Bio-Reference Laboratories' (BRLI) CEO Marc Grodman on Q3 2014 Results - Earnings Call Transcript

Bio-Reference Laboratories (NASDAQ:BRLI)

Q3 2014 Earnings Call

August 27, 2014 10:30 am ET


Tara Mackay -

Marc D. Grodman - Founder, Chairman, Chief Executive Officer, President and Managing Director

Sam Singer - Chief Financial Officer, Chief Accounting Officer, Senior Vice President and Director


Amanda Murphy - William Blair & Company L.L.C., Research Division

L. Mitra Ramgopal - Sidoti & Company, LLC


Good day, ladies and gentlemen, and welcome to the BioReference Laboratories Inc. Third Quarter 2014 Earnings Conference Call. My name is Tuanda, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Tara Mackay, Investor Relations Coordinator. Please proceed.

Tara Mackay

Thank you. Good morning, and welcome to BioReference Laboratories' Third Quarter Fiscal Year 2014 Earnings Conference Call. BioReference Laboratories is one of the largest full-service clinical diagnostic laboratories in the country with focused marketing capabilities in the areas of genomics, oncology, women's health, correctional health and physician office pathology. Leading us on the call today will be Dr. Marc Grodman, President and Chief Executive Officer; and Sam Singer, Chief Financial Officer.

Some of the commentary made in this presentation may relate to future results and events. Statements regarding the company's revenue and earnings guidance are based on the company's current expectations. Actual results in future periods may differ materially from those currently expected or desired because of a number of risks and uncertainties including: general economic and business conditions; future regulatory requirements and pressure on healthcare reimbursements; the service, customer and geographic market mix of any particular financial period; the company's ability to effectively manage its operating costs and collect its receivables in a timely fashion; the level of demand for the company's products and services; and the company's ability to manage its supply and delivery logistics. Additional discussion of these and other factors affecting the company's business and prospects is contained in the company's periodic filings with the Securities and Exchange Commission.

I will now turn the call over to Dr. Marc Grodman, President and Chief Executive Officer.

Marc D. Grodman

Thank you, Tara. This has been a challenging year and this had been an interesting quarter for us. Sometimes, when we look at our episodes of quarter-by-quarter growth, we look at them as separate chapters, but they're really not. They are chapters in an ongoing story of how we've put together revision over the last 30 years. We're proud of this quarter. We're proud of what we've done. We are proud of our response to the challenge that we faced and how we see the vision will change over the coming years. Sam Singer will go ahead and give you some ideas and review about our results for this particular quarter, and then I'll have some comments to make. Thank you. Sam?

Sam Singer

Good morning, everyone. During the current quarter of fiscal year 2014, which ended on July 31, BioReference recorded net revenues of $222,053,000, the highest quarterly net revenues recorded by the company compared to 185,000 -- $185,427,000 in the third quarter of the prior fiscal year, an increase of 20%. Gross profit on revenues for the current quarter was $102,443,000, representing a 46% gross profit margin.

In the third quarter of the prior year, gross profit on net revenues was $85,660,000, representing a 46% growth -- gross profit margin. Earnings per share on net income after taxes were $0.55 per share in the current quarter versus $0.53 per share in the prior year quarter. Patient count for the current quarter increased to 2,511,000 from 2,161,000 for the prior year quarter, an increase of 16%.

Net revenue per patient for the third quarter just ended was $87.54 compared to $85.25 per patient in the same quarter of the prior fiscal year, an increase of 3%.

On July 31, 2014, working capital was $187,436,000, a 16% improvement over the $161,116,000 that we reported on October 31, 2013. Our day sales outstanding on July 31, 2014, was 105 days.

Our net revenues were $604,688,000 for the 9-month period ended July 31, 2014, representing a 16% increase over net revenues for the same 9-month period in the prior fiscal year. Our gross profit on net revenues for the current 9-month period was $263,146,000, or 44%, compared to the prior fiscal year of $237,258,000, or 45%.

A number of patient service during the current 9-month period was 7,082,000, which was 14% greater than the prior year comparable period. Net revenue per patient for the 9-month period just ended was $84.43, which was 7% greater than the prior year comparable period. Earnings per share on net income were -- was $1.02 per share for the 9-month period just ended as compared to $1.25 per share in the prior year.

Thank you. I now turn the call over to Dr. Grodman.

Marc D. Grodman

Sam, thank you very much. Fifteen years ago, I was at a -- gave a talk at the National Meeting of Clinical Laboratories. The title of the talk was "Leveraging The Assets". The underlying proposition was that clinical laboratories have incredible assets that need to be leveraged, including connectivity with physicians; the value of the data in clinical decision support; population health; the ability to innovate, as well as the ability to educate as professionals facilitate clinical discovery. At the time I proposed that the ultimate value of clinical laboratories would be to make all other providers in the healthcare continuum, hospitals, physicians, other diagnostic companies, pharmaceutical companies to develop new therapeutics more effective. At that time, I characterized clinical laboratories as information companies. To this day, we continue to work toward that vision.

In the intervening 15 years, we have grown nearly fourteenfold. We expect that this year, despite what has clearly been significant reimbursement challenges faced by all clinical laboratories, we'll mark our 21st year of 20% compound annual growth, which, of course, has been overwhelmingly organic.

We've established a record of innovation that we believe is unmatched in its depth and breadth from changing the paradigm of Women's Health testing, creating the first Spanish-First clinical laboratory, new cancer diagnostics are blazing new trails in clinical genomics among other initiatives.

That underlying vision that we talked about has been strengthened by the incredible technical capabilities of the genomic revolution, something that we anticipate even before the acquisition of GeneDx in 2006. Within a few years, we expect that over 1/4 of our revenues will be based on sequencing technologies and we have and will continue to develop our systems and abilities to analyze and to extract the maximum clinical value along the way.

This places us, we believe, in an enviable position as we seek to be partners to providers to help them extract information critical to improve patient outcomes in clinical discovery, necessary to the changing healthcare paradigm. Our aspiration is to be a clinical knowledge company fueled by our continued record of innovation and growth, and facilitated by our willingness to recognize that our partners are not all the same, that we need to be adaptive and flexible to meet their needs and fit into their infrastructure in a way that we've approached the physician market for the past 2 or more decades.

We are among the few of any who can bring the same expertise to somatic and germline mutations, meaning, we offer solutions for both cancer and clinical genetics. Our test menu rivals anyone in the world in these areas and place us in a unique position of being able to offer system-wide genomic solutions.

The reason that I'm discussing this today is because our current results are a product of this underlying vision. Despite the substantial reimbursement issues our industry has sustained over the past year, we've maintained significant growth in those areas that best position us for the future. We are a single company that more than ever uses specialty capabilities, technology and branding to differentiate our services with a testing menu that is specific to those specialty areas.

At the other -- at a time when our industry has basically been challenged to grow organically, BioReference grew 20% in net revenues, with an over 16% in patient count. This was achieved despite the highly discussed decrease in revenue per patient for our nongenetic testing services. The net result during our third quarter was an increase overall of revenue per patient of $85.25 to $87.54 over an overall revenue per patient or an increase of almost 3%.

Of those tested carried the GeneDx brand, whether they were performed in Maryland or New Jersey, net revenues virtually doubled from those at the same quarter last fiscal year.

Now this growth level will change. Last year at this time we did not offer inherited cancers. Their introduction contributed to part of, but clearly, not to all of the increase in the GeneDx revenues. By the same token, however, until the fourth quarter of the current year, inherited cancer services have not been offered to existing GenPath physician clients in oncology and Women's Health. They are being introduced to those existing clients during this current fiscal fourth quarter.

I'm also enthusiastic about our new tumor-sequencing services that will be introduced by the end of the fourth quarter of this year. While these tumor-sequencing services may not have the same significant effect on revenue per patient, given our emphasis on a cost-effective solution, we believe they will enhance our sequencing-based revenue. We also believe that our new services for oncology will combine those elements that are critical today, and differentiating today, truly cost effective, justifiable, clinically actionable, and simultaneously providing more information for the money, so as to enable both the enrollment and stratification of individuals, clinical trials, as well as support other clinical efforts.

Our effort in cancer has been well thought out and built on outstanding scientists and clinicians. We're very excited about this work.

Earnings per share was $0.55. Actually, somewhat better than last year. This metric, however, needs to be understood since in this area, we have many moving parts.

We invested in infrastructure in Florida and California last year to fulfill our goal of providing logistics and services around the country to support our specialty testing. This investment was in the clinical areas that were the most affected by decreasing reimbursements.

Over the past year, we have embarked on a significant campaign to make those acquisitions as cost effective as possible while at the same time working to feed the growth in our genetics and cancer business.

We understand that one size does not fit all. We have the ability to differentiate our approach to various segments of the market, recognizing their differences and acting accordingly. To be clear, our response to the reimbursement changes of the past year had not been to simply slash expenses. We're recognizing opportunities and the special circumstances that we are afforded. We believe we have and will continue to cut wisely and invest smartly for the future.

This is the last quarter where the usual quarterly comparisons don't work, given the changes in the reimbursement environment from last year. Despite those changes, we are encouraged by the fact that gross margin was a bit of a 46% as comparable to the same quarter for last year.

Other SG&A expenses were higher, but we believe this also will improve over the next year. We must take note, however, of the legal fees. We are currently in litigation on 2 major fronts. The BRCA case has a life of its own that's been very well documented. While we defend our rights along with others' defendants in the Federal District Court, our attorneys have pursued another path and have recently filed petitions with the United States Patent and Trade Office to invalidate 11 of the 13 patents that the plaintiff in this case alleges that we violated.

This new procedure was established by a bill by the America Invents Act of 2011 as a means to challenge patentability at the patent office level based on the grounds of prior art. These proceedings will proceed in parallel with the litigation. While this procedure has only been available to litigants for less than a year, our attorneys have already proven in other cases that it is a valuable tool in resolving intellectual property matters.

Testing for inherited cancers have become a critical element of modern healthcare. We believe that we are one of the world's leading diagnostic providers in the area in both cancer pathology and cancer genomics, as well as a pioneer in clinical next-generation sequencing. The cost of the affiliation and the expenses related to our recent filings with the United States Patent Office will be significant but are based on a critical path that we intend to pursue.

We have been vocal for many years about our commitment to ensuring that patients have choice and access to care on every single front. It's a commitment that will endure.

A short note, our litigation with Horizon Blue Cross Blue Shield continues. The case is in discovery mode and there's no further news to report.

Marketing expenses were around 9% and changed from last year. They should rise in sync with our topline. It is our expectation that our new lines in business, together with our reacting to what we perceive as the evolving needs of the market, will result in an increase in our sales personnel by as much as 20% over the next year, certainly by the end of next year. Bad debt is around 8.5%, consistent with where it's in last year and where it was in our most recent second quarter. Unless we see a substantial shift in our payor mix, we don't see this changing in the near term.

DSOs remain at 105 days. We frankly were hoping they would be better, and in fact, we saw our cash collections improve in the third quarter. We've seen improvements in collections in our nongenetic testing business, but as more of our revenue has been in genetic testing, the collection cycle for these testing services is simply longer, requiring greater provision of medical records and payor review. Remember, we are not building a single test. Our menu of testing is probably as wide as any laboratory in the world and our billing of complex test to third-party payors may be second to none. As a result, much of the improvement that we would have shown in routine testing, I think, is somewhat counteracted by the genetic side of the business.

One other note. There was talk about next year that there will be new AMA codes for next-generation sequencing. It's an ongoing process. We have been through this for -- we all know about the effect of the AMA codes in the past for molecular testing. And it's still too early to know what the effect of these are going to be since they will go be announced later in the year. The one thing that I do believe about this is that having learned what we have learned as a system, as a collaborative system, about the other molecular codes, there will be far more input put into this process. But we expect to have a reasonable role in it and we look forward to what that will be, but it's too soon to know what the effect of it will be.

I think it's also important to note that our cash flow of $7.7 million is almost 3x that of the previous quarter, almost double the cash flow of the same quarter last year, and quite frankly, the best cash flow that we've reported since the fourth quarter of 2012. We're constantly working on these metrics. We look forward to, but cannot guarantee, continued improvement. There are some other issues we need to address.

We believe that reimbursement levels are relatively stable. I think that it is a global view when you look at aggregating all payors. Clearly, there are some areas in our business that are affected more than others. But taken as a whole, we believe that reimbursements are on a relatively stable cycle.

We believe that the reimbursement levels for inherited cancer testing are coming down from where they've been historically. However, since this a new market for us, we're basically unaffected by any reductions. And overall, this business has a positive effect on our revenue per patient.

Genetic testing is taking longer to get paid and often requires prior authorization in the reduction of more medical necessity materials than in the past. Nonetheless, the clients who request this work are highly trained professionals who, by and large, know how to use these sophisticated tests and know how to provide the necessary information.

On the other hand, our growth in this area necessitates our investing in greater expertise to deal with the complexity and successfully billing for all these esoteric services. We look forward [ph] to PAMA and the requirement of market-based pricing to determine Medicare reimbursement in 2017. I do believe that it does a disservice to Medicare beneficiaries.

In the ongoing effort to be able to go in and have entities report, I believe and take the position that the underlying thrust of this is flawed. If you combine the 4 largest laboratories in the United States, including us, we represent less than 20% of the Part D Medicare laboratory spend. The labs that service the remaining 80% will be most affected by any change in reimbursement.

In the new and emerging world of healthcare, you pay for access. Medicare has the greatest access at any payor in the world. It's critical that they pay for access and Medicare beneficiaries deserve access.

Finally, the FDA has issued proposed guidance for the regulation of laboratory developed test. This is an issue, which, I think, in our position is well known, and clearly, it is premature to even contemplate the effect of this proposed guidance. There's a lot yet still that needs to be fleshed out. But I do want to make some points. There are about 11,000 laboratories in the country that perform complex testing in the United States. Now I don't think anyone really has a great handle on how many laboratory developed tests are performed. But their estimates are significant. I mean, that may be as many as 100,000 to 200,000 discrete assays, and many of these are hospital-based and many simply work on the routine characterization of tumors. If the proposed language becomes guidance, all of these tests will be submitted, just submitted -- a list submitted to the FDA, and then a subset, at some point down the line that will be deemed high-risk will be required to submit an application for review.

By contrast, last year, the FDA -- or in 2013, the FDA cleared less than 25 discrete assays for premarket approval. Without any other comment, this is a huge undertaking that is proposed. In addition, all stakeholders on every conceivable side of this issue have tried to define just what is high risk, and I have been party to this for over a decade of conversations. And I will tell you that there hasn't in this entire time never been a concurrence, consensus or resolution of this definition.

And what made it interesting is that while we have a proposed regulatory restructure, we still are unclear about what exactly we're regulating and what the answer is. If it was easy, it would have been answered. It would have been consensus and cleared because a lot of people tried hard to do this. There will be interesting times ahead.

I think we responded well to the challenge of the past year. I've often stated the greatest risk of our business is commoditization. I think I was wrong. The greatest risk is uncertainty. I think we've dealt with that challenge. This year, we believe that we will have our 21st year of 20% compound annual growth. The fact that we may achieve this goal is a testament for our people, first; our vision, secondary; our conviction and determination, third. Given the unusual circumstances around this year, we have been more explicit than usual in guidance with regard to quarterly performance. We believe our fourth quarter will be in the range of $0.62 to $0.64. One of the outstanding unknowns is the uncertainty of our legal fees, especially in regard to our petitions to the United States Patent and Trade Office to invalidate certain patents related to inherited cancer genes, including BRCA.

It should be noted, however, that if we can reach the midpoint target of our guidance, the increase in EPS between the third and fourth quarters of this year will be around 15%. It'll represent the highest percent increase between those quarters in at least the past 6 years.

As I stated over 15 years ago, we continue to leverage our assets and prepare for the challenges ahead. Clearly, we're a different type of company. And given the perspective of completing almost 3 decades of service, I've given considerable thought to why that is. Why are we different? What is it? Given our record and the evolution over time, what defines us? It's not only the innovation and growth. It's not only the focus on sales and service, and it's not only our preoccupation with differentiation and science. Even though I think that all those qualities apply to us, I do believe it is the passion and vision that has become infectious among the incredible people who built this company through years of loyalty, commitment and just plain hard work. They're the ones who responded to the challenge of the past year. They make me proud and thankful to work with them every day.

I'm happy to go in and respond to any questions that anyone might have.

Question-and-Answer Session


[Operator Instructions] Your first question comes from the line of Amanda Murphy with William Blair.

Amanda Murphy - William Blair & Company L.L.C., Research Division

I just wanted to -- you gave quite a bit of detail around the patient -- the revenue per patient growth. So I kind of just wanted to talk a little bit about the volume growth. Obviously, a really strong number, so I'm just trying to -- can you give us just a perspective on where that's coming from? I think other labs have alluded to maybe some benefit from the ACA starting to flow through the numbers. I think you had some acquisitions in there. I don't know if that was any contribution. And then, also, obviously, the GeneDx -- and I don't know if that's actually impacting the volumes at all. I know it's obviously much higher revenue per patient. So any color there would...

Marc D. Grodman

It is. The GeneDx volume, I think, as I mentioned, is clearly substantial. I mean, a number of patients doubled, but it's a small number compared to the overall volume over where we are. And I really don't give credit to the Affordable Care Act. I think the acquisitions we did may have added 1 or 2 points, but at a 16% increase in net revenues that we -- in net patients that we showed over -- it's really over -- it really is new patients and new accounts and new growth. And I really don't go in and have not really seen that has a measurable effect on the Affordable Care Act. It really is new business.

Amanda Murphy - William Blair & Company L.L.C., Research Division

And is that coming from regional kind of expansion or is that -- I know one of the things you've talked about is kind of getting the routine testing out of some other OB/GYN offices and whatnot. Is it -- can you talk a little bit about what's driving the growth?

Marc D. Grodman

Sure. Sure, Amanda. I mean, I think that there has been strength in the regional markets. I think there has been strength as we've expanded them. And I think that it's why we see that and we don't see the same dominant increase within expansion and growth in areas without the higher reimbursement. It's also been growth in Women's Health that we've been able to continue to go do. So I think it's a combination of the patient growth of not just the acquisitions, which is relatively small, but a growth of the acquisitions, as well as the ongoing expense of the business. The reality is, is that the regional business, we do well. We grow. We have a pretty good product, and historically, we've done well with it. And all things being equal, we can grow it. And no matter how we slice it, the growth in the specialty market begets clinical growth. And quite frankly, the clinical growth gives us more power to go make stronger solutions for local groups that begets the specialty growth. But it clearly is -- I mean, if you look at higher patient like that without concomitant increase in revenue per patient, it's going to be regional in Women's Health.

Amanda Murphy - William Blair & Company L.L.C., Research Division

Got it. And just switching to the GeneDx kind of a business. So can you talk a little bit about reimbursement? So I think there's been some conversation around some payors specifically contracting with labs such as BioReference, like Kaiser, for example. Are you -- have you had specific changes in contracts around BRCA and inherited cancer testing? And then, secondly, to that point. In terms of some of the panels that you're working on, there are -- and I know you're introducing some coming up here, but are you billing those under -- like are they being billed under Tier 1 codes? And is there a risk around that to the extent that there are new next-gen codes introduced next year kind of similar to what happened with MOPAS?

Marc D. Grodman

I think that we are -- I think that number one, we don't really comment on specific contracts with certain clients. We just -- it's policy. We don't really do that. We don't think that this is necessarily the best form for it. But I don't blame you for asking, but we try not to be able to do that. But you are right in that we have had an increase in BRCA testing and we had an increase of that. The reimbursements of these tests, I mentioned, are coming down, but it's not a coming down for us because we've already had reimbursement at the higher levels where they were. So for us, this is really all-new testing. And still we think is -- even though it is maybe less than where they've been historically, it's very good reimbursement for the business that we're doing, and the newer contracts that are coming in are all being reimbursed at these newer levels. So I mean, I think that it is that way but we don't really show it -- we just see it as new business. We bill, yes, we do a lot of the billing and a lot of the billing is very complex because a lot of the work that we do is complex. And we just -- simply it's too new to know what the effect of next-gen panel is going to be and whether they're going to be -- if they will be positive flat -- if they'll be negative, positive, or they might even be about positive to it quite frankly. There was ultimately are some payors when you deal with next-gen panels, because nobody understands the value there, and they'll know what we're doing it and a lot of the value come in codes that are in Tier 1, Tier 2 or other ones the doctors specifically request and we have to go through multiple areas of people reviewing and what medical records show the value. So we really don't know yet what the effect of it is going to be. It may well be a positive effect. It should be, because people now can appreciative value of the underlying test and really take a look at what the cost is and go from that point on. But we just still don't have a sense about what it is. It is a complex process. We've invested a lot and we'll invest more on the process of getting paid with this, because there's a lot of detail involved. There's a lot of cooperation we need from both the clients and the payors to go in and understand it. But it's too soon to comment on it. I think the experience that we went through as an industry with molecular testing, which still is not even resolved, is giving a great number of people caution about how we're going to go in and approach this when these new codes come out.

Let me make one other comment about this. Clearly, clearly, in the area of cancer, next-generation sequencing codes will be a positive. Because whenever people go in, where they bill, the major payors only will pay for the specific analyte or biomarker for which there is an FDA-approved strategy, and to get them to pay more is very hard. We are planning our business in next-generation sequencing for tumors on a cost-effective basis. We want to give providers the most information for the most liberated bang for their buck, if you will. So we're basing it on the pretty limited reimbursement of today. So if it's going to be better, it will benefit us, and it will be a major upside. Does that help, Amanda?

Amanda Murphy - William Blair & Company L.L.C., Research Division

Yes, it does. And then, just a couple more on the cash flow side. So you had a good number there, but thinking about what DSOs -- so those were up sequentially, so I'm just trying to think where was the cash flow generations sort of coming from in the quarter?

Marc D. Grodman

I mean, it's coming from more areas when -- we get into the weeds with this, but the cash collections have been -- have done well. And I think it was just the other -- there is -- as business increase in the genetic testing, the revenue cycle for that is longer. And I think we would have made improvements in everything other than in genetic phasing tests, but we didn't see it because we saw the increase. But on a whole, the cash was better. Overall, we collected more than what went into the AR, which is the basic determinant of cash flow. So I think that as I mentioned in my comments, is that we've made improvement but because of the massive shift to the business of genetics we're not really seeing it right now. I think we will, but that's the dynamic that's got off of this quarter.

Amanda Murphy - William Blair & Company L.L.C., Research Division

Got it. And just last one on the guidance for Q4. So if you kind of roll that forward, it is a bit lower, implied a bit lower for the growth rates for the year than what you guys were seeing before. So I'm just -- is that mostly the legal expenses then you were referencing or is there something else there that's...

Marc D. Grodman

No, I think that -- I mean, it's a very -- it's a fair question, a good question. One of the things that I said in talking about the challenges that we're faced is the problem with uncertainty. And last year, when we went out and we gave guidance, there were a lot of moving parts. And there were a lot of people who gave guidance, changed guidance, went out and did that over a multiple different ways. We didn't. And we have said that we thought that even given all the challenges that we're going to grow and we're going to still show improvement over that time, and we said we would do it. We've quoted a number of 10%. And there was no way last year that we had -- knew all the variables that were there, but we thought that we needed -- and we had ample opportunity to go change it. We thought we needed to make a statement, to provide some certainty in an area where there wasn't very much to hold on to. You're right. Legal fees are going to be higher. This new effort that we -- that we've set off to be able to go in and then validate the patents through the United States Patent Office is going to be costly and that certainly is going to be an effect. But when we can look at what the net effect is, I think that if we go in and actually look at the numbers and see what it would have been, if we meet the midpoint of our numbers or around there, I actually think we're like at 9.5% increase given the weather of where we would be year-over-year. So the difference to me is just based more on what we have and what the reality, what the numbers are versus what we really were trying to make a year ago, which is to really -- and what I was trying to do. I was doing it. I was trying to go be a CEO, and say at this time of uncertainty that this is where I think we'll be. And I think we're going to make it. I think we've done that. I think we've been there. We've shown that the growth is still there, that the underlying business proposition of what we offer is still there. And if we do 9.5% of on top of what last year was given the changes or it turns out to be 9.2 or 9.7 or 10.1, we really did do that part. So I don't know if that answers specifically your question. I mean, it really does because it gives you the motivation for what we said and where we are right now.


Your next question comes from the line of Mitra Ramgopal with Sidoti.

L. Mitra Ramgopal - Sidoti & Company, LLC

Just a few questions. First, given a strong topline growth we saw, how much of that can you say is coming from maybe investment in expanding the sales force as opposed to just strength in the underlying business?

Marc D. Grodman

I think a lot of this is investments that we made over time. Investments made this year. Not necessarily at all in increasing the sales force. We have made additions to the sales force this year, Mitra. I mean, it was -- it's a very good point. But I don't think that in itself has increased the business. When we do things, we invest years ahead of time in different projects. And a lot of this has been work that we've invested in terms of capabilities for years. I think that next year, as we -- as I mentioned, we'll plan on increasing our sales force by 20% by the end of the year. I think some of that will be affected by the pure numbers of sales people. But our numbers have not terribly increased this year. These are the results of the investments we've made in services over the last few years, but that's a good point in differentiation.

L. Mitra Ramgopal - Sidoti & Company, LLC

Okay. And again, in terms of the 20% increase in sales force, is that pretty much going to be going mostly in tariffs, for example, on the GeneDx side, given you're seeing a lot of volume?

Marc D. Grodman

Yes, I think that you got to remember more and more the work of GeneDx is being merged with GenPath oncology. So we are looking at this in a lot of different ways and we are kind of mixing things up between Women's Health and genomics and institutional sales. So I think that, yes, more of the hires will be in -- are going to be into those genomic areas in where they'll be. But Women's Health is doing well and still has well-differentiated service. And I think that we have opportunities to be able to do there and we'll take the growth in the regional business that was given to us and we're working at it. So -- and there's novel ways in which we are building in that market. So it'll be across the board, but more of an emphasis will be on the genomic areas.

L. Mitra Ramgopal - Sidoti & Company, LLC

Okay. And then, question regarding DSOs. I know you mentioned it did increase, and given the mix of the business going forward as it relates to longer time, maybe should we be seeing -- looking at DSOs now in terms of -- sort of a higher base going forward given that's the trend of the business?

Marc D. Grodman

Well, clearly, there is a higher base of genomic testing, of doing it, than what there is in the routine business. And it does have that effect. So I do the base is going to be somewhat higher going forward and we have to simply go with it, and do as well as with it. We have challenges ahead and a lot of it is informatic and just dealing with the complexity of the test. But I do think that the more we do genomic test, there's a higher turnaround time.

L. Mitra Ramgopal - Sidoti & Company, LLC

Okay. I know you mentioned in the fourth quarter, regarding guidance, in one of the uncertainties, legal fees. Is that pretty much a fourth quarter issue or should we expect that to continue into fiscal '15?

Marc D. Grodman

Well, I'm sure the attorneys would like to continue for it indefinitely. I think there'll be a higher amount that'll be in the fourth quarter, but it will be an ongoing process. I mean, we're dealing with a major issue going forward and we'll be fighting it on 2 fronts over -- for the next year or so. And I think that some of our competitors are talking about much higher numbers than what we are. But I think a big chunk will be in the fourth quarter. There will be a higher baseline going forward, and then we'll give greater clarity on that on our fourth quarter call.

L. Mitra Ramgopal - Sidoti & Company, LLC

Okay. And finally, regarding acquisitions. I know you've done a few that have worked out really well. Given the balance sheet and the ability to lever it, that something you'd be looking at or is it more the focus now just on growing what you have?

Marc D. Grodman

We look at things all the time, and we continue to look at. We will go in and we will even look at -- we're very conservative on leverage, but we'll consider it if the deal makes sense. Everything now for us, everything for us is strategic. We will not do any business that don't look good in the short term. I mean, I'm sure I sound emphatic about that. We're not short-term players. We're not going to look good for a time. We're not going to do customer list deals. We need to do something, if we do it, it's because it has long-term value that we can make it grow. The reality is that if it wasn't for the decrease in revenue per patient in the routine business, the acquisitions in California and Florida would have been remarkable. But the business was a different business. We still grew them. So we are absolutely in the market. We absolutely are looking to go in and do it, but it's all based of what can we do with the business to make it better. We've done this. We've done this in the past and made companies better as they adhere to a longer range vision of value so we're absolutely in the market.

L. Mitra Ramgopal - Sidoti & Company, LLC

And finally, again, I know I said the last question was the final one, but as we look at the revenue per visit clearly from the first quarter into the second and now third, we're seeing some nice increases despite the reimbursement challenges. Should we kind of look at the third quarter now as sort of a new base or is that being a little too optimistic?

Marc D. Grodman

I never -- I just never believe one quarter makes a base. I'm not saying no. I'm not saying yes. I'm just saying is that in doing this for a long time, I just like to see things. I just don't think 1 quarter ever makes a base. So I mean, it should be able to be stable where it is. It certainly should be, but we just have to see where it goes.


And with no further questions, I would now like to turn the conference over to Dr. Marc Grodman for closing remarks.

Marc D. Grodman

Great. I want to thank everybody for being on the call. I appreciate everyone's time this morning. I wish you all a Great Labor Day, safe Labor Day and I'm sure we'll speak again before the end of the year for our fourth quarter call. Take care.


Thank you for joining today's conference. That concludes the presentation. You may now disconnect and have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!