Neogenomics Inc (NEO) 2011 Q1 法說會逐字稿

Greetings and welcome to the NeoGenomics first-quarter 2011 earnings conference call. At this time all participants are in listen only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions).

It is now my pleasure to introduce your host, Doug VanOort, Chief Executive Officer. Sir, you may begin.

Thank you, Alexis. Good morning. I would like to welcome everyone to NeoGenomics' first-quarter 2011 conference call and introduce you to the NeoGenomics team that is 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; 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 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 statements speak 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 make some brief remarks about our results and comment on progress relative to our key initiatives and future prospects. We will then turn the meeting back over to Steve to discuss our 2011 first-quarter results in more detail.

We reported results this morning that were on track with our expectations. After a slow start in January and early February, our pace of volume growth accelerated nicely during the last half of the quarter. In fact, we ended the quarter with an average level of reported test volume per day in March that was about 17% ahead of January's levels.

Our operations continued to run very smoothly. The quality of our service to clients was outstanding, and our costs are under control. While it is still early in quarter two, the current level of daily volume is continuing at a similar pace as the strong March levels.

We are definitely beginning to see success from several new sales and marketing initiatives. And we continue to believe that our revenue growth will build increasing momentum as 2011 unfolds.

I would like to briefly summarize our quarter one highlights. Our overall revenue grew by only 5% in the first quarter, as compared with last year. Test volume grew by about 10% and accelerated as the quarter progressed.

On the other hand, average unit price declined more than we expected. Compared with last year's first-quarter average unit price declined by about 5%. As we noted in the press release, the change in average unit price was primarily driven by a large reduction in reimbursement rates for Urovysion and a smaller rate reduction in other test categories.

The net unit price decline reduced our revenue and gross margin by about $525,000, and was responsible for almost 3 percentage points of the decline in our gross margin.

Costs were under good management. Our average cost per test improved from the level of the most reason two quarters, and our total number of employees was the same as it was at the end of last year's first quarter. Our adjusted EBITDA was a loss of less than $100,000 for the quarter, with the unit price declines negatively impacting adjusted EBITDA and net income by approximately $400,000.

On the surface the numbers don't look very exciting; however, the underlying trends are strong and are getting stronger. As we look forward to the rest of the year, our results will compare more favorably because quarter one of last year was the last quarter in which we derived sizable revenue from the large client that had internalized testing. In other words, our year-over-year comparisons should start to get more positive.

Based on the guidance issued this morning of $9.3 million to $9.8 million in revenue in quarter to of 2011, our year-over-year revenue growth would increase to between 10% and 15% in quarter two compared with the $8.5 million in revenue last year's second quarter.

We told you that we considered 2011 as a time for us to perform, and we feel like we are on track. 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.

We are generally pleased with the changes we made in much of the Company's operations. In sales and marketing we are beginning to see results from our many initiatives. As you may remember, we made quite a few changes in our organization and in our sales representatives, revised our compensation systems, better defined our sales process, invested heavily in training, significantly enhanced the way we manage our pipeline of opportunities, and are managing in a more disciplined way to enhance accountability and productivity.

Early returns are promising. The number of new clients that began to send cases during the quarter increased nicely, and we are working hard to gain their business fully and to close a number of other large accounts. We have had some turnover in our sales team, but we have been able to add some talented people to augment a group of seasoned and productive representatives. Our sales and marketing team is gaining confidence, and we are gaining confidence in the team.

We continue to be pleased with the quality of our service, and that our cost structure has improved. Our selling, general and administrative costs were 2% lower in quarter one compared with the same quarter last year.

Obviously, we are not pleased with the 44% gross margin we posted in quarter one, but we are becoming more productive in our laboratories. We fully expect to increase gross margins back up closer to 50% as we leverage our cost structure with an increased volume as 2011 unfolds. Turnaround time and other important measures of quality and service are outstanding.

As we have discussed in the past, we continue to invest in new product development. We have had a number of inquiries about the market adoption of our Melanoma FISH test. While this hasn't gotten the early traction we would have hoped, it still is early in the adoption cycle for a new genetic test.

We continue to work to publish the results of our comprehensive validation study. And n with an awareness of this test -- and with an awareness that this test will follow a more traditional adoption curve, we are allocating our sales and marketing resources to the fastest growing areas of our business.

We also are continuing to invest in validation of a second test under the strategic supply agreement with Abbott. Early work is promising, and we are now in the middle of a comprehensive study, which we expect to conclude by the end of quarter three. If successful, we plan to announce and launch the product in quarter four.

As we look forward we have important initiatives underway in three key areas -- information systems, adding to our product of testing menus, and further building out our medical team. We believe these three general areas of activity will enhance our competitive position further, and we are organizing to aggressively invest in each of these areas.

I will summarize my remarks in the following way. We continue to build and make progress building and developing our Company, and we are now just beginning to see those efforts yield improved financial performance. We continue to believe we will accelerate our revenue growth as the year unfolds, and we remain determined to drive toward profitability.

We are excited about 2011 for a number of reasons. We are beginning to realize revenue from the pipeline of opportunities we discussed previously, and the current pipeline remains strong.

As a result, our salesforce productivity is now beginning to improve. The 17% intra-quarter increase in the number of tests reported per reporting day is evidence that the initiatives we put in place over the last year are beginning to work.

Operational efficiencies and effectiveness are good and getting better. We hope to achieve further gains with additional investment in laboratory information systems and process improvements. Our costs are under good management, and we are also looking forward to returning to quarterly profitability later in 2011.

Finally, beginning now in quarter two year-over-year comparisons for the remainder of 2011 will not be meaningfully impacted by the effects of the internalization by that one large customer.

As I said in our last conference call, the combination of revenue drivers, operational improvements and cost controls 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. We are intensely focused on building upon our momentum in the coming months.

I will now turn the floor over to Steve to comment more fully on this past quarter's results.

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 first quarter we reported total revenue or approximately $8.8 million, a 5% increase from Q1 last year. However, after normalizing our growth for the lost revenue from the insourcing activities of one large client, revenue from the rest of our clients grew by approximately 11% from last year.

The total number of requisitions or cases processed in Q1 increased by 7% from Q1 last year. Average revenue per requisition decreased by 2% from last year.

The total number of tests reported in Q1 increased by 10% from Q1 last year. However, on a normalized basis testing volume from all clients, other than the large client that insourced, grew by approximately 19%.

This adjusted test volume growth number is very important to understanding the strength of our business. It is the only metric that washes both the effects of insourcing and the effects of unit price declines out of the equation. We were especially encouraged to see a 7.3% sequential increase in this number from Q4, whereas the adjusted test volume growth only increased by approximately 1% sequentially from Q3 2010 to Q4 2010. Thus this is more evidence that our salesforce productivity is picking up.

We also mentioned that the number of tests reported per day increased 17% intra-quarter from January to March during Q1. Obviously, the weather in January impacted January's average tests reported per day, so some of this increase was due to the weather rebound. However, for all of Q1 we reported 242 tests per day on average, a 7.4% increase over the 226 tests per day reported in Q4. For those of you that are interested in such things, we used 63.5 reporting days in each of Q4 and Q1.

Average revenue per test was $572, a 5% or $28 decline from the $600 recorded in Q1 last year. As discussed in this morning's press release, the declines in average unit prices were slightly higher than expected. Although we saw a nice increase in the Medicare reimbursement rate for non-bladder cancer FISH and flow cytometry, these increases were more than offset by three things.

First, the approximately 50% decline in bladder cancer FISH reimbursement. Second, the 1.75% across-the-board rate reduction on all Medicare tests reimbursed off the clinical lab fee schedule. This includes cytogenetics and molecular tests, in particular. And third, the local coverage determination by First Coast Service Options, the Medicare claims processor for our Florida-based claims, that has resulted in a maximum of 24 flow markers being reimbursed without filing an appeal. Obviously, filing an appeal is an arduous process.

To put a little context around this third item, it is nearly standard practice in our industry by oncologists and hematologists to order 28 to 31 flow markers on a complex (inaudible) case. Many of you may remember that the Medicare claims processor for California, Palmetto GBA, tried to limit the number of markers reimbursed for flow last year as well, but has backed off of outright denials if medical necessity can be demonstrated, which in most cases it is pretty easy to document.

Unfortunately, this has not been our experience in Florida thus far, and more than two-thirds of our flow cases are done of our Florida lab. Thus we have adjusted our revenue recognition policies accordingly until we can get a broader resolution on the matter. This has resulted in a reduction in revenue of about $60,000 per month.

Turning now to gross margin, it decreased by approximately 4.5 percentage points in Q1 to 43.9% from 48.4% in Q1 of last year. Most of this decrease was driven by the $28 decline in average revenue per test I just discussed. This impacted our level of gross profit on a dollar-for-dollar basis as all unit price declines do.

Our average cost per test, calculated by dividing the total cost of goods sold by the number of tests reported, only increased by $12 in Q1 2011 to $321 from $309 in Q1 2010. This was mostly as a result of increased labor and supply costs. However, as Doug mentioned, our average cost per test fell in Q1 from the levels reported in Q3 and Q4, so the trend is very good in terms of our lab operations and productivity.

As you think about our gross margins, keep in mind that all other things being equal our incremental gross margin on each new $1 of revenue is about 60%, because many fixed cost are already covered. Thus as our revenues and test volume scale, our gross margins will rise because of this operating leverage.

Because of the operating leverage that we are starting to realize, we believe our gross margins will return to a level closer to 50% as 2011 unfolds.

Sales and marketing expenses were approximately flat versus Q1 last year, decreasing by approximately $10,000. General and administrative expenses decreased by $79,000 from Q1 last year. This decrease was primarily attributable to the decrease in R&D spending this year versus last year. Recall that we launched the MelanoSITE melanoma FISH test in late Q1 2010, and as a result these R&D costs were slightly higher last year.

The rest of our G&A costs were largely flat to last year. Total SG&A expense decreased by approximately $89,000 or 2% over last year. As a percentage of revenue, total SG&A expenses decreased to 52% in Q1 from approximately 55% in Q1 last year. As we have stated previously, we expect total SG&A expenses to drop into the 40s as a percent of total revenue as 2011 unfolds.

As we discussed on the last call, now that our salesforce and management team expansions are largely completed, we are going to see a lot more operating leverage, which is going to -- which is what is going to make these SG&A as a percentage of revenue fall.

We believe that with continued good cost management practices and stable unit prices, we should be able to continue to drive strong growth in our operating profit relative to the amount of growth in revenue.

Net interest expense in the first quarter was approximately $182,000, an increase of 14% from last year. This increase was driven largely by increases in borrowings under our accounts receivable [back] line of credit.

Net loss for the first quarter was approximately $893,000 or $0.02 a share compared to the net loss of $750,000 or $0.32 a share reported in Q1 2010. Although our net loss for the quarter increased, we estimate that 5% year-over-year decrease in average unit price negatively impacted our net loss by approximately $400,000 in Q1 from what it otherwise would have been.

Depreciation was approximately $488,000 in Q1, and EBITDA was negative $223,000. However if you were to further adjust our EBITDA for the $126,000 of non-cash charges relating to stock-based compensation and warrant amortization, our adjusted EBITDA for the quarter would have been approximately negative $97,000.

We finished Q1 with 181 full-time equivalent employees and contract doctors, down from 185 at December 31, 2010, and slightly down from the 183 at March 31, 2010. We were quite pleased to hold the line on employee growth in Q1, but we do currently have a number of open positions.

Our accounts receivable balance, net of allowance for doubtful accounts, was $6.2 million at March 31, up approximately $1 million from the $5.2 million balance at December 31. Our AR balance expressed in terms of days sales outstanding was 63 days as of March 31, up from the 55 days reported as of December 31, 2010. The flow cytometry issue I cited earlier had an impact, as many of our earlier claims that were denied are still pending an appeal.

In terms of our overall liquidity, as of 3/31/2011 we had $3 million of cash and restricted cash on hand, $171,000 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.

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 only and would like to submit a question, please feel free to e-mail us at sjones@neogenomics.com during the Q&A session. We will address your questions at the end if the subject matter hasn't already been addressed by our call-in listeners.

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

We will now be conducting a question and answer session. (Operator Instructions). Peter D'Agostino, AMI Research.

Congrats on a good quarter. I just have a couple of questions. Do you expect more of the test revenue rebound in this current quarter that was lost because of the severe weather?

You know, there's so many days in which doctors can see patients. I think we saw a nice pickup in March that was the bulk of the rebound. I suppose it is possible, but I think what will drive revenue increases in Q2 is greater salesforce productivity, and a continued increase in the number of tests reported per day.

That's fair. You mentioned on the call that you were going to build out the medical team, right, and you had a few more open positions on staff there. How are you going to maintain that SG&A level where you said that was going to drop into the 40s by bringing on that payroll?

Well, the medical team is in cost of goods sold. That wouldn't be affected in the SG&A. The open positions we have in the SG&A line are a few replacement sales representatives and some billing people, but it is really not very many at all.

Probably very marginal.

Yes.

Then, lastly, can you add a little bit more color on that second test that you mentioned that it's going to be launched in quarter four?

In short, no, we can't. We made the mistake last year when we announced melanoma, of announcing it six months before we launched. It gave a number of our competitors a leg up on how to position what we were doing relative to what they were trying to do in melanoma, and it made it tougher sledding for us than we otherwise needed to do.

So we are committed to not launching or even talking about this -- or not announcing or an even talking about this test until we are just ready to launch it, because we think it has got a very good potential. Doug, do you want to add anything to that?

No, I would just add that the validation process -- this is a multi-staged the validation process. We are done with the first stage of it. The first stage was successful. This next phase is a little trickier. We are getting a number of samples in from a number of different sites. And we've got to prove the prognostic value of this test, which we are trying to do right now. So we don't want to say too much about it until we have completed the work that is going on.

That is terrific. We are all excited. I will jump back into the queue. Thanks, guys.

(Operator Instructions). Gentlemen, there seems to be no questions or comments at this time. Do you have any closing remarks?

I have one question here. Can you comment a little further on your plans to list on one of the exchanges? This is something we have talked about before. We are always looking at this. As it turns out, we meet all of the listing requirements for both the MX and the NASDAQ, except for the minimum bid price requirements.

In the case of the MX you need a $2 minimum bid price for, I think, it is 10 days to be eligible to list. And in the case of NASDAQ on their NASDAQ Capital Market you need a minimum bid price of $4.

We are very optimistic that our increased revenue growth and return to profitability later this year will drive stock price performance and that we will finally meet these thresholds, so we are taking a number of overt steps to get ready for that.

Over the coming weeks you're going to see us file something called a Form 8-A, and that will bring us fully in compliance with Section 12(g) of the Securities Exchange Act. So you're going to see us doing a couple of things that will show up in our SEC filings, and that is all a sort of as a prelude to get ready for this.

I've got one other question here. Why the decline in medical doctors? Is that related to managed care pressure? Doug, you want to take that? I think the write-in question is the reverse of what you said -- we are going to invest more heavily in the medical piece of the equation.

We have not had a decline in the number of medical personnel. In fact, we -- as Steve just mentioned -- we are going to add to our team. Adding to our team is part of just our -- reflects our growth, but we also believe that it is time to augment our team a little bit.

When we talk with clients and prospective clients, we are actually engaging our medical staff quite a bit. And we now know that we need to augment them -- the number of them, not just do the work, but also to help us in our sales and marketing activities. So we are going to add to our our team and invest in it.

Okay, I've got another one here. Timing on potential resolution of the number of markers issue. In California there was no way they could justify limiting the number of markers -- too subjective, too onerous on medical doctors to justify everything. How is it possible that Florida reached this conclusion?

Well, those are excellent comments, the person who wrote that in, and we feel exactly identical to you. There was a lot of uproar over this when it worked its way through the California circles last year.

They put a little context around this. California's official stated policy is they won't reimburse more than 24 markers; however, they don't outright deny all the claims, they just suggest that everybody have medical necessity documented. So we are able to get reimbursed on the number of markers that our client request.

In Florida it is a little bit different. They are outright denying everything with more than 24 markers. The hue and cry in Florida is building in crescendo, and I would envision that this is something that the claims processor in Florida is going to have to look at pretty carefully.

Having said that though, I want to be transparent. There is more and more pressure in other Medicare claims processes in other areas of the country to try and limit these flow markers.

So we don't have a good crystal ball. We adopted a fairly conservative accounting stance which said, we are not going to recognize revenue more than 24 markers in Florida up front. We will recognize any incremental revenue we get upon successful appeal as a prior-period adjustment, but it would be inappropriate to recognize revenue that we may not ever realize and then have to write-off later. So that $60,000 a month number I gave earlier is a result of this change in revenue recognition policy.

With reimbursement it is always better to be conservative on these things. Too many labs have gotten into trouble on those issues in the past.

I just have one more e-mail question. What are -- IR initiatives are you planning to do here in Q2?

I would say that we generally have a philosophy that it is better to do what you say you're going to do and point out what you have done than it is to go out and hype your stock. Having said that, we always try to participate in at least one conference per quarter.

We have the Noble Financial conference coming up in May. There is another one I was just invited to yesterday in June. We may do that. We have the Rodman & Renshaw conference in September. And we will probably work in an non-deal roadshow sometime after the second quarter as well. So if there are institutional callers on the phone, that want to see us, by all means give me a call. My phone number is 239-325-2001.

I don't see any other call-in questions or e-mail questions. So, Doug, at this point I will turn it back to you to wrap up.

I'm going to turn it over to Bob to wrap up our call.

Thanks, guys. As we end the call, we would like to recognize all 181 of the NeoGenomics team members around the US for their dedication and commitment to helping build a world-class cancer genetics testing program.

On behalf of our Neo team here in the conference room and all of us, I thank you for your time and joining us this morning on our Q1 2011 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. Goodbye.

Thank you. That does conclude our teleconference. You may disconnect your lines at this time. And thank you for your participation.