Neogenomics Inc (NEO) 2010 Q4 法說會逐字稿

Greetings and welcome to the NeoGenomics fourth-quarter and year-end 2010 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. Thank you. Mr. VanOort, you may begin.

Well thank you, Rob, good morning. I would like to welcome everyone to NeoGenomics fourth-quarter 2010 conference call and 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, Finance; Mr. George Cardoza, our Chief Financial Officer; Mr. Jerry Dvonch, our Director of Finance and Principal Accounting Officer; and Fred Weidig, our Controller.

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 statement 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 statements speak only as of today and we undertake no obligation to update any such statements to reflect events or circumstances after today.

Well, thanks, Steve. I'm going to make some brief remarks about our results, comment on progress relative to our key initiatives, review some recent developments and share some thoughts about our industry dynamics and our future prospects. Bob will then review activities with respect to our melanoma FISH test and our new product plans for 2011, and then we will turn the meeting back over to Steve to discuss our 2010 fourth-quarter results in detail.

We reported results this morning that were consistent with our guidance. Although our revenue growth was still soft, our operations ran very smoothly, the quality of our service to clients was outstanding, our costs are under control and we have undertaken several new sales and marketing initiatives to increase sales force productivity.

Although we've not yet seen quantifiable results from the significant changes we've made in the sales and marketing area, we believe we are on track implementing our plans. We also believe overall that our Company is better positioned than ever before and that we will begin to build increasing momentum as 2011 unfolds.

I would like to briefly summarize our quarter four and full-year results. Our overall revenue grew by a little over 12% in the fourth quarter compared with last year.

Costs were under good management as we realized a healthy incremental operating profit on about $950,000 of increased revenue. We also benefited during the quarter from a special one-time governmental research credit of about $374,000 and our net loss was one penny per share.

Excluding the special one-time gain and non-cash stock-based compensation charges, our adjusted EBITDA was positive for the first time in 2010. So in many ways, it was the best quarter of the year.

For the full year 2010, revenue growth was about 17% and our net loss was $3.3 million or $0.09 per share. I have described 2010 to our employees and Board of Directors as the year in which we made significant progress building and developing our infrastructure and during which we were challenged by some significant headwinds.

Most of those headwinds were a result of external factors but some were of our own making. And while we are generally pleased with the changes we've made, we are extremely disappointed with our financial results for the year as a whole. Now frankly, I'm mostly pleased that 2010 is over.

In our last conference call, we discussed significant actions and changes we put in place and I would like to briefly update you on those initiatives. First, we remain very pleased with the changes we've made in our management team.

Our team is very experienced and our people are working collaboratively and productively together. The team is very focused and is very committed.

We are also pleased that our cost structure has improved. We reduced our selling, general and administrative costs by over 5 percentage points in the fourth quarter from the third quarter to the lowest level of the year.

While our gross margin percent remained in the 45% area, we're becoming more productive in our laboratories and we're beginning to make progress adding new tests to our internal capabilities and product offerings. We believe that these actions and further revenue growth will allow us to leverage our cost structure and have a positive impact on gross margins and profitability as we grow into 2011.

I am particularly pleased with the initiatives we have implemented in our sales and marketing organization. We put in place a new sales structure, a new compensation system, a leadership training program, a sales training program for all our representatives, improved metrics and measures and better coaching and discipline.

We also replaced a number of representatives and feel good about the current state of our team. We're hopeful that we'll begin to realize a number of the good prospects which are in our sales pipeline and then our revenue growth momentum will improve as we begin to realize the benefits of our significant efforts.

There are also a couple of recent developments worth mentioning. Shortly after year-end we announced the Qui Tam suit filed against our Company and several other labs was dismissed with prejudice.

We spent a lot of time and energy managing our compliance processes and we strive to operate at the highest standards of conduct in our industry. It took a year of review by the US Attorney's office and time and energy on our part defending ourselves against this suit.

While we were always confident in our actions regarding this matter, we are nonetheless pleased that this is now behind us. Also after year-end we announced the completion of a $3 million equity financing at $1.50 per share with certain members of management and the Board participating as investors in that transaction.

Now as we drive toward profitability and positive cash flow, we expect our current level of cash to be more than sufficient to fund our operations. Obviously the equity financing also improved our financial position nicely.

During our last conference call, I commented on the state of our industry generally. The market in our industry continued to be quite dynamic.

Clearly there has been an accelerated pace of mergers and acquisitions in our industry. Just in the past few months, three of our competitors -- Clarion, Genoptics and Genzyme Genetics -- have announced that they are being acquired. Whereas consolidation within the industry is not new, this is different because non-laboratory companies have emerged as buyers and the pace of deal activity is certainly higher than in many years.

While we are cognizant of these dynamics, we are very focused on growing our business and creating a great company. There are many different dynamics affecting reimbursement in our industry.

On one hand, Medicare reimbursement rates for the technical component of many of our flow cytometry and FISH tests have increased for 2011. On the other hand, reimbursement rates for Urovysion have decreased by approximately 50% from the 2010 level.

Fortunately, bladder cancer FISH test thing is only about 7% of our revenue. In addition, various initiatives such as requiring a physician's signature on requisition forms and other things is likely to keep pressure on reimbursement as we go forward.

As we analyze the expected impact on NeoGenomics other than for changes in average price resulting from a different mix of test, we expect that our average price per test will be relatively stable for 2011. There are also changes expected as a result of health care reform.

For example the prospect of accountable care organizations is causing some hospital systems to increase their desire to acquire physician practices. On the negative side, we've seen a few good clients become acquired and change their laboratory provider.

On the other hand, we believe that the flexibility of our business model is our ability to provide technical component services, professional component services or both for a variety of testing methodologies using our advanced Web-based information system positions us uniquely to help pathologists and clinicians as they navigate the uncertainty of reform.

Clearly, there continues to be significant activity in our industry which presents both challenges as well as tremendous opportunities for our Company. So I will summarize my remarks in the following way.

We made significant progress building and developing our infrastructure in 2010 but we fell significantly short of achieving our financial goals. Now we consider 2011 as a time for us to perform. We believe we can perform better as we accelerate our revenue growth and we are determined to drive toward profitability.

We are excited about 2011 for a number of reasons. We are now growing off a more stable base of revenue in 2011 as the year-over-year comparisons will not be impacted by the effects of the one large customer internalization and the managed-care pricing pressures we experienced last year.

Our sales force productivity should start to improve as a result of our significant initiatives and actions. Our pipeline of opportunities is strong.

Our operational efficiencies and effectiveness have improved as a result of this year's implementation of our new laboratory information system and our process improvements. That laboratory information system change occurred in the middle of last year, but that is behind us now. And our costs are under good management.

The combination of revenue drivers, operational improvements and cost control should allow us to return to quarterly profitability as we move forward in 2011. We remain very pleased and proud of our Company's quality and service levels and of our people.

We believe that our flexible business model, excellent test menu and new product portfolio are strong and as a team, we are excited about the Company and its prospects and we are intensely focused on building momentum in the coming quarters. I would like now to turn it over to Bob to update you on our activities with respect to the melanocyte melanoma FISH test and our plans with respect to launching new tests in 2011.

Thanks, Doug, and good morning to everyone. For the next few minutes, I would like to spend time talking about our new genetic and molecular tests that we have been working on as a result of our strategic supply agreement with Abbott and our projects in R&D over the past year.

As Doug mentioned in the last earnings call, the development of the new melanoma FISH test launched as a result of our strategic relationship with Abbott Molecular was the most important genetic test that we developed last year. However it was not the only one. Before I discuss these other tests that we worked on in 2010 and our launching in 2011, here is a quick update on melanocyte.

One, based on completing the largest FISH study of melanoma specimens to date, we were able to report an 84% sensitivity and 98% specificity for this test. To put that in perspective, the Urovysion FDA approved FISH test for bladder cancer had sensitivity and specificities in the 70s and 80% range when it was first launched. This makes the melanoma FISH test one of the most sensitive and specific FISH tests on the market today for any disease.

We have been selling this test for about 11 months now and the word is spreading on the power of this test and the clinical questions that this test answers. We believe that awareness for this test is also increasing as a result of our efforts.

As an example, in this month's Archives of Pathology front cover contains an image of a melanoma FISH test result. The scientific paper we wrote last year that includes the results from our large validation study was submitted to a well-known pathology journal in early December, passed the first two hurdles and is now in the hands of the expert reviewers. As with any new test, the more peer-reviewed articles in the literature, the more awareness in the field and ideally, the better adoption curve.

Working with our regional melanoma advisory board experts, we have begun sketching out the next paper to follow our initial results paper. Its publication schedule will in part be determined by the publication schedule of this first paper.

The next test being developed as a result of the strategic supply agreement with Abbott which is unrelated to melanoma other than it is also a four-probe FISH test is currently being worked on. We've not made a public announcement as to what arena or disease this test will focus on, but if all goes as planned in R&D, we will be able to announce and launch this test later this year.

Over the last several months, we have also been working on other genetic tests to complement our current molecular offerings. I'm pleased to report that we will be launching the following tests in 2011 including some on this list already launched since the beginning of this year.

One, an expansion of our myeloproliferative neoplasia panel or MPN panel to include not only JAK2 but exon 12 and NPL. Two, automated plasma cell enrichment or PCE for multiple myeloma or any plasma cell dysplasia patient at all three of our laboratories in Florida, Tennessee and California.

Three, the EGFR mutation analysis for lung and colon. Four, the BRAF mutation analysis in skin. Five, HER2 non-breast FISH test thing, and this includes specimens such as gastric, esophageal, uterine, cervix and lung.

A dozen new FISH tests to complement our current FISH test menu and finally the expansion of our IET antibody menu to substantially increase the number of IC stains that we currently offer. We are excited about these many new tests and what our sales team will be able to do with them in 2011 and beyond. I will now turn the podium over to Steve to update you on our Q4 2010 financials.

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

During fourth quarter, we reported total revenue of approximately $8.8 million, a 12% year-over-year increase from Q4 2009. However after normalizing our growth for the lost revenue from the in-sourcing activities of one large client, revenue from the rest of our clients grew by approximately 17% from Q4 2009.

The total number of requisitions or cases if you will increased by 12% from Q4 2009. Average revenue per requisition was $911 which was essentially unchanged from the $910 reported in Q4 2009.

The total number of tests reported in Q4 increased by 13% from Q4 2009. However on a normalized basis, testing volume from all clients other than the large client that in-sourced grew by approximately 20%.

Average revenue per test was $610, a slight decrease from the $613 reported in Q4 2009. I am pleased to report that this is the second quarter in a row where we've reported modest sequential increases in our average revenue per test.

This stabilization is a result of the managed care unit price decreases now being fully reflected in our reimbursements as well as a small reduction in the number of lower-priced histology tests in our mix.

Turning now to gross margin, it decreased by approximately 3 percentage points in Q4 2010 to 44.6% from 47.3% in Q4 2009. This decrease was largely driven by increased investments in our California lab to bring up an expanded second shift and a third shift as well and to internalize certain tests that we had previously been sending out to other labs.

Sales and marketing expenses decreased by approximately $246,000 or 12% to $1.8 million in Q4 2010 from the $2 million in Q4 2009. This decrease was a result of two factors.

First, Q4 2009 sales and marketing expenses contained approximately $86,000 of severance charges and second, we restructured our sales force this past September and had some positions that were not refilled until December or January.

Our general and administrative expenses decreased by $367,000 or 12% to $2.67 million in Q4 2010 from the $3.04 million reported in Q4 2009. This decrease was primarily attributable to the $410,000 of additional bad debt expense over and beyond what we would've normally accrued and recruiting costs that we reported in Q4 2009 that were not in our expense mix in Q4 2010. On a normalized basis, G&A costs were only up about $46,000 or 1.6% from Q4 2009.

Total SG&A expense decreased by approximately $610,000 or 12% from Q4 2009. On a normalized basis, after adjusting for the approximately $500,000 of extra charges incurred in Q4 2009, SG&A expense actually decreased by approximately $100,000 or 2% on a year-over-year basis. Considering we had a $955,000 increase in revenue over this period, we're quite pleased to have held SG&A to no growth.

On a sequential basis, total SG&A decreased by $435,000 or 9% from Q3 2010, reflecting the cost savings initiatives we put in place last September. In addition as a percentage of revenue, total SG&A expenses decreased from approximately 56% in Q3 2010 to approximately 51% in Q4 2010.

As we've stated before, now that our sales force and management team expansions are largely completed, you should start to see a lot more operating leverage from our SG&A. Indeed you can see this in the healthy $325,000 of incremental operating profit on the $955,000 of incremental revenue we reported in Q4 2010 as compared to Q4 2009.

Of course this $325,000 of incremental operating profit is after adjusting for the $500,000 of special charges in Q4 2009 that we recorded. This implies an approximately 34% operating margin on the incremental level revenue. We believe that with good cost management and stable unit prices, we should be able to continue to drive disproportional product growth as revenue increases.

Net interest expense in the fourth quarter was approximately $186,000, an increase of 32% from the $141,000 we reported in Q4 2009. As mentioned in the press release, we recorded $374,000 of other income in the quarter as a result of a therapeutic discovery grant that we were awarded by the US government last fall.

This was a program enacted by Congress as part of the stimulus package last year and our R&D activities with respect to developing the melanoma FISH test and other tests qualified for the grant. We've now received $244,000 of this grant and we expect the other $130,000 in the next few weeks.

Net loss for the fourth quarter was approximately $377,000 or $0.01 per share compared to a net loss of $1.5 million or $0.04 per share in Q4 09. Although our net loss for the full year 2010 increased to $3.3 million or $0.09 per share, keep in mind that the decrease in average unit price was the primary reason for this.

We estimate that the 7% decline in average price per test from 2009 to 2010 on a full-year basis reduced our net income by $2.2 million for the full year 2010. Two-thirds of our losses in 2010 were due to this factor. We believe that our average unit pricing is now stabilized in 2011 and thus we should not have anyone near the drag on earnings this year as we had last year.

Depreciation was approximately $483,000 in Q4 and EBITDA was negative $79,000. However, if you were to further adjust our EBITDA for the $108,000 of non-cash charges relating to stock-based compensation and warrant amortization, our adjusted EBITDA for the quarter would've been approximately positive $29,000.

We finished Q4 with 185 full-time equivalent employees and contract doctors, up from 182 at September 30 and 174 at December 31, 2009. We were quite pleased to hold employee growth to just 11 FTEs in 2010 even as our full-year revenue grew by $4.9 million.

Our accounts receivable balance net of allowance for doubtful accounts was $5.2 million on December 31, up approximately $600,000 from the $4.6 million balance at December 31, 2009. Our AR balance expressed in terms of day sales outstanding was 55 days as of December 31, 2010 unchanged from 55 days at December 31, 2009. Our billing and collection team is really very, very efficient at this as one of the best in the industry and we continue to be very proud of them.

In terms of our overall liquidity as of 12/31/2010 we had $1.6 million of cash and restricted cash on hand, $262,000 available to us under our credit facility and $8 million available to us under our stock purchase arrangement with Fusion Capital. This arrangement allows us to sell shares from time to time in the future at our sole discretion at then-market prices.

Of course, these figures do not reflect the $3 million in net cash proceeds we received on January 12 as a result of our recently announced equity transaction. In that transaction we sold 2 million shares of restricted stock at a price of $1.50 per share to two of our existing institutional investors and five members of our management and the Board. As of 12/31/2010 we had approximately $3.5 million drawn on our working capital facility and approximately $3.3 million outstanding on our capital lease facilities.

With respect to our payor mix, we are currently receiving approximately 50% of our revenue from Medicare, 25% from commercial insurance, 24% from client billing and 1% from other payors such as Medicaid and self-pay arrangement. At this point, I would like to close down our formal remarks and open it up for questions.

Incidentally if you're listening to this conference call via webcast and would like to submit a question, please feel free to e-mail us at sjones@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. Again that's sjones@neogenomics.com. Operator, you may now open up the call for questions.

(Operator Instructions) Raymond Myers, Benchmark Capital.

Sure, thank you. I need to correct you. That is Benchmark Co., not Benchmark Capital. Good morning, gentlemen. Congratulations for being I think in the best financial position since I have known NeoGenomics currently.

Yes, I want to ask about that a little bit, because this is something that is a little bit new. Usually you've been operating on a very lean budget, to say the least. And now you have some access to cash. So, Doug, now that you have some flexibility and the business is emerging to profitability, what opportunities does that present that might not have been available in prior years?

Well, Ray, our first objective here is to drive sales growth and to achieve profitability and positive cash flow. So that is unchanged.

The cash that we have in the bank provides some insurance and some flexibility if we would like to make a small investment in equipment or something to drive further revenue growth. But we don't plan on spending that. In fact it's more money than we really believe we need, but we thought it was a prudent thing to do to raise $3 million at a slight premium to the market, and it positions us to take advantage of some opportunities.

Well, I guess that's what I'm trying to get at. It positions you to take advantage of some opportunity. In what areas are these opportunities?

Well, Ray, I think in terms of new product introduction, there may be some opportunities that we would like to pursue in terms of making some strategic moves geographically without disclosing our strategic intentions, we might want to use a little bit of cash.

But I will just say it again. We have no immediate plans to use this cash. We're driving and very focused to driving toward profitability.

Great. Let me ask one more broad question.

You mentioned on the call that the market -- there's been market entrants of non-laboratory acquirers in the laboratory space. How does that change the competitive dynamic first that there are so many acquisitions recently? And second, that some of them are from non-laboratory companies, is that different?

Well, it's very different. 10 or 12 or 15 years ago, pharmaceutical companies were interested in the laboratory sector. They were not over the past decade -- it appears that there is some interest from the pharmaceutical sector.

The GE-Clarient merger was interesting to us as well. There's a lot of interest in our sector from a lot of people because they see growth opportunities out there, and I think a lot of people want to play in this sector.

Now the implications for us are -- we don't really know yet. We're very focused on our business, we have a very small market share. There's a lot of room for us to grow. I think there's a lot of room for a lot of our competitors to grow as well.

One of the areas that we are focused on increasingly is this area of companion diagnostics. That's why I think you see a lot of pharmaceutical interest in the genetics and molecular area. And we will continue to think about that area and the opportunities for us there.

That sounds exciting. And I would be remiss if I didn't conclude with a question about the weather and the seasonality. Steve, maybe you can put a little finer parameters around that?

Sure, I don't think we're ready to give any specific numbers out, but we had a pretty tough early January like most labs and a pretty tough early February like most labs. The winter storm season this year has been I think more brutal than most.

Doctors are people too and when it snows and they can't get to work, they don't work and patients don't go to assigned appointments and volume is depressed as a result of that. We just thought that it was more appropriate to get out in front of some of this.

We are still Try to quantify what the overall impact will be for the first quarter, but there's definitely been an impact. I believe you're going to find lots of labs issuing some more kinds of statements as the earnings season progresses here.

Yes, LabCorp said as much this morning, so you've got a lot of company. Okay, thank you, gentlemen (multiple speakers)

Boris Peaker, Rodman & Renshaw.

I have a couple of questions on melanocyte. We heard Bob Gasparini sum it up and it sounds like there's a lot of opportunity there. So I'm just wondering when we might expect it to be broken out as a separate line item.

I think the way we think about that is we have a lot of competitive information that is discussed on these calls, and we still have lots of folks throwing rocks at us with respect to adopting a new FISH test that could change ordering patterns and whatnot. So any information we deem might be used in a competitive fashion against us is not information we are really ready to share.

Obviously when and if it becomes a material portion of our revenues, we have a fiduciary duty to break it out. But you know, until we have this test firmly established in the marketplace, we probably won't be breaking it out.

Boris, this is Doug. I hope we encounter that problem. We are trying to gain traction in the marketplace right now.

I see, because I just want to kind of -- the greater question I'd just like to understand is if you roll out these new tests -- and I understand that it may occur later in 2011, probably won't generate that much revenue in 2011 specifically.

But just going forward, I want to get a sense of if and what kind of segmentation we may see in a new test versus older business or do you think it's going to be rolled into one or -- projecting a year or two out?

I don't think we really know enough to be able to tell you that. I think we've slowly gotten more comfortable breaking out the percentage of our revenue by FISH test. It's still the most significant part of our revenue.

This is a FISH test. We expect it to add nicely to our overall FISH revenues as time progresses here.

But I think anything more than that -- I mean there's two of our competitors' representatives are on this call right now. We can look at the list of people and if we go any further than that would go a little bit too far I think.

I see. My other question is in terms of reimbursement.

You guys have done an excellent job in terms of keeping the day sales outstanding relatively flat and actually coming down a little bit in the year and keeping a flat accounts receivable. So congratulations on that.

I just want to understand the allowance for doubtful accounts, because I see that is trending upward throughout the year and also as a percentage of overall receivables. I just want to understand, is that having to do with the new tests or different accounting rules or any kind of internal assumption changes?

That's a great question. We took a hard look at this at the end of last year, the early part of this year, and we were writing off stuff that was over 120 days old that we felt could be collected with a lot more effort.

And so what we did was before we started writing off stuff that was over 120 days old, we said let's try to collect it a lot more. But as a quid pro quo for that, we took our allowance as a percentage of the gross account up from about 11% of the gross accounts receivable to about 22% of the gross accounts receivable.

So that in the event we weren't able to collect that, we would be more than covered for it. But the good news is we are collecting a lot of it. We have a just a terrific billing team, as I mentioned in my remarks, and they are aggressively pursuing anything that has an initial denial around it or oftentimes it takes a month or two or three months or work through the appeals process for these commercial insurance guys. And so our stamp on this was really more of a shift to get a lot more proactive on the older stuff and we felt it appropriate to increase the reserves as a result of that.

I see. Are these prior receivables that were written off and are now coming into the revenue? I just want to understand. And if they are, how significant they are to the current revenue.

No, it's more the case where it's revenue that we would've -- receivables that we would've written off under the prior policies in 2009 that we're not writing off against the balance now. And as a result of that, the balance is higher than it would normally otherwise be because we're not writing off as much against it. So I said as a percentage of revenue, it actually fell in 2010 but just by a little bit, but it did fall in 2010.

Okay, so it was brought back into accounts receivables, just to clarify.

Yes, it was always in accounts receivable. Just instead of writing it off which would've taken it out of accounts receivable, we are working on it more and we are leaving the allowance at a higher level because we're not writing off against the allowance.

Got it, that makes sense. Alright, well thank you very much for taking my questions we look forward to 2011.

Peter D'Agostino, AMI Research.

Thanks for taking the question. I want to visit for a second your discussion on M&A activity. What are the multiples being paid for by the three competitors that are being acquired?

Okay, so I will take a crack at this. The Genzyme Genetics sales of their lab was done at a 2.5 revenue multiple. The GE Healthcare -- these are run rate revenue multiples by the way -- the GE Healthcare acquisition of Clarient was done at a 5.0 run rate revenue multiple and the GenOptics or the Novartis acquisition of GenOptics which has been announced but not closed -- after you adjust the enterprise value and collide with the share price for the $140 million or so of cash on their books, the enterprise value is a multiple of revenue -- run rate revenue is about 1.67 times. So it's a little bit all over the map.

You know, they're sort of averaging in around the 3 range if you will. And these are higher multiples than we have seen in recent or even in the intermediate past for this.

Great, thanks. I have another question. You pretty made it clear that the $3 million that you capital raised you're going to use for working capital needs and hold it in the bank. Any plans on raising capital in the near future?

Yes, we really don't have any plans to raise capital. For us, there's a large component of insiders that hold the stock and we are very dilution sensitive.

Until we have a great use of proceeds, we wouldn't raise money unless we really knew we could put it to work quickly for that. Like every other executive and every other company, we believe our stock is dramatically undervalued. So we are quite sensitive about using our currency at a point in time where we feel like our stock is undervalued.

And then last question, gentlemen, where do you expect the gross margin to stabilize through this year?

Excellent question. Gross margin should rebound into the 50% range as the year progresses here. We are starting to see a lot more operating leverage in our business, just small incremental increases in revenue resulting.

The way to think about it from where we are now, all of the fixed costs and cost of goods sold are fully allocated out. So the incremental cost of goods sold on each new dollar of revenue is really only about 40%. So you have a much better incremental gross profit and that will slowly work the overall gross margin up.

(Operator Instructions) Bruce Jackson, Morgan Joseph.

Hi, nice quarter.

Thanks, Bruce.

Looking at your new business and the test mix, where is most of your new business coming from on a technology basis and then also on like a customer segment basis?

So we have disclosed sort of overall revenue breakdowns by types of test. In Q4, our total FISH revenue as a percent of total revenue increased to about 46%. Flow cytometry is in the 28, 29% range, close to where it was. Cytogenetics remains about 12% and everything else is the rest.

We are seeing greater growth in our FISH testing volume, and I think that is being driven by just a very broad and increasingly broad FISH product offering. We really have one of the fullest menus in the country for FISH tests and we have a very extensive myeloma set of FISH and (inaudible) FISH related panels.

Melanoma is certainly included in that. So FISH will probably continue to grow as fast or faster than other parts of our revenue. FISH and flow have been the two fastest growers for the last two years and I expect that to continue.

And, Bruce, this is Doug. I will just add, in terms of type of customer, we are relatively focused on the pathology market.

There's a lot of growth opportunities remaining for us in the pathology market, and that is driven primarily by the uniqueness we believe of our business model with a terrific technical-only product offering. And if you extend that product offering and think about the partnership opportunities we have beyond the pathology market, we are beginning to focus on that too.

And what I mean by that is as hematology and oncology businesses seek to partner with companies like us, we think we are in a pretty unique position there. So a lot of opportunities, our pipeline looks strong and it contains the same kind of pathology organizations and firms that we have been doing business with for a while.

There's one thing that I would just add to that. It's not intuitively obvious when you look at it. But the in-sourcing activity we had over the last few years was done by a $1 billion plus diversified services oncology company.

There's very few customers like that that are big enough to make in-sourcing of both the professional component and the technical component be a viable business model. Most of the in-sourcing -- we believe that most of the in-sourcing that will be done by (inaudible) groups on a moving-forward basis will be just in-sourcing of the professional component.

So you have a whole suite of guys out there that are going to start looking and thinking about bringing the professional component of pathology testing services in-house. And our tech-only business model is perfectly positioned to service those guys as they begin to think through those challenges. And so we have the ability to offer strategic partnership type relationships with the those (inaudible) groups as they contemplate in-sourcing and we are very, very excited about the opportunities that that might present.

Hi Bruce, this is Bob. If I could just add one last thing to give you some -- try to respond to your question and give you some insight.

If you look at our new products that are coming out in 2011 that I talked about, the second one which was plasma cell enrichment aimed at the (inaudible) are for the most part FISH based, the HER2 non-breast and I mentioned a plethora of different types of tissue that we are doing HER2 testing on that is all FISH based.

And then I think I specifically said a dozen more FISH tests, not counting the next one we're working on as a result of our strategic relationship -- strategic supply agreement with Abbott Molecular. So, if you add all of those up, you get some insight into where we think the growth is for 2011 and where we are putting some of those hard earned dollars.

Okay, that's great. And then you also said you are expanding into the IHC area as well, and I was wondering if you could mention what the reimbursement looks like in that area next year.

Yes, Steve, do you want to talk to the reimbursement part and I'll take the pathology part?

Sure, we we've actually had an IHC offering out for a few years. We are expanding the number of stains we are going to be offering and we're sort of always looking at that.

But just to give you a context, most of our revenue is derived from California and Florida, and I'm going to give you the average reimbursement increases for -- between California -- an average for IHCs.

On a global basis, IHC testing between California and Florida went up about 4.9% and on tech-only basis, it went up about 9%. So nice increases in the average reimbursement for IHC.

The professional component did fall about 1%, but overall nice increases. And we saw the same thing in flow and in FISH as well. The average reimbursement for flow cytometry for a Medicare test between Florida and California went up about 7.5% and the average reimbursement for tech-only FISH -- automated tech-only FISH between Florida and California went up about 11.5%.

So we saw interesting reimbursement patterns for Medicare for -- on the tech-only side. The professional interpretations mostly had declines 2010 to 2011, but the tech-only pieces of Medicare reimbursement schedule at least for our mix of business had nice increases.

And, Bruce, just again to give you some insight into the constructs behind that -- this is Bob. The idea of being able to partner with the pathology groups, the pathology community and offer them this concept of one-stop shopping is what drives the development of some of our pathology products.

We consider ourselves a cancer genetics testing company. But many of our clients, customers, partners, whichever word you'd choose to describe them, have asked for more.

They don't want to be sending their more classic routine anatomic pathology testing somewhere else and the genetic testing stuff to us. So the response has been as Steve mentioned a few years ago start to develop an initial pathology offering.

And when we talk about more classic pathology testing, we include things like histology, immunohistochemistry or IHC as it is known, and the the new wave if you will of imaging, digital imaging. So that's really one of the things that -- it was the last one on my list that we want to sort of significantly expand our IHC antibody menu consistent with the need to meet our clients/customers/partners needs in this more classic area.

Okay, got it. And then one last housekeeping question. How many testing days did you have last quarter?

Fred, you got that number off the top of your head?

We averaged about 20, 21 testing days -- reporting days, the way we look at it (multiple speakers)

63, 64, in that range.

Puja Jain, AMI Research.

Great quarter. I just have two questions for you. One is, how do you see the average revenue for test panning out this year? And the second -- if you could answer that first?

Sure, we were actually quite pleased to see that number stabilize. That number more than anything else as I mentioned in my prepared remarks was what impacted our profitability last year.

On a full-year basis, it went down by 7%. We finished the year around $610. We saw a nice modest sequential increase around $600 in Q3.

I believe you will see us operate in call it $590 to $610 range for the better part of this year. And if we get some real good high-priced FISH tests moving forward and expanding FISH as a percentage of our mix, it may even start to creep up a little bit.

But the good news is the drag on that -- keep in mind, that's down from about a high of $660. And so the drag on average reimbursement is because of the managed care contracting process is now fully baked into our system. So it should no longer impede our growth.

Right, I agree. And the second question is the SG&A has actually declined in the quarter. But with the 18 new tests coming up, how do you see that being factored into the SG&A?

So it's important when you think about SG&A -- we need to be honest here. There was $500,000 of additional charges in Q4 of 2009.

So when you normalize for that, SG&A really only went down by $100,000. But we are pretty pleased with that when you consider we added almost $1 million of new revenue on a year-over-year basis.

A lot of that decrease in SG&A cost in Q4 came as a result of the September 2010 cuts that we made. As we move forward here, we've stated publicly many, many times that we believe we have a full complement of management folks now.

The sales and marketing division, we made massive investments over the last few years. We need to get that working in a much more productive way before we start thinking about adding a lot more.

So we're not looking to add a lot of people this year. So what are the increases in SG&A going to come from?

They are going to come from more bad debt as a result of greater revenue. We will add some more billing people and technology people. We'll probably add some more commission costs because of the incremental revenue.

But on an all-in basis, SG&A as a percentage of revenue should continue to fall through 2011. And we are of the mindset that we can drop a significant portion of each incremental dollar of revenue to the operating profit line on the order of $0.30 per incremental dollar or so.

For the most part, many that new test development that Bob spoke about can be done with our existing people. We will have to add a little bit of technical resource, but for the most part, we can absorb it.

Right, that's exactly what I wanted to know. Thank you.

Thank you. There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Let me poll my e-mail questions here. I get this one every quarter.

What upcoming IR initiatives do you have planned? We don't have a lot in the near future. We're going to be participating in the Noble Financial conference in May. I think that's the next formal outing that we have on the schedule.

We generally try to do one conference a quarter and we usually will try to do a day or two of non-deal roadshows. If there are institutional investors on the phone that would like us to put them on the list of people to visit, by all means, give me a call. I'm at 239-325-2001. Bob?

Before we sign off, I'd like to take a moment to recognize all 185 of the NeoGenomics team members around the US for their dedication and commitment to building a world-class cancer genetics testing program. On behalf of all of us here at NeoGenomics Laboratories, I would like to thank you for your time in joining us this morning on our fourth quarter 2010 earnings call.

For those of you listening that are investors or thinking about investing in NeoGenomics, we thank you for your confidence in us as we continue to drive shareholder value in 2011. We all look forward to speaking with you again at our 2011 Q1 earnings call. Good bye.

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