Neogenomics Inc (NEO) 2009 Q4 法說會逐字稿

Greetings and welcome to the NeoGenomics Inc. fourth-quarter 2009 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions).

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Douglas VanOort, Chairman and CEO for NeoGenomics Inc. Thank you, Mr. VanOort, you may begin.

Thank you and good morning. I would like to welcome everyone to the NeoGenomics fourth-quarter and year-end 2009 conference call and to introduce you to the NeoGenomics team that is here with me today.

Joining me this morning are Mr. Bob Gasparini, our President and Chief Scientific Officer; Mr. Steven Jones, our Executive Vice President of Finance; Mr. George Cardoza, our Chief Financial Officer; and Mr. Jerry Dvonch, our Director of Finance and Principal Accounting Officer.

Before we begin our prepared remarks, I've asked Steve to read the standard language about forward-looking statements. This 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 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.

Thanks, Steve. I'm going to make a few brief comments before turning the meeting over to Bob to discuss our recently launched melanoma test and then to Steve to discuss the quarter four and year-end performance.

2009 was truly a year of significant change and transition for NeoGenomics. While we are certainly not satisfied with all aspects of our performance, we are proud of the significant progress being made to position the Company for strong growth and profitability in 2010 and beyond.

Looking back over the past quarter and year, the Company made progress in several key areas. Our sales and marketing organization is bigger and stronger than ever. At our national sales meeting a little over a week ago, I was struck by the depth of our team of talented regional managers, sales representatives and marketing professionals.

We also added to our capabilities by implementing a robust customer relationship management system, new training programs, additional marketing support and greater accountability and incentive to our team. I'm expecting a much stronger productivity from the team in 2010.

The strategic supply agreement with Avid is also important for NeoGenomics. As part of that agreement, we spent considerable time developing the melanoma test. Bob will tell you more about this test in much more detail in a few minutes.

We recently launched the laboratory developed melanoma test through our own sales organization and in partnership with Aurora Diagnostics, Diagnostic Lab of the Central States and Path Logic. It's early but we are as excited about this test as we ever have been. So so far, so good.

We also made good progress building our management team. During the last quarter, we added George Cardoza as Chief Financial Officer, Jack Spitz as Vice President of Operations, added talented people to our operating team. And from a personal standpoint, after some time at a part-time interim capacity, I joined the Company as Chairman and Chief Executive Officer four months ago.

And while we don't like normally to do subtractive analysis, it is important that our revenue growth, subtracting the one large client who internalized testing at the midpoint of 2009, grew by 60% in the fourth quarter and 70% for the full year when compared with 2008. All in, our growth in the fourth quarter was 32% and 47% for the year as a whole.

The Company's financial position is also much better than it was at the end of the prior year with $2.6 million in cash, a strong networking capital position and minimal debt other than leases. So in summary, we believe the Company knows what it stands for, knows what it needs to do, knows how to execute on its objectives and is properly focused to accomplish its goals for 2010.

As a team, we're all truly excited about the Company and its prospects and we expect to build momentum each quarter this year. At this point, I'm going to turn the call to Bob Gasparini, our President and Chief Scientific Officer, to review our recently completed validation and introduction of the melanoma test.

Thanks, Doug and good morning with a special hello to family, friends, investors, colleagues and others who have joined us this morning. At our last earnings call, I mentioned the growing excitement building around the launch of NeoGenomics Laboratories first signature product as a result of our strategic agreement with Abbott Molecular.

Well, as mentioned in our press release this morning and by Doug a few minutes ago, I'm happy to announce the first exclusive test has been launched last week in conjunction with our partners who helped supply us with the specimens we used for the validation study. So what exactly is this excitement all about?

What we do know is that melanocytic or melanomic lesions exhibit significant morphologic heterogeneity, meaning they look different. What this means is that abnormal specimens can look like normal specimens leading to a missed diagnosis of cancer; in this case, melanoma.

While the majority of biopsies suspected of being the melanoma can be classified as either benign or malignant, there exists a group of patients that we call ambiguous for which the diagnosis of metastatic disease is difficult or impossible to determine based on the current standard of practice prior to this new genetic test for melanoma. The literature is quite clear.

Prior to this test, there was significant disagreement between pathologists, even expert pathologists in the diagnosis of melanoma. The good news is that is not the case anymore. Based on the agreements signed with Abbott Molecular last year, the country's first melanoma FISH test is now on the market. In brief summary, here are the activities we engaged in to launch this test.

We designed, built and staffed a one-of-a-kind automated melanoma FISH laboratory adjacent to our existing laboratory in Irvine, California. We optimized the front-end automation and never before done four color paraffin FISH automation analysis, making this truly a one-of-a-kind.

We surrounded our state-of-the-art FISH facility with an AP laboratory allowing us histology, IHC and virtual imaging capabilities. Working in conjunction and cooperation with dermatopathologists around the country, we completed the validation study for this new test that we are calling MelanoSITE.

In our validation study, we analyzed over 500 biopsy specimens that included normal nevi, dysplastic unusual looking nevi and abnormal melanoma samples using a set of four DNA probes developed by Abbott Molecular and tested for over four years in multiple academic centers around the US and the world. To date, there are over 30 peer-reviewed scientific articles discussing the association of these four DNA probes or genes with melanoma.

Based on our internal validation study, we obtained a specificity of 97%, i.e. the true negatives and false positives measure; and a sensitivity, i.e. the true positives and false negative measure of 77%. Looking at it another way, the negative predictive value which is calculated by dividing the true negatives by the true negatives plus false negatives came out at 98.3% meaning that when this test is normal, there is a very high degree of accuracy that the patient does not have melanoma.

This is significant because the tendency to call ambiguous cases positive in order to be certain, every possible abnormal was found. Most experts will agree that the potential for overcalling existed resulting in unnecessary or excessive surgeries, scarring and significant health problems related to those surgeries.

In addition to being sold by the new NeoGenomics sales team, now 30 strong across the country, MelanoSITE is in the process of being launched through Aurora Diagnostics, Dermatapathology Laboratory of Central States and Path Logic; each of whom contributed samples for our validation study. We have been told that each of these laboratories will offer this FISH test through their own customer networks.

As part of the rollout, we're also exhibiting at three national trade shows this spring all focused on the dermatopathology community. We have set up a series of Neo University offerings around the country including webinars, tutorials and proficiency testing on Melanoma FISH, for all of our marketing partners, early adopters, our current Neo pathology partners and finally our Neo pathology partners who are learning about tech-only FISH for the first time via this test.

And lastly from the scientific perspective, and guided by our nationally recognized melanoma advisory board, we're continuing to add to our database of over 500 FISH analyses, now including severely dysplastic nevi, childhood melanoma and spitz nevi. Our goal is a publication in a peer-reviewed pathology journal by the end of the year which will be to date the largest cohort of melanoma patients in one study.

And finally, we are beginning to look ahead at what is next beyond melanoma testing. As many of you on the call are aware, the strategic supply agreement with Abbott signed last year allows for the development of two additional exclusive cancer tests backed by Abbott's intellectual property and gene licensing agreements.

In short, we are starting to realize the Neo vision of becoming America's premier cancer testing laboratory. As we progress through the next two years of our Company's growth, all of us are focused focused on both our vision and our mission which is quite simply to improve patient care through exceptional and now exclusive cancer genetic diagnostic services.

Stay tuned at our next earnings call for a sneak peek at the next one-of-a-kind cancer test that will arise out of the NeoGenomics-Abbott relationship. I thank you for your attention thus far this morning and will turn the call over to Steve to review our financials for the quarter.

Thanks, Bob. I'll start by reviewing some of our financial and operating metrics and then we went to open it up for questions

During the fourth quarter, we reported total revenue of approximately $7.8 million, a 32% year-over-year increase from Q4 08. But as Doug mentioned, if you were to exclude the in-sourcing of the one large customer, our revenue growth rate would've been 60%.

The total number of requisitions or cases processed in Q4 increased by 18.7% to approximately 8600 from 7200 in Q4 2008. Average revenue per requisition grew by 11% to $910 from $820 in Q4 2008. This was driven mostly by increases in the number of higher priced hematology FISH and flow cytometry cases as a percentage of our total mix.

Heme FISH revenue grew by 108% in Q4 2009 from Q4 2008 and now represents approximately 28% of our total testing revenue, up from 17.7% in Q4 08. Indeed this was our fastest growing product in 2009.

Flow cytometry revenue grew by 70% in Q4 2009 versus Q4 2008 and now represents 30.9% of our total testing revenue, up from 23.9% in Q4 2008. Total FISH testing revenue including Heme FISH, Breast cancer FISH and Bladder Cancer FISH now represents approximately 44% of our total testing revenue.

Another key driver of average revenue per case is the average number of tests performed per case. As we've discussed before, Heme FISH testing is typically done in conjunction with leukemia and lymphoma cases which usually have two to four tests per case. So they usually have higher average revenue per case.

In Q4 09 we performed 1.48 tests per case on average which was up 13% from 1.31 reported in Q4 08. The total number of tests processed in Q4 09 increased by 34% from Q4 08 to approximately 12,700 tests. Average revenue per test was $613 which was a slight decrease from Q4 08.

As discussed in the press release, our sales and marketing expenses increased by 100% to $2 million in Q4 09 from approximately $1 million in Q4 08. This level of expense was equal to 26.1% of our total revenue which is a higher level of investment than any of our publicly traded peers.

We finished with 23 sales representatives, four regional managers and three marketing personnel as well as several customer services representatives. As Bob just mentioned, we're now up to 26 representatives an four regional managers, making the total 30.

Our general and administrative expenses increased 8% on a year-over-year basis to approximately $3.0 million. As we discussed in an earlier press release, we took approximately $500,000 in restructuring and other one-time charges associated with certain severance and recruiting charges and the writing off of some of the revenues we previously booked from our relationship with Response Genetics during Q4.

We also took about $933,000 of other special charges in Q4 08. If you were to normalize our Q4 08 and Q4 09 G&A expenses to eliminate the special charges, the growth in G&A would have been approximately 34% on a year-over-year basis, about half of which was due to spending to develop the new melanoma test and prepare it for launch.

Net interest expense in the fourth quarter was approximately $141,000, an increase of 42% from Q4 2008. This was due to increased interest expense on capital lease arrangements directly attributable to increased capital expenditures during 2009.

As of 12/31/2009, we had $552,000 drawn on our working capital facility and approximately $3 million outstanding on our capital lease facilities. Net loss for the fourth quarter was approximately $1.5 million or $0.04 per share compared to a net loss in Q4 2008 of $994,000 or $0.03 per share.

Depreciation was approximately $370,000 in Q4 and EBITDA was negative $1.017 million. However, if you were to further adjust our EBITDA for the $96,000 of non-cash charges relating to stock-based compensation and warrant amortization, our adjusted EBITDA for the quarter would've been approximately negative $921,000.

We finished Q4 with 174 full-time equivalent employees and contract doctors, up from 161 at September 30 and 119 at December 31 last year. Our accounts receivable balance expressed in terms of days sales outstanding was 54 days.

We used approximately $455,000 in cash flow from operations during Q4 and $1.5 million for all of 2009. In terms of our overall liquidity, as of 12/31/2009 we had $2.6 million of cash and restricted cash on hand, $2.45 million available to us under our credit facility and $8 million available to us under our stock purchase agreement (technical difficulty) capital which allows us to sell shares from time to time in the future at our sole discretion at then market prices.

With respect to our payer mix, we're currently operating at about 45 to 50% Medicare, 25 to 30% insurance billing, 20 to 25% client billing and less than 2% for all other payers such as Medicaid and self-pay arrangements. At this point, I'd like to close down our formal remarks and open it up for questions.

Incidentally if you are listening to this conference call via webcast only and would like to submit a question, please feel free to e-mail us at IR@neogenomics.com during the Q&A session and 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) Boris Peaker, Rodman & Renshaw.

Congratulations on the launch of the new test. I have a couple of questions. First question is Bob mentioned there were three conferences or trade shows that you are going to be presenting your test. Can you tell us what they are and when they are going to occur?

Yes, I think we have those at our fingertips. Two of them are going to be in Miami and we have -- okay, the AAD and I think that's the American Academy of Dermatologists; the ISDP, that's also in Miami (multiple speakers) International Society of Dermatapathologists; and actually there's two others, the USCAP, it's the US Canadian Academy of Pathology. I believe that is in Washington, the first two are actually in our home state here in Florida. And then there is a FLSCO meeting which is the Florida Society of Clinical Oncologists.

Great, thank you. And looking forward at the test, in your view what would it take for this test to become the standard of care? I'm specifically referring to the ambiguous pathology samples.

So that's a great question and you know, the best way that I can think to answer that is to sort of look back and use history as a guide. As we moved in breast and as we moved in bladder from morphologic diagnosis to genetic diagnosis, it was a combination of a more accurate test. It was a combination of the adaptation that got ramped up, the abstracts and the literature that was published; and quite frankly, the talks that were given at national meetings.

It was in short the spotlight being shown on the data and the power if you will of a genetic test. As we look at melanoma in regards to the existing algorithm, I mean most of the genetic tests have the power of either a prognosis or even response to therapy, what we call prediction.

But this is an algorithm or this is a current process where we are all the way back at the beginning on the diagnostic part of it because there is this ambiguity based on current methodologic or histologic techniques. And so, I think when you have a genetic test that turns its attention to the front end, the adaptation is relatively quickly.

So I think it's -- the onus is going to be on us to help get the word out. We have seen -- we have the early adopters. We have our partners or clients in ways if you will, those that helped us with the validations; those that are our top 10, top 12, top 20 clients and then all of the others as we move the information for this test out.

I see. Can you comment on the relationship you have with the partners that you mentioned in the press release?

Bob Gasparini Sure, Steve. Each of the partners helped us in varying degrees. The one common theme is they all sent us validation samples that we used in the study. Certain of the partners didn't want to be active participants in the advisory board aspect of it, but others participated in detail in advisory board meetings and gave us lots of comments and thoughts about how we should position this meeting and we respected each partner's individual choices about what was comfortable for them.

At least one didn't want to be perceived by their clients as pushing a test that they were intimately involved with developing but they like the test and are going to offer it to their clients. In one particular case, we have a special arrangement that will allow us to give a little bit of a lead in the marketplace in certain geographic areas for their sales force for a limited period of time in offering the test.

I would tell you that it's a very large company and it's very interesting to us from the perspective of covering a lot of geography quickly. Doug, do you want to add anything to that?

I would just add that Aurora Diagnostics is the second-largest dermatopathology company in the country and they are a very strong partner of ours in this endeavor and they -- we have a good relationship with them and we are going to offer this test through their sales force in many regions around the country where they have a big presence. So the other labs are also very important to us but Aurora is by far and away the second-largest and a very large player in this space.

Okay, I see. And just I guess these two more housekeeping questions probably for Steve. Could you remind us what that $1 million in restricted cash is? And also just want to kind of get your thoughts on what appears to be seasonality in the G&A and the average revenue per test. What may be driving that?

Sure, the restricted cash arised out of the -- we entered into a $1.5 million capital lease line on very, very favorable terms to the Company; something like a 30 or 40% reduction in interest rate relative to what we have been borrowing at before. As part of that process, they wanted us to post $1 million of cash in a deposit account at their institution.

This was holding company cash that we never planned on using. It's reserve cash, it's nothing that impacted our operations. They've -- actually SunTrust has now come back and said that if we want to establish a line of credit to borrow against that $1 million dollar for dollar, we can, which we will probably do this quarter.

So we think it has minimal impact in our operations in terms of liquidity and you know (inaudible) a company growing at the rate we are, we would never let our cash get below $1 million anyway. Your second question about the average revenue per test, we look pretty hard at that.

There are a lot of different things going on with that and it would be remiss for me to point at any one thing as a driving cause of that. But we are having some uptick in volume in the lower priced immunohistochemistry testing that we've talked about, that is when we wound down the Bladder Cancer FISH testing relationship with our largest customer and when we started winding up the immunohistochemistry testing relationship.

So you're seeing more of that in our mix. We are also seeing one or two of our insurance out of contract insurance company payers starting to impose some price reductions on us for the out of contract work. We actually got way in front of this curve a year ago and hired a very experienced seasoned manager to come in and start negotiating contracts with all the insurance companies.

And so we are making actually good progress on getting on contract. And typically what happens when you go from being off contract to on contract is you do take some price reductions but you wind up being included in their marketing and their own push and you wind up getting more volume as a result of that. So we're not really ready to disclose much on that yet, but as the year unfolds, I think you'll see us talk about the new contracts that we put on for insurance billing.

Keep in mind, this is only 25 to 30% of our revenue stream. It's not like a traditional lab that doesn't have as much Medicare in their mix. Because cancer is a disease in the elderly and so more cancer genetics labs have a greater percentage of Medicare. So it wouldn't impact us anywhere near to the extent of some other labs that are more just clinical labs in nature.

All right, well thank you very much for taking my questions.

(Operator Instructions) Raymond Myers, Emerging Growth Equities.

Thank you and good morning, everyone. I wanted to ask about the weather effect. Guidance for the first quarter, you had mentioned that the weather is impacting the results. It's snowing outside my window again (multiple speakers) I didn't think things were that bad in the Southeast or is it?

No, it did snow in Florida a few weeks ago. That was Northern Florida. It's actually interesting, it was something that we weren't too concerned about by the end of January. We saw a little bit of impact but we started really noticing it in February.

We have attempted to quantify it, but when you quantify it, you're always sort of speculating about what you would have got absent that. We did as scientific an analysis as we could and we believe that on the quarter-to-date basis, our [possessions] are down 3 to 5% and a lot of that (multiple speakers) as a result of the weather-related stuff and almost all of that is coming from the Northeast.

It's snowing again today and my brother lives in Washington, his kids were out of school for nine days and he was ready to ship them all to Florida to get him out of his life. So at the end of the day, the snows affect everybody and it's not something that we think is going to have a huge material impact but we're not the only lab. There's a bunch of other labs that have noticed this. Fortunately for us, the Northeast is probably only about one third of our business.

Good. Can you update us on the qui tam suit?

Sure, for those of you on the call who don't know what this is about, there was a sales representative of a large, for lack of a better way to put it, laboratory services company and pharmaceutical company that was terminated; that this particular company supplied us with certain supplies. This individual filed what's known as a qui tam suit which is a whistleblower lawsuit and they named the company that terminated him as well as several laboratories as abusing one of the FISH tests that we use and diluting the probes.

We validate every single batch of probe. Not only do we validate the probe up front before we bring up any new tests, we validate every batch of probe against known normals and abnormals on each of the machines. And as result of that, we are fairly confident that this whole thing will not be -- I guess the process for qui tam suits is they file it with the US Attorney and US Attorney has to decide whether they want to intervene.

We sent all our stuff off to the US Attorney's office two weeks after we got notice of this. We think it's going to go away. Our lawyers think it's going to go away. They are reviewing everything and until they respond to us, we don't have any real definitive data to point. But it's not just NeoGenomics, it's a lot of labs that are involved with it. We're probably the smallest of the labs that got embroiled in this.

So there's been no new information though?

There is no new information.

And then last quarter's call, we talked a lot about initiatives to help improve the sales force traction. I was hoping we could address that. And then specifically, [absent] four managers for a total of 30 salespeople, is that as of the end of Q4 or is that currently?

Doug, you take the first. The last is currently, we were 23 reps and four RMs at the end of December and as of today we filled a few replacement positions in the intervening two months. We're at 26 reps and four RMs.

Good. Okay, so clearly you've made progress in terms of numbers. How is that flowing through to traction?

Well it is flowing through to traction and there are a number of inputs to that process I guess to gain traction and momentum in our sales force and I'll just rattle off a few of them for you. One is the melanoma test.

We have talked about the validation and the launch. But essentially that test allows us to get into pathology practices that have a dermpath because it's an exclusive test to us and that allows us to have a foot in the door and places that we didn't get to before in addition to the natural sales momentum that is there.

The second thing is additional training. I mentioned the national sales meeting that we held a little over a week ago. About 70% of that meeting was training of our sales reps. In addition, we have got a pretty robust training plan scheduled for this year on a monthly basis. So that's the second thing I would point to.

The third thing I would point to is our implementation about two weeks ago of a customer relationship management system which allows us not only to track where our sales people visit, but it also helps us with lead generation, understanding who is trialing us, understanding better when specimens even come in the door and how they are linked to customer care, to our sessioning group. It allows us to track incidents a lot more. It allows our sales reps when they enter a client's office to know who talked with that client last, what specimens are in the door; what are waiting, turnaround time; all that sort of thing.

So those are a number of things that we have done. We've also just added significantly to our marketing materials and some other product lines, in particular the hemoc space where we have just introduced to our sales team new literature, new materials, new collection kits and so forth. So there are a lot of things that we have just done and just rolled out to add to our productivity.

I did mention greater accountability at our sales rep level and there's a lot behind that. We've also goosed up the incentive plan a little bit to make it more interesting for our sales reps. And as we go forward, we are about to launch a new laboratory information system which allows our customers better reporting capabilities and that's going to be rolled out through our sales team too. So we are arming them with a lot of tools which we believe is going to make a big difference.

(inaudible) understand, you're taking progress, getting more salespeople and all this progress in making them productive and then we get the weather out of the gate, so we've got to give you a pass on that. But how should we think about revenue growth into Q2 and beyond when hopefully weather won't be as much of a factor? What kind of rebound do we get?

As you and I have discussed many times, the Company really doesn't give specific guidance beyond the quarter out. We are a growth company. For us a $0.01 per share is only $400,000 of difference in expense and candidly, that's not a lot of money in the grand scheme of a company that's growing 70% year over year on an adjusted basis.

So we're really not at a place where we're going to be providing guidance further than one quarter out. We did in the January 7 press release issue our thoughts with respect to where we thought EPS would be over the course of the year. We said that we would be approximately breakeven in Q2 and profitable for the second half of the year and we are I guess able to reiterate that here this morning.

I'd just build on something Steve said and that's that because of all the things I just mentioned, we expect to gain momentum as the year goes on quarter by quarter. We feel pretty good about that.

Okay, good and I have to ask you questions on reimbursement unfortunately. Our government is meeting today to try to work on a healthcare plan but as it stands as far as I know, there's going to be a 21% reduction in Medicare payments to doctors starting on Monday, March 1, if they don't pass something here very soon.

And we all know that's likely to be retroactively reversed at some point but the way our government is going, nothing is too certain these days. And that's not the only reimbursement issue. The smaller ones would be the TC grandfather clause and the Palmetto flow cytometry coverage proposal. Hopefully these things get addressed, but the way things stand in Washington, nothing is happening very soon and it's really not very certain. How do you feel about these issues and what kind of impact could that have in the short term?

Okay, so there's a lot in a question and let me break this down a little bit. The last two items you mentioned, the TC grandfathering and the flow cytometry Palmetto and California issue, are stuff that are directly specific to us and we can comment in some amount of detail on. The first of these doesn't impact us directly but might impact us from an ancillary perspective because if the docs get a decrease, they're not going to practice as much medicine, etc. and so forth.

My understanding is that the doc fix which is the 21% sustainable growth rate was in the House bill that was passed in December as was the TC grandfathering issue [you passed] and they were both in the Senate bill, the Senate Jobs bill, which was approved yesterday.

My understanding is that the House bill is a much larger bill and it needs to go through some reconciliation, but there is a ton of incentive for everyone to get this done. It's part of a jobs bill which is politically very popular.

You saw I believe it was 15 Republicans cross partisan lines yesterday on the Senate bill, and so that gives you some indication about this is something on a -- this Congress may be the only bipartisan thing they're attempting to do. We believe both the sustainable growth rate issue and the TC grandfathering issue are going to go away and are going to go away quickly.

Usually when a bill has passed both chambers, it is just a matter of mechanics to get to a reconciliation process and a bill of this important that's tied up a jobs bill we certainly wouldn't have any concern wouldn't be signed by the President. So I think in the short term, there's still some risk but in the not so too distant future, we believe both of those issues will be resolved.

With respect to the TC grandfathering issue, I understand that they're going to delay that issue until December 31 of this year. And the permanent fix for that will come in a healthcare bill if and when that is passed.

The third part of your question dealing with the local coverage determination in California by Palmetto, which is the Medicare servicing agent in California, to reduce the number of flow markers in certain cases; there is a lot of information on that. It's a very fast moving situation. I will give you what I know as of 5 PM last night.

There was a huge meeting on Tuesday with the Palmetto folks where they acknowledged that their proposed 10 flow markers was not good medicine. They furthered acknowledged that limiting flow markers by what the ultimate diagnosis was not good medicine because when you do a test, you do it based on a clinical indication. You're trying to rule out a diagnosis in many cases. And that they outright, flat out said that they weren't going to be moving forward with the limitation of 10 markers.

The question now is whether they would even try to put in a 21 marker limitation. What we have learned is that what's driving this is a concern that some of the larger laboratories have been billing 30 to 35 markers on average, in their view, abusing the system. The jury's still out on it.

I think there's a lot of literature that would show 28 to 30 markers is appropriate. I don't know about beyond that, but the one indication we have is that there will be this notion that they're going to limit to 10 seems to be folding up even before the comment period is even over.

So there may still be a local coverage determination limiting it to 21 markers, but we've also heard that if we have medical necessity justification, no problem to submit that with a claim and we can get reimbursed for more of that. So in terms of any revenue impact, I think it would be far smaller than it would be if it was a 10 marker determination.

We did some math on this. When we were concerned that it might go to 10 markers, we actually felt this would be limited to about 1 to 1.5% of our revenues. If it's only limited to 21 markers, this would certainly be less than 1% of our revenue at risk. So we don't believe that in the overall scheme of the balanced portfolio of our business across many states and across many different test types this would have a material impact on us. But it is something we're watching pretty closely.

Thanks, guys. It sounds like you have a good handle on it.

(Operator Instructions) Leonard Samuels, Private Investor.

Just sounds very interesting, I wanted to understand a little bit more because I look at the sensitivity of 77% which is missing about a quarter and I wanted to get a little color on that. The first thing I need to know is what is the gold standard and what's its quality? Can you give me a little better understanding of what you're using as a gold standard to say that you have missed something?

Sure, so right now the gold standard for melanoma diagnosis is morphologic and that is the basic H&E. If there is some question, there is a limited armament or a repertoire available to the pathologist to further answer that question but they can go to couple, maybe three at most four IHCs or immunohistochemistries to try to help them.

But similar to what we see in other cancers and the closest analogy is probably cervical where we actually have a type of morphologic classification that includes the words 'of unknown clinical significance,' what we find in melanoma or what the dermatopathologists find in melanoma is an ambiguous or a gray zone that no matter how you look at the agent; right, left, upside down or sideways; no matter how many of the two or three or even four immunos you do, it's still ambiguous and it's histologically ambiguous.

And even now with some of the new data, with some of the new genetic data, knowing which ones are actually melanoma and which ones are actually dysplastic, even severely dysplastic, you can't predict with any degree of accuracy. In other words, there was some hypothesis that once we know which ones are actually FISH positive or genetically abnormal, we can go back and we can find the appropriate markers or road markers, but that's not the case.

This is a true class of ambiguous based on H&E. And so as I said, the influence of this genetic test is at the front end of the diagnostic spectrum or the front end of the algorithm, although there is now impact on prognosis and prediction. But we can come back to that.

Yes, that's what I'm after. Because a 77% sensitivity isn't very good. But if it's based on agreement with the gold standard that isn't good, then I don't know the clinical meaning. Is the clinical meaning of our test better than the clinical meaning of the morphology testing?

Right, so here's where we are now. Let me see if I can take a stab at that.

We are actually okay with the 77% sensitivity and so is our melanoma advisory board. We have had some of the countries or the world's experts, depending on how you look at them, say I have no problem with that at all. Because the power of this test is being able to identify the normals because it's when you are not sure that it's normal the error is -- the default if you will is to overcall and/or overtreat and the treatments are pretty severe because it involves surgery and the consequences associated with that and sometimes they're not minor surgeries, but they're relatively larger surgeries.

And so the power of this test and the power of a test that has sort of a morphologic characteristic as the gold standard is in being able to identify the normals. And at 98% with a negative predictive value, if this test says that it's normal, then the patient does not or most likely with a high degree of accuracy does not have melanoma and is not going to get overtreated.

If we miss some of the positives or if we overcall -- sorry, not miss -- if we overcall some of the positives, i.e. the false positives, you still are putting the treatment decisions in the hands of the dermatologists and it doesn't necessarily mean they're going to do something. It's one data point in a continuum and they have the patient in front of them. So we are more concerned with the normals and missing or inappropriately calling those normals positive than the other way around. I don't know, Len, does that make sense?

Yes, so I as a patient am concerned about whether you are going to successfully pick up my melanoma. Now what happens in clinical practice? The people cut off all these different things from the skin and send it in regardless of how clinically likely these things are to be melanoma.

So when you're talking about a negative predictive value, when to begin with 98% of the ones sent in aren't melanoma -- I don't know what percentage is the actual -- but the great majority are not melanoma, you're going to start off with a good negative predictive value. To begin with if you just called all of them melanoma, I mean if you called all of them not melanoma, you'd be at about a 95 or 94% corrected negative predictive value because obviously if you're missing a quarter and you're getting better than 98%, you'd multiply that by four, you would miss all of them, you'd still be at 94%.

Right, not -- well, you know there's -- that number that you're talking about is really dependent on the number of biopsies that are done. But if we switch to percentages, we know that based on the number of biopsies that are done in the United States -- there's rationale and there is motivation for these 2 million biopsies and most of that motivation since only 3% of the biopsies are actually melanoma, the motivation for doing 1.8 million or 1.99 something million of those biopsies is because you're worried about something being positive. It turns out that only 3% are melanoma but 5% are -- or a minimum of 5% -- I mean literature would suggest 5 to 7% -- are going to be ambiguous. And that leaves about 92% that are pretty clear cut up front that they are just benign.

We wouldn't get those.

Right (multiple speakers) those are not the ones that are going to (multiple speakers) right. I think you've almost got to take about 95% right off the top because they are going to be handled.

This test is not necessarily aimed at identifying the abnormals or the normals upfront because there's still a reasonably decent gold standard in the IHC or in H&E arena. But it's the 5%. And when you talk about 5% of a couple million biopsies, that's 100,000 patients.

It's a significant number that the docs really don't have a clue on. That's where the power of this test comes in. And that's where we calculate positive and negative predictive values based on the ambiguous group.

Is that -- because when you talked about patient population, the samples, you said about a third of them were normal, (inaudible) were dysplastic and a third of them were abnormal.

No, no, no; I don't know those numbers (multiple speakers) for the study. What we loaded into the study maybe because I'm not sure about where those [one, one, one third] numbers are coming from.

I'm not sure that they were equal groups but you did mention normal dysplastic and abnormal.

We loaded our validation with mostly nevi and melanoma. Because really that's the group that you have to calculate your sensitivity and specificity from. So I think we had about -- not about, we had 200 by nevi and we had 180 melanomas. So 380 of our 504 samples were just -- were histologically normal or histologically abnormal and so that's how we were able to calculate our sensitivity and specificity. We made an assumption and we have them reviewed by a minimum of two dermatopathologists that they were indeed normal based on current standards or they were indeed abnormal.

And your (multiple speakers) is talking about distinguishing dysplastic nevi specimens from melanoma, not having (multiple speakers)

Right, the other 124, the other 125 were the dysplastic nevi group that once we had our cutoffs established based on normals and abnormals, we then applied those numbers to the dysplastic nevi group to see where that sifted out. It's that group that we generate our data from. So we're saying within the dysplastic nevi group, we can identify those that are absolutely normal that are -- they're just funny looking. They don't necessarily have metastatic potential based on their DNA profile.

And, Len, just to add one thought to this. In the focus groups that we ran, what the dermatopathologists overwhelmingly told us was that they wanted a test with high specificity because they needed to have absolute confidence that when they call something normal, it was normal.

Remember, this is one of the most litigated of all the cancers, these ambiguous melanomas. So what a high specificity does is it gives them some assurance that they can call it that way. That is a huge, huge benefit to the dermatopathology community.

In addition and in response to that, what we did was we had a bias in where we set the cutoffs for the test to maximize specificity because that was what people said was most important. As a result of that, it did have some impact to the sensitivity.

And depending on where you set your cutoffs, you can make -- you can move those around a little. If we had set a lower specificity, we probably could've got a higher sensitivity. So that's an important point that should not be lost. We were reacting to market information that told us to make sure we had the highest possible specificity and that's why we set it that way.

What would happen to your specificity if you took the sensitivity up to 90?

We would be speculating.

I don't know. We would have to do that. We would have to -- if we raised the cutoff for the sensitivity (multiple speakers) our false positives would go through the roof.

We'd have to re-analyze the whole (multiple speakers)

Hypothetically, right. That's an interesting academic question but not something that we were advised to do. Again, our MAB, the Melanoma Advisory Board, include docs like [Dr. Bastian and Dr. Thrami] the world experts and other dermapaths; experience noted, senior if you will across America and this is the direction as Steve said that they pointed at.

Is there any follow-up you are going to be able to get on the clinical situation on those that you purportedly missed? Is there a possibility that the ones you purportedly missed will turn out to have a benign clinical outcome? Will you be able to discover that?

These specimens were all blinded to us. They were blinded by those that submitted it and then we blinded them and we just gave them a new number, one of our own internal numbers, so in a sense a double blind. We would have to unpack that.

We set up the original relationships with our partners that it was going to be a blinded study because we didn't know where the data was going to take us. So I think the short answer to that question is we are probably not going to be able to backtrack on our validation samples.

It would subject our partners to litigation.

Right, potentially if we start saying -- hey, you know what? This dysplastic nevi was actually a melanoma -- it was what it was intended to be and that was a validation study to look at the sensitivity and specificity of this genetic technology in a cohort of ambiguous melanomas.

Right, it would enable a different gold standard is what it would do (multiple speakers)

Right and that's really where we are heading. If we look back at breast and bladder when the two FISH tests for breast and bladder were introduced, they quickly became the gold standard. In one case by themselves HER2NU and in another case, in combination with the existing morphologic gold standard which for bladder was urine cytology at the time.

So if you look at the power of the bladder cancer test, and I don't mean to go down the tangent here, it's a combination of the genetic and the morphologic test that became the gold standard. But if you look at the other one, breast, it was the FISH test that became the gold standard.

And it is -- I mean your questions are incisive. There is a process and sometimes a painful process as we adapt to this new data and understand that what we have been doing for two decades is not the best way. I think though the pathology community as a whole is pretty pragmatic and what we are hearing from the dermatopathology community which is not the most conservative sector within the pathology community, that they are embracing this and looking forward to it.

There are no further questions in the phone queue at this time.

Okay, I've got a couple of e-mail questions here that we just want to clean up real quickly. What IR initiatives are you planning here moving forward?

We are -- I guess the next investor conference we have planned is in early June with Noble Financial. We are trying to do two to three non-deal road shows a year. We are scheduled to do a short mini one early next week.

There is a plan in place this year to bring up our IR activities. We're getting a lot more institutional interest in the stock as we get more and more toward profitability.

Another question is can you give us more color around and quantify the loss revenue from the large customer? Well we've stated before that it was about $4.4 million from this customer in 2008. In 2009, it's looking like it was $2.9 million in total but that included some of the IHC revenue that we got.

So not all of that $2.9 million will go away. We are and actually we said in our January 7 press release that we did about $300,000 of revenue in Q4 for IHC. So it will come down dramatically this year but most of those decreases on a year over year basis will be limited to the first two quarters because it's already baked into the second two quarters of 2010. That's all I have. Bob, you want to --?

Sure. Okay, so before we sign off. I would like to take a moment to recognize the more than 170 now NeoGenomics team members around the United States for their dedication and commitment to helping build a world-class cancer genetics testing program.

On behalf of all of us here at NeoGenomics Laboratories, I'd like to thank you for your time and joining us this morning on our Q4 2009 earnings call. For those of you listening in that are investors or thinking about investing in Neo, I would like to thank you for your confidence in us as we continue to drive shareholder value in 2010. We look forward to talking with you on our Q1 10 earnings call which should be around the end of April. Good bye.

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