Genoptix, Inc. Q3 2008 Earnings Call Transcript

| About: Novartis AG (NVS)

Genoptix, Inc. (GXDX) Q3 2008 Earnings Call Transcript November 6, 2008 5:00 PM ET

Executives

Marcy Graham – Senior Director, IR

Tina Nova – President, CEO and Founder

Doug Schuling – SVP and CFO

Sam Riccitelli – EVP and COO

Analysts

Kemp Dolliver – Cowen

Adam Feinstein – Barclays

Robert Willoughby – Banc of America

Bud Leedom – California Equity Research

Art Henderson – Jefferies & Company

Operator

Good day, ladies and gentlemen and welcome to the third quarter 2008 Genoptix Incorporated earnings conference call. My name is Meleni and I’ll be your coordinator today. At this time, all participants are in a listen only mode. We will conduct a question and answer session at the end of this conference. (Operator instructions) I would now like to turn the call over to Ms. Marcy Graham, Senior Director of Investor Relations. Please proceed.

Marcy Graham

Thank you. Welcome to the Genoptix quarterly conference call to discuss operating results for the third quarter of 2008. Joining me on today's call are Dr. Tina Nova, Genoptix's President and CEO; Doug Schuling, SVP and CFO; and Sam Riccitelli, EVP and COO.

This call is also being broadcast live over the Web and will be available for replay through Thursday, November 13, 2008, on the Investor Relations section of our website at www.genoptix.com.

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

For reconciliation of GAAP to non-GAAP financial measures discussed today, please access the GAAP reconciliation and supplemental material page of the Investor section of our website. For information about the risks and uncertainties that Genoptix faces, please refer to the Risk Factors section of the Genoptix Form 10-Q for the three and nine months ended September 30, 2008, filed with the Securities and Exchange Commission earlier today, November 6, 2008 as well as any subsequent filings with the SEC.

Genoptix assumes no obligation and expressly disclaims any duty to update any forward looking statement to reflect events or circumstances after today's call or to reflect the occurrence of unanticipated events.

At this time, I'd like to turn the call over to Dr. Tina Nova, President and CEO of Genoptix. Tina?

Tina Nova

Thank you, Marcy. Good afternoon, everyone, and thank you for joining us to discuss results for the third quarter, the outlook for 2008, and an initial view into 2009.

It was just one year ago that we took the company public and since the end of the third quarter last year we have expanded our customer base by nearly 46% to more than 950 currently ordering physician customers per month up from 650 the same time last year and 850 reported at the end of the second quarter of 2008.

Our case volumes have increased 64% over the same period last year reaching nearly 9900 cases at the close of the third quarter of 2008 up from 6000 for the same period in 2007 bringing the total number of cases processed to more than 27,000 year-to-date.

Revenues also continued to grow dramatically increasing by 98% year-over-year to $32.1 million for the third quarter, which includes $2.5 million in out of period revenues. For the first nine months of 2008 we reached $82.2 million in total revenues a 102% increase over the same period one year ago. This strong performance was directly in line with our expectations for the quarter while our successful collection efforts pushed us beyond what was expected.

Our continued success is evidence of the demand for a more personalized approach and higher touch model in specialized medical services. This approach is specifically tailored for diseases with a great deal of complexity and fills the specific need that we believe is not otherwise meet for our hem/onc customers.

One of the primary elements of our service offering is the depth of understanding and know how possessed by the hematopathologist charged with providing diagnosis and client support. We now have 25 full-time hematopathologist on the Cartesian medical team, which we believe is one of the largest groups in the country. They’re highly skilled and well trained physicians with an average of 20 years of experience following medical school and seven years post fellowship training.

These esteemed specialists are a primary element of our high quality services and consistently provide personalized diagnostic consultations to our growing client base. The Cartesian physicians are responsible for managing and increasing number of patient cases each quarter thanks to the efforts of our expanding sales team which has grown by another 8 members in the third quarter and totaling 52 sales representatives calling on clients across the nation.

We strive to ensure that our sales force is one of the best out there and seek to hire only those with a solid background in personalized services, technical sales, and oncology. Currently our reps have an average of 9.5 years experience in medical sales and average of nearly six years in oncology and just over 4.5 years of medical lab experience.

Each quarter we work with our sales team to build additional channels of communications with current and prospective clients. One of the key methods of measuring information with our hem/onc customers is through the reports we provide with each patient diagnosis. In seeking effective ways to better communicate with our hem/onc customers we turned our attention to our chart report or comprehensive hematopathology assessment and review over time.

We revised the layout to improve usability and enable easy comparisons of key clinical information with an emphasis on correlating primary testing outcomes. Our chart sales continue to ramp up and we’re seeing a steady increase in its adoption as we provide added value to our installed base of loyal customers by offering specialized services that other labs do not.

We are also currently working to inform our customer physicians about our wide array of testing solutions with an emphasis on specific disease dates through regularly launched campaigns. Currently we are educating our clients on our COMPASS for blood report with indications particular to CLL cases or patients with chronic lymphocytic leukemia. Because patients with CLL have tumor cells that circulate outside of the bone marrow this form of leukemia is more conducive for blood testing than other forms requiring a bone marrow sample.

Once diagnosis is confirmed our COMPASS for blood work incorporates IgVH analysis, a robust DNA sequence-based assay. This allows us to move beyond the initial diagnosis towards identifying the patient’s prognosis and expected disease progression. There are large variances in the prognosis of patients with CLL, some surviving for long periods with no defined treatment while others rapidly deteriorate in spite of an aggressive treatment regime. We understand how important it is to determine an accurate prognosis which is why we added this critical element to further assist in effective case management.

Our increasing number of cases and customers is at the foundation of our growth. Thought it has been just one year since our IPO, we’re already addressing the need for greater capacity. We look forward to operating out of our new lab space, moving into our new administrative offices and to welcoming the new employees who in concert with our current phenomenal team will drive our growth in the coming years.

Now for additional detail on our latest initiatives and third-quarter financial performance I will the call over to our CFO Doug Schuling. Doug.

Doug Schuling

Thanks Tina. We are pleased to report improvements in top and bottom line performance as we ended the third quarter and first nine months of 2008 with strong financial results. As Tina stated, our total revenues for the third quarter were $32.1 million which includes a $2.5 million benefit from changes in accounting estimates relating to prior periods with $900,000 of it attributable to 2007.

For the first nine months of 2008 revenues totaled $82.2 million with a total contribution from changes in accounting estimates of $2.2 million relating to 2007. These positive changes in accounting estimates related to differences between the actual collected amounts associated with our non-contracted payers and our original estimated revenues for services rendered in prior periods. These collections were better than expected primarily due to continued improvements to our billing systems and collection processes but more directly to the increased hiring of personnel and management focused on the collection of accounts receivable.

We expect our recent emphasis on the collection process and new hiring to result in additional favorable adjustments going forward but these out of period revenue collection amounts will likely decrease in the coming quarters as we gain familiarity with our payers over time.

Our average revenue per case increased by 9% during the third quarter primarily due to the contribution from changes in accounting estimates related to prior periods.

Gross profit for the third quarter of 2008 was $19.8 million or 62% of revenues and for the first nine months of 2008 was $49.5 million or 60% of revenues, consistent with 59% in the first nine months of 2007. For the third quarter of 2008, increased case volumes and higher average case pricing helped to offset the impact of higher expenses associated with our rapid growth namely increased stock-based compensation cost and other costs associated with our growing number of employees. With the cost of our recent facilities expansion, the expense associated with new hematopathologists and laboratory personnel and continued stock-based compensation expense; we expect gross margins to settle in the mid to upper 50% range for the remainder of 2008 and going forward into 2009.

Operating margins for the third quarter was 27%, a figure that is inflated from last quarter due primarily to the increase in positive revenue adjustments. For the first nine months of 2008 operating margins were 22% consistent with the first nine months of 2007. Due to the increase in positive revenue adjustments and gains in operational efficiencies we anticipate operating margins of approximately 20% for the full year 2008.

Additional expenses associated with our recent facilities expansion are not yet fully reflected in expenses lines and will apply downward pressure on this margin going forward. We recorded increases in most expense lines for the quarter as compared to prior year, which were expected and attributable to the expense associated with our growth and the cost of operating as a public company.

Stock-based compensation expense was approximately $1.9 million for the third quarter and $5.2 million for the first nine months of 2008. Approximately 30% of this stock-based compensation expense for the third quarter was included in cost of revenues with the remainder included in operating expenses.

Cash and investment balances generated interest income of $671,000 for the third quarter consistent with the second quarter of 2008 and down from the start of the year due to declining interest rates as a result of changes in market conditions. Interest income generated during the first nine months of 2008 totaled $2.3 million, an increase over the $245,000 earned in first nine months of 2007, primarily due to the increased cash balances resulting from our IPO proceeds and cash from operations.

As we have discussed in prior quarters, sustained profitability over several periods would result in a reassessment of our valuation allowance against deferred tax assets. Our pretax profits have now exceeded our currently available net operating losses and the remaining reserve against the tax asset was removed. This resulted in a $9.8 million credit to income tax expense offset in the quarter by actual tax expense at a fully taxed rate. Therefore we’re recognizing a $6.2 million net tax benefit in the third quarter of 2008.

Our future effective tax rate will be approximately 45% for the fourth quarter and going forward into 2009.

Including the $6.2 million tax benefit, GAAP net income for the quarter was $15.4 million compared to net income of $3.6 in the third quarter of 2007. Diluted earnings per share for the third quarter was $0.87 based on 17.8 million weighted average common shares outstanding, including the $0.35 per share net benefit resulting primarily from the recognition of deferred tax assets as we transition to a fully taxed rate. For the first nine months of 2008 net income totaled $26 million with diluted earnings per share of $1.48, including a $0.33 net benefit per share resulting primarily from the one-time recognition of deferred tax assets, based on 17.6 million weighted average common shares outstanding.

Our DSOs averaged 53 days in the third quarter of 2008 flat as compared to third quarter of 2007. We ended the third quarter with a bad debt provision of 3% of revenues. As of September 30, 2008, total cash and investments were $101.3 million of which $4.1 million was classified as long-term. We continued to hold a position in one auction rate security with a par value of $5 million. Due to current illiquidity in the markets for auction rate securities and recent conditions in the global credit markets we have recorded a temporary impairment in the valuation of this security and have recognized a $1.2 million unrealized loss. Therefore, we have classified the security as a long-term asset on our balance sheet with a fair value of $3.8 million.

Purchases of capital equipment during the first nine months of 2008 totaled $7 million related primarily to purchases of laboratory equipment, facility expansion initiatives, and technology necessary to support our accelerated hiring and continued growth.

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

Sam Riccitelli

Thank you. The results from solid operational performance throughout the company have resulted in another quarter of robust growth as we have increased the number of cases managed and doctors served and added headcount in key areas to support additional growth as we close out 2008.

To maintain the high levels of service essential to our success we are continuing to seek to hire the best in the business. During the third quarter, we increased the number of hematopathologists on staff with Cartesian adding six new physicians since July and 12 since the start of 2008 bringing the total number of hemapaths on staff with Cartesian to 25. These recent additions to the physicians’ group bring us to our year end goal of housing a staff of hemapaths numbering in the mid 20s by the end of 2008. Cartesian intends to continue to hire additional physicians over the coming quarters. And we will provide an update on future expectations during our next earnings call in early 2009.

To make room for this growing group of medical professionals this month we are finalizing tentative improvements to our newly released administrative offices and are in the process of moving all administrative functions out of our current facility into the new space. By making this move, we free up space to house physicians offices, to create work space for medical staff and key laboratory personnel, and to expand laboratory testing resources.

We recently completed the expansion of our medical testing facility with new lab space becoming operational as of late October. We believe this new expansion will permit us to nearly double capacity and manage increasing case loads through 2010 based on current rate of growth. This lessens the immediacy previously associated with opening another facility enabling us to push back the timing on this expansion. We are now targeting late 2009 or early 2010 as a time frame for selecting a second location.

Based on these strategies we maintain our forecast of approximately $11 million in capital expenditures for the full year 2008, which will include the cost associated with our recent lab expansion and improvements to additional administrative facility.

By considering our performance for the full year, we’re aware of the nature of seasonality in our business. Though we’re extremely pleased with the results in the third quarter we believe the summer vacation season and hurricanes in the Southern and Gulf states each had a small negative impact on total revenues for the period.

The year-end seasonal activity associated with holidays in the fourth quarter is also expected to impact results going forward as it has historically. For instance, the weeks of Christmas and New Years have traditionally seen a slowdown in test ordering as patients are less likely to schedule visits with their doctors during this time. This year, both holidays occur in mid week rather than adjacent to or on a weekend potentially amplifying this effect which could decrease case volumes for that time period.

Due to our growth in the past nine months and the results in improvements in billing and collections we are moving our revenue outlook upward, now expecting to reach approximately $112 for 2008 representing an average increase of 24% over our initial guidance of approximately $90 million and 90% over last year’s revenue of $59 million.

Our continued growth is expected to result in net income of approximately $29 million for 2008 including the benefits and recent changes to our tax accounts during the quarter and stock-based compensation charges now expected to be approximately $7 million for the full year. Due to our strong performance in the first nine months of 2008 and the expectation of continued performance in the fourth quarter we also anticipate ending the year with diluted earnings per share between $1.60 and $1.65 on an estimated 17.7 million shares outstanding. This includes $0.33 per share of net tax benefit recognized in the first nine months of the year and is based on a tax rate of approximately 45% for the fourth quarter.

As the year closes we’re looking towards 2009 with an expectation of revenues of approximately $165 million. This is inclusive of all applicable changes to the Medicare fee schedule. We’re also expecting an average annual tax rate of approximately 45% up from the 40% rate we previously discussed. We will provide further insights into our expectations for the coming year on our year end call in early 2009.

With that I will turn the call back over to Tina.

Tina Nova

Thank you Sam. Once again we have delivered a quarter we can be proud of and are pleased with the results we have achieved. We expect to finish the year with record revenues thanks to our growing team who have committed themselves to providing the best customized diagnostic solutions and quality integrated services to our customers.

We’re now ready to take questions.

Question-and-Answer Session

Operator

And our first question comes from the line of Kemp Dolliver with Cowen. Go ahead.

Kemp Dolliver – Cowen

Hi, thanks and congratulations on your continued progress. A couple of questions. First, we had a chance to quickly run through the 10-Q, and noticed that comment about your receivables from noncontracted payers is up pretty nicely $9.2 million versus $5.3 million at the end of the year. What has been the trend in that and how does that relate to the substantial increase in the amount of prior period adjustments you recorded this quarter?

Doug Schuling

Sure. Kemp this is Doug. The ratio I think, which is what you are alluding to a little bit in terms of the contracted versus noncontracted has stayed somewhat consistent year-over-year with about half of our business being contracted and the other of being noncontracted. So that has been pretty consistent over time. So the increase in receivables related to them is due I think, mostly just to the overall growth in business year-over-year. The specific about the changes in accounting estimates is really the result of just better processes, additional personnel. We have increased our staff since the end of last year, fairly significantly in our collections, billing, and collections department and those efforts over the first two quarters for certain and this third quarter really came to fruition here in the third -- and again as a reminder we recognized that revenue when we report the test and so we’re making the estimates back. In some cases we were collecting more from 2007 revenue where we originally estimated that revenue. So it is a combination of things.

Kemp Dolliver – Cowen

Right. And I guess the mix of payers in that adjustment says how many are -- you know what is the average experience or length of experience you have with these payers where you are making the adjustments now, is it 6 months, 9 months, 18?

Doug Schuling

The specific number of months, I don’t have a specific number. I would estimate probably about 9 to 12 months to be the experience typically. Again we are still fairly young, still seeing a lot of new payers as we go into new territories and so establishing a recognition policy on each of those (inaudible). We’re cautious on that and careful and I would say as we’re seeing these increases probably 9 to 12 months would be probably a good average.

Kemp Dolliver – Cowen

All right that is very helpful. And then just a last question before dropping back into the queue, what is the penetration of COMPASS orders and chart orders?

Sam Riccitelli

Hi Kemp this is Sam. It has remained about the same. Still roughly 55% to 56% of all requisitions of the company by chart or COMPASS orders. When we look at the bone marrow issue by sales it is still approaching 90%.

Kemp Dolliver – Cowen

That is great. Thanks.

Operator

Your next question comes from the line of Adam Feinstein with Barclays. Go ahead.

Adam Feinstein – Barclays

Hi, thank you. Great number here; really stands out in the current environment. So, good job there. Just, maybe just to start, and clearly you continue to add sales force, continue to add hemapaths, seems like you saw some acceleration here. Just here if you can talk about the process in terms of recruiting and just any observations in terms of what is driving the acceleration here.

Tina Nova

Yes, hi it is Tina. Recruiting is always a tough thing to do Adam because we always look for the best as you know. You know my mantra. And so you know that hasn’t changed as far as how picky we’re about the people that we hire and we do have these qualifications that they must meet. They must know about oncology. We don’t want to teach them about oncology. We want to teach them about the Genoptix way. And there have been more resumes from some of the pharmaceutical companies because of some of the layoffs that we’re seeing over the last few months but they’re not necessarily qualified for diagnostics. Some are and some aren’t. So I would say we’re as picky as we have always been and we make it tough to hire. But we have a real rigid process in our hiring process. We really -- we put people through a lot before we hire them. And that has never changed.

Adam Feinstein – Barclays

And you are not seeing any increase in terms of what you are paying for these in place?

Tina Nova

No more than. It just depends on their past experience and that hasn’t changed over time.

Adam Feinstein – Barclays

Great. All right and then just with respect to the guidance, I know you gave revenue and tax rate guidance for ‘09 but didn’t earnings or operating income. So, I am just curious in terms of thought process there and just any certain swing factors that you are currently thinking about?

Sam Riccitelli

Yes, Adam this is Sam. We just want to get through our budgeting process. Get it all finalized, approved by our board of directors. Really -- also shakeout a bit more on the tax rate issues. This is an extremely complicated quarter for estimating taxes and we want to really get that now done before providing a solid income expectation for 2009.

Adam Feinstein – Barclays

Great. All right and then just with respect to the costs. There was a disclosure in the Q and I think you made reference to some of -- in the prepared comments talking about $20 million to $25 million in terms of adding personnel, $10 million to $15 million in terms of expanding the lab, and another $10 million to $15 million for capex, just you know, these numbers continue to go up but then clearly the company’s growing much faster than what you know, it has been (inaudible), just can you talk a little bit more about those numbers and just -- and whether you think we’ll continue to see those numbers move higher?

Sam Riccitelli

I don’t think we’re going to see them grow higher significantly relative to the numbers that are currently in the Q. We’re watching this very, very closely and pacing our growth as accurately as we can. I think bottom line is when you look at the capital resources that we have Adam, we have got -- we’re in a good position to handle any of those amounts not only from what we have currently in the bank but also from the cash that we’re generating currently. So don’t expect a huge change in that area and we have as mentioned earlier, the investments this year, the $11 million, we will be finalizing that expansion and we will be moving into those facilities here this quarter and so that is a key milestone. And in future calls, we will continue to address our expansion from a facility standpoint.

Adam Feinstein – Barclays

Okay, great. And then just my final question, the fee schedule came out last week, just curious in terms of your initial thoughts in terms of the reimbursement outlook?

Sam Riccitelli

It was certainly good news to Genoptix and we anticipate again what you are referring to just for other listeners here is the announcement of some increases on the (inaudible) for select procedures by Medicare. And overall we do anticipate that we will benefit as obviously and it is baked into the $165 million guidance into 2009. We anticipate that to be in the single digits, probably the high single digits on -- about 40% of our business.

Adam Feinstein – Barclays

Okay, great. All right, thank you very much.

Sam Riccitelli

Thanks Adam.

Operator

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

Robert Willoughby – Banc of America

Hi, Doug. Reading through the Q there was a reference to I guess California decided to suspend the utilization of NOLs, I had not seen that elsewhere. Was that -- can you tell me what happened, are we back in business there or how should I think about your ongoing position there?

Doug Schuling

It is a budgetary issue that was placed or enacted here I should say here in the State of California, which delayed the timing in which we can utilize NOLs in the State of California after 2010 and there is other complexities related to that delay in terms of some retroactive benefits to that but I think all as it applies to the -- to our taxes and to that NOL in Q3 here the reversal of that allowance on our deferred tax assets really places all of that on to our balance sheet now. So, from an income statement standpoint we should be a little bit easier to and consistently be predicting our tax rates on a forward tax basis. So back on, the California issue has not gone away Bob and it has just been delayed from a timing -- in terms of our ability to utilize it. So it would be mostly a cash issue in terms of how we ultimately pay our tax provisions to the State of California.

Robert Willoughby – Banc of America

And your guess if there at some point will be some reversal of this to 2010 phenomenon that we see that cash come back or --

Doug Schuling

Yes, that would be our best estimate at this point in time, yes.

Robert Willoughby – Banc of America

Okay, and perhaps for Tina or Sam, I -- your position on acquisitions has been fairly well known here but given the corrections in the market, given some of the stresses on the private equity guys and some of these assets out there and your cash position here. I mean isn’t now the time to be a bit more aggressive on the M&A front or still kind of wait and see opportunistic, no need right now?

Tina Nova

I think that is a great comment. I don’t think we’re going to let the economy drive the way we evaluate the potential companies that we could acquire. But I think that you are right that a lot of people are not going to be able to fund maybe some of the programs they would have liked to in the past and so that is going to create more opportunities and so but we certainly want to just continue to make sure we focus on our customer base and that is really the driver for us Bob.

Robert Willoughby – Banc of America

Okay, thank you.

Operator

Our next question comes from the line of Bud Leedom with California Equity Research. Go ahead.

Bud Leedom - California Equity Research

Hi. Thanks for taking my questions. Just a quick question on the average cases per physician, ordering physician there, obviously you grew the physician count nicely in the quarter, and I noted a slight moderation in the average cases and I’m wondering if that is more based on a same physician ordering situation or you had an aggressive add. So, therefore it moderated due to the way is shook out in the quarter or basically what trends you are seeing in terms of potentially increasing accounts down the road?

Sam Riccitelli

Hi, Bud. This is Sam again. Yes, we haven’t seen any degradation in the way we measure it in cases per customer per month, which is obviously a key metric that we track here literally daily. If anything, we’re starting to see perhaps some slight trending upwards, likely we think due to the implementation of our account management strategy and the great folks we have doing that work for us today out in the field. We think there is some positive benefit coming out of that. Too soon to make any (inaudible) about it. But to answer your question specifically we haven’t seen any real degradation in the way we measure it.

Bud Leedom - California Equity Research

Okay, and I’m just curious too, have you seen any moderation or any potential reversal of the fuel surcharges that were enacted by FedEx and maybe what your outlook is in terms of the impact on gross margins going forward.

Doug Schuling

Bud this is Doug. As far as -- we have seen some reduction in the surcharges from FedEx and they have posted that on their web site. I think you can probably track that as well and so we have seen some reduction as we think about it we’re -- we are cautiously optimistic as we were but we are not going to certainly assume any continued reductions there. So don’t have any other insights than that and for all intents and purposes kind of (inaudible) has been flat really quarter-over-quarter and year-over-year at this point in time and you know, it is certainly is a piece of cost of goods sold and right now hasn’t really took the scale significantly in terms of margin percentages.

Bud Leedom - California Equity Research

Okay, and then obviously that was a nice addition to your sales force for the quarter and I’m just wondering could you discuss maybe some new geographies that you are getting into or strategically how these 8 new sales reps are being placed in the market?

Tina Nova

Yes we don’t really disclose that Bud, but what I can say is that there is still a lot of territories that we have not penetrated at all. And there are areas where there are still field reps covering way too much territory. And so therefore we still have a lot of this country to cover and so we feel very comfortable about the addition of sales reps and we’re not concerned with overlaps at all at this point.

Bud Leedom - California Equity Research

Great. Thanks again.

Operator

(Operator instructions) And our next question comes from the line of Art Henderson with Jefferies & Company. Go ahead.

Art Henderson – Jefferies & Company

Hi thanks for taking the question. Very nice quarter. Doug real quick just a follow-up question on the fuel, what is that as a percentage of your revenue right now?

Doug Schuling

As far as the FedEx?

Art Henderson – Jefferies & Company

Right.

Doug Schuling

We’re not really comfortable talking about that level of detail Art. (inaudible) disclosed.

Art Henderson – Jefferies & Company

Okay, that is fine. And then Tina I guess this is either for you or for Sam, as you interact with the referral sources, the oncologists, are you finding, are they asking you for additional kind of testing capabilities or anything that kind of adds to the personalized service that you deliver and I’m specifically thinking more about genetic testing and some of the opportunities there. It seems like with the expanded capabilities you will have in terms of facility size and capacity that it might be an opportunity, but I was curious to get your thoughts on that.

Tina Nova

I mean capacity has not been an issue for us all along, I mean as far as what we do in the laboratory or how we introduce new tests. We have gotten out that what we need to get out there in the market. But I really think it is the other way around Art in the fact that we actually go to the hem/oncs and say we have been reading the literature, we have been attending scientific meetings, we have been talking to his physician base of, you know this incredible number of physicians, the 950 that we had at the end of the third quarter. And we go to them and we tell them about new things that we have seen out there scientifically and what we think they may need in the future. And so I think the education process sometimes is both ways around. Not just from the doctor to us. But we don’t feel that if anything that our physicians need right now today to diagnose the patients that we specialize in that we do not offer.

Art Henderson – Jefferies & Company

Okay that is helpful. And then one last question, I know you have given a little bit of an outlook into 2009. Doug I think you mentioned that if I’m correct in repeating this that you said there might be a little bit of margin pressure, could you elaborate a little bit more. Are there things that we need to be thinking about as far as the preliminary numbers or the numbers that we’re putting out there for ‘09 to think about without getting into too much depth and putting you on the spot?

Doug Schuling

Sure, we’ve -- when would look at the types of things that we would ask you to consider and (inaudible) as you work on the guidance is you know, we have had a significant amount of facility initiatives going on here in the last couple of quarters. And that will apply some pressure not only at the gross margin level but obviously at the operating income as well. And so we’re still thinking mid to high 50s for gross margins. In particular when you look at facility costs and the initiatives I was referring to, our initial kind of estimates on that would in fact say an increase of about $2.2 million in facility related costs in 2009 over 2008 of which we could share maybe as much as 70% of that being cost of goods sold related. Does that help?

Art Henderson – Jefferies & Company

No that is perfect. Thank you very much. I appreciate it.

Doug Schuling

Sure.

Operator

And our next question is a follow-up from Kemp Dolliver with Cowen. Go ahead.

Kemp Dolliver – Cowen

Hi thanks. In the last call you all mentioned some pickup in business with the CTC technology and in fact, some of it I think was breast cancer related. Have you seen any additional interest in your client base for that?

Doug Schuling

Kemp, absolutely. We’re seeing nice increases across the board, across all of our entire customer base for interest in our CTC. I will say we’re very pleased with that performance and we don’t see any slowdown in the trend.

Kemp Dolliver – Cowen

And any sense how much of it is for say breast cancer versus leukemia and is it becoming say part of the standard bone marrow order?

Doug Schuling

Well for our client base we’re seeing primarily the majority of the samples coming in are related to breast cancer patients and that really hasn’t changed.

Kemp Dolliver – Cowen

Great. Thank you.

Operator

Ladies and gentlemen, as there are no further questions at this time. I like to turn the call back over to management for any closing remarks. Please proceed.

Marcy Graham

Thank you for joining us on today’s call and for your continued interest in us. If you have any further questions about today’s results or if you need additional information, please give investor relations a call, 760-930-7127. Thanks.

Operator

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

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 www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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

About this article:

Expand
Tagged: , Drug Manufacturers - Major, Switzerland,
Error in this transcript? Let us know.
Contact us to add your company to our coverage or use transcripts in your business.
Learn more about Seeking Alpha transcripts here.