Neogenomics Inc (NEO) 2010 Q3 法說會逐字稿

Greetings and welcome to the NeoGenomics third-quarter 2010 earnings conference call. At this time, all participants are in a listen-only mode. A 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, Mr. Doug VanOort, Chairman and Chief Executive Officer for the NeoGenomics.

Thank you, Mr. VanOort. You may begin.

Well, thank you, and good morning. I would like to welcome everyone to NeoGenomics' third-quarter 2010 conference call and introduce you to our team that is here with me today.

Joining me this morning are Mr. Steven Jones, our Executive Vice President, Finance; Mr. George Cardoza, our Chief Financial Officer; Mr. Jerry Dvonch, our Director of Finance and Principal Accounting Officer; and Mr. Fred Weidig, our Controller. Bob Gasparini, our President and Chief Scientific Officer, is out of the office today and will be unable to join us.

Before we begin our prepared remarks, Steve will read the standard language about forward-looking statements.

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 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 am going to begin our meeting with a summary of the state of your company, comment on some significant changes we have implemented to position the Company for sustainable and profitable growth going forward, and then provide some context for you to gauge our progress and future prospects. We will then turn the meeting back over to Steve to discuss our 2010 third-quarter results in more detail.

We reported results this morning that, on the surface, looked not very dissimilar to our quarter two results. However, while I described the state of NeoGenomics last quarter as simply unacceptable, I would characterize the Company's state this quarter as improving, as a result of some significant changes we have implemented.

Our overall revenue grew by over 19% in the third quarter as compared with last year. This is a slight improvement from the growth rate we experienced last quarter. Our volume of testing was up 29%, while our price per test was down about 8% from last year. So volume was up a bit more and price was down a bit less.

However, on a normalized basis, after adjusting for the loss of revenue from internalization, revenue was up 24% and volume growth was up a respectable 42%.

In our last conference call, we told you we were taking action, and we did. We implemented a number of significant changes in the past several months. We changed our management team, we changed our laboratory information system, and we changed our cost structure. We believe each of these changes will help us drive sustainable and profitable growth.

Our management team looks different today than it did a few months ago. At our last conference call, I reported that we had recruited an unnamed sales and marketing executive. Just to close the loop on that, Mark Smits joined our team as Vice President of Sales and Marketing about eight weeks ago. Mark comes to us from Fisher HealthCare, where he was Vice President of Marketing, Sourcing and Business Development, and prior to joining Fisher, Mark spent 25 years with Abbott in a variety of senior sales management roles.

In addition, we have added an operations leader for our West Coast operation, a vice president of information technology, restructured our operations management team, refocused our R&D efforts, and restructured our marketing organization. At a recent meeting of our senior leadership team, it was not lost anyone that 9 of the 12 people in the room were either new to the Company or had a change in role over the past 12 months.

I am also pleased to announce that Kevin Johnson has agreed to join our Board of Directors. Kevin was the former Chairman, President and CEO of DIANON Laboratories (sic), and brings an outstanding experience and a significant history of success in our industry. Kevin joined DIANON in 1996 when it had $50 million in annual revenue, and six years later, it had grown to $200 million in annual revenue when it was sold to LabCorp. Kevin also spent many years at Quest Diagnostics, where he and I worked together back in the early '90s.

Bottom line, our team is strong and it is getting stronger.

Another major change was our laboratory information system. Converting to a new and different laboratory information system is an initiative that scares the daylights out of laboratory management teams, and we worked hard to make this one successful. Our conversion, for which we have been preparing for months, took place on July 29. The conversion process consumed huge resources for our Company, both in quarter two and in this past quarter. It caused us to temporarily lose productivity in our operations and in our sales force, as most of our customers needed to be trained on our new system.

We are pleased to report that the conversion was successful. We are not aware of any customers that we've lost as a result of the conversion. We now have a platform that allows us to be competitive, including an improved ability to develop many new capabilities for our clients and to make our operations more efficient. And importantly, the conversion is finally behind us. Our productivity numbers are rebounding, and we can now focus on selling and delivering exceptional service again.

We also made changes to reduce our cost structure. On September 1, we have reduced the size of our workforce to accelerate our drive to achieve positive EBITDA.

In total, we eliminated about $125,000 of cost per month or approximately $1.5 million in annualized costs. We try to surgically remove costs while maintaining our ability to implement our growth programs. Our goal is to achieve a break-even level of EBITDA with minimal sales growth, and we think we are close to achieving that short-term objective.

On our last call, I commented on a few other items which I want to provide a brief update for. The first is salesforce productivity. I discussed a number of initiatives being implemented to drive improvements in the productivity of our salesforce, including our customer relationship management system, new training initiatives, and greater focus on accountability. These actions have begun to take hold and we expect to see good sales momentum going forward.

With the new leadership of Mark Smits, we are making additional changes to our focus, targeting methods, structure, process, training, and compensation systems. Mark's strong leadership is already beginning to make a difference.

The second area is price reduction. In the second quarter, we reported that revenue per test decreased by approximately 11% on a year-over-year basis. In this past third quarter, our revenue per test decreased 8% compared with last year. But it actually increased 2% from the last quarter's level. We had expected our average price to stabilize and are encouraged with the third-quarter results.

Part of the reason for that price reduction is managed care. We have dramatically improved the number of managed care plans under contract with NeoGenomics and now are a participating provider with three of the largest insurance payers as well as a large number of regional and local plans.

At this point, we believe that these plans will provide for general price stabilization and for growth opportunities, especially in light of the fact that many managed care organizations are becoming increasingly aggressive in managing out-of-network providers.

I would like to also update you on our plans relative to development of new genetic and molecular tests. The most important test we developed and launched this year was for our FISH-based test for melanoma, launched as a result of our strategic supply agreement with Abbott.

As you know, we have branded it as MelanoSITE. This is a powerful test, and we have now been in the market for about eight months. Although the uptake has been slower than we originally anticipated, we are encouraged by a number of actions we have taken. As a result of additional development work, we are pleased to report the test performs with 84% sensitivity and 98% specificity. Both improved from our early release of this test.

We reported on our last call that we hired an experienced dermatopathology marketing manager to help us more appropriately and properly position and market this test. We have now repositioned this test and changed our organizational approach, augmenting our sales force activities with a dedicated sales team to sell this new FISH test directly to selected dermatologist practices.

We also introduced several powerful marketing tools and training programs and are nearly finished with our first scientific paper that includes the results from our comprehensive validation study, which we plan to submit to a peer-reviewed pathology journal in November. We believe that publication of this paper, which we expect within the next three to six months, will add credibility in the marketplace, raise awareness and engage key opinion leaders to endorse this test.

We have also been working for several months to develop a new genetic test based on our strategic supply agreement. Our work on this test is continuing with additional scientific and market collaborations. We are proceeding deliberately on this test development, especially in light of the potentially significant impact of the new FDA regulations for laboratory-developed tests.

We will proceed more aggressively with our plans when there is greater clarity from the FDA, allowing us to understand our return profile with greater certainty.

At this point, I would also like to make a few comments about the state of our industry, generally. Clearly, growth has slowed for the laboratory industry. Laboratory Economics recently reported that revenue growth for the 16 publicly traded lab companies it follows, slowed from 5.4% for all of 2009 to 1.3% in the first half of this year. Although competitive levels remain high, our growth rates are still well above industry averages and are among the highest in the industry.

There is also a continued high level of strategic activity. During the past couple of months, LabCorp announced its acquisition of Genzyme Genetics and GE Healthcare announced its acquisition of Clarient. Each of these deals is being done at high valuation multiples, 2.5 times current annualized revenue for Genzyme, and 5.3 times current annualized revenue for Clarient.

These market multiples or valuation multiples are significantly higher than the NeoGenomics' current public market valuation, which is closer to 1.2 times annual revenue.

Of note is that these companies were either not profitable or just recently achieved profitability with increased scale.

You should know that there are also some interesting dynamics that may change competitive activity somewhat, including an expected decline in reimbursement for UroVysion testing, proposed new rules from the FDA for the approval of laboratory developed tests, which I just mentioned, and also some greater clarity to push back on in-office testing by physician practices. Clearly, there is significant activity in our industry which presents some challenges as well as tremendous opportunities for NeoGenomics to create shareholder value.

Before I end my prepared remarks, I would like to put our recent financial performance in some perspective and summarize why we are excited about 2011.

I joined NeoGenomics in quarter two of last year when the Company reported a small profit. Over the last five quarters since that time, NeoGenomics has lost approximately $5.7 million in revenue and $4.8 million in EBITDA, as a result of the loss of the large client to internalization and the pricing declines associated with going in network with managed care organizations. This was a huge drag on our overall topline growth and profitability and created quite a challenge.

We have been working to grow our way out of that hole since I joined the Company, and what may not be obvious is that we had $11 million in revenue growth from all other clients during this period before factoring in this revenue loss. Indeed, we have made significant changes in our response to our external environment and to position the Company for sustainable and profitable growth. And strong organic growth is allowing us to recover. In fact, we are targeting to have recovered to a slightly positive level of adjusted EBITDA in the fourth quarter.

With our stronger team of people, improved infrastructure, and continued focus, our management team is excited about our prospects in 2011, and we expect it to be a much stronger year for the following reasons.

We will be growing off a more stable base of revenue in 2011 as the year-over-year comparisons will no longer be impacted by the effects of customer internalization and managed care pressures. Our sales force productivity should start to improve as a result of our significant focus and under the capable leadership of Mark Smits. We expect that our MelanoSITE product will continue to gain traction in the marketplace, based on our repositioning and after publication of our strong validation study results.

Our operational efficiencies and effectiveness should continue to improve as a result of this year's implementation of our new laboratory information system and process improvements. The combination of revenue drivers and operational improvements and our recent cost-cutting initiatives should allow us to return to profitability in 2011. And at some point, the investment community is going to realize that our market capitalization and valuation is not a logical, relative to the value proposition we would bring to a potential strategic buyer and other trends that are happening in our industry.

The recent acquisition multiples of Clarient and Genzyme Genetics, two of our closest and biggest competitors, are current indicators of the value that strategic buyers place on companies in our industry.

We remain very pleased and proud of our Company's quality and service levels, organizational health, and our people. We believe that our flexible business model, our excellent test menu, and new product portfolio are stronger than ever, and as a team, we are all truly excited about the Company and its prospects, and we are intensely focused on building momentum in the coming quarters.

Now I will turn it over to Steve to discuss our quarter three results in more detail.

Thanks, Doug. I will start by reviewing some of our financial and operating metrics, and then we want to open it up for questions.

During the third quarter, as Doug mentioned, we reported total revenue of approximately $8.7 million, a 19% year-over-year increase from Q3 '09. However, as Doug discussed, after normalizing our growth with the approximately $250,000 of lost revenue from the insourcing activities of our largest client, revenue from the rest of our clients grew by approximately $1.65 million or 24% from Q3 '09.

Incidentally, for those of you who are tracking such things, the revenue from this one large client was only $130,000 during Q3, and by the end of September, it was completely out of our revenue stream. So this is something that we won't be talking about as we move forward.

The total number of requisitions or cases processed in Q3 increased by 28% from Q3 '09 to approximately 9,677. Average revenue per requisition was $900, which was a 7% decrease from the [$966] reported in Q3 '09.

Total number of tests reported in Q3 increased by 29% from Q3 '09 to approximately 14,005. However, on a normalized basis, testing volume from all clients other than our largest client grew by 42%. Average revenue per test was $601, which was an 8% decrease from the $652 recorded in Q3 '09.

Turning now to gross margin, it decreased by approximately 5 percentage points, it decreased 44.7% from 49.7% in Q3 '09. This decrease was largely driven by the decline in average revenue per test and productivity decreases associated with the implementation of our new LIS system.

Sales and marketing expenses increased by $190,000 or 11% to $2 million in Q3 '10 from $1.8 million in Q3 '09. This increase is driven primarily by an increase in commissions, travel expenses, and an increase in sales recruiting expenses.

Our general and administrative expenses increased by $461,000 or 19% to $2.9 million in Q3 2010 from $2.4 million in Q3 '09. This increase is primarily attributable to more management and IT personnel as well as increases in our bad debt provision resulting from increases in revenue.

On a sequential basis, however, recurring SG&A expenses after adjusting for certain severance expenses incurred in Q3 increased by only $90,000 or 2% from Q2 2010.

As we have stated before, we now believe that our salesforce and management team expenses are largely completed, and we should start to see a lot more operating leverage from our SG&A.

Net interest and other expense in the third quarter was approximately $186,000, an increase of 44% from $129,000 reported in Q3. This increase was largely driven by an increase in capital lease financing.

As of September 30, 2010, we had approximately $3.9 million drawn on our working capital facility and approximately $3.4 million outstanding under capital lease facilities.

Net loss for the second quarter was approximately $1.2 million or $0.03 per share, compared to net loss for Q3 '09 of $755,000 or $0.02 per share.

Depreciation was approximately $459,000 in Q3 and EBITDA was negative $553,000. However, if you were to further adjust our EBITDA for the $155,000 of non-cash charges relating to stock-based compensation and warrant amortization, our adjusted EBITDA for the quarter would have been approximately negative $398,000.

We finished Q3 with 182 full-time equivalent employees and contract doctors, down from 189 at June 30, 2010, and 174 at December 30, 2009.

Our accounts receivable balance net of allowance for our doubtful accounts was $5.6 million at September 30, up approximately $200,000 from the balance of June 30. Our AR balance expressed in terms of days' sales outstanding was 59 days as of September 30 versus 58 of June 30.

In terms of our overall liquidity, as of as of 9/30/2010, we had $2.1 million of cash and restricted cash on hand, $170,000 available to us under 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 in our sole discretion at then market prices.

At this point, I would 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 question at the end if the subject matter has not already been addressed by our call-in listeners.

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

(Operator Instructions). Boris Peaker, Rodman & Renshaw.

I have a -- let's start with the melanoma test. I just wanted to get an update what you are hearing, the feedback you are getting from the physicians and any KOLs.

Well, Boris, as we mentioned, we have and are in the process of continuing to reposition the test. Our approach at this point is, and we are getting very good feedback from the market with our approach, which is to target large dermatology practices that have insourced histology. So as you all know, the trend of insourcing by specialty groups, urologists, and others, has been a trend, which has been important for this industry for a few years. That trend is happening in the dermatology space, and we are seeking to capitalize on that trend by approaching these large dermatology practices and selling to a pathologist within that practice. This -- so far, so good.

Now we have just been at it for a month or so, six weeks, and we have targeted a few different states, and we seem to be getting some traction by employing this approach.

So other than that, I would say that the test is a very good test. It is being used by more and more dermatopathologists. Our volume generally is increasing just as a normal trend, and we believe that when we have our paper published and when we continue to get traction here in the marketplace with our repositioned strategy that we are going to see pretty good sales momentum.

I see. You have also mentioned an improved performance for the test, and I was just wondering what is the sample size for that improved performance, and do you have any plans to publish that data?

Yes, that is exactly what we are going to be publishing. I do not know the sample size off at the top of my head, but the original one was over 500, and we've basically added a number of samples to that as time's gone on and we have refined the way we process that [and on.] So we now believe that we are as good in sensitivity and specificity as any new FISH test that has been introduced over the last 10 years.

Keep in mind when they first released the UroVysion test, the sensitivity was down in the 60s, I believe, the specificity was in the 70s, and it just continued to get better and better and better. So we actually feel like we have gotten significantly better in a much shorter period of time than what others before us have done.

I see. And I have a couple of financial questions for you, Steve. You mentioned that SG&A, you expect an annual cost savings of about $1.5 million.

Right.

So should the 2011 SG&A be about $1.5 million lower than 2010? Is that --?

Well, you'll always have some increases in G&A because as your revenue goes up, your bad debt allowance goes up. We typically have been averaging around 7% bad debt. I actually think that that will start to come down now that we are on contracts with more folks, but you can use that to be conservative.

Things like test validations for new tests and all that get put into SG&A, as well, so there will be some growth initiatives that are into that. But based on where we are now, if we hired no more people and did no more growth initiatives, you would look at it as $1.5 million could come out of it in 2011. That will probably be offset by some modest growth initiatives.

And regarding doubtful accounts, I just noticed that there was an increase this particular quarter relative to the other quarters. Could you explain where that is coming from?

Well, I think when you've delivered as many bad quarters as we have on the net income line, you want to make sure that you are conservative in the way you have things positioned moving forward. We feel very well reserved for bad debt right now, and we think that we do not have any exposure at all to any further surprises on this stuff, and you can chalk that up to us perhaps being more conservative than we have been in the past.

Okay, I see. And lastly, in terms of the pricing and becoming -- going on a formulary right now and stabilizing the pricing, where do you see the pricing per test stabilizing? Is this approximately it? Is there more formulary pressure or is there some opportunity to increase pricing?

We think it is probably around the 585, 600 level. We do not see a lot of impacts to pricing declines from managed care any further; that is baked into the mix right now. There is always things that impact average price per test on a quarterly basis like what the level of prior period adjustments we have and what not, and that is just impossible to predict, but -- so we feel pretty good that you are not going to see any material decreases in 2011. Of course, all of that could change if Medicare whacks their reimbursement for 2011 a lot, but basically, what we have moving forward is we know that Medicare pricing will be 1.75% below whatever the growth for that year was. So at this point, we are sort of expecting that maybe it will be flat, it might be down a little bit, but I do not think we are anticipating a major hit to Medicare reimbursement next year.

The only thing I would maybe build on that one is that our average price is subject to changes in the mix. So as we change our mix or augment that with additional histochemistry testing and that sort of thing, it may change as a result of that. But other than that, our price should be exactly what Steve said.

All right. Well, thank you, guys, for taking my questions.

Bruce Jackson, Morgan Joseph.

You mentioned that there are going to be some changes to the in-office testing regulations. I was wondering if you could elaborate on what those changes are and how it might impact your business for next year?

Well, Bruce, I said that there was pushback. I am not sure if there is going to be change or not. There are industry members, ACLA, and a coalition of other players that has pushed back significantly on the notion of testing being conducted in physician practices, large physician groups, which, as you know, originally testing -- there was an exception for this testing to be performed when it was same-day testing and that sort of thing, and that has grown substantially, as we all know.

And so I do not know what is going to happen with that pushback. Obviously, there are powerful forces on either side of that. We mentioned it. It is too early to tell what will happen.

Okay. And then with the reorganization that is underway, where did the changes mostly occur? Was it in, for example, corporate staff or lab or sales? Where were the changes made?

The changes were primarily in the -- well, there were a number of changes in the administrative area, a couple of changes in the management area; a few sales territories we eliminated, where we were actually not profitable and where our pipelines were not healthy. I think that was primarily it.

Okay. And then one final question. In terms of the new sales strategies, can you tell us a little bit more about what you are doing with the salesforce? In terms of the marketing strategy, have you made any changes to the, for example, the compensation structure or their targeting? What kind of actions are you taking within the salesforce?

Bruce, we are actually making a number of changes there, or I would say refinements, in some cases. So we are looking at changing the compensation structure, and I would describe that as a refinement. The approach there is to target growth a little bit more than maintenance, and we have got some other changes taking place there. We are actually talking with some of our people. We have talked with some of our people last week about it in the salesforce, and then will be finalizing that shortly for 2011.

Relative to targeting, one of the things that we have done in the past is let our salesforce target clients themselves. And we know that that is not very efficient. And so as we try to improve our productivity, one of the things that we are doing is we are spending more time at the corporate level in our corporate marketing organization, targeting accounts in the field that we think are most likely to become clients of ours. And so we have a -- we are developing a pretty sophisticated approach in doing that.

So there are a lot of changes that we are putting in place in the sales organization. We mentioned Mark Smits, a terrific sales professional, and we have a good team of regional managers and other salespeople now, and they are very excited about our direction, and we are hoping that it really makes a big difference.

All right. Thank you very much.

Peter D'Agostino, AMI Research.

Good morning, guys. Congrats on a really nice quarter. I have two questions Steve, really. The first one, in the last conference call, you guys mentioned that you had a few tests in the pipeline for launch in 2010. Are you still on schedule with these releases?

Yes, we have released two tests so far in the last -- I guess, really last quarter, and we are, at any given point in time, we have anywhere from two to four more tests in our pipeline, and we are always kind of looking at things along the way. And these are separate and distinct from the second test we have with Abbott, with is also -- have been something we have been focused very heavily on this year, and as Doug mentioned, we are sort of waiting to see what the final regulations look like on that.

But we did launch a test for KRAS and BRAF gene mutations in the third quarter, and so far, we are getting pretty good uptake on that.

Part of the driver in that is that when we release one of these new molecular tests, our send-out costs go way down, so it saves us money on G&A -- sorry, cost of goods sold and allows us to get a much bigger share of the gross margin.

Great, thanks. And then the other question. Doug was talking about the valuation a lot on this call. Have you guys been shopping for strategic buyers?

No, we have not. We get a lot of calls.

Yes, I imagine you would. Okay, I guess that's my questions for now. Thanks.

And not at this price.

No. Sure.

Raymond Myers, The Benchmark Company.

I wanted to ask about the number of salespeople and managers. How many are there currently?

So as of September 30, there were 20 sales reps and four regional managers. That is down from approximately 24 sales reps and four regional managers at the June 30 time frame.

As Doug mentioned, we did some reorganizational activity during the third quarter where we eliminated some sales territories that were not profitable and/or did not have healthy pipelines. This is all sort of the normal process of paring your sales organization and focusing on where it is most effective. We do expect to backfill these sales positions as we move forward, and Mark Smits is well on the way toward filling the slots that we have released, different slots. They may be in different territories, but we should be filling those shortly.

Good. And then next, I wanted to ask a broader question about the competitive opportunities that you are seeing today and also overlapping economic trends, such as the trends in physician office visits. We have seen the troubles at Genoptix -- Genzyme Genetics was acquired; that's always disruptive -- Clarient was just acquired, perhaps that is disruptive. Are we seeing opportunities in the market, and what is the economy doing to us?

Well, Ray, this is Doug. So the competition is tough. We have very good competitors in this space, as you know. There are a lot of things happening strategically. Whenever there is disruption out there, we try very hard to take advantage of it, and we are trying our best given the disruptions that you mentioned.

We compete in the marketplace every day. And I think Steve mentioned that we are growing -- we grew in the last five quarters $11 million in organic growth. I mean, we are growing and we are winning in the marketplace. We --- we're winning because we have great service, we have a great menu, we have a good team, but we also have a model that we believe works today and it will work in the future. And that model is a very flexible partnership sort of model where we can sell to pathologists, we can sell to clinician groups, we can -- and it is very flexible with our TC/PC program, as I think you know. So we feel that we are positioned in a competitive way quite nicely.

Relative to the industry at large and volume in the industry, it is depressed. There is no question that the volume of physician office visits is down. And it is remarkable that it's even down in the cancer area. But it is down, and we do not know exactly why; we can speculate just as you can as to why that is happening, but it has clearly happened. And we are battling it out every day.

Okay, great. Can I ask you about managed care revenue? What percentage of your managed care revenue is currently under contract, and how is that changing?

So we have about a 25% to 30% of our total revenue stream that is subject to insurance reimbursement. You never are going to get all of that on contract. You have all the municipalities, Indian tribes, self-employed, self-insured employers, what not. We estimate that of the -- let us call it 30%, two-thirds of that is eligible for going on contract, and of that, we probably have close to 75% of that now on contract. We estimate around 14%, 15% of our total revenue or about 75% of the two-thirds of the insurance is on contract. So we do not see much more in the way of big contractual hits. We continue to nip and tuck and add along the way.

We have announced previously that we have Blue Cross/Blue Shield. We have United. We now have Aetna. We have parts of Humana, and we'll continue to get the various parts of other big insurance companies that we do not have, and we will get other regional and local plans. But I think we feel very comfortable that the worst of the pricing impacts that is going to hit us or the bulk of them are now fully baked into our mix.

When did you get Aetna?

Aetna was signed in May. It went effective July 15.

Okay, good. Did you get any benefit or are you getting any benefit from Aetna's push pressure on Genoptix?

Absolutely. Aetna has been a terrific partner for us. We are one of their few nationwide laboratory contracts. We get things like leakage reports from where they are getting some leakage in their system, and that is something that helps us target where we are going. I would not say it is specific to any one competitor, but we do get pointed in the right direction where they want us to focus in.

Well, clearly there is a reason why they prefer to do business with you. That is a good thing.

Genoptix has a contract with Aetna, as well. They announced one. They went on contract in April.

Yes. But you are still getting leakage reports, etcetera?

Yes, but that's usually -- that comes with going on contract.

Let's talk about the FDA for a second. They are having a big LDT meeting coming up in November in Washington. What do we expect from the FDA regarding LDT regulations and how might they affect MelanoSITE? Do you have any insight as to what they are doing?

Well, we have some, and we will be at that meeting in Washington. There is a lot of uncertainty out there relative to what the FDA may or may not do, relative to grandfathering and everything else. Obviously, grandfathering would -- they have mentioned that they would grandfather tests that have been out in the marketplace, and we expect that MelanoSITE would fit into that part of their framework.

The FDA has talked about a risk-based approach to managing LDTs, and they have not come out with anything yet, really, and we have been a part of the ACLA's work on this. We try to keep up to speed as to what is happening and try to do our part to provide feedback to the FDA.

I think what this means to us is relative to the new Abbott test. I think I used the word deliberate. We are going to be very deliberate about this, because this is a costly exercise to develop a test and then to launch a test. And given the uncertainty out there, we want to make sure that we understand the return profile. And so we are going a little more slowly. And we hope that on November 22, we will have a little bit more clarity as to what is going to happen here, but I think there is a fair amount of uncertainty within the whole industry about this.

Have you had direct communications with the FDA about your test?

No, we have not.

Okay. Okay, well, see you in November then. I will be there, too. Thank you.

I look forward to it, Ray.

(Operator Instructions). Puja Jain, AMI Research.

Hi. I just have a follow-up question on the test mix. Given the internalization is out of the system, do you see stability in the test mix ratio? And could you just provide us an idea of how it is going to look -- span going forward?

Good question. We did not have any real material changes in our mix from Q2 to Q3. FISH is still around 43%, 44% of our total revenue and flow is still around 30%, 31% of our total revenue. Cytogenetics has always been 12% area. As we get more and more into being competitive in the marketplace, look for us to be more competitive in certain pathology offerings, so I think we will begin to add more immunohistochemistry testing and other areas like that.

In terms of overall changes to their mix, I do not know that they will be material over the next 12 months. We can't predict that much better than you guys can, but we are not expecting any major or material shifts in mix.

And just another question on -- since the contracts with the managed care organizations are in place, would it be possible to give us a sense of where the pricing has settled for each type of the test?

I am sorry, but I am going to have to generally demure on that one, Puja. That is competitive information, and it is not something we want to make. All of our competitors listen to our call as we listen to all their calls, as well.

Oh, okay, fine. Just thanks. Fine, that will be it. The rest are answered, so I'll just take leave then.

Thanks.

Thanks.

Gentlemen, we have no further questions at this time.

We have had a couple of questions come in via e-mail here. Let me just clean those up.

"Can you discuss whether there is an opportunity there for you guys to step in and grab some of the business from larger customers that were using Genzyme Genetics and do not want to use a huge competitor such as LabCorp? If so, what size opportunity do you estimate that would be? Is it tech only, is it full-service?"

I would tell you that generally when a large company buys a smaller lab, there is a lot of leakage from customers. Most customers that are with smaller labs, are with smaller labs because they like the service of those smaller labs and they have specialty niche products. Usually the larger labs do not have as focused a service level.

We have seen in the past, in big acquisitions, as much as 20% of the customers leave over the ensuing 12, 24, 36 months. I do not have a crystal ball about what is going to happen with Genzyme, but I would imagine there would be some dislocation there, as well. I know that a lot of employees have certainly been out looking for jobs there. So I think it is an opportunity, but it would be hard to quantify.

The next one was, "Can you clarify or elaborate on what Doug was saying about the new test being worked on? It sounded like you guys remain committed to and are spending on it, but you are also looking at the FDA and how they are looking at regulating/improving LDTs. Anything you can add based on what you have learned to date or are working on?"

I think I tried to answer that in the last response. We are excited about the test development work that we have been doing. We have continued the work. We are spending money on it. We are spending R&D money. We are spending marketing money. We are spending management team money. But before we spend a lot more, we want to make sure that we know the rules. And that is where we are in that.

Okay, so that covers all of the e-mail questions we have had. Operator, unless there is any other questions that you have received, I think that covers it.

No, we have no further questions.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and we thank you for your participation.