Cancer Genetics' (CGIX) CEO Panna Sharma on Q4 2016 Results - Earnings Call Transcript

| About: Cancer Genetics, (CGIX)
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Cancer Genetics Inc (NASDAQ:CGIX) Q4 2016 Earnings Conference Call March 23, 2017 9:00 AM ET


Jay Roberts - Chief Operating Officer and EVP of Finance

Panna Sharma - President and Chief Executive Officer

Igor Gitelman - Chief Accounting Officer


Ram Selvaraju - Rodman & Renshaw

Ben Haynor - Feltl and Company

Sherry Grisewood - Dawson James Securities


Good morning. And welcome to the, Cancer Genetics Fourth Quarter 2016 Earnings Call and Company Update. This morning, the Company issued a press release that provided an overview of the fourth quarter 2016 and full-year 2016 results. Today’s conference is being recorded and will be available online at Additionally, CGIX has also provided a set of slides to accompany today's update that are available, both online or by contacting

At this time, I would now like to turn the conference over to Mr. Jay Roberts, Chief Operating Officer and EVP of Finance. Please go ahead sir.

Jay Roberts

Thank you, operator and thank you all, for joining the Cancer Genetics’ fourth quarter and fiscal year 2016 earnings conference call. On the call today is Cancer Genetics President and Chief Executive Officer, Panna Sharma; our new Chief Accounting Officer, Igor Gitelman, who was most recently with BioReference Laboratories, now a division of OPKO Health. And I am Jay Roberts, Chief Operating Officer and EVP of Finance.

The Company issued a news release this morning and a set of slides to accompany its earnings call. They highlighted our fourth quarter and full-year 2016 financial results and operational progress we have been making through the year and as we enter into 2017. The presentation materials are available under the Investor Relations' section of the Company’s Web site. We will be filing our Annual Report on Form 10-K later this morning after our call.

Following the Safe Harbor statement, Panna will provide an overview of the fourth quarter and our significant accomplishments during 2016, including our business results, region strategic activity progress on our strategic goals and update on our recent debt financing. I will then provide a summary of the fourth quarter and year-end financial results, and the focus on our operational improvements and achievements. We will then open up the call up to questions.

We’d like to remind everyone that various remarks about future expectations, plans, and prospects constitute forward-looking statements for purposes of Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Cancer Genetics cautions that these forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from those indicated, indicating risks described in the Company’s filings with the SEC.

Any forward-looking statements made on this conference call speak only as of today’s date, Thursday, March 23, 2017, and Cancer Genetics does not intend to update any of these forward-looking statements to reflect events or circumstances that would occur after today’s date. This conference call is also being recorded for audio rebroadcast on Cancer Genetics’ Web site at All participants on this call will be in a listen-only mode. The call will be followed by a question-and-answer session.

With that, I’d like to turn the call over to President and CEO, Panna Sharma. Panna?

Panna Sharma

Jay, thank you for the introduction. And thank you to, all of those who are listening in on the call this morning, and especially to those who are listening in through the Internet as well. We had an outstanding quarter, powered by the unique talented and committed colleagues we all work with. We’re fortunate to work with colleagues, customers and collaborators who are committed to changing the future of cancer, while also making sure that we contribute to the daily improvements that change patient outcomes and improve our ability to predict, diagnose and manage cancer.

CGI is at the forefront of a major shift away from one type of catch all medicine towards precision and more importantly personalized medicine. Annualized durable growth of 50% and 4 year CAGR of 42% is simply impossible without the long-term commitment to a vision of a future where Cancer is managed and fundamentally changed. Our singular vision to develop and deliver on those comprehensive and innovative capabilities in oncology diagnostics is slowly coming to fruition.

CGI is at the forefront of delivering molecular information that is needed to make precision oncology a reality, for both therapeutic companies and for clinicians and their patients. The fourth quarter for CGI was another very strong quarter, one in which we made good progress with biopharma customers and with our clinical customers, while continuing to reduce our expense profile and sustainably expand margins.

Our revenues for the fourth quarter of 2016 was $7.2 million, a record quarter for us and 32% increase over the prior year, driven by organic growth across all segments, and in annual revenues of over $27 million, which is a 50% increase over 2015. This was done in an environment where we reduced operating expenses by nearly 25%, improved net losses by 51%, extended gross profit margins from 13% during the fourth quarter of 2015 to 41% during the fourth quarter of 2016, and continued to innovate by launching several new offerings in immuno-oncology profiling, liquid biopsy, hereditary cancer and several other segments of somatic cancer profiling.

We've accomplished a lot in terms of growth, both in revenue and capabilities, but we’ve been in an environment in which we’ve been able to continually lower our actual operating expenses and continue double-digit organic growth; most recent quarter was 32%; show a significant advancement in our portfolio and partnerships; and this portfolio of partnerships have been very busy in three critical areas that we think are important to the future of cancer.

Let me walk you through this three ways; the first liquid biopsy, which analysts predict to be $20 million market in the future. We’re now involved in multiple accelerated projects for the development of multi-gene liquid biopsy panels for renal and lung cancer with multiple pharma partners. And second hereditary cancer testing; we’ve demonstrated immediate market traction for the launch of our next generation hereditary cancer panel focused first sight with testing inherited risk for breast and ovarian cancers in both the clinical and pharma markets.

Third, next generation immuno-oncology; last year when I was able to talk to investors, we started the year by having roughly five immono-oncology projects, today we have over 36. Immuno-oncology drugs and patient management paradigms are becoming more commonplace and are driving improved based outcomes. And also, very importantly for companies like us, a change in the way patients are tested, monitored and tracked. Very few companies can provide the scale and depth of capabilities that CGI does in both genomic and immune market testing.

Our investments during late 2015 and throughout 2016 have resulted in a 12 fold increase in the number of clinical trials we are imagining and powering using immuno-oncology and immune markers. In midst of all this fundamental innovation, it can be easy to lose side of our progress towards standalone profitability. During 2016, we’ve had changes in multiple fronts due to the commitments of our team and our managers.

Let me walk you through some of those. We got a greater consolidation of operations across sites we started after our acquisition of our molecular center of excellence in Los Angeles. Our operating expenses today are combined basis are actually lower than they were when we first acquired the center in California. We also have greater leverage in key testing areas by focusing on the advancement of centers and more importantly, in doing more and more multicenter projects. We've had a significant increase in being able to use resources across our centers of excellence to deliver on revenue and more importantly, to generate higher margin projects.

For those of you that are new to CGI and would like some additional background, the focus of our Company is that we are an emerging leader in precision medicines for oncology. Our labs get tests and samples from biopharma customers, which represent nearly 60% of our revenue, as well as clinical centers and healthcare centers around the globe, to provide information on how to diagnose and mask the therapy. We provide critical genomics and biomarker information for the personalization of their treatment programs. We have to select treatment plans, make decisions among therapy choices, stratify patients, and now also develop the bioinformatic and clinical informatics plans that help understand patient outcomes.

Today, CGI is supporting the work for over 125 clinical trials and studies for leading biopharma companies globally. Those 125 trials have an average duration of roughly two years; of course, some can began in a month or two, or maybe three or four, or six months for some smaller studies, some are three to four years. But in average those trails are about 2 to 2.5 years and they give us good visibility into future revenue. The genomic and biomarker data that we deliver influences and informs decisions, not only on how patients are treated but also and very important on what drugs are advanced and how they’re advanced in the pipeline. We believe in our short-time, we've become a critical partner to the advancement of oncology therapeutics globally.

At the same time, our impact on the clinical market continues to advance. In 2016, we delivered on over 28,000 tests, test that helps to not only influence treatment decisions but also make therapy selection. Our proprietary and disease focused genomic panel supports the work at many clinical centers and hospitals, as well as the precision medicine initiatives of major biotech and pharmaceutical companies globally. We have a unique and unparalleled global infrastructure in the U.S., India and China for the developments and delivery of oncology diagnostics from bench-to-bench site.

We currently have research collaborations with major partners globally over 15, and these collaborations are important on two fronts. First, they give us access to new insights, new tests and new patients data with partners such as Mayo Clinic, Memorial Sloan-Kettering, the National Cancer Institute, Columbia University, the Keck School of Medicine at USC, University of Utah, Moffitt Cancer Center, University of Paris, as well as the Apollo Hospitals in India, just to name a few.

Secondly, these research collaborations provide us revenue opportunities through collaborations through early investigation programs and more importantly, through patients testing. Again, we reported $27 million in revenue for 2016, which is a 50% increase over 2015, and our fourth quarter was 32% increase at $7.2 million compared to 2015 of $5.5 million. All categories of our business showed improvements throughout 2016, as we fully integrated all of our acquisitions, generated greater operating leverage across CGI, especially notable with our significant increase in gross profit margin and increased some market share.

As we integrated our U.S. sites, we achieved margins that we think will continue to rise as we grow revenue, as we grow leverage, and we introduced new capabilities. We’ve also started major initiatives to make our information and molecular data more available to both our biopharma customers and to healthcare systems.

We expect that our new initiative around Big Data and Artificial Intelligence will further expand our margins, while increasing our value to oncology ecosystem and introduce new revenue opportunities for CGI. Artificial Intelligence will fundamentally transform cancer care, but more importantly cancer development. Earlier this year, we announced the partnership with Lantern Pharma to use our genomic and biomarker capabilities in conjunction with their machine learning algorithms to help rescue drugs. We also have speculated this quarter to announce several other partnerships where artificial intelligence and Big Data will help us become a more nimble and more active partner in the clinical community and patient trail, and in drug development.

With that, I'd like to turn the call over the Jay Roberts to talk more about our financial and operating results. And also very importantly, to introduce the key member of our team, Igor Gitelman, who is our Chief Accounting Officer. Jay?

Jay Roberts

Thank you, Panna. So, since our last conference call, we've continued strong organic revenue growth, as well as revenue from the highest successful integration of our solid tumor center of excellence based in Los Angeles. Additionally, we have continued to focus extensively on streamlining our internal operations and reducing our cost through rationalization of our staffing and proving our purchasing and lowering our G&A expense.

As we complete the integration of our recent acquisitions, we are now experiencing operating leverage as our revenue accelerated over an existing cost structure. My discussion today will focus on changes in the fourth quarter of 2016 versus the fourth quarter of 2015 in the fiscal year ended December 31, 2016 versus the same fiscal period ended December 31, 2015. For additional information, please refer to our Form 10-K for the year ended, December 31, 2016, which will be available on our Web site after this call.

Let us begin with the recently completed fourth quarter results. Total fourth quarter revenue was $7.2 million, a 32% increase over the fourth quarter 2016; Biopharma services revenue was approximately $3.9 million; Clinical revenues were approximately $3 million; Discovery Services revenue were approximately $300,000. We experienced an across the board increase in revenue quarter-over-quarter in 2016. Thus, as compared to revenue achieved in Q4 of 2015, our revenue from Biopharma services increased 34%, revenues from clinical services increased 25% and revenues from discovery services increased 102%.

Our gross margins were 41% or almost $3 million, which compare to 13% or $700,000 in 2015. Although, we move quickly to in integrating the various operations acquired in 2015, the fourth quarter was impacted by delays in billing that were mainly associated with our California operations.

Cost of revenues decreased from $4.8 million in the fourth quarter of 2015 to $4.3 million in Q4 2016 as we've been able to recognize cost savings due to the efficiencies gains as a result of integration of our California operations.

While revenue increased 32%, total operating expenses decreased by 18% to approximately $6.5 million during Q4 of 2016; significantly lower than the $7.9 million we reported in Q4 20105. We continue to believe there is significant potential leverage in our business as we scale-up operations, maintain our cost structure and increase our revenues.

Our net loss in the fourth quarter decreased to $2.8 million, significantly down from $5.7 million in the fourth quarter of 2015. On a diluted per share basis, that translates to $0.15 in Q4 of 2016 compared to $0.48 per diluted share in 2015.

Turning to the 12-months ended December 31, 2016, total revenues were $27 million, a 50% increase over the corresponding annual period of 2015; Biopharma Services revenues were $15.3 million, a 32% increase from ’15; Clinical Services revenue were about $10.7 million, an 88% of increase from the 2015 amount; and the Discovery Services were about $1.1 million or 31% increase from the prior year.

Cost of revenues increased to $17.1 million for the year from $14.1 million in prior period, an increase of 21%, which is well below the 50% increase in revenues, highlighting our operating leverage through substantial cost savings and the revenue growth as we scale-up.

Gross margins were 37% or about $9.9 million, which compares with 22% or $3.9 million in the 12-months ended December 31, 2015. The improvement in gross margin percentage is attributable to improved utilization of resources and increased cost savings on materials and supplies associated with the higher volume. Total operating expenses were $26.7 as compared to $25.3 million in the 12-months ended December 31, 2015, an increase of only 5%.

Our net loss in the 12-months period ended December 31, 2016 was $15.8 million or $1 per diluted share as compared to $20.2 million or $1.96 per diluted share in the corresponding period in 2015.

We had a total cash and cash equivalents at December 31, 2016 of $9.5 million. And as many of you have seen, we closed yesterday on $12 million debt financing, which adds in a non-dilutive manner significant working capital to help us fuel our growth requirements. The new facility was partially implemented to restructure our senior debt into a revolving line of credit, which now allows us to conserve cash on our debt structure and to leverage our accounts receivable to improve the velocity of our cash availability and visibility.

So, we eliminated principle payment requirements on what is now a larger term loan and extended the term to three years, which immediately improves our quarterly cash flow by nearly $250,000 a quarter or about $1 million a year, which we can introduce to drive investments in sales and operating efficiencies.

As a growth Company, this is critical additional capital that we are confident will help us drive shareholder value. Echoing Panna’s earlier comments, our innovation will continue to drive our top line growth and revenue performance. But additionally, we are very focused on expense control and margin management that can allow us to achieve profitability as a precision medicine company. For additional information, please refer to our SEC filings in our press release included on Form 10-K for the year ended December 31, 2016.

I’d like to now introduce a new member of our finance team, Igor Gitelman, our Chief Accounting Officer.

Igor Gitelman

Thank you, Jay and Panna. I would like to start by providing our listeners and investors with some context and background about my professional carrier. Prior to joining the Company, I’ve been in multiple senior policy saving financial management roles; the last 11 years of which were with BioReference Laboratories, now with subsidiary of OPKO Health. I help them grow the business from about $160 million in revenue to over $1 billion in revenue. There I served in a variety of corporate finance and accounting roles, including financial public reporting, corporate accounting, corporate tax and treasury, as well as internal audit.

My career has primarily focused on growth oriented companies where I can bring my skills to integrate finance, cash flow management, financial modeling and operations; in order to drive up shareholder value and optimize the Company's performance. This experience is directly is been applicable to my work at CGI, where I will be Chief Accounting Officer responsible for our financial reporting and managing our accounting, tax and corporate policies. CGI has done a very good job of growing a truly unique business, and I'm very much looking forward to working with the Company and getting to know many of you over the coming years.

As a first item for many of you today, I want to address some housekeeping items that many of you have asked about in a past calls; first, our truly diluted shares. For the fourth quarter of 2016, the Company had about 18,839,000 diluted shares; for the full year 2016, the Company had about 15,861,000 diluted shares; second item is stock equity based compensation, which is a non-cash item. For the full year 2016, our stocked based compensation was 2 million and while as worth 479,000 for the fourth quarter of 2016.

I would be happy to take some additional questions during our Q&A session. And I wanted to take this opportunity to thank you, and turn the call back to our CEO, Panna Sharma.

Panna Sharma

Igor, thank you. We’re very fortunate to have someone with Igor’s background at CGI. During 2017, we expect our business to continue high double-digit durable growth, while continuing to innovate in the development and delivery of precision diagnostics and testing for oncology.

Let me also share with your some additional highlights from our biophrama work. Some of these key metrics are included in the slide presentation we’ve made available online. One of the things that we’re most excited about is the number of active projects that we have with biopharma customers globally. These asset projects give us visibility and line of sight to future revenue, but also and very importantly, for our share holders that give us opportunities to develop long-term durable new diagnostics.

Tests at CGI will have unique or exclusive rights to, but more importantly, we’ll be first in market in terms of testing. Being first in market in our states with new staff is essential. Today, we have over 125 projects at the end of last quarter of Q4 2016 going into our system to help genomic and biomarker based testing and stratification. This 35% increase was significant and more importantly, we expect it to continue. We also had the number of projects in immuno-oncology increase rapidly from about three or four this time last year to now over 36.

Also, the number of cross-site projects; cross-site projects mean sights or projects that are being done for biopharma companies in multiple labs. Because of our centers of our excellence, we have increased our number of cross-site projects from 105 this time last year to nearly 20. This is a significant increase and more importantly, allows us to add more value to the biopharma ecosystem.

We believe that we have a clear path towards achieving profitability and accelerating our market share through partnerships and collaborations in areas that are becoming increasingly critical to the next generation of breakthroughs in patient care and in drug development. Technologies and trends, such as Artificial Intelligence, Big Data, and liquid biopsy and combining genomic and immune marker testing to improve the outcomes, are all areas at CGI is integrating into our business model on a active and accomplished basis every single quarter.

We have a unique global business infrastructure and growing reach in the oncology ecosystem. This coupled with the strengthening of our operating fundamentals and our recent access to capital makes CGI a leader in developing and delivering oncology diagnostics from bench-to-bench side.

With that, I'd like to turn the call over to any questions that the community might have.

Question-and-Answer Session


Thank you [Operator Instructions]. And we’ll go first to Ram Selvaraju from Rodman & Renshaw. Your line is open sir, please go ahead.

Ram Selvaraju

Hi, thanks very much for taking my questions. Just a couple of quick-ones…

Panna Sharma

Ram, how are you?

Ram Selvaraju

Very good, and congratulations on all the progress that's been made in the fourth quarter of 2016. And obviously, I hope you’re looking forward to stronger performance in 2017. Firstly, with respect to the gross margin improvement, maybe you could walk us through what the specific main drivers were of that in the fourth quarter and what you anticipate seeing in the upcoming quarters, whether we should be anticipating any seasonality impact or whether you expect to see gross margins continue to improve on a sequential basis. Secondly, maybe you could give us a sense of, in a general manner, when you anticipate there being more predictability in top line quarter-over-quarter from a growth perspective and when you anticipate that taking on a smoother trajectory as it works as sources of revenue becomes more reliable, more long-term in nature. Thirdly, if you could perhaps comment on the status of specific arrangements you have in palace, which would potentially lead to cancer genetics possibly receiving royalties on the sales of drugs that are associated with its companion diagnostic modality. And finally, maybe Jay, could you just walk me through the salient features of the revolving credit facility, please.

Panna Sharma

I think we've got nine or 10 questions, we’ll try our best Ram and get most of those. Let's go to the credit facility key points quickly, so I know people will have questions on those. And then I'll address the question inside margin and revenue visibility.

Jay Roberts

So the credit facility is two parts. We have a asset based line of credit that provides for up to $6 million worth of access to capital underneath the revolver, and it's based upon formulas driven by our accounts receivable. And we also have, in addition to that, we have $6 million term loan that is interest normally and is -- the full principal balance due at maturity, which is in 36 months. And then as part of the $6 million term loan, we issued some warrants yesterday. And the details Ram is all in an 8-K and obviously our 10-K here will be filed shortly.

Panna Sharma

In terms of margin expansion, I agree Ram. We had a very good margin expansion in 2016, coming out of a year where our gross profit margins in ’15 were about 22%, increasing that to a full year '16 at 37% with Q4 being about 41%. It was largely driven by three factors, one it was top line because of the continue increase on top line. We were able to become more efficient at delivering on projects, developing teams, getting more price side projects. Second was our streamlining of the Company.

I think as we went through in the last call, we had a pretty aggressive program to streamline operations, which started post the acquisition of our molecular center of excellence in Los Angeles and then continued. So, we were able to reduce our headcount quite considerably throughout the year in a very programmatic function, which culminated eventually obviously in the redoing of our finance and G&A under Jay's leadership. So headcount reduction was the second factor.

The third factor, which is very important and we are continuing the do, which revolves really around customer focused and customer optimization. This became acutely apparent to us in last year, looking at which customers were the most ideal from the margin profile for CGI; and really optimizing our go-to-market strategy around customer optimization; this included sometimes having to give up customers; this also included at times, being more thoughtful about direct pricing in the clinical environment; it also had to do being more thoughtful about ancillary service pricing with key biotech and pharma; the pricings is a major piece of that as well.

So, I think a lot of those things came together for us in Q4. We expect that to continue going into next year. Let me give you a very important casing point. We grew our top line by $9 million or 50% from ’15 to ‘16. Of those $9 million, we dropped $6 million to the gross profit line. So, that means our incremental revenue dollars had 66% gross margin associated with it, that's operating leverage. Now, that's for focus; now that we have a global infrastructure; a more streamlined process and better visibility. We expect that additional incremental top line dollars will generate gross profit margin that are higher than our existing cost structure.

So, we believe and that we’re a good position to continue. And as you know quarter-over-quarter we made changes because revenue from some of the biopharma customers can be very lumpy. But as you know, as we grow, those ones tend to become less and less noticeable. So, if I remember and I recall running down the Company for a while, when we were doing only less than a $1 million in revenue in biopharma, it was very different because a few $100,000 could really change it. Today, what we’re doing $4 million going on $5 million doing in $6 million a quarter in biopharma revenue that same number has a less of an impact.

So, I think the gross margins will be a little lumpy because of the nature of that business, but long-term on a annualized basis, we see consistent solid double-digit gains to our gross margin line in ’17. And we expect that to continue in ‘18. Because of that proprietary nature of many of the tests that we do, we think long-term, our gross profit margins for our business model will exceed 55% and perhaps approach 65%. And so that's our goal to get in the high-50s.


We'll take our next question from Ben Haynor from Feltl and Company. Please go ahead.

Ben Haynor

So, now looking at the presentation that you put out here today, it appears you’re up to nine out of top-10 biopharma companies in the world. I think and up until relatively recently you had talked about eight of the top 10. I was just wondering if you could give any color on the size or scope of the projects that you might have picked up in gaining that 9th of the top 10 biopharma?

Panna Sharma

We’re very happy to do the work with biopharma -- and so we’ll give you some color on that and talk little bit about the size and quality of our projects with them. We have -- in my experience I have not seen such an exciting time to be part of therapeutic development as it is in 2017. Biotech companies are tremendously innovative, tremendously receptive, and most importantly pharmas now are also very critical in understanding that the innovation in therapeutic development being done by partners like us, needs to make its way into the clinical environment through companion, complementary diagnostics and testing.

As you mentioned, we're now working with nine other top-10, and also very importantly, 16 out of the top 20 biotech and pharma companies by revenue globally. Our revenues from biopharma customers increased 32% to $15.3 million as compared to $11.6 million in 2015. And also, we believe our average contract side increased also.

For the fourth quarter '16, our revenues increased 34% for the same period in 2015. Many new innovative companies, such as Baygene and H3Bio became customers. And there we’re doing work that’s not only in immuno-oncology but also immuno-oncology plus molecular targeted category; so both small molecules, such as kinase inhibitors plus I/O drug. And also, at the same time, we can clearly make very good inroads with large scale companies, such as Merck where we were selected as their national reference lab for Keytruda.

So as our average contract size goes up, we also see a very interesting development, which we think is essential to our durable business model. The work that we're doing in clinical trials for our customers not only yields new drugs hopefully into the marketplace, but also yields new insights about mechanisms of action, about patient stratification, and about the potential therapy response; because we hold a lot of that genetic and molecular information, both about the patient and the trial and sometimes even about the assay itself. That insight goes back into Discovery, often times pre-clinical work, investigator led initiatives and new ideas. Long-term, we expect all of that -- much of that to go back into discovery and we expect our discovery revenue to increase. So, we're very excited about that, because we believe we have a high margin way to develop and deliver discovery work.

So again, we’re not only excited by the top line increase in our average contract size, our better penetration into the top clients and customers, our increasing exposure to the top companies globally in terms of revenue. More importantly that we’re now being tasked and challenged, we're taking that information at a successful or sometimes not successful trials and bring that back into discovery phase. So, I think we're uniquely positioned there and I think a lot of growth going into '17, '18 and beyond we’ll be taking that work from the clinical trials and mapping that back and becoming a developing partner of four or five pharma customers.

Ben Haynor

And should you become a development partner with some of these customers. Is there any potential that these could turn into milestone or royalty agreements, if your insights ultimately help one of these partners get a drug approved and into the marketplace?

Panna Sharma

Obviously, a lot of those details are confidential. But we actually have some programs like that, but more importantly, we have many, many discussions like that, especially with biotech companies where CGI has the ability to participate in the upside, more importantly has the ability to have some unique access or exclusive access to the testing paradigm. So again, it's an essential part of our business model and one that we’ll begin to use more aggressively as long as we don’t think it impacts or damages our near-term operating capability to our margin.

So, we're always looking very carefully at one of the opportunities where we can have larger upsize or larger outsize revenue in the outer years, but at the same time as you know, as a growth Company our first and primary directive is to again ensure that near-term we achieve profitability. So, it's a balancing act and one I think that we’re always evaluating. But as you know, Ben, anyone any specialty biotech they can pay you tomorrow. They gladly will for upside, the potential upside, that we have to be very careful about how we take that.

But we will. We’re very open and I think because of our team’s capabilities in understanding the biology of these cancers and having a unique viewpoint, not just being only technicians, we're in a great place to do that. So we will do that and more importantly, we’ll be very thoughtful about how we do it given our March toward profitability.

Ben Haynor

And it's exciting if you can capture those, some of those, opportunities on the backend as well. And then just a big picture question, when you’re going after immuno-oncology business, I know you guys have pretty unique capabilities, if not completely unique capabilities. Do you see much in the way of competition when you’re trying to acquire one of these new partnerships or collaborations?

Panna Sharma

We see competition, obviously, every day. It's amazing to me the speed at which competitors put together fancy PowerPoint presentations to say they do the same thing that CGI does. But these pharma companies and biotech companies are very thoughtful, very diligent. Typically after a visit or two and talking with multiple team members, our capabilities and team really outshines the rest of the industry. So, as I mentioned in the beginning of our call, we’re very uniquely positioned and gifted because of the unique nature of our colleagues globally. I think no company can have a durable and sustainable business model without the unique talented and committed colleagues that we have.

So I think you are right, there is more competition. But it's an attractive market and everything from former President Obama and by the Moon shot initiative to the number of new genomic and biomarker companies out there to even research institutions out that are trying to work with pharma. I think there is a -- I think competition is really good for the industry. I think it's fantastic because of mix, people are aware and available of the great work and the potential break with this move, the challenge really comes down to who do you select and who do you partner with. And I think that's something that we really shine at we really tend to position ourselves very differently.

So, it's something that we’re trying to do more and more. Although, our sales and marketing dollars decreased quarter-to-quarter from Q4 ’15 to Q4 ’16 by about 40% that's a number that we’re particularly, I would say, wed to. This was essential for our improved profit profile, our improved long-term durability and part of the business rational that I talked about earlier about looking at customer mix and customer concentration. So, the sales and marketing dollars -- it's essential that we continue to invest in sales and marketing, because you’re right. We've got capabilities that absolutely outshine everyone in our category and we’ve got to make that more known and more available. So, that happens outside of places like this phone call. So, it's really essential that we have all of our collogues and customers out there with the right content material and case studies and awareness program, about our capabilities.


[Operator Instructions] And we’ll go next to Michael Solomon from Maxim. Sir your line is open, please go ahead.

Michael Solomon

Just a quick question, your case study with the biotech was very interesting. Can you tell us why biotech and pharma companies are selecting CGI over some of the major testing labs? Are you bigger? Are you more attractive for bigger pharma or smaller biotechs?

Panna Sharma

So we look at our biopharma value proposition all the time. And we look at wins and losses and what we're doing right or what we can do better. So, for us its three big drivers for CGI being selected, and we’ve happened to be commonplace; as now one, as a biotech and pharma company that’s involved in a race to get these drugs out every month tens of millions of dollars and sometime for the blockbuster I/O drugs it can be hundreds of millions of dollars and usually, but maybe hundreds.

So the thing you can market two months faster, three months faster, four months faster, six months earlier or first to market, it's really essentially. And I think people often times underestimate the amount of logistics involved in using multiple labs. So, when they look at a laboratory or they look at a testing partner; they want someone that can do immuno-oncology; they want someone that one can do genomic markers; they want someone that can do epigenetic work; they want someone that can do the full range of services, very few companies offer that today.

As I mentioned on earlier call, our unique and singular focus is to have the most comprehensive capabilities in oncology. We’re not wed to only one type of sequencing box. We’re not wed to only one type of proteomic box. We think we bring all those things together. So, the range of capabilities totally outshines people in the industry, that’s a critical. The second thing is because we want to be a long-term durable business, not a one trick pony or something that one tricks would, because we are focused and being a durable company, we actually collaborate with our customers. We don’t tell them take one panel or nothing. We only do A panel that does everything, or A test that does everything and you don’t like it, tough.

We actually collaborate with them and sit down with them to make sure that our testing paradigm makes sense; does the panel need to be customized; does it need to have greater depth; does it need to have higher sensitivity; do we need to do less genes, more genes; do we need to do a combination program. That type of collaborative dialog being only doable when you have collogues that really understand the biology and nature and methods to those tumors. So, after the range of capabilities the second we've made partner with us is because they see us not only just a testing lab but by enlarge we win when they see us as a collaborative partner in the development of the assay and in the delivery of the clinical trial data.

The third reason we win, which is very important, is because we have multiple labs. Often times in these studies they need more than just one site to concord. They sometimes have lot of volumes. So they want to make sure you have a back-up sight. Sometimes we have global needs in China or India or other places. So they want to make sure that you can take care of not only the needs in the East Coast or West Coast, but there you get the samples in a timely way to a different lab.

So, our global infrastructure on a collaborative capability and our range of comprehensive testing are three reasons that really again outshine and allow us to win. Our key is -- and more importantly, spend more sales and marketing so that we can win more frequently.


[Operator Instructions] And we’ll go next to Sherry Grisewood from Dawson James Securities. Please go ahead.

Sherry Grisewood

I wanted to get a little more color as to the significance about being named the national reference lab for Keytruda. What does that actually mean? Does that mean you are going to be their central clear lab for all Keytruda diagnostics? And help me understand the impact for the Company in terms of future revenue out of that?

Panna Sharma

Merck has obviously -- analyst expects billions of dollars from Keytruda, not only in lung cancer but multiple of other indications. Merck has chosen several labs, some obviously some big guys with LabCorp, and Quest and Genoptix, but also a few academics like [indiscernible] and then CGI. So, we've very privileged to be, I would say, the small handful of labs. But more importantly as a national reference lab for Keytruda one leading to our selection is because of our significant testing volume in lung cancer, which now Keytruda is not only a combination but also as a monotherapy for patients that are PDL-1 positive over certain ratio and level. So, we were selected there and that's driven probably about a 10x increase in our PDL-1 testing in our solid tumor center of excellence last year.

So, it's a major driver of revenue today, and it continues to grow. For Merck to meet its analyst projections or to meet the need in the market for that drug, they have to test probably roughly even their own numbers, about three patients or 3.2 patients for every patient that's selected. So, that's lot of volume, Sherry. So, if you just think about lung cancer and PDL-1 expression, that's literally hundreds of thousands of patients per year, you multiply that number by 3. So, our total addressable market we estimate, today, can continue increasing in a fairly rapid cliff over the next two to three years.

But more importantly, for us and for our shareholders and ultimately for cancer patients, is the monitoring that's required. And that's something that we’re not just sitting back and saying okay we have PDL-1 -- and by the way we have every PDL-1 clone that's available. So, it's not just Keytruda. We have all the complimentary and companion diagnostics. So it's again, going back to most comprehensive capabilities being what's beyond the PDL-1, CPLA-4, LAG3 other genes, other protein markers.

So, the key is after they get tested we’ve been ongoing monitoring. And so we’re also, we believe, beyond being just a national reference lab at the future of this industry is to then actually monitor and perhaps even predict when patients might relapse. And so, that's getting into issues around data collections, Big Data aggregation and Artificial Intelligence. And so, it's not just being testing once, but it's really managing the patient. And the future of our industry will change to being very focused testing, developing comprehensive knowledge basis and then predicting and modeling future outcomes. So, for us, being national reference lab is just one step towards a much larger vision of managing cancer.

Sherry Grisewood

And will the revenue or -- and who will actually be paying you. Is Merck going to be paying you, or is this going to go through the third party payers?

Panna Sharma

Merck, now this goes to third party payers. In the U.S., it's not allowed for pharma companies to pay for testing like that. There are some couponing and rebate programs with certain companies have used in the past. They’ve been looked at a lot of skepticism and concern about is it --. So no, in the U.S. it's typically the pharma companies will help you ensure that you get adequate payment from third-party insurance companies and you get on to the formulary program to the diagnostic testing. So, otherwise they don’t get their drugs out. So Merck is not paying, it is going to be clear now in the U.S. for that.

Sherry Grisewood

Okay, thank you very much.

Panna Sharma

But we do expect a lot of revenue as a result of our immuno-oncology testing for Keytruda.


With no further questions in the queue, I would like to turn it back over to Mr. Sharma and Mr. Roberts for any additional or closing remarks.

Panna Sharma

Thank you. I'd like to thank everyone for the questions. We have some great questions today. Our Company finally believes the progress we've made and the work we continue to do are important steps to realizing our vision of being the precision oncology partner of choice from bench to bed side. We believe that our capabilities, our collogues and our global infrastructure allow us to become a durable partner. And more importantly, provide comprehensive information for managing cancer with our collaborators and partners. Thank you and I look forward to meeting many of you over the next few weeks.


Ladies and gentlemen, that does conclude our conference for today. Thank you so much for your participation. Have a wonderful day, and you may now disconnect.

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