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Executives

Dr. Marc Grodman - President and Chief Executive Officer

Sam Singer - Chief Financial Officer

Analysts

Art Henderson - Jeffries & Company

Amanda Murphy - William Blair

Robert Willoughby - Banc of America Securities

Balaji Gandhi - Oppenheimer and Company

Graham Tanaka - Tanaka Capital Management

Unknown Analyst – True Partners

Bio-Reference Laboratories, Inc. (BRLI) F2Q08 Earnings Call June 5, 2008 10:30 AM ET

Operator

Good day ladies and gentlemen, and welcome to the Second Quarter 2008 Bio-Reference Laboratories Earnings Conference Call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Ms.Tara McKay, Investor Relations.

Tara McKay

Good morning and welcome to Bio-Reference Laboratories 2008 Second Quarter Earnings Conference call. Bio-Reference Laboratories is one of the largest independent regional full-service laboratories in the country with focused marketing capabilities in the areas of genomics, oncology, correctional house, 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 today’s 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. Additional 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 mandated pricing reimbursements, the service, customer, and geographic market mix of any particular period, the company’s ability to effectively manage its operating costs and collect its receivables in a timely fashion, on the level of demand for the company’s products and services, and on the company’s ability to manage its supply and delivery logistics in such an environments. 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.

Dr. Marc Grodman

Tara, thank you very much. This has been a strong quarter for Bio-Reference. The numbers do reflect exactly what is going on and who we are. We are a growth company. We’re a company that is not afraid to invest in the future growth of this company. We are a company that will go and seek out new areas where we can go in and make a difference, and I think that numbers and our explanation of where we are with it will show that this is what we’ve demonstrated and this is what we’ll continue to demonstrate for our investors, shareholders, and employees and our physician clients.

I want to introduce Sam Singer, our Chief Financial Officer, and then I’ll come back with a statement, and we’d be happy to take questions.

Sam Singer

Good morning everyone! During the second quarter of fiscal year 2008, which ended on April 30, 2008, Bio-Reference recorded net revenues of $75,180,000, the highest quarterly net revenues ever recorded by the company, compared to $60,953,000 in the second quarter of prior fiscal year, an increase of 23%. Gross profit on revenues for the current quarter was $36,182,000, representing a 48% gross profit margin. In the second quarter of the prior year, gross profit on net revenues was 30,524,000, representing a 50% gross profit margin.

Earnings per share on net income after taxes were $0.25 per share in the current versus $0.23 per share in the prior year quarter. Patient count for the current quarter increased to 1,050,000 from 921,000 for the prior year quarter, an increase of 20%. Net revenue per patient for the second quarter just ended was $70.95 compared to $65.59 per patient in the same quarter of the prior fiscal year, an increase of 8%.

On April 30, 2008, working capital was $54,234,000, an 11% improvement over $48,747,000 that we reported on October 31, 2007. Our day sales outstanding on April 30, 2008, was 109 days. Net revenues were $142,059,000 for the six month period ended April 30, 2008, representing a 24% increase over the net revenues for the same period in the prior fiscal year. Gross profit on net revenues for the current 6-month period was $67,833,000, or 48% compared to the prior fiscal year of $56,717,000 or 49%.

The number of patients serviced for the current 6-month period was 2,013,000, which was 15% greater than the prior year comparable period. Net revenue per patient for the 6-month period just ended was $69.94, which was 9% greater than the prior comparable period.

Earnings per share on net income for the 6-month period ended April 30, 2008, were $0.40 per share as compared to $0.37 per share in the prior year.

Thank you. I’ll return the call to Dr. Grodman.

Dr. Marc Grodman

Sam, thank you very much. Bio-Reference continues to demonstrate strong growth in all areas. We more, we’ve demonstrated our commitment to develop new, exciting, and clinically relevant testing capabilities to promote better healthcare, better patient care. It’s clear that we’ve been presented with a window of opportunity at this time to build substantial value, especially in our especially in our GenPath and GeneDx divisions. GeneDx, in particular, though only in its initial stages of developed, reported an almost 80% increase in revenues over the corresponding period in the prior fiscal year. We must take advantage of the opportunity to support these franchises, and while these investments may have an impact on near-term margin growth, they are critical to secure the long-term future and value of BioReference.

We are what we are. We’re a growth company that seeks out and develops emergent cutting-edge technologies in clinical testing for emerging markets and clinical testing services. Our growth and our commitment to that growth have not wavered. Our financial numbers are truly reflective of the tremendous effort that we’ve made over the first half of the current fiscal year to take advantage of these opportunities in the market place. Our net revenues exceeded our expectations because we invested substantially in both infrastructure and marketing to take advantage of the available business.

Patient count for the current quarter was up 14%. Revenues overall for the company were up over 23%. Revenues per patient rose above $70, an increase of 8% over the second quarter of last year and reflective of an increase in esoteric testing to 47% of revenues, compared to 44% for the corresponding quarter last year. We experienced solid growth throughout all business areas. There was continued growth in the regional area, fuelled by promoting and providing better clinical services, more feet on the street, better answers, fuelled by women’s health initiatives, by our advanced cardiovascular program, and a significant increase also in our sales personnel. Feet on the street are critical to success in this market place.

GenPath also grew by the virtual doubling of our sales personnel, and this area will take longer to ramp up, and we expect to see the results of this investment in the coming quarters. The 80% increase in GeneDx’s revenues includes a 25% increase in the core DNA sequencing business for the diagnosis of rare disorders. The balance was into the new array services primarily used in the diagnosis and characterization of developmental disorders.

Gross margin for the company was 48% in the current quarter, compared to 50% for the second quarter of the prior year. This change was primarily attributable to increases in technical, professional, and semi-technical staffing, all but the latter due to additional infrastructure required to fund and support the growth of GenPath and GeneDx. In fact, the regional business, despite doing more tests at lower reimbursement rates, showed positive signs of leverage. This was the result of our focus last year on scaling out for the additional volume, and areas that count within cost of services such as pick-up and delivery despite increased energy costs, reference testing, lab supplies, billing and collection costs all either scaled with volume or demonstrated leverage. The investment was overwhelmingly in the technical areas.

We have invested in professional and technical people at GenPath and GeneDx. We do believe in the future of our highly diversified specialty offers. We’ve invested in new platforms for GenPath. Staying at the cutting edge for our physician client is the best way to ensure continued growth and improved patient care. We’ve invested in development of new testing platforms at our GeneDx division because our belief is in the value and the future of genetic testing. Those investments are beginning to bear fruits. For the first 6 months of the fiscal year, over $0.04 per share or close to $500,000 has been spent for R&D, developing new testing platforms or services. These are fully expensed. These R&D efforts are expected to continue on a similar scale in the next few quarters.

Excluding sales marketing and bad debt, other SG&A expenses for the current quarter grew 12% compared to the second quarter of fiscal year ’07, in the setting of a 23% increase in net revenues in the current quarter demonstrating, I think, considerable leverage. As percentage of net revenues, other SG&A expenses in the quarter actually decreased from 18.4% to 16.7% for the corresponding quarter, a decrease of 170 basis points. The investment in SG&A overwhelmingly was in sales and marketing. Total sales and marketing rose almost 42% for the quarter, over the same period last year, representing an increase of 8% of net revenues to over 9% this year. This increase was across the board in all areas, but proportionally greater in GenPath where we have doubled our sales staff to over 40 representatives around the country. This increase occurred throughout the fiscal year, but most heavily during the previous four and especially first quarter. As I mentioned before, GenPath has a longer sale cycle than the routine clinical market, but we have already began to clearly to see and are clearly encouraged by the results that we’ve demonstrated.

GeneDx’s growth and success also necessitates commitment. We’ve recently begun to assemble a sales staff that would further enhance these expansion efforts. We believe that genetic testing belongs in the physician office, and we believe that the laboratory must be the translator that empowers the physician to constantly order these valuable tests. To do this, we need superb technology, we need the ability to educate, we need the ability to support, and you need to see it on the street.

Bad debt was fairly flat at 13% of revenues. DSOs were 109 days at the end of the second quarter, compared to 116 at the end of the same period last year, and at 120 days at the end of the immediate previous quarter. We did a good job of collecting money. Cash flow from operations for the current quarter exceeded $5.4 million compared to a negative $2 million for the corresponding quarter in the prior fiscal year, the best cash collection and cash flow from operations the company has ever demonstrated in a quarter.

Bio-Reference began as regional laboratory providing full clinical services in the New York metropolitan area, and while that original franchise has grown and continues to show strength, the company’s national esoteric testing franchises specializing in hematopathology and genetics thrived, and have staked out unique and compelling positions in their markets. We are determined to get better recognition with superb technology and science that we’ve developed to meet the rigorous demands of these specialty areas. We are determined to continue to lead the way in these specialty areas to better medicine and better care. We are far more than a regional clinical laboratory. We have pretty substantial investment into the growth of our specialty services at GenPath and GeneDx, and we believe we demonstrated a special growth. The healthcare community recognizes our specialty services as a premier provider of diagnostic services. We have stepped up our marketing efforts to take advantage of that recognition.

I believe that we succeed because we’re an outstanding physician office laboratory for this northeast New York area, and we are also a leading provider to the correctional healthcare market. We are also an outstanding specialty laboratory in hematopathology at a national level. We have an outstanding genetic laboratory on both national and international level with GeneDx.

As I said at the beginning of the call, we are who we are, a growth company seeking laboratory franchises that will place us at the cutting edge of testing capabilities. We’ve demonstrated strong growth and have invested in technical infrastructure, new testing platforms, and sales and marketing. We are investing in the future of the company in each of these franchises. Because of the window of opportunity is opened, we intend to take advantage of our strength in the marketplace.

Thank you for taking part in the call, and I’m pleased to answer any questions.

Question-and-answer Session

Operator

(Instructions) Our first question comes from the line of Art Henderson with Jeffries & Company.

Art Henderson - Jeffries & Company

A couple of quick questions. As we think about the next couple of quarters and, Marc, I know you don’t give quarterly guidance, but in terms of your ongoing investments which clearly seem to be the right move, how should we think about the expenses for new sales, personnel, and marketing expenses and R&D over the next few quarters? Is it going to be similar to what we saw this quarter?

Dr. Marc Grodman

It’s going to be similar to where we are for the current quarter. I don’t expect them to be higher. Some of the new products have been rolling out. We will be hinging on demand from the market place and expect to go in and have matched revenues for those areas, and timing of that will be unclear, but we think that the R&D efforts will be where they are now without the offset of revenues. In terms of sales and marketing, they will be at these levels. The only caveat to that is we have an area and probably the most exciting part of clinical laboratory testing business which is genetic testing. We’ve demonstrated an area and have a unit which is increasing growth by 80%. We are committing to go in adding sales and marketing personnel to that, so that would be an increase, not in the same scale of GenPath, of course, but other than that, I think that the numbers in the areas we are going to hold going forward.

Art Henderson - Jeffries & Company

So you have 40 sales personnel in GenPath right now. Is that where you want to be for a while?

Dr. Marc Grodman

That is where we want to be. What we’ve built out GenPath to over the last year is where we wanted to be. A good chunk of this is now over the last year, but most of it occurred at the end of last fiscal year and at the end of the first quarter. We are now where we think you need to be and want to be.

Art Henderson - Jeffries & Company

Okay, and then on GeneDx, can you go over what you have and what you want to have there in terms of sales folks?

Dr. Marc Grodman

These sales people that we are brining on are rather educated in a very specialized area. We now have 3 people who we have just added on over the course of the last 2 months, and for the time being over the course of the next quarter, we feel this is where we are, although I would not rule out if the opportunity exists for us to be able to go and add people, but it’s going to be at a much smaller scale than the GenPath build-out, so it won’t impact overall sales and marketing numbers as much.

Art Henderson - Jeffries & Company

It appears the growth that you are seeing in the esoteric business and the gene-based business, for lack of a better word, to be erupting right now, and I’m wondering is this prompted by, I know there was this new bill passed, the Genetic Information Nondiscrimination Act. Do you anticipate that gene-based testing is going to really ramp up now that that has been passed, or is it separate from that?

Dr. Marc Grodman

I think there is an entire evolution which is occurring currently where every part and every provider and every stakeholder is responsible for. Driving it the most is technology that we are able to go in and get clear answers. For years, people said I don’t know what to do with the information, and I think what we have done in the last 2 years as we’ve entered into the wonderful people at GeneDx and have truly done with the model is to take people with great technical insight and scientific thought as geneticist and kind of bring in people that we had and merge it out to go and try to fulfill a market and try to go in and provide clinically relevant answers, and what’s happening is that there’s a combination where older research was built up over the years that looks for areas where we can provide diagnostic help to clinicians is beginning to come into fruition. We are closer to the office, and technical capabilities and testing for reasonable prices are beginning to come closer, and what it’s going to take are certain areas where we can translate. We talked about this before. Labs are wonderful businesses. We’re not transactional companies, and I guess maybe I’m different in that. I don’t see us as that. I see us as being able to translate technology into new testing platforms to improve care. We don’t sell tests as drugs. We sell them as services to grow as businesses, and now I think with all these including the legislation that was passed, that all of this is getting us to the point closer where we will provide meaningful products to physicians. A lot of education has to be done. So, is it going to be a revolution? No. Is it evolving? Yes, but the speed of it certainly happening, and I think that over the next 2 years, we’re going to see major changes in what’s going to be available in the same way that we do with working with the clinician, and the products that we’ve been talking about, we’re working with for developmental diagnostic dilemmas, but also certainly with our new sequencing platforms, that old trusted areas in cardiology will be able to fulfill a medical need and those are among the most exciting things that we’ve ever done. So, yes, I think that this business which has always been a small part where people looked at and said was not ready for primetime is clearly coming in and moving into primetime, and we’ll see those changes in the next few years.

Art Henderson - Jeffries & Company

Two quick questions, and I’ll get back in the queue. Any sort of legislative update on what’s going on with competitive bidding? We’re hearing that it could get rescinded possibly, and then number two, are you doing anything different on your collections efforts today? Obviously, the DSOs went down dramatically. It’s great to see. Wheat should we expect there, and what’re you doing there?

Dr. Marc Grodman

In terms of legislative update, we’re very hopeful about competitive bidding, about it having a final legislative solution. The industry has united over this issue. Patient groups have united. Competitive bidding is bad policy, but I have to say that as a clinical laboratory, exclusionary tactics of any laboratory is a bad policy. It hurts patient care, and people who promote exclusion do so because there are obviously concerns about competition. Competition improves patient care, and I think this message has kind of come out. I think we’ve made it clear, so I think we’re very hopeful that this message clearly has been heard. We live in a tough area and a tough time in terms of federal budget, but I think that we as an initiator did well to demonstrate our area, and I’m very hopeful about a final legislative solution. In terms of collecting money, we are constantly doing things to obtain the information necessary to collect. I think that a lot of what happened over the last year is that in many ways, the more you find holes, the more you have reasons why there are more reasons and why you don’t. Being the second referred laboratory at an office taking less electronic claims, not more, because of the competition, so I think there are a lot of little things that we seemed to get very well and improved our performance. I don’t give quarterly guidance. I don’t give collection guidance either, but we’re very pleased about it. We keep doing a lot of little things, and for this quarter, I think that a lot of things seemed to have worked, and there were less counteracting things that it harder.

Operator

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

Amanda Murphy - William Blair

Just a few questions. First you talked in the past about your efforts to expand regionally. Can you provide an update on how that’s progressing and how do you see that initiative impacting numbers in any way at this point?

Dr. Marc Grodman

Yes, I think that it has impacted numbers. We have found that our regional expansion is going to be contiguous, not segmental if you will. We’re going to continue out from where we are, and we spent a lot of time with our eyes towards the South if you will, down towards Pennsylvania and especially in Maryland. As you know, we did an acquisition a while ago, and we’ve some very strong support for our efforts in Maryland, and that has clearly contributed to the, if you will, regional growth. A lot of the growth that we’ve had is as we’ve gone further south, and maybe it’s because of the targets of what we do well. We think that we’re providing a really superb service. Our percentage of HPV/Chlamydia cases that come in on ThinPrep I would imagine is higher than anyone in the country, because we promote this and educate physicians well, and these are products that we out to these areas and sell, and I think that part of the regional growth clearly has been by the expansion of the area supported by women’s health initiative, the advanced cardiovascular testing, and those differentiating products.

Amanda Murphy - William Blair

In terms of the managed care coverage, how is that progressing in the various…

Dr. Marc Grodman

When we looked at collectability, we have really not seen any problems there. There are going to be certain ones who have very limited closed panels, especially in the Mid-Atlantic region, but they’ve really affected our ability to grow and also when we look collectability, the rates had been certainly good on the accounts. I think that there and in those other areas like in New York, they are used to using more than one laboratory. Although we certainly were concerned about, it does not appear to be a hindrance.

Amanda Murphy - William Blair

Give that the private payer pricing environment has stabilized at this point, what are you seeing out of the plan that’s new? Is it incorporating lab testing and benefit designs or coverage genetic-based tests? What’s new at this point?

Dr. Marc Grodman

I think that the overwhelming concern of private payers is to pay less, and for genetic testing, I think that we have to go in and explain the value of testing in terms of what are the effects on patient care, and that’s value, and not just saying how can I pay the least but how can I get the most for my overall dollars, and that’s an overall discussion. I think that the private community is still very unclear about what’s happening with genetic testing, which is why we have to go in and start on tests were the clinical relevance is compelling to go get them to pay for it, because there is a really easy way to deny, so we have to go start in those areas, but I think they are troubled by some of the technologies because they are not business as usual, and we are playing for higher stakes and greater effect on patient care, and we can’t just treat them in the same way, so I think they’re trouble by it because they may have to pay more.

Operator

Our next question comes from the line of Robert Willoughby with Banc of America Securities.

Robert Willoughby - Banc of America Securities

You answered earlier with a view that some of the higher expenditures are going to continue going forward at least over the next couple of quarter. I know you gave an EPS guidance for the year, I believe, of above 15%, but the higher expenses do continue. You’re kind of running into that metric it looks like, from my standpoint. Is there any kind of comment to your own guidance that really want to make here? What’s the buffer zone, or is 15% kind of a good number?

Dr. Marc Grodman

I really don’t at this point feel comfortable in changing anything which was already said. I think that clearly our revenue numbers are very strong. We’re pleased by that. I think we have to go look at what our shift of revenue growth is. We grew in all areas. GeneDx is a small part of a business that grew astronomically. GenPath and the routine business grew as well very well, and clearly we’ve been investing more in GenPath, so we expect that to in fact go up as well. And what I’ve learned with R&D, these are not long-term commitments. This is like you’ve got to run these 100 tests or you have to go and bring rare each quarter expenditures that had been commitments. So I’m kind of comfortable leaving things where they are right now. Clearly our revenue growth is going to be substantially higher than we were and we know we’ll be for the year.

Robert Willoughby - Banc of America Securities

And to bring up the one contract there where there is some debate about it, you assumed anything in the numbers or any change in the relationship that’s in question now on the GHI front, or what do your forecasts assume there?

Dr. Marc Grodman

We certainly have counted them. There are two parts to the question because as everyone on the call knows my position about these kinds of episodes and contracts. I have to be careful with my comments, but let me say that as of right now, we’ve made efforts in that area very strongly. In terms of where we were with it, I think that we knew this was a small part of our business and that we still got assurance that we’re going to be paid as a provider, but beyond that we’re hopeful that the situation will be resolved. We think it’s for our larger area. Those of you who know me know that I’m involved in this area for the future and for the country and know that on a national basis that we fought very hard to promote a competitive environment, so I find it very hard to go in and tolerate it or see it on our local networks. We have hope that at least we will be able to continue talking and we have some hope and some indication that whatever changes are going occur in GHI at least will be suspended or at least be discussed going forward. We’re not sure when these changes will take effect, and so I think we counted them into what our numbers are going to be, but we certainly are hopeful that things may in fact turn out to be different.

Robert Willoughby - Banc of America Securities

That revenue number is ahead of where we thought it would be. GenPath and GeneDx are obviously big drivers for you. Is there anything we can take away, Marc, from just the overall utilization of lab services in the quarter? There’s certainly been a consensus view that those are trending lower here of late, but was it a good fundamental market or was it bang-up execution by Bio-Reference?

Dr. Marc Grodman

I think it was a good fundamental area. I think that the growth in GenPath certainly was stronger toward the end of the quarter which is reflective of the increase in ramp up of sales and marketing efforts. So, we have not experienced that, but by the same token, it’s not to say that it’s not something which is going to be there. It’s not reflective of where we are now. People raise a lot of issues. We’ve talked about it about what effect the economy is going to have on laboratory testing services, and you can’t go in and see that. You didn’t see it in the second quarterly, but our quarter ends April 30th. I don’t know, it certainly is possible, but we have not seen evidence of that yet. It doesn’t mean that it’s not there.

Robert Willoughby - Banc of America Securities

Sort of a core trend, more or less in line with where you thought it would be?

Dr. Marc Grodman

Yes, pretty much.

Robert Willoughby - Banc of America Securities

On the M&A front, you did indicate some willingness to look at some bigger assets of late. Any changes in philosophy for you, or are we still looking at some of these outreach programs as your opportunity?

Dr. Marc Grodman

I think that what we’re really looking at is building GeneDx and GenPath. I mean this is a great opportunity. We really are excited by that. The cost to move out of the region is simply too high. If there was no business, then I’d rather go do one contiguous spread, not buying another asset to go build it out. We would look at anything that makes theoretical sense. We really do look at our business easily in terms of franchises, what can we build, how do they fit in, and by and large, we haven’t found anything on a larger scale that we can make into that. As time goes on that certainly doesn’t mean we don’t look at them. We look at them all over the country.

Robert Willoughby - Banc of America Securities

Lastly, are there differences in the bad debt profiles by the businesses? Is GenPath a driver, better, or worse for you? I would imagine these are a little bit better for you. Are they not?

Dr. Marc Grodman

Yes, they are a little bit. One of the things that’s different is that you can go in and when you have a higher reimbursed bill, you can spend more time. We talked about improving in a lot of little ways. One of the little ways is really go into the far more hands on on higher reimbursed business and kind of walk it through the process. You still get shocked by the reactions we get on cancer patients for a whole variety of reasons, but they have to be worked and they require in many ways more manual involvement, not automated. We try to go and explain these to the multitude who work with us. So I think the profile could be remarkably similar, but the effort now really is far more on the higher-end business.

Operator

Our next question comes from the line of Balaji Gandhi with Oppenheimer and Company.

Balaji Gandhi - Oppenheimer and Company

I just had a couple of questions. Did you give us the CapEx number for the quarter?

Dr. Marc Grodman

I did not, and I think we usually wait till the Q comes out before we do that.

Balaji Gandhi - Oppenheimer and Company

Okay. We’ll wait for that. With bad debt, I think you said 13% of revenue?

Dr. Marc Grodman

It was virtually flat from last year. It was 13% for both quarters.

Balaji Gandhi - Oppenheimer and Company

Two other things. One, you talked a little bit about what we should expect for sales and marketing, but stripping that out from the other increase in expenses, I guess you were talking about more technical spending. I’m assuming that’s personnel?

Dr. Marc Grodman

That’s all personnel.

Balaji Gandhi - Oppenheimer and Company

So, how should we think about that trend going forward? Do you feel like you’re….

Dr. Marc Grodman

We’ll kind of end where we are. I don’t see it going up. I think this has been build out from the last few quarters. We had to go add professionals. When we look at our technical build-up over the year, as I said in my comments, looking at the leverage of technical help on the routine clinical business, and I really don’t mind referring to it as clinical, it’s routine as a physician business, they actually scale technically pretty well, and in those areas in those other expenses and cost of services like pick-up and delivery which were remarkably scaled even despite the fact that price of gas and energy costs went through the root. Many of those areas we’ve been able to show reasonable scaling with volume or leverage. The increases all were in those buckets that we talked about which were technical, professional, and semi-technical salaries which are all related to either new testing, handling the business, building out infrastructure, or supporting the business.

Balaji Gandhi - Oppenheimer and Company

Do you think about that specifically falling under GenPath and GeneDx?

Dr. Marc Grodman

Most of the increase if you look quarter to quarter in those areas was greater in those than in the clinical business, which in fact scaled pretty well, and in terms of SG&A, the big driver was sales and marketing, which was 42%, and that’s all virtually were either people or some wait-and-see marketing and things like that. It really is simple. It really is just in those areas. Everything else scaled pretty well. Our cost of services was flat or dropped. The increases were just in the technical, professional, semi-technical sales and marketing. The numbers really do tell the story.

Balaji Gandhi - Oppenheimer and Company

The last question was just on your expansion. You talked about maybe trying to do it more organically and contiguous expansion. Are there any opportunities out there to do acquisition in the outreach area or hospitals in the Northeast?

Dr. Marc Grodman

I’m not sure what to do with the hospital market. We’ve looked at it virtually every year and every other year both people and hospitals that want to be in the business, that want to sell the business, who after selling the business want to go and get back in the business. There is a business of consolidation around the country. Whatever the area is, we really move toward consolidation, except in the hospital market, which goes in and out. People say we’re going to build out a commercial laboratory and now we’re going to sell a commercial laboratory, because the returns are so unclear. So hospitals are a world by themselves. They have their own demographics. They have their own societies, and each case is different. If there’s an opportunity that presents itself as a hospital, we’d jump it, but there’s no compelling economic reason to make it work or not work. It has to be specific to the situation.

Balaji Gandhi - Oppenheimer and Company

We should think about contiguous expansion, especially when you throw in more personnel and marketing.

Dr. Marc Grodman

Exactly, and part of that is technical. Our new women’s health initiative that we’re going to be bringing out over the next three months is incredibly exciting. There is a huge area on younger women with sexually transmitted diseases that we’re going to be addressing, and where do we spend on this? We spend money technically signing up with new platforms and testing services that we have developed, but we don't’ get revenues for it today. We spend time on sales and marketing to be able to promote and has agreed to position the materials and consultants to help us build the programs and the people to go out and get the programs and sell them, so those are the areas that we use to channel towards growth, so it isn’t just people on the street. It’s also having technical capabilities with the new programs.

Operator

Our next question comes from the line of Graham Tanaka with Tanaka Capital Management.

Graham Tanaka - Tanaka Capital Management

What quarter do you think the numbers as of percentage of sales is G&A and R&D, when might it come back to more normalized long term…

Dr. Marc Grodman

Graham, it would not be something that I would go in and give a quarter on. I really would not. This is where we are right. We are in the middle of projects. When we’re talking about introducing new areas and new testing, so much is involved. It has to do with the validation of new platforms and how fast we can validate new services, and so I wouldn’t put anything on that. I already said that I thought this was going to continue for the rest of this year. The idea behind it is that we are going to always look for new areas and new growth. We’re not going to be a static business. We’re not going to be here and say now let’s go and see how we can go cut this company and go in and not grow the business, and if we do that, we’re always going to go seek areas. The question gets to be when will we get back the investment that we made in sales and marketing? It’s going to be more sales. We’re confident it’s going to happen, but we’re still going to invest in that, and it’s something that we feel pretty good about. We know there’s a range of when it’s going to happen throughout the rest of this year. When it comes to genetic testing, these are new areas. We’re looking for new acceptances, and we are building out, and we’ll always invest although this has really been a very heavy time and different for us over the course of the last year. We’ll always invest, but they’ll be counterbalanced by new revenues, and that’s going to be an ongoing process. So I wouldn’t commit to any quarter and say that it’s going to stop in this first quarter of next year or the second quarter of next year. It’s an ongoing process, and it’ll fuel the continued strong growth the company has demonstrated.

Graham Tanaka - Tanaka Capital Management

The answer, it sounds like the timing is a question of when you might start to [inaudible].

Dr. Marc Grodman

It’s all the factors.

Graham Tanaka - Tanaka Capital Management

The other question that I wanted to ask was about margin. What is the direction there? I would have thought that it might have gone up.

Dr. Marc Grodman

There are a number of things that make up gross margin or cost of services. As I mentioned before, technical people, infrastructural turnaround times, improving services or technical services for customers, professional salaries, a lot of the R&D efforts, the materials for those area, technical, professional, and semi-technical which are basically going in and working with businesses in terms of drawing blood and getting specimens in. Those are the areas that are all people. That’s the area that’s an increase. That was the funding of the infrastructure increase, people. The other cost of service is how do you pick up a specimen? How do you do it, how do you collect it? All of those other things are scalable. As I mentioned in my comments, many of those areas either increase at the same rate as volume or shoed leverage off of volume. The areas that were higher were people. Those people were investments, and they occurred over the time as we said we believe in the areas of business, and a proportion of revenues, in terms of what the percent of technical, professional as a percent of revenue, the highest amounts were the areas of GenPath and GeneDx. You see it as gross margin. We see it as technical personnel and professional personnel both as people and other areas, and that’s a differentiation that we want you to make today.

Graham Tanaka - Tanaka Capital Management

What’s the longer term direction on reimbursement?

Dr. Marc Grodman

I don’t think anybody knows. Make no mistake, private payers don’t want to pay for these tests. They don’t want to pay for any test. We have to go in and start the testing that shows compelling clinical value and are able to say that this is really necessary, and overall when you go in and look at patient care that this expenditure will really improve quality of life and future expenditures. Private payers are concerned about the overall expenditure, and we have to engage in active dialogues that these tests are going to demonstrate our case. Number one, we have to deliver in half the case that we’re going to be able to save money in the future on these tests, and if we give them compelling reason, they’ll pay for it, but we can’t be on opposite lines, if you will. We’ve got to find some common ground, and we’ve got to do our part to demonstrate the need, which is why I think that we chosen those areas of testing that I think are pretty powerful.

Operator

Our next question comes from the line of Abraham __________ with True Partners.

Unknown Analyst – True Partners

I was wondering if I could direct you a question on a slightly different subject. On the cost side, the two esoteric areas that you’re putting so much emphasis on, genetic testing and in the oncology area, what has been the trend in the cost of actually performing those tests, and how do you see the trend going forward? What I’m trying to get at is, is there any technology on the horizon or in development that you see that can drop the cost of genetic testing by a factor of 5 or 10 and the same in oncology where I know it’s a little bit people intensive? I know in genetic testing the sequencing has dropped dramatically over the years. I don’t know what the actual dollar ratios have been, and I don’t know where they are going, but it seems to me that with reimbursement being such a major issue and the cost per test so many multiples for routine clinical testing, the cost trend might become very important in the future for getting reimbursement. I’m wondering what you folks see on that.

Dr. Marc Grodman

That’s an interesting question. You’re right. It has two different parts. In oncology, a lot of testing is being done, and there have been certain areas of hamatopathology where a lot of investment is lying on personnel. A lot of the areas and suppliers there are not necessarily automated, and a lot of suppliers are not now looking for actually ways to reduce costs in those areas, so they do become challenges at some point.

Unknown Analyst – True Partners

There’s nothing like the automated reading of Pap smears that’s possible?

Dr. Marc Grodman

No. In the areas of oncology, the accepted areas I’m talking about now, right now we have a technology where there are really more people, we need to go there and continue turnaround time, we need to go and improve client service. The demand in the market place is such that physicians want the best and the quickest all the time, and that’s what the cost of business is. Genetics is very very different. I mean there are some potential changes, and there still are areas. For instance, we do cytogenetics. As I mentioned before, people talk about personalized medicine as an idea or as a concept. There is nowhere that personalized medicine a more appropriate than in the monitoring and diagnosis of most hematological malignancies, leukemias and lymphomas. It’s in these areas that we do multiple tests to be able to see what kind of treatment may work, how long that treatment works. Virtually everyone who goes in to [inaudible] for a leukemia has karyotying or chromosome analysis. We will be, as we talked about and we published in the America Society of Hematology, using oligonucleotide arrays to characterizing leukemias. We’re doing this with our scientific advisory board. We are doing it under what we think are the most important and within traditional means of looking and understanding these diseases and these tests and they could potentially go in and add more information. Will they drive the cost down? No. Even though the cost of these arrays will come down, there will be information that’ll get that patient care, and we’re not going to ever replace karyotyping and that cost will remain, but we’re able to do that and it’ll cost less money in the coming years. In genetics, in the areas in which we’re working on, especially in the areas that we’re introducing in cardiology, we will base on new platforms be able to go in and do sequencing of multiple mutations that are crossed that will be potentially less than traditional DNA sequencing.

Unknown Analyst – True Partners

Are we talking about a drop of 50% or 80%?

Dr. Marc Grodman

We’re talking about a drop that could be as much as 50%. We’re talking about a drop that’s going to be able to go in and do more for that 50% drop. It’s not there. It’s not automatic. You can’t do it unless you really have the capabilities of understanding the wealth of data which is being produced. This is really a cutting-edge stuff and fascinating clinical topic, but the promise really does hold out. The challenge is to go out there and do it well. The challenge is to go find the areas, get the best professional people to go in and if you will bless the services that we’re trying to offer and held to the rigorous standards of technologies that we use. It’s not easy, and if it wasn’t for the collection of people that we’ve put together here, which I will put against anywhere in the world, we couldn’t tackle it. So the access to be able to go do these tests is certainly more available. The access of arrays for developmental disorders is certainly more feasible now than what they were, and they probably will be less over the next two years, so we can be part of the practice of children who have speech delays or have developmental questions. So these tests are coming. When technology is now one platform, it’s up to the labs to be able to use the information well. That’s why I’m excited about what the labs can do because we can play the leading role in this.

Operator

There are no further questions. I would now like to turn the call back over to Dr. Grodman for closing remarks.

Dr. Marc Grodman

Thank you very much for being on the call. Thank you very much for your comments and for your questions. I look forward to being in touch with you. For any of you who want to come in and get a closer idea of what we’re doing here and what we’re working on and how we’ve achieved some of the efficiencies, we have automated a good chunk of areas of our front-end processing, please give us a call. You’re welcome to come and visit. We believe in the future of the company. We’re committed to the future, and the future of the laboratory business. We practice laboratory medicine here at the highest order, and we believe in the future. Thank you very much.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect.

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Source: Bio-Reference Laboratories, Inc. F2Q08 (Qtr End 4/30/08) Earnings Call Transcript
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