Neogenomics Inc (NEO) 2009 Q2 法說會逐字稿

Greetings and welcome to the NeoGenomics laboratories second-quarter 2009 earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Doug VanOort, Chairman and Chief Executive Officer of NeoGenomics Laboratories. Thank you. Mister VanOort, you may now begin.

Thank you. Good morning, everyone. I would like to welcome everyone to NeoGenomics' second-quarter 2009 conference call and introduce you to the NeoGenomics team that chair with me today.

Joining me this morning on this call are Mister Bob Gasparini, our President and Chief Scientific Officer; Mister Steven Jones, our Chief Financial Officer; Mister Jerry Dvonch, our Director of Finance and Principal Accounting Officer; and Mister Fred [Wittig], our Controller.

Before we begin our prepared remarks, I have asked Steve to rad the standard language about forward-looking statements.

Thanks, Doug. This conference call may contain forward-looking statements which represent our current expectations and beliefs about our operations, performance, financial condition and growth opportunities. Any statements made on this call that are not statements of historical fact are forward-looking statements.

These statements by their very nature involve substantial risks and uncertainties, certain of which are beyond our control. Should one or more of these risks or uncertainties materialize or should the underlying assumptions prove incorrect, actual outcomes and results could differ materially from those indicated in the forward-looking statements.

Any forward-looking statement speaks only as of today, and we undertake no obligation to update any such statements to reflect events or circumstances after today.

Thank you, Steve. To begin this morning, I am going to make a few brief comments before turning the meeting over to Bob and Steve to discuss our second-quarter.

As many of you know, I have been here at NeoGenomics for four months now. As I told our Board members last week, I'm now even more excited about the Company and its prospects than I was when I started.

During these past four months, we have fully developed and refined a mission, a vision, core values, critical success factors and objectives for the remainder of this year. We have communicated those broadly throughout our organization. We have aligned our Company's incentive plans with our objectives and those goals. And we are now executing those objectives. And we are holding ourselves accountable as we execute.

As I mentioned during last quarter's call, we have six areas of focus for our Company with specific objectives and goals for each. They are to promote and ensure compliance; to develop our people and organization; to establish a culture of continuous improvement; to build and integrate our IT capabilities; to grow; and to drive performance.

I feel good about our plans. And I feel good about the pace of our work on these foundational management processes.

Now, another key area of focus for us has been developing and executing the strategic agreement with Abbott. Many of you told us over the past several months that you were interested in what you perceive to be a missing strategic ingredient in the NeoGenomics' arsenal of capabilities, and that was accessed to intellectual property.

We believe our agreement with Abbott adds that strategic ingredient. It allows NeoGenomics an ability to invest in new test development in a manner that adds to our strategic capabilities and allows for competitive advantage.

Now, by now, most of you have read last Friday's press release. And many of you have already talked with Steve about the strategic supply agreement. It is a complex agreement, so I will review briefly only some of the key terms with you this morning.

Our agreement provides for Abbott to supply materials for NeoGenomics to develop our own FISH-based test for the diagnosis of melanoma. Once we decide on the specific probes for the test, we will have an ability to purchase certain of those probes on an exclusive basis for a 10-year term.

We expect to develop the new laboratory developed test, or LDT, for melanoma diagnosis over the next six months and to begin to offer the tests in early 2010 in the United States. Our agreement also provides NeoGenomics with the opportunity to evaluate and select from certain other Abbott IP and to develop two tests for other cancers under circumstances in the future.

As you know, in a related transaction, we also announced that Abbott has acquired 3.5 million shares of NeoGenomics' common stock, representing a 9.6% ownership interest for $4.8 million.

The bottom line is that we spent considerable time and energy in developing this strategic relationship. And we hope it will provide an important strategic asset for NeoGenomics in the future.

The last area I will comment on is our Quarter 2 activities and results. Bob and Steve will cover those results in detail.

I have already mentioned a focus of our activities was to build our infrastructure and organizational capabilities. But we invested a lot of time and energy in compliance, for example. We are 100% committed to have a model compliance process, particularly for a company our size, and we have ramped up our activities in this area as a result.

We have also invested heavily in sales and marketing. I believe we have good opportunities to grow. We have evidenced that and we need to take advantage of those opportunities with smart and deliberate investments.

During the quarter, we hired Grant Carlson as our Vice President of Sales and Marketing. As many of you know, Grant has been acting as our Vice President of Sales and Marketing for about six months. And Grant has a history -- a long history in the anatomic pathology space.

We established a marketing department. We added six new salespeople in the quarter, bringing the total representatives we have to 23 at the end of the quarter. We launched a new automated image analysis product. We invested in training. And we just recently hired a new regional manager for our Company.

Overall, we increased our sales and marketing costs by 29% in Quarter 2, compared with just last quarter, Quarter 1. But we were still able to keep our total SG&A expenses as a percentage of revenue constant from where it was in Quarter 1 by turning it back on our G&A expenses.

We are going to continue to invest heavily in sales and marketing; and that investment will also include additional costs in Quarters 3 and 4 in preparation for a launch of the melanoma test.

Now, we are not yet satisfied with the productivity results in our sales and business development organizations. But nearly half of our sales organization is new to NeoGenomics in 2009.

Grant has put in place essential building blocks to drive improvement, and we are hoping to begin to realize an improvement in productivity as we go forward.

So the bottom line is that I am excited about the Company and its prospects. We are adding to our capabilities and we are building momentum. We also had a solid Quarter 2 performance. And to discuss that, I am going to turn it over to Bob Gasparini, our President and Chief Scientific Officer.

Thanks, Doug, and good morning with a special hello to family, friends, investors, colleagues and others who have the opportunity to join us this morning.

As highlighted in this morning's press release, our revenue for Q2 2009 was approximately $7.5 million, an 8% sequential increase from Q1 2009 and a 53% year-over-year increase from Q2 2008, despite the fact we entered the dog days of summer here in Florida in Q2. Also, for the fifth consecutive month, we ended the quarter in June with what was at the time a record revenue month.

Q2 '09 also saw our G&A expenses increased slightly, driven primarily by, one, investments in infrastructure, including the expansion and buildout of our Florida facilities here in Ft. Myers, and buildout of our California facility in Irvine, California; two accelerated investments in the sales organization, allowing us to reach our year-end goal by July; and finally, expansion of our marketing department which, for the first time in '09, we started investing in.

Despite these additional expenditures, our SG&A as a percentage of revenue remained unchanged at approximately 53%. And we were profitable for the quarter. I am particularly pleased to note that although our sales and marketing expenses were up, our actual G&A expenses decreased by about 5%, relative to Q1 09. Steve will take you through a much more detailed analysis of these numbers in a moment.

You heard from Doug how we, as a senior management team, have refocused on our mission, our vision and the critical success factors that all of us believe will drive both Neo's growth and shareholder value. We recognize that our future success will be measured in our ability to balance sales growth with personnel and infrastructure; our ability to continue to expand on our innovative and market-leading product offerings; and our ability to maintain our industry-leading turnaround time.

There's a lot going on at Neo. But I would like to spend the next few moments with you, talking in more detail about one of those innovative and market-leading product offerings.

This is not just a catchphrase that we use. You have been hearing about this a lot for the last few days. The melanoma test development end market. Although we have a lot of work to do over the next six months to develop and commercialize the country's first melanoma FISH test, there is a lot to be excited about.

Since the first paper on genetic changes in melanoma in 1988, there has been a growing body of literature pointing to the need for a genetic test for skin cancer. One could point to Doctor Boris Sebastian's work in the late 1990s as the landmark for [Sentinel Paper], similar in scope and graft to Doctor [Denny Slayman]'s landmark paper on [HER-2] FISH testing in breast cancer.

Doctor Slayman's paper came 10 years before the practical application of FISH testing into mainstream clinical work, and it now appears that Doctor Boris Sebastian's work would have been published exactly 10 years prior to this new FISH application and melanoma. In fact, there has been a mini explosion of scientific papers on FISH testing in melanoma with no less than three of those papers published in the last eight weeks in three different major pathologies and cancer journals -- all reporting excellent results using the FISH test design for the diagnosis of skin cancer.

This is what we mean at NeoGenomics Laboratories when we say we defend all of our new products with science.

As discussed in the press release, the earlier and now more recent melanoma FISH studies performed at multiple academic centers around the US and in Europe have reported sensitivity rates in the 87% to 90% range, and specificity at a rock solid 95%. What this means is that these tests have only a 5% false positive rate and up to a 10% to 13% false negative rate on the samples within those studies, which by anyone's standards in 2009 is a very strong laboratory test, consistent with the analytical sensitivity and specificity similar with other genetic tests such as HER2 breast cancer FISH and bladder cancer FISH, both FDA-approved.

Indeed, some of -- some will argue that the melanoma FISH test is the best of the three for picking up disease and not leading to false positives.

Skin cancer, as we know, is one of the most common forms of cancer, and melanoma is the deadliest form of that. The American Cancer Society estimates that there'll be approximately 121,000 new cases of melanoma reported this year in the US, of which 68,000 will be the more serious invasive melanoma and the remaining 58,000 cases localized or in situ melanoma.

The final or total number of specimens needed to identify these 121,000 cases is conservatively estimated to be between 1.5 million and 2 million biopsies that will need to be screened. The literature is also quite clear on how hard it is to diagnose some of these melanoma cases.

Roughly 25% to 40% of melanoma cases involve a condition that may be difficult for [anamotic] pathologist to diagnose. In one study, 10 melanoma experts around the world were asked to analyze 30 specimens and come to a consensus.

17 specimens, or more than half, did not result in a diagnosis, and in only one of the 30 cases did six of the 10 melanoma experts actually agree on a diagnosis. In fact, some of the biopsies that actually proved fatal to the patient were characterized as benign by the majority of these 10 international experts.

Because of statistics like this, melanoma cases are subject to the highest rate of litigation in the pathology community. So a more accurate and effective test should be of interest to [dramato] pathologists and dermatologists around the country.

The literature is also getting clearer. Patient care will be approved, lives will be saved and healthcare costs reduced, with more accurate and diagnosis and, ultimately, timely targeted therapy. As a result of our due diligence of the conversations we have had with both dramatic pathologists and dermatologists over the last six months, we are excited about the early intensity and level of interest there appears to be in having the FISH-based test for the diagnosis of melanoma.

And finally, as Doug mentioned, NeoGenomics' ability to evaluate and select from both at its intellectual property or IT on both the use of key genes in this test, as well as their IP on the FISH technology platforms should allow NeoGenomics Laboratories a competitive advantage, relative to the melanoma diagnostic market. In short, we are starting to realize the neo-vision of becoming America's premier cancer testing laboratory by delivering uncompromising quality, exceptional service and innovative products.

As mentioned, at our last earnings call, we have been very conservative with our expenditures, getting to the end of phase 1 of our Company's development earlier this year. And as we progress through the next phase of our growth, all of us here are focused on both our vision as described and our mission, which is quite simply to improve patient care through exceptional cancer genetic diagnostic services.

Here at Neo, you can expect us to continue investing in growth initiatives that we believe will add both short-term and long-term shareholder value, new tests that could arise out of the NeoGenomics-Abbott relationship are just two more examples of what is to come.

I thank you for your attention thus far this morning, and I will turn the call over to Steve to review in more detail our financials for Q2. Steve?

Thanks, Bob. I will start by reviewing some of our financial and operating metrics. And then, I would like to dig a little deeper into what we think will be the impact to NeoGenomics from this test.

During the second quarter, we reported total revenue of approximately $7.5 million, a 53% year-over-year increase from Q2 '08. On a sequential increase, revenues increased by $546,000 or 8% from Q1 '09.

The total number of cases processed in Q2 '09 increased by approximately 34% of approximately 7,800 from 5,800 in Q2 '08. Average revenue per requisition grew by 14% on a year-over-year basis to $953 in Q2 '09. This was driven mostly by the increase in flow cytometry testing as a percent of our overall revenue.

In Q2 '08, flow cytometry was approximately 24% of our revenue, whereas in Q2 '09 flow had increased to approximately 29% of our revenue. As we have discussed before, flow cytometry has the highest average reimbursement of any of the tests we perform. So when it increases, it takes our overall average revenue per requisition [up].

We also saw a decrease in the percentage of single tests per case bladder cancer FISH test from Q2 '08 to Q2 '09. This was a result of the fact that we provided a lot of bladder cancer FISH test to another reference lab in Q2 '08, which we are now no longer providing, as well as the decrease in bladder cancer FISH tests for our largest customer that we reported in our press release.

As a result, our average number of tests completed requisition 1.35 in Q2 '08 to 1.45 in Q2 '09. This also had a positive impact on our average revenue per requisition.

The total number of test processed in Q2 2009 increased by 43% from Q2 2008 to approximately 11,300 tests. Average revenue per test increased by 6.8% to $659 from $617 in Q2 2008, mostly as a result of the changing mix that I just described and as well as due to the Medicare price increases from 2009.

As discussed in the press release, our gross profit margin remained at approximately 55% in Q2 '09, essentially unchanged from Q2 '08 and Q1 '09. SG&A expenses in the second quarter were approximately $3.9 million, a 54% increase from Q2 '08 and a 7% increase from the amount recorded in Q1 '09. However, as discussed in the press release, the vast majority of these increases were in the sales and marketing side of the equation and not the general and administrative side.

Indeed, general and administrative expenses actually decreased by $126,000 or 5% from Q1 '09. As a percentage of revenue, our SG&A expenses remained at approximately 53% in Q2 '09, unchanged from both Q2 '08 and Q1 '09.

As we have discussed previously, now that we have reached $2.5 million of monthly revenue, we are beginning to see significantly more operating leverage in our business. And we have been able to reinvest all of our incremental revenue into sales and marketing. We currently have 23 reps and four [RMs], which is up from 14 reps and three RMs at year-end.

Net interest expense in the second quarter increased to approximately $130,000 from $69,000 in Q2 '08. This increase was primarily due to interest associated with the increased balance on our working capital facility and on increases in the amount of capital leases we have outstanding.

Now that we have closed the $4.8 million equity investment from Abbott, we intend to pay down the balance on our working capital facility. We will, however, leave this line in place as a backup source of financing. It currently has an interest rate of only 6.39%; and it has another 18 months of life left on its term.

Net income for the second quarter was approximately $8,000 or $0.00 per share, which is a small decrease from the $72,000 reported in Q2 2008. Depreciation and amortization for the quarter was approximately $266,000 and EBITDA was $404,000. However, if you are to further adjust our EBITDA for the $123,000 non-cash charges related to stock-based compensation and warrant amortization in the quarter, our adjusted EBITDA for the quarter would have been approximately $528,000.

We finished Q2 with 148 full-time equivalent employees and contract doctors, up from 137 at March 31 and 119 at December 31. Our Accounts Receivable balance, expressed in terms of days sales outstanding, remained at 51 days as of June 30 and was unchanged from that at March 31.

We used approximately $201,000 of cash flow from operations during Q2. However, we decreased our accounts payable and other accrued liabilities by $207,000 for the quarter. Thus, on a normalized basis, we were effectively cash flow from ops neutral.

I am also happy to report that we have now collected about -- all but about $90,000 of the $500,000 or so that was hung up in medically unlikely edits during Q1. And we expect to resolve the remaining $90,000 this quarter.

In terms of our overall liquidity, as of June 30, we had $697,000 in cash on hand; $1,140,000 available to us under our credit facility; and $8 million available to us under our stock purchase arrangement with Fusion Capital, which allows us to sell shares from time to time in the future at our sole discretion at then market prices.

However, these figures do not include the $4.8 million of new equity capital we received from Abbott last week. So our overall liquidity position as of right now is probably greater than it has ever been in our corporate history.

Before we open up the call to questions, I want to quickly address a few points related to the melanoma LDT we are developing. Over the last few days, I've received many calls from investors asking us what the financial impact to NeoGenomics will be as a result of this new test.

Given that we already possess the core FISH expertise required to run this test, we believe that most of the expenditures required will be for the validation of the test up front, the purchase of incremental capital equipment to support increased testing volumes on a moving-forward basis, and for incremental sales and marketing activities.

We expect that this initiative will have a modest negative impact to our EBITDA for the balance of this year in the first six to nine months of next year, but that incremental revenues from this test will allow us to fully fund the required operating expenses within six to 12 months after the date we launched the test.

For the balance of 2009, we expect that the melanoma LDT validation expenses, the initial marketing expenses for the melanoma test, and the timing impact of the restructuring of our relationships with our largest customer will result in an impact to EBITDA of approximately $500,000 to $1 million, which may result in a modest net loss in Q3.

For 2010, it is too early to provide much in the way of economic impact, but we believe that any incremental operating expenses that we may have to fund earlier in the year for the melanoma LDT will be offset by incremental melanoma test revenue later in the year.

At this point, I would like to close down our formal remarks and open up the call for questions. Incidentally, if you're listening to this conference call via Webcast only, and would like to submit a question, please feel free to e-mail us at IR in the NeoGenomics.org. During the Q&A session, we will address your questions at the end if the subject matter hasn't already been addressed by our call-in listeners.

Operator, you may now open up the call for questions.

(Operator Instructions). Jeremy Hellman.

Jeremy Hellman, [Avenue T] Fund here. I don't know where Transcend Services came from. But anyway, just wanted to get a sense of the timeline with respect to getting the melanoma test approved for reimbursement by healthcare payers.

Okay. So this is not a genomic health type test where we are not going to have to go to CMS. This is a FISH test. FISH is a technology that has been around for about 20 plus years. The original CPT codes from the late '80s, early '90s covered FISH on the clin lab fee schedule.

In 2005, the AMA's CPT advisory committee approved two new FISH CPT codes for the physician fee schedule. And currently all FISH testing in the United States falls under those recognized CPT codes.

So that is a process unlike some of the other companies that launched new tests with new exotic technologies we are not going to have to go through.

Okay. And so is it then reasonable to assume that the reimbursement level associated with the test is going to be consistent with other FISH testing?

100% correct.

Okay. That takes care of another question I had there. Just going back to the SG&A, can you guys -- and I am new to the stock and I was curious if you have the breakout between GMA sales and marketing, maybe just for Q1 and Q2 this year?

We historically have not actually broken it out in the press release. I think from our perspective, we are happy to discuss it as long as people understand that we don't intend to break it out on a moving-forward basis.

For the quarter ending June 30, our sales and marketing expense was about $1.7 million and our G&A expense was about $2.2 million.

Okay. And then I can backup to Q1, then, from what else [you had said].

Well, actually, I will give you Q1, just to make it easier for you. In Q1, our sales and marketing expense was $1.33 million. And our G&A was $2.34 million.

Okay. And getting back to the planned sales reps, you are at 23 at the end of the quarter. You mentioned some investments in sales and marketing associated with the melanoma test. Does that include hiring new reps or I guess, speaking broadly, what are your plans for where you want to be at the end of Q3 or year-end with respect to sales reps?

We are still evaluating exactly how we are going to market this in the United States (technical difficulty) [slogic] community. I think at this juncture, we believe it will be some combination of dedicated sales reps and some of our existing routes.

Doug, would you like to add anything to that?

Yes. At this point, we -- it is too early to give you a definitive answer. But we will most likely be adding to our sales force and our marketing organization, as we develop the tests and the capability for year-end.

We anticipate hiring some specialists to attack the dermatology market similar to what we have today. We have territory business managers and specialist representatives focused on the oncology space.

So that model, I think, will work for us, but we have not yet fully defined our plans.

Okay, thanks. I will jump back in queue.

Raymond Myers. Emerging Growth Equities.

Thanks for taking the questions. Congratulations on a lot of progress this year. Now that NeoGenomics has $5 million in cash, you are no longer cash-constrained for the first time in quite a long time.

Doug, now that you have that luxury, will you increase investments to support growth? And if so, in what areas?

A good question. The tough thing for us is balancing our investments in growth as we look forward. But clearly, we have a number of growth opportunities in front of us.

And speaking about melanoma specifically, we intend to do this right. So we are going to invest in marketing. We are going to invest in educating the marketplace. And we haven't defined exactly what that means in terms of our level of investments. Steve gave some indication of that in his remarks.

But we are not going to go crazy. We are going to be deliberate about our investments; but we are going to do it right, relative to introducing this product line. And we intend to continue our innovative spirit as we go forward.

Great. And what about those other two tests that you might -- or few other tests from Abbott?

Yes, there are two other tests that we have discussed with Abbott. And there are a number of important cancer tests that Abbott has some intellectual property around. And we will be working with them over the course of the next couple years to identify the tests that we think would be appropriate in terms of timing and in terms of our ability to introduce them.

And so we are excited about that. But we are not describing specifics. In fact, we haven't done a lot of work on the other cancer tests in order to opine yet on which ones we will be targeting.

Right. Well, we will take one at a time.

Steve, I wanted to ask you a question. In your remarks, you mentioned restructuring a relationship with your largest customer. Naturally, that piqued my interest.

Can you describe that in a little more detail?

Sure. As we reported in our 2008 10-K, we have a very large diversified oncology service company based in Florida that accounted for about 22% of our revenue last year. This is a very large $1 billion area annual revenue company.

And we have been looking for ways to expand our relationship with this customer for quite some time now. They are a very forward-thinking and innovative group. And one of the things that we have been discussing with them over the last several months is helping them to internalize some of their bladder cancer FISH testing activity and, in exchange for that, helping us to provide more and different types of services to them than just the bladder cancer FISH testing services and expanding our service offering to multiple other locations, both within Florida and outside the state of Florida.

We actually think that this is a good new situation for NeoGenomics and that it should open up significant additional revenue opportunities for NeoGenomics and come with kind of the blessing of the corporate office. But this is a timing issue. We've got some negative impacts as they begin to internalize the bladder cancer FISH testing, that we hope will be offset by other revenue increases from immunohistochemistry testing and other testing in multiple other locations that we are hoping to expand too.

So, it is never clean when you do something like this and you are always subject to some timing things. But we are not overly concerned at this point in time that this is going to have a dramatic or permanent impact to our revenue.

Of course, as we get into it, things may roll out differently than we expect. But at this point in time, we view it more as a timing issue.

And this isn't that you would lose all your FISH testing? This would just be they are taking the professional component in-house?

No. Actually, what it is is it's a little bit different in that they are taking -- (multiple speakers) they are internalizing their Medicare -- the Medicare portion of their Eurovision FISH testing and have asked us to continue providing the third-party payer portion.

They are just not set up to bill for the third-party portion of this the way we are. And so we still will be doing it -- a significant amount of bladder cancer FISH testing for them. But we are helping them set up and we are literally providing professional advice to them on a monthly basis and serving as a backup for them for their own internal bladder cancer FISH testing now.

So they will be doing both components?

They will be doing both components on the Medicare portion of it, yes.

Ray, this is Bob. They were always doing the professional component anyway because this was a very, very large $1 billion corporation that has their own pathologists. They do a lot of other testing. They have multiple CLIA laboratories. But they never got into FISH testing until just recently, based on some of their own restructuring.

Okay. No, that makes sense. When do you expect they will start to increase the business in IHC and other testing?

They have already started. They have already started over the last three or four months.

And how long do you think it will be before the increase in the other business offsets the decrease in what they are taking away?

Well, that's the $1 million question. We could give you our views on that, but it would just be pure speculation. Let's leave it at we are trying to accomplish this as quickly as we can, and hope to minimize the future impact of NeoGenomics.

Okay. And this $500,000 to $1 million of EBITDA impact, from restructuring this relationship and from the melanoma, is that in the second half of this year is that over the next 12 months?

We expect that to be the second half of this year.

Okay.

In terms of next year, as I had mentioned, we expect there will be some impact earlier in the year as we continue to invest in sales and marketing for the melanoma. But we believe that that will be offset by increases from the melanoma LDT revenue.

Great. Understood. Now, did I hear you right? That you have 128 employees now and 137 at March 31?

We have 148 now, 137 at March 31.

Okay. That makes more sense to me. All right. Thank you for taking all those questions, and again, congratulations.

Nancy Hull. Ladenburg Thalmann.

Congratulations on the Abbott relationship. Very exciting.

Most of my questions have been answered, but I would like to ask about the nice -- looks like -- fairly steady increase you are seeing in the test per requisition. I know you explained that that is due to the increase in flow cytometry, but how should we think about that going forward? Do you expect that trend to continue or maybe stabilize a bit?

It's actually a pretty subtle issue. In the past, the bladder cancer FISH testing has been one of the fastest-growing components of our business. We had two things happen in Q2 '09 that resulted in bladder cancer FISH testing, actually going down, relative to Q2 '08.

The first is that we had this large reference lab that we talked about, that was ordering in Q2 '08 that we kind of wound up on our wholesale relationship with fairly quickly. And the second is is the restructuring of this large customer resulted in significantly fewer bladder cancer FISH tests in Q2 '09.

So as a result, we probably did 600 fewer tests this quarter than we did in a similar quarter last year. And because bladder cancer by its very nature is a one test per requisition type of arrangement, it was holding back that average number of test per requisition.

So what had happened is we filled that with more [Heem] cases, which usually have two to four tests per requisition, and that is what drove the average up.

Okay, so you think it will maybe trend a little bit back down to a more normalized level going forward?

You know, we have such strong momentum in our Heem business right now that I actually think that we are going to start to see this remain where it's at and maybe even trend up a little bit over time.

(Operator Instructions). Jeremy Hellman.

Did I hear you right, saying that you are going to pay down that outstanding balance on your working capital facility in Q3?

Yes. The current plan is to pay down the expanding balance of about -- around $2 million, $1.8 million to $2 million balance. We can redraw it on a moment's notice. It is not anything that will be paid down and cut off.

We are going to leave the facility in place. It doesn't -- the term of it runs until February 2011. So we've got quite a bit of time on it.

It is a relatively low interest rate facility. We did a pretty good deal there. It is a LIBOR plus 3.25%, and so it would be to a LIBOR floor of 3.14. So we are currently borrowing at 6.39%.

But it [didn't] make sense to keep the negative carry on the interests, and we don't lose the flexibility of accessing this capital by paying it down.

That's great. Just looking at the share count, was up close to $3 million in the quarter. That didn't include any of the shares issued to Abbott, correct?

No. The June quarter will not have that included.

We currently have about 33.1 million prior to Abbott, and if you add the Abbott shares we are at about 36.6 million basic shares outstanding.

Okay. One last thing, just kind of thinking bigger picture, but it's actually not to put the cart in front of the horse here, but are there any other Abbott-like situations out there that you might pursue? I would think you would want to get the melanoma test developed and often running first but down the road, are there possessors of IP out there that you might hope to partner with in other areas?

Well, first of all, I would say that we are very focused right now on melanoma. And secondly, we have got the opportunity to develop a couple of other important tests as part of the Abbott relationship. And we think the Abbott relationship is pretty special for us. And so, we are intending to give it a lot of our effort and focus on going forward.

Now, does that mean that there's nothing else out there? Not at all. We want to be known as a company that takes innovation seriously and does it right.

And so if there are other tests out there, we will be deliberate about it. But we will certainly pursue those. But right now, I would say we are very focused on the tests that we talked about.

Great. Thanks, guys.

Mike Petusky from Noble Financial.

Just a couple clarifications. I want to make sure I understand. I think Bob earlier said that June was a record revenue month. Is that all times that or just for previous Junes?

All time.

All time, yes.

All time. I mean, it's like every month now, all-time record revenue months. And that is why I say us at that time, because we are into July now, and we (multiple speakers).

Keep talking, Bob.

No. No.

Okay. And let me just make sure I understand. So you are going to take six months to develop the melanoma test and then do you expect that then to be available for sale in Q1? Or will there be some time frame there where you are either getting ready for commercialization?

No, we should hit the ground running. Part of the strategy will be to work with some of the thought leaders in this area over the next six months. They will be an internal validation, but we've also initiated that contact with some in the dermatopathology and dermatology world already.

And so we will continue to expand on that, put together an advisory board, look for groups to work with for the validation process, as well as look for those early adapters. So by Q1 of 2010, we should be hitting the ground running.

Okay. Terrific. And then I didn't catch this if you did say it, but of the 22% revenue customer, how much of that revenue is actually going to ultimately be transitioned? What's the plan?

We expect it will be able to recoup all of the lost revenue in our -- cautiously optimistic we will be able to increase the relationship even beyond where it was last year.

Right, but in terms of, if you are looking at that customer right now at your current revenue level, how much of that is going to be transitioned? I thought you were going to mitigate that was the offset of the other testing revenue, but how much of the 22% actually is (multiple speakers)?

Well, it is a difficult question. If you just did the math on last year's numbers, it would be $4.4 million, the vast majority, 90% of which or more was [Eurovision] bladder cancer FISH testing.

I don't have a good feel for how much of that was Medicare, but I would probably -- if I had to guesstimate, pretty high, maybe 60% or more. And so, it is a fairly significant amount of revenue that we are transitioning.

Again, we were down 278 in Q2 on Eurovision bladder cancer testing, but we were up 103 on other stuff. So we are making it up; it's just going to take some time.

Okay. Congratulations again on the quarter and on Abbott.

By the way, just to clarify one thing on that. We view this as a real opportunity. Right now we are just in a small number of locations in southwest Florida. And this gives us an opportunity to get into a substantially greater number of locations throughout Florida and potentially throughout the United States.

So this is not something we view as necessarily a bad thing over the long term. It is going to be a little traumatic in the short-term.

Thank you. At this time, we have no further questions.

Okay. I've gotten a few e-mail questions here that I just want to clean up real quickly. The first is, can you describe for us the impact of seasonality a little better?

I'm not sure what else I can say here, but perhaps if I reduce it to dollar terms -- we said in the press release that our non-Florida-based revenues grew 28% sequentially from Q1. To put that into dollar terms, that is a $1.1 million increase, which is greater than the overall total increase in revenue from Q4 to Q1, which was only $1 million.

So our Q1 to Q2 non-Florida business grew by a greater amount than our Q4 to Q1 total amount of revenue. It was just offset by about a $550,000 decrease in the Florida base.

So our sales and marketing organization is coming up to speed. And as Doug mentioned, we anticipate getting increased productivity from this. We are just in the period where we have some seasonality in our Florida-based business. And the good news is is it is down -- Florida is down to about 30% of our total revenue. It was 41% last year.

So as these increases in non-Florida business continue to propagate through our system, the impact of seasonality in the future will be less and less over time.

The other question is longer term there is a series of questions here about Abbott -- longer-term, if successful, how large a dollar value would you put on the melanoma test market in the US? Beyond 2010, what kind of annual revenues might the new test ultimately generate for NeoGenomics?

Let me clean those two up and then there's a few other questions. As we have stated in the press release from last Friday, we believe that this is ultimately a $50 million to $100 million revenue opportunity for NeoGenomics within four to six years. That is an annual revenue opportunity.

The way we derive that number is a little bit complicated, but I'll walk you through the high levels of that now. Basically, various industry experts believe that 1 million to 2 million skin biopsies are performed each year, to either confirm or rule out a diagnosis of melanoma.

And they have written about this in the scientific literature. Bob talked about one group that was estimating 1.5 million to 2 million. Based on conversations we have had with leading dermatopathologists, we believe that approximately 5% of these biopsies lead to an ambiguous result and an additional 20% lead to a questionable or gray zone result.

And it is these ambiguous and gray zone cases that are the ones that best lend themselves to our new melanoma FISH test. So if you start at approximately 1.5 million skin biopsies per year, related to melanoma, as a "potential addressable market" and then take a 25% penetration of this figure -- again 5% for ambiguous and 20% for gray zone -- this would lead to a total addressable market that would suggest currently approximately 375,000 skin biopsies are candidates for this new test.

Given that the incidence of melanoma has doubled every 10 years or so over the last 30 years, this would further suggest that the total addressable market is growing by 6% to 7%.

As Bob discussed, we believe that there is a pretty strong IP position for this melanoma test. As a result, we believe that over the first six years we offer the test, we can achieve a 40% to 50% penetration of the ambiguous portion of the total addressable market, and a 25% to 35% penetration of the gray zone portion of this addressable market.

Although we are still confirming the number of probes we will offer with this test currently we estimate that it will be a four probe FISH test. If we were just to take our average revenue per test for our four probe FISH test that we currently get through our neo-genomics system, which is about $650, this would suggest an annual revenue opportunity of approximately $50 million in year four and approximately $100 million in year six.

And again, this is scaling up to 30% penetration of that total addressable market for gray zone, and 45% penetration for the addressable -- for the ambiguous addressable market. Of course, these estimates are based on our best estimate at this point in time of how the market will roll out and actual performance may differ than what we expect.

And we would always encourage investors to do their own due diligence and develop their own estimates. But we believe about a 33% penetration of the total addressable market over the first six years or so is a reasonable estimate of what is possible in this market.

Let's see. There is another couple questions here about the other relationship. Is the melanoma test something that NeoGenomics might be able to license out to others to generate additional revenue?

The answer is no, we did not get a license to the core technology from Abbott. We did, however, sign a supply agreement. And that will give us exclusive access to purchase some of the key reagents for this test.

How would you characterize Abbott's investment in NeoGenomics? Is it just a one-time tactical move to assist in development of their technology? Might there be other opportunities for NeoGenomics to collaborate more with Abbott?

Well, as Doug mentioned, there is in our agreement an opportunity for us to develop two additional tests for other cancers. So we actually believe this is a very strategic relationship.

And I don't want to speak for Abbott, but I believe that Abbott made their investment in NeoGenomics because they saw the promise of our business model and our strategy and would anticipate doing more with less than just this melanoma LDT.

That actually concludes all of the questions I have received by e-mail. And I don't see that we have any other questions.

So at this point, I am going to turn it back to Bob for some closing remarks.

Hello again. Before we sign off, I would like to take a moment to recognize all 148 of the NeoGenomics team members around the US for their dedication and commitment to building a world-class cancer genetics testing program.

So on behalf of all of us here at NeoGenomics Laboratories, I would like to thank you for your time and joining us this morning on our Q2 2009 earnings call area. For those of you listening in or investors are thinking about investing in Neo, we would like to thank you for your confidence in our eyes as we continue to drive shareholder value in 2009. We will look forward to talking with you again at our Q3 '09 earnings release, which should be around the end of October. Goodbye.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.