost. Total operating expenses in fourth quarter were $3.2 million compared to $1.9 million in fourth quarter 2012. Operating loss in the fourth quarter was $2.7 million compared to $1.9 million reported in the same period last year.
Interest expense in the fourth quarter was $347,000 compared with interest expense of $1.4 million in fourth quarter 2012. The decrease resulted from the conversion of $9.6 million of debt in April 2013 and the pay-off of $3.6 million of debt in August 2013. We expect quarterly interest to decrease by approximately 85% beginning in second quarter 2014.
The company had a net loss of $2.5 million for a diluted net loss per share of $0.37 in fourth quarter 2013 compared with the $4.0 million net loss and a diluted net loss per share of $3.86 in the comparable period last year.
Now turning to the financial results for the fiscal year ended December 31, 2013. As Panna already highlighted, total revenue for the year increased 54% or $2.3 million to $6.6 million in 2013, up from $4.3 million in 2012. Revenue in 2013 excluding grants was up 69%. Test volume increased by 63% to 10,771 tests in 2013 compared with 6,610 tests in 2012. Our average revenue per test excluding grants and probe revenue increased to $566 in 2013 compared to $553 per test in the prior year.
Revenue from direct bill customers increased 141% or $2.2 million to $3.8 million in 2013 compared to $1.6 million in 2012, principally due to increased revenue from a significant clinical trials client.
Cost of revenues increased 25% to $4.9 million for 2013, up from $3.9 million for 2012, primarily due to a $650,000 increase in employee compensation related expense from increased headcount, together with a 244,000 increase in supply cost from higher test volumes.
Gross margin for 2013 improved to 25% from 9% in 2012, primarily the result of an increase in revenue and improvements in utilization fully offsetting an increase in labor and supply costs related to higher volumes.
Research and development expenses were $2.2 million in 2013, a 4% increase over the $2.1 million reported in 2012. The increase was the result of a $237,000 increase in supplies expense and a $72,000 increase in non-employee stock-based compensation expense which were offset by $230,000 decrease in employee compensation.
Sales and marketing expenses were $1.8 million in 2013, an increase of 32% over the $1.4 million reported in 2012, primarily due to an increase in headcount and compensation related costs.
General and administrative expenses were $6.1 million for 2013 compared to $4.5 million in 2012, for an increase of 36%. The increase was primarily due to an increase in compensation and headcount related expenses, a $618,000 write-off of deferred IPO costs and higher insurance costs and professional and consulting fees related to our transition to being a public company.
Interest expense decreased 50% or $2.3 million to $2.4 million for 2013 compared with $4.7 million for 2012. The decrease is attributable to the conversion of $9.6 million of debt into common stock, which occurred concurrently with the closing of our IPO and the repayment of $3.6 million of debt in August 2013.
Our loss from operations for the year ended December 31, 2013 was $8.5 million compared to a net loss from operations of $7.6 million in 2012. At the time of our IPO in 2013, we converted $9.6 million of debt into common stock at the IPO price of $10 per share. In connection with this conversion; we expensed the remaining debt discount of $3.5 million, financing fees of $419,000, as well as the contingently recognizable beneficial conversion feature in the converted debt of $3.0 million. The total resulted in a write-off of $6.9 million.
The change in the fair value of our warrant liability resulted in $4.6 million in non-cash income for the year ended December 31, 2013 as compared to non-cash income of $7.5 million in 2012. During the year-ended December 31, 2013 we received $664,000 in cash from the sale of certain New Jersey NOL carry forwards.
We recorded a net loss in 2013 of $12.4 million or a loss of $2.65 per basic share and a loss of $3.64 per diluted share compared to a net loss of $6.7 million or a loss of $4.97 per basic share and a loss of $10.55 per diluted share in the same period 2012.
Cash used in operations for the year ended December 31, 2013 was $8.1 million. At December 31st the company had cash and cash equivalents of $49.5 million compared with $800,000 at the end of 2012. The increase year-over-year was a result of proceeds raised from our IPO and two subsequent financings. The net proceeds raised in these transactions were $61.5 million offset by repayment of $3.6 million of debt.
For a more detailed explanation of our financial results, we would encourage investors to consult our 10-K Form for the year ended December 31, 2013 which will be filed with the SEC shortly.
This will be the last earnings call that I will participate on for Cancer Genetics and I would like to thank each of you for your interest over the past quarters. And at this time, I would like to introduce Ed Sitar, who we will be assuming the role of Chief Financial Officer on April 1st.
Thanks Elizabeth and good afternoon. It's a pleasure to be speaking with you this afternoon. I want to start by thanking Panna, Elizabeth and the team of the warm welcome I have received at CGI. I look forward to working with and meeting with our investors as my tenure continues.
CGI is at the forefront of genetic testing for oncology, serves large markets, has proprietary technology and is in growth mode. Payers and providers believe personalized medicine is critical to improving patient outcomes and lowering the cost of treatment. CGI will be a leader in that transformation. My experience in working with companies that have grown rapidly and [genetic] as an ideal fit. I look forward to making tangible impact with the company in the coming months and years.
And now I will turn the call back to Panna.
Thank you, Ed. On our last earnings call, I shared the five main elements of our growth strategy. Today I will provide an update on each of the main strategic elements. First increasing geographic coverage; we have seen already that there is a significant need to partner with community hospitals and cancer centers to drive more effective unique state-of-the-art testing for complex cancers.
When I came to the company in 2010 community hospitals and centers accounted for about 14% of our volume. That number is nearly 40% today not only in the U.S., but also in emerging countries as well. This is a critical element in our growth and we have developed a very focused team to call on and work with community hospitals.
In Q4 we continue to expand the team focus on hospitals in North America and there are over 4,000 community hospitals and 1000s of local oncologists that need a partner for genomic incensement and improved disease management for their patients.
We developed a program called Expand DX where we have helped in the hospitals to expand their value proposition and expand their capabilities in personal cancer diagnostics.
During our last call, I mentioned that we had seen significant uptick in areas such as Texas and Midwest. Those have been amongst some of the fastest growing regions for us. I would like to now report that the Southwest is also now showing a significant growth especially over the past few months from some of the recent hires there.
And now with the greatly improved cash position, we are seeing recent -- recently really build out our national sales footprint, and start uncovering additional market share. We expect to have 25 to 30 sales and marketing professionals by the close of this year.
Our second strategy, main element of our strategy is our SelectOne program where we are partnering with the biopharma community both biotech and pharma companies. SelectOne which we formally launched in Q1 of 2012 continues to grow quarter-over-quarter driven by our partnerships with companies such as Gilead Sciences and Roche and others that we plan on announcing in the coming quarters.
The biopharma community is aggressively moving toward biomarker based therapeutics. We are in an ideal position to help them drive the changes that are needed to introduce more specific compelling diagnostics, genomic markers to improve theranostic programs and to make the clinical trials more effective.
Today our contracts in this category are over $14.5 million in value and we expect to work through that over the next 2 to 2.5 years. SelectOne has made us a true value partner of the biopharma community to help them manage the key issue of genetic-based patient stratification and patient selection.
The third element of our strategy is our strong focus on payers and on reimbursement, the recent expansion of our reimbursement team and the hire of Ed Sitar from Aetna with his background is important to our long term value. We want to ensure that healthcare providers and organizations see the added value in our testing, in our approach and then the impact that we are making on their patient lives and on improving the efficiencies of their healthcare spend.
We start making investments in generating the dialogue, exposure and trials of payers that we can have more payers on board and a more robust approach of bringing health cost organizations, adapt our genomic assessment of this complex of cancers. We are now actively in dialogue with several additional payers that we expect to bring on Board and we’ll routinely update our investors on this progress.
The fourth strategy or strategic element is our joint venture with OncoSpire genomics. This is our joint venture with Mayo Clinic. As many of you know, next generation sequencing is an approach that will change the future of healthcare and the patient management. And as the technology continues to mature and the standards emerge, CGI and our shareholders would be uniquely positioned to capture value in this area.
We created this joint venture with Mayo so we can in fact leverage their significant insight, their resources, their significant investment in bioinformatics and NGS infrastructure to take a disease specific approach to developing IP protectable panels as opposed to simply multiplexing hundreds of known genes.
We’ve now launched programs with world leading clinicians in lung, multiple myeloma, and follicular lymphoma that are looking at questions that are not able to be addressed in the existing technology or tests that are out there today.
We are very hopeful that these panels will generate significant long-term value for our shareholders. And more importantly we will be providing routine updates on these programs.
This is very important is our continuing investment in our existing portfolio at CGI. As we discussed earlier, we have built this company on a foundation of tremendous genetic knowledge and being able to rapidly translate that into clinical questions that are actionable in managing the disease in a comprehensive manner. We’ve commercially launched now five compelling tests with great data, most recently in renal and cervical. We are going to continue investing our existing products through additional trials, more validations. We are finding the algorithms that will improve the performance and sensitivity and continuing to update the portfolio.
During late Q2, we’ll be having an Analyst Day, we’ll be providing and sharing developmental details of this portfolio and giving inside into adoption patterns, sharing case studies and sharing the pipeline of the publications that we’re working on that will continue to help us drive adoption, impact patients and help make better care decisions.
Executing on these five pillars is going to be central to getting growth, achieving long-term sustainable shareholder value and keeping us on the leading edge of genomic-based care in oncology.
The healthcare industry as all of you know today is going through a significant paradigm shift, one that we think will take several years, but really move us away from traditional approaches to much more comprehensive biomarker and genomic-based approaches of not only the routine, but also very complex cancers. Our company is ideally positioned with the right portfolio at the right time with the right team and now and very importantly with the right capital to execute on this plan to become a leader in the genomic assessment of these tumors.
It is because of our technology and our pragmatic and comprehensive approach that works that has allowed us to partner with premier institutions such as Mayo Clinic, Sloan-Kettering, Cleveland Clinic and many others. And we believe that we can continue to drive the necessary information to personalize the treatment and be a real partner of choice for biopharmas and cancer centers.
With the entire industry in the midst of this paradigm shift not only here in the U.S., but globally we believe that providing a complete set snapshot of the tumor system is becoming widely adopted among clinicians and pathologists and the use of our tools and services is going to be central to ultimately helping physicians drive better, more accountable care, improve patient stratification, better predict outcome and drive more cost effective care for the healthcare system.
Thank you for listening in and I’d like to now open up the line for Q&A.
Thank you. We would now be conducting a question-and-answer session. (Operator Instructions). Thank you. Our first question comes from Ram Selvaraju of Aegis Capital. Please go ahead.
Ram Selvaraju - Aegis Capital
Just a couple of financially related questions if I may; could you comment on how you anticipate gross margin trends to evolve over the course of the year 2014 and which specific test offerings you expect to be associated with the highest gross margin contribution?
Secondly, just please if you could maybe comment on the ordering trends that you are seeing emerge in early 2014 and how that is coloring your expectation for revenue growth especially with respect to sample volume processing?
And thirdly, maybe you could just comment on the plan within the company to potentially expand bandwidth in particular with respect to access to additional clear facility square footage? Thank you.
Ram thanks, very good questions. I will -- those are big meaning questions all of them, so I’m going to try to go through them quickly and I’m sure you will have some follow-ups. So the first one on gross margin trends, I’ll discuss and also I'll discuss just general ordering trends that we see.
If you don't mind I'll hold off on discussing kind of facility expansion and new expansion for clear facilities till later on the call, I think there’s a kind of lot of big topic to cover.
In terms of gross margin trends, we think we're seeing pretty big improvements in gross margin through increasing test count, better more effective utilization of our existing capacity and just the order volumes increasing. We do expect some slight variation of quarter-to-quarter, largely based on test mix and kind of how we use up the supplies, et cetera. But we see pretty significant improvements in gross margin especially in the second half of the year.
A lot of that is also driven by our SelectOne business and I think if you look at some of our SelectOne backlog which was posted I think it was about $13 million earlier this year, it's now over $14.5 million and growing. A lot of that tends to be higher margin work for SelectOne than the clinical work today, because we're very conservative in terms of how we account for revenue on the clinical side. So, we're seeing the pipeline there just continue to expand. So, I think gross margins will pick up and pick up very notably as -- especially going into the latter half of this year.
In terms of overall testing trends that we’ve seen for the first couple months, they are very consistent with what we've seen last quarter, we have launched FHACT and FHACT has come out to be a pretty very high demand test. It tends to be today slightly lower margin than the other tests, but we expect that to change because now we’re beginning to manufacture the FHACT test more and more in our facility in India and we'll continue scaling that. So, we're very pleased with FHACT and the pick up that FHACT has had. And we think that will also; will get that to the margins that we needed to be as well going forward.
So overall the expansion, as I think I’ve indicated in the past, I’ll try to answer those in the second, as we go through the remainder of the questions. But in this facility alone, we can continue expanding substantially this year. But again, to really fulfill our mission of personalizing and touching as many lives it is essential. I think that overtime we’ll look at additional [clear type] facilities. But right now we’re certainly in a position where we can scale and utilize our existing facility without a problem.
Ram Selvaraju - Aegis Capital
Okay. With respect to expense, I guess expectation is the right word. I just wanted to ask about two aspects of the recently reported results to better understand how this might inform, how we should be looking at the evolution of those two line items going forward. So that would be R&D, as well as G&A. On the R&D front it looks like the expenditures came in a bit higher than what we were initially expecting.
So my question would be do you anticipate R&D spending to be at that same roughly $800,000 level on a quarterly basis going forward. Do you anticipate it going substantially higher as you prepare for new product launches and you continue to extend the research activities, particularly with respect to your various collaborations or do you anticipate the R&D expenditures to start to mitigate over the course of 2014?
And then with respect to G&A expenses, can you give us an idea of what principally drove G&A expenses in the fourth quarter? Thanks.
Good question, Ram. The R&D for Q4 was higher than we expected largely because of supply cost, so we’re kind of gearing up for some big programs, both in the NGS work that we talked about, as well as in the microarray validation, large scale validation we just finalized with the Cleveland clinic. So R&D expenses largely were supply driven as opposed to headcount driven in Q4.
Going forward, we do expect our full year 2013 R&D expenses $2.2 million, we do expect that to go up, but it’s certainly not going to be -- it is not going to be 800,000 kind of number going forward, I think it was kind of a one-time event because of the increased supplies that we had to kind of gear up for in that quarter. And most these were again unfortunately more expensive supplies in the array and NGS side.
So I hope that answers that. I do expect R&D to go up, but definitely not double; I think the supply cost will bubble up from time-to-time though.
Thank you. The next question comes from Ben Haynor of Feltl and Company. Please go ahead.
Ben Haynor - Feltl and Company
Good afternoon everyone.
Hey Ben, how are you?
Ben Haynor - Feltl and Company
Doing well. Just going to start off here on the sales reps. Did I hear that you had 16 sales reps exiting the year or 16 sales reps as of today?
As of today, that's this quarter.
Ben Haynor - Feltl and Company
We closed the year I think with about 13 or 14, we’ve continued to hire a few more very good headcount this year, we have expanded, continue to get more people in overseas and we continue to build out in the West Coast -- West and Southwest. In fact right now, our fastest growing territory is Southwest which is new for us, but it’s really come on quite strongly in the last month or so. So, we are getting our reps up and running probably within three or four months which is pretty consistent with our model.
Ben Haynor - Feltl and Company
Okay. So, you are pleased with the traction that the sales reps are having, the new hires?
Absolutely. We are getting in front of some of the best names in oncology. I think we are getting some very good trials of major centers. I mean our pipeline for cancer centers and hospitals has virtually tripled since our last call. So, I mean that’s a direct function of the sales force and feet on the street. So, we think we got a lot of very qualified opportunities, vast majority of them in trials and lot of them we expect over the course of the year to convert into pretty substantial customers.
Ben Haynor - Feltl and Company
Okay, great. That’s helpful. And then on FHACT, how big of a validation is having Kamineni come on here and start for the FHACT test along with their cervical cancer testing and what do you think that might do to other maybe developing nations seeing that, will that drive increased traction do you think?
Yes, very good question. We are very excited Kamineni bringing on FHACT; I mean they did in a pretty public way in India on International Women’s Day. Just to be clear there; they are doing the service themselves buying the product from us as a pro panel which as you know was a couple of hundred thousand in revenue for us last year. It’s growing and we expect that to be several million over the next couple of years as we grow and we will scale that up to be very high margin product.
So Kamineni started back in June or July, pretty large scale validation and several hundred samples and now they have brought it into their kind of as a complete package. So in terms of revenue, I don’t expect a lot of revenue because of pricing, here in the U.S. it’s about four or five times that than of what we are doing as a product in India because we are doing it as a service here as LDT. And so we expect a lot of volume just as the early, again early indications here for FHACT is that there is a lot of demand and because it is using genomic markers that are understood and we’ve got very high sensitivity. We’re seeing some -- we’re seeing very good traction in the handful of accounts that we started servicing already in Q1.
And again, we are very targeted, we have infield product manager and team that goes after these OB/GYN sites, ordering sites and path labs. And so the cost savings are fairly tremendous because of the fact that you don’t have to bring a woman back to have an additional sample, you don’t have take up OB/GYN time. And so there is -- we see a lot of demand for this type of product.
The other thing that we’re seeing is as you probably know in the era of patient empowerment; you’re seeing more and more women much more active about what types of testing and what kind of samples are taken from their body. So we think that although we’re not active in the end-consumer demand side, we are seeing a lot of end-user and end-patient demand for non-invasive or less invasive testing.
And so this fits very nicely into that what we think is a larger, broader kind of tailwind in our space. And so there also we’re routinely getting information back where they’re going to our webinar or going online somewhere and finding out about things like FHACT and other non-invasive testing and taking that in.
So, we think this is a multi-quarter, multiyear trend; again 1.5 million abnormal Paps and we have a test that’s got tremendous specificity and is early to market and has some good data behind it. So we think this is going to be a real homerun for our shareholders.
And one of the things that we’re doing now to again drive margin higher is increasing the yield per batch production in India and also we’re investing heavily in the automation, in automating the image analysis and automating the genomic analysis associated with that test. So that will -- we think as we get that fully underway that again will continue to drive our gross profit margins.
Thank you. (Operator Instructions). And the next question comes from Brooks O'Neil of Dougherty & Company. Please go ahead.
Brooks O'Neil - Dougherty & Company
Good afternoon. I was hoping Panna, you could talk just a little bit about what you plan to do to develop the sales organization and whether you have identified some metrics that will help us track their ongoing productivity enhancement?
Brooks, how are you?
Brooks O'Neil - Dougherty & Company
Good, very good question. Like I said, a key part of our strategy now is that we have a good portfolio to drive execution in this, boots in the field category you know very well about. Again, we -- our sales force expansion really happened significantly in Q4 post to second follow-on and now into Q1. So we’ll begin to see significant uptick in pipeline. So although we don’t report pipeline, we do expect to report number of people that we have in the sales force, we do expect to report on major account wins either sites or centers that allow us to use their name, we’re very -- in active dialogue with a number of those centers today.
And obviously you will be able to -- we’ve got certain metrics in place for test count and revenue count per head. For us, it takes about three to four months for the reps to get fully productive. And typically what we see with the existing reps is that from year one to year two, we see productivity increase by a factor of 80% to 100%.
So it’s -- again continues to be inline. Our goal by the close of this year and what we want to map is to have by late Q3 and going into Q4 kind of that 25 to 30 headcount of sales in commercial professionals, both sales, as well as clinical sales people.
Brooks O'Neil - Dougherty & Company
So, I think one of the things that you probably had seen in our quarterly financials is probably you haven’t seen the major uptick. But I think as you go into this year, you’re going to see a major uptick in the sales and marketing side of the business. So, that’s probably going to be the fastest growing kind of line item on our operating expenses.
Brooks O'Neil - Dougherty & Company
Great. And then just sort of following on with some of the questions that Ram was asking. Do you think as the -- as you invest in the sales and marketing organization that you can continue to drive margin enhancement through sales productivity and really driving the top-line or do you think there will be some pressure on the margins in 2014, as you try to scale the organization to be much larger company.
I think probably the pressure on, definitely not the gross profit margin because of the utilization, a lot of the process innovation that we did in 2013. We had decent growth in 2013 with about the same amount of headcount and same amount of feet on the street. So, I think gross profit margins, we’ll see pretty good expansion, very healthy expansion I think on the operating margins because of the investment in sales and marketing, obviously you’re not going to see I think the operating margin grow as much in 2014 as you will see in 2015 once you kind of fully built out the organization.
The other thing that we’re seeing and we’re very actively working on is something I alluded to in the call in the prepared remarks is revenue per test. We have seen a small increase in revenue per test, we continue to see increase in revenue per test from the SelectOne side of the business, as well as our with payer projects and with specific payers.
So, we’ll be reporting on that and I do expect some big changes in revenue per test, since we’ve recently started focusing on reimbursement and on the contracts with these payers. So, I think gross profit, I don’t expect, in fact I expect healthy increases as our plan, but on OpEx I don’t expect major improvements to operating margin until 2015.
Brooks O'Neil - Dougherty & Company
Great, and then just one other question. You were just talking about the revenue per test enhances which is great; are you seeing pressure on reimbursement or pricing per test from any of the segments that you are targeting at this point?
It’s great question, Brooks. I think everyone in our industry that tell you that’ not accurate, I think there is so much pressure from Medicare on all types of tests and what they pay, how they pay, what they like to pay, what kind of proofs they are seeing. So even though our revenue per test is increasing, what we are seeing is that the process involved to get to that revenue tends to be quite laborious. And it’s something we have gotten better at, it’s something we need to invest more time in. And given the unique nature of our test, as many of you know, we think we will be able to command much higher premiums going forward, but it is -- it’s not easy to get there and you do need to have a lot of kind of I would say embedded institutional discipline inside to make sure you do that.
On the SelectOne side of the business, we are not seeing that kind of pressuring that tends to vary. And so the big guys do want to use their purchasing power, but sometimes they like the speed, or they like the agility or they like the uniqueness of the test. So it balances out. But the pressure there on pricing is definitely not anywhere near kind of what we are seeing on Medicare.
Private payers, that category tends to be very mixed. That mix is driven by a couple of factors. It’s driven by the uniqueness of the test, it’s driven by the volumes. And as we start getting into the conversations about payment on specific types of test, bundled or non-bundled, I think those will help us alleviate any of the traditional pricing pressure that comes from the [current] organization because the way we tend to go into these organizations tends to be both in the technology side and on the clinical side. And so, our big push as we start last year growing from 1 million to now 2 million kind of per quarter and higher, we are now able to have these conversations that are outside of kind of sourcing and procurement and traditional contracts and more into the clinical affairs and patient management side. And so, those are the live places for us to show the value of the test and command better pricing over time.
Brooks O'Neil - Dougherty & Company
Great. Just one more question, so you had tremendous success working with some of the leading cancer centers and some of the leading biotech companies, would you expect more of that in 2014 and give us any hints if you do?
I think our pipeline is growing tremendously in that category. We have several additional biotech and pharmas that we have already started working with and we are working on now migrating it, migrating these two announced type deals. It’s not uncommon for us to start working on a project or a deal with the pharma and then wait several months or a quarter or so before make the announcement. So there are several that we have already begun. Similarly, our fastest growing categories in terms of geography or outside kind of our Northeastern zone, they’re in the Midwest and the Southwest, they are in Texas. And so the pipeline has really has increased tremendously and most of these I think will be sticky clients that will convert and will get obviously traditional [heal on] type business that will migrate to other solid tumors and that will migrate into kind of full work ups and full panel work. So again it’s a process but what we see in the pipeline so far in Q1, what we’re seeing from the existing biopharmas on both sides, we see very good indications. Thank you.
Thank you. The next question is from Ben Haynor of Feltl and Company. Please go ahead.
Ben Haynor - Feltl and Company
All right. Just one more quick one kind of following on Brooks’ last question there. These other biopharma partners that you planned to be announcing in the next couple few months or quarters, could you maybe characterize the types of firms that these might be; could it be smaller biotech, is it more likely to be the household name big pharmas or what should we expect there?
Good question, Ben. Kind of our strategy right now is focused on big biotechs and pharmas, so things that are more I would say maybe not household names but they’re definitely better known brands out there. Part of our strategy is we’ve got [learned] resources and headcount, and so we need to really be will be able to work with groups where we’re going to have a tremendous impact and also have the right kind of wallets and right kind of ability to partner with us.
So, we’re very focused on kind of the bigger brands today, because you have -- it’s a lot easier to continue selling in size one of those units and to multiple indications and become more valuable than it is go after 50, smaller names and resell over and over again in our experience. So again, limited resources; it’s easy to focus on a couple of billion dollar companies and $20 million, $50 million to $100 million companies, at least today.
We do expect to make announcements, like I indicated earlier we’re already working with several and some of them want to mature the programs, want to see things in place or are sensitive talking about the nature of work. So we end up going back and forth, not surprise the only downside with some of the bigger names, they take longer to kind of get a meaningful press release out there.
As you guys know, I’m not a big fan of putting out press releases that say unknown pharma, unknown contract, unknown work that we’ve seen plenty of those out there, and I try to avoid those.
Ben Haynor - Feltl and Company
All right. That’s helpful. That’s all I have. Thank you very much.
Thank you. (Operator Instructions). Thank you. We have no further questions at this time. I’d like turn floor back over to management for any closing remarks.
Okay. We’d like to thank everyone for participating, great questions. Again, I think we’ve had a great close to 2013, got the company properly financed and it really started making the turn towards being much more operationally focused this year as we scale out our sales and marketing organization and continue take advantage of our deep pipeline.
Thank you guys for participating. And we look forward to hearing from all of you soon.
Thank you. Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. And thank you for your participation.
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