Neogenomics Inc (NEO) 2013 Q4 法說會逐字稿

Greetings, and welcome to the NeoGenomics fourth-quarter 2013 financial results 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, Mr. Douglas VanOort, NeoGenomics' Chief Executive Officer. Thank you. Mr. VanOort, you may begin.

Thank you, Bob, and good morning. I'd like to welcome everyone to NeoGenomics' fourth-quarter 2013 conference call, and introduce you to the NeoGenomics team that's with us here today. Dr. Maher Albitar, our Chief Medical Officer and Director of R&D, is joining me here in our Irvine, California lab. In our Fort Myers headquarters, we have Steve Jones, our Executive Vice President for Finance; George Cardoza, our Chief Financial Officer; Bob Gasparini, our Chief Scientific Officer; Steve Ross, our Chief Information Officer; Fred Weidig, our Controller and Principal Accounting Officer; and Jerry Dvonch, our Director of External Reporting.

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

Thanks, Doug. This conference call may contain forward-looking statements which represent our current expectations and beliefs about our operations, performance, financial condition and growth opportunities. Any statements made on this call that are not statements of historical fact are forward-looking statements. These statements by their 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. We'll begin our call today with some comments about fourth-quarter performance, and then we'll discuss progress in some important areas, and comment on key objectives for 2014. I will then turn the meeting back over to Steve to discuss our financial results in more detail.

NeoGenomics performed very well in the final quarter of 2013. Growth accelerated nicely. Gross margins rose to 50% of sales and profit increased by almost $1 million compared with last year. We continue to invest resources in a variety of exciting growth initiatives and believe we have made significant progress. Overall, our teams executed well, and we were pleased with the Company's financial and operational results.

Revenue increased by 23% compared with last year's fourth-quarter, driven by a strong 28% growth in test volume. In fact, test volume was up almost 16% sequentially from quarter three. At $18.3 million, revenue was above customer accounts. Revenue from new products launched in the last two years represented about 60% of our growth in the quarter. Revenue growth was also fueled by the acquisition of new customers, as our sales team continued to win new accounts. Those factors more than offset the reduction in revenue caused by more cautious ordering by hospitals and pathologists, and a 3.7% reduction in average revenue per test.

Fourth-quarter revenue growth was strong across all regions of the country, with particularly strong growth in the Western region, where revenue more than doubled from the prior year. As you know, we expanded our sales team in the second half of 2013, and are pleased with the productivity of our new representatives. Including regional managers, we ended the year with a high-quality group of 25 field professionals on our sales team. Once again, we were especially pleased that incremental profit was strong. Our gross margins improved to 50%, as we drove 80%, or $2.7 million of the incremental $3.4 million of revenue on a year-over-year basis, to the gross profit line.

Productivity and process improvement initiatives continued to help us improve efficiency. As an indicator of productivity, the number of test processed per lab employee increased by almost 15% in the fourth quarter compared with last year. Operating expenses also remained in good control despite continued investment in information technology and innovation, and an increase in the size of our billing team. Adjusted EBITDA grew by 90% compared with last year to $2.7 million in the quarter. Our adjusted EBITDA has improved each and every quarter for the past six quarters, and rose to 14.9% of revenue. We reported $858,000 of net income compared with a small loss last year.

One not so bright spot was in billing, where we had a large increase in receivables. Cash collections were slow as a result of a conversion to a new billing system and increased complexities by payors. Denials for molecular testing have risen, as many commercial insurance payors do not seem to recognize the full value of the tests we perform. We have hired additional people to provide increasingly demanding documentation requirements, and to appeal new and unjustified denials, just to get paid for the testing that we have been requested to perform.

As a consequence, days sales outstanding increased back to 94 days from the 86 days we reported at September 30. We have put a lot of extra attention on our billing processes lately, and we expect to make progress in this area over coming quarters. Given the challenging environment in which we operate, all in all, we were very pleased with the Company's fourth-quarter financial performance.

Now every company has a particular style of managing their business, and at NeoGenomics, we have implemented a management process to identify specific critical success factors and key objectives, and to get all of our people aligned to achieve our goals. We work hard to develop a culture to support and execute this management process.

There are four key areas of focus for us -- build our team, get lean, grow, and diversify. And I will briefly describe some of our activities, progress and plans. We believe that engaged employees are essential in order for us to create satisfied customers, and that having satisfied customers will generate strong shareholder value. Therefore, one of our critical success factors is to build our team. We've worked hard to improve hiring practices, pay and benefit programs, education and training, and communication tools and techniques. Ultimately, we are working to establish an outstanding culture based on living up to a strong set of values.

I think these initiatives are paying off and our employees are fully engaged. For example, our annual companywide employee satisfaction surveys results have consistently improved in each of the four years that we have been conducting the survey. Overall employee satisfaction with the Company increased by 10% over the past year, and that has translated to employee retention rates which have climbed each and every year.

This is quite important for a number of reasons. First, longer-term employees are more productive and do a better job satisfying client requirements. Second, it's critical that we continue to attract the very best people to join our team as we grow. At the end of the year, we had 320 full-time employees, an increase of about 50 people from year-end 2012. Because of improved retention levels, we have been able to be more strategic about hiring. Most of the additions have been investments made to reduce overall costs, and to add to our sales and marketing capabilities.

Our objectives for 2014 are focused on continuing to drive employee satisfaction and retention levels through better ways to communicate, more formalized career development, and improving the way our labs and departments work with one another. Our people have a common purpose. They know that their work saves lives. And this galvanizes all of our employees. In 2014, we are working to further build our team and make our Company an outstanding place to work.

Our second key area of focus for 2014 is to get lean. We have been working hard to improve our cost structure to be a low-cost provider in each of our core testing disciplines. Through quality and process improvements, automation, best practice initiatives, and better information systems, we have been able to drive our cost per test down consistently over the past few years. For example, in quarter four of 2013, we drove a 15% reduction in our average cost of goods sold per test compared with quarter four of 2012. Since 2010, we've reduced our cost per test by 22%, which has more than offset the 19% reduction in average revenue per test during this period.

For 2014, an important area of focus is to increase the use of information systems and technology to move NeoGenomics further along the path of being a digital lab. To us, this means using online ordering, bar coding, specimen tracking, and other tools to create a streamlined, seamless and efficient lab. We have a long way to go, but we are investing in information technology, people, and processes to make this happen.

As we reported to you last time, we are now reengineering our largest laboratory in Fort Myers, Florida. This will allow us to make significant changes in workflow and automation, to lower costs and expand capacity at the same time. We expect to be fully operational with these changes by the beginning of the second quarter of 2014. After another expansion in Irvine, we now have 75,000 square feet of laboratory and administrative space in our Company.

Getting lean also includes a lot of blocking and tackling. As a result, our people continue to work on best practice teams, execute lean initiatives, implement automation, and constantly develop better ways to improve quality while reducing cost. Over the course of this year, we expect these initiatives to result in further process improvements and reductions in our cost of testing, and we have targeted another 8% to 10% reduction in cost per test for 2014.

One way to reduce cost per test and increase earnings is to drive more testing volume through the same basic infrastructure. And so our third critical area of focus, simply, is to grow. We have been fortunate to have developed a very good and stable sales and marketing team over the past few years, and 28% volume growth is evidence of their productivity. It's important to note that growth was achieved despite more cautious ordering by clients, which we estimate may have dampened the quarter's growth by a few percentage points. Our sales team was able to overcome this by achieving strong market share gains.

We've decided to further expand our sales team in 2014. As part of that effort, we were fortunate recently to have hired a terrific National Director of Sales named Tim Christiansen. Tim has strong sales leadership experience in our industry, and is well-respected by our team and by our key customers around the country. Together with Tim, our sales leaders will focus on productivity and will fill some important geographic areas that are now under-represented. Compared with year-end levels, we expect to add four to six additional sales representatives to our Company by the end of 2014.

Growth objectives for 2014 also include delivering better information to our clients, payors and patients, and an objective that we can all embrace called "get paid for our work." Because it's not just about growing revenue; it's about growing cash. To be frank, in our current healthcare environment, it's often easier to perform and deliver complex genetic testing results for critically ill cancer patients than it is to get paid.

In many cases, either Medicare or insurance companies just refuse to pay, citing new and seemingly arbitrary reasons. It's frustrating, because we perform medically necessary testing that's ordered at the request of physicians who, like us, are trying their best to save the lives of cancer patients. After we spent the time and delivered the test results, we have little recourse to initial denials for reimbursement other than to invest ever-increasing resources in billing and collection.

In 2014, we are going to be more proactive about developing two-way dialogues with payors. At NeoGenomics, we often offer new leading-edge tests that have not yet been reviewed for coverage by Medicare or commercial insurances. And given our comprehensive menu of state-of-the-art tests, it's important for us to have more tests covered and reimbursed properly, and we are working on this.

As we work to create a strong company that can prosper even in difficult reimbursement environments, we know we need to diversify. During the fourth quarter, we announced an exclusive alliance with -- between NeoGenomics and Covance Central Laboratories to provide comprehensive anatomic pathology, histology, and specialty lab testing for worldwide clinical trials. This is a very important initiative. It allows NeoGenomics to participate in the exciting and growing market for clinical trials by doing what we do best, and by leveraging the capabilities of Covance's market-leading central laboratory for clinical trials. I will discuss our 2014 plans for this initiative in just a minute.

We've also been working to diversify our product lines. We have invested to quickly develop new tests during the past couple of years, and have introduced 68 new molecular tests and disease profiles during that time. The efforts are paying off. In the fourth quarter, we realized $2 million of new testing revenue from new products introduced during the past two years. And for 2013 as a whole, $5.2 million of revenue was derived from these new products.

For 2014, we plan to continue to develop and launch additional new and important tests. One example of our efficiency in this area is our recently launched new molecular test for calreticulin, or CALR. An original article was published about this in the December 19th New England Journal of Medicine. Less than three weeks later, on January 7th, NeoGenomics announced the launch of a fully validated test for CALR mutations. Since that time, we've received about 250 orders for the test from existing clients, other labs, and academic centers.

Also just recently, we announced the introduction of 22 new cancer genomic tests designed for actionable profiling of a wide variety of hematologic and solid tumor cancers. Each targeted test type is offered as either a concise profile, designed to include fewer genes to be responsive to the needs of more cost-sensitive patients and providers, and a comprehensive profile, designed to include additional genes and be useful for more complex cases. These Neo-type profiles allow flexibility to meet the needs of the scientific community and of our clients.

Our NeoSITE molecular test and profiles will soon be augmented by our introduction of next-generation sequencing. We are now completing final aspects of our next-generation sequencing product offering, and expect to formally launch this new service in March. The initial test offered will include a 48-gene solid tumor profile and a 16-gene MDS profile. We will be rolling out other tests using next-gen as the year progresses, including using next-gen testing for certain single-gene tests that we currently perform using bidirectional finger sequencing. In fact, given the volume of molecular tests we currently process each month, we believe next-gen testing may actually help us to reduce costs, as it will allow us to more efficiently batch tests together.

We have previously disclosed a very exciting proprietary test development initiative for prostate cancer. This NeoSCORE prostate cancer test is unique, as it's performed on blood plasma and urine rather than on prostate tissue biopsies. As we have described, the goals for this test are to diagnose the presence of cancer in patients with BPH, and to distinguish high-grade from low-grade cancer in patients with prostate cancer. The result of our first trial, which was completed last June, will be published in the March print edition of the Genetic Testing and Molecular Biomarkers Journal, and the article is currently available online.

In addition, we recently completed a follow-up study with additional patient samples. Although we won't disclose the details of this second trial until results are published, to be in compliance with Journal publication protocol, we can report that they largely confirm the published preliminary data. An abstract describing the second trial was recently submitted for an upcoming National Oncology meeting, and Dr. Albitar is working to have another paper published with the new data.

The next phase of development of this test will include testing patient samples from outside the United States. While further work needs to be completed, we continue to be excited about the potential for this test. We are planning a limited launch of our NeoSCORE test in the second quarter and a full launch later this year. The speed and efficiency of new test development and launch, the clinical utility of our disease profiles, and the upcoming launch of next-generation sequencing and an innovative prostate cancer test, are all examples of the work of Dr. Albitar and his R&D team. And we are all very proud of him.

Growing in clinical trials is also an important 2014 objective. Our strategic collaboration with Covance is off to a very good start. We are developing our joint laboratory capabilities in this first quarter, and looking forward to expanding these capabilities globally at Covance locations in Shanghai, China and Geneva, Switzerland later this year. We've hired a terrific new Director of Biopharma Services, designed marketing materials, created a website, and worked with the Covance Central Laboratory sales team to plan and to prepare.

Pharmaceutical firms are showing interest in our molecular testing menu and new NeoTYPE panels. Just in the last two months, we've already responded to more requests for proposals than we have in the entire history of our Company. Although it's still early, we expect our initiatives with Covance, and generally in clinical trials, to begin to show results in the second half of 2014, and to ramp up continually over the foreseeable future. We believe that our efforts to diversify NeoGenomics by expanding our clinical trials business and through new test development will strengthen the Company further over 2014 and into future years. And diversification should also reduce the percentage of our business reliant on Medicare.

Perhaps the best way to explain our desire to reduce exposure to Medicare is to explain yet another Medicare reimbursement issue we are dealing with. As you know, last year's proposal to cap reimbursement for tests covered by the physician fee schedule, at levels that Medicare pays to hospitals under the payment structures referred to as the hospital Outpatient Prospective Payment System, or OPPS, and the Ambulatory Payment Classification System, or APS, was not enacted.

We were very pleased by CMS's response to the overwhelming opposition to their proposal. In fact, we had planned for a relatively stable reimbursement environment in 2014, with only a small percentage decline in average price per test. However, just recently, we discovered a new guideline concerning FISH reimbursement issued by the National Correct Coating Initiative, or NCCI, without warning or opportunity to comment from the lab industry. The guideline is very confusing and technically misguided.

The new FISH guideline appears to follow a construct recently imposed for immunohistochemistry testing. However, IHC and FISH testing are performed using very different processes with vastly different costs. Also, the new language inserted in the NCCI policy manual in December directly conflicts with existing language in the same manual. The new language is also in direct conflict with AMA guidelines, CPT coding rules, and certain FDA regulations. We have checked with the Medicare carriers, FISH probe suppliers, reimbursement experts and competitors in the lab industry, and there seems to be universal confusion.

Here is an example to help with your understanding. Under our interpretation of the new NCCI guideline, reimbursement for HER2 FISH testing for breast cancer cases would include reimbursement for only one of the two FISH probes used. Under this interpretation, Medicare's reimbursement for the technical component of HER2 FISH would be about $200, which is below the total cost to perform the test. If labs lose money for every HER2 test performed for Medicare patients, there's a good chance that fewer labs will offer the test. That's unfortunate, because the test is essential to determine what cancer patients will respond to $75,000 and more Herceptin therapy. To us, the policy doesn't make any sense at any level.

We apologize to our investors for yet another uncertainty caused by Medicare. We have written to NCCI and to CMS, and are working with the ACLA and others to resolve the uncertainty. A copy of this correspondence can be found on our website, and we filed an 8-K this morning with a more detailed discussion of the issue. Unfortunately, we don't have any clarification on this issue as of this time.

In order to be completely transparent, we are providing guidance for the full year and the first quarter, and a preliminary estimate of the potential impacts of a negative resolution of this NCCI edit issue with the guidance. For now, that's the best we can do. We'll issue another 8-K as soon as we have clarity or any response from CMS.

Notwithstanding the CMS uncertainty, I'd like to summarize my comments by making a few key points. We are very pleased with the Company's performance in quarter-four. Growth has re-accelerated, costs remained in good control, and profitability improved significantly. Our growth prospects are excellent. And we have a portfolio of growth initiatives being executed by skilled and dedicated people. We are continuing to execute a variety of process improvements designed to continuously improve quality and lower our cost of cancer genetic testing services. In fact, we can believe -- we believe we can lower our costs continuously for the foreseeable future.

The bottom line is NeoGenomics ends 2013 a stronger company than ever before. Our teams are genuinely excited about our prospects, and we are focused on continuing our growth momentum in the coming quarters.

I'll now turn it over to Steve to comment more fully on our financial results.

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

Fourth-quarter revenue was $18.3 million, a 23% increase from Q4 last year. Test volume increased by 28%, and average revenue per test declined by 8.7% to $470. During the quarter, we recorded $287,000 less revenue than we otherwise would have, as a result of changes in our revenue recognition policies relating to certain molecular and FISH testing services. These changes result from significant new documentation requirements imposed by payors, especially on molecular tests that are now required to justify the utility of certain comprehensive cancer tests. This makes the collection for such tests much more difficult, as we typically are required to go through a lengthy appeals process in order to get paid. We adopted these more conservative revenue recognition policies to compensate for the likelihood that we will not get paid on all such tests.

Gross profit was $9.2 million in Q4, a 42% increase over last year. As discussed in the press release, we improved our average cost of goods sold per test by 15.3% year-over-year by increasing lab productivity, realizing leverage from higher volumes, and from a variety of cost containment initiatives. This drove our gross margin up by almost 700 basis points to 50% from 43.2% in Q4 2012. Clearly we have been able to unlock a lot of operating leverage in the last few quarters. We believe we can continue to make further improvements in average cost of goods sold per test in 2014, with further reductions of 8% to 10% for the year.

Providing there are no material changes in reimbursement, such as a negative resolution of the NCCI edit issue, this should translate into further gains in gross margin in 2014. However, even if there is a negative resolution of the NCCI edit issue, we still believe we can keep gross margins in the same general area as our full-year 2013 gross margin of 47.7%.

Turning now to SG&A, total sales and marketing expenses increased by $800,000 or 47% versus quarter-four last year, as a result of increasing personnel costs and incremental commissions on the increase in revenue. As of December 31, we had three regional managers and 22 sales representatives. We expect to add another four to six professionals in 2014, so investors should expect our sales and marketing expenses to continue to rise.

General and administrative expenses increased by $726,000 or 17.7% versus Q4 2012. And R&D expenses increased by $201,000 or 45%. This increase in R&D was primarily the result of a large increase in non-cash stock-based compensation expense in the quarter. As we have discussed before, we are required to use variable accounting to account for certain warrants awarded to our R&D team. And when our stock price rises or falls by a significant amount, it has a disproportionately large impact on the stock-based compensation charges in any given quarter. And our stock was up nearly 21% in the fourth quarter. Total SG&A and R&D expenses were up about 1.7 million or 28% year-over-year.

Net income for the quarter was $858,000 or $0.02 a share compared to a net loss of $113,000 or $0.00 per share in quarter-four of last year. This $970,000 increase in profitability is due primarily to the excellent cost controls and productivity increases over the last year. Adjusted EBITDA was $2.7 million in the fourth quarter, a 90% increase from last year. We finished the fourth quarter with 320 full-time equivalent employees and contract doctors as compared with 308 at September 30, and 268 at December 31 of last year.

Our Accounts Receivable balance, net of allowance for capital accounts, was $18.7 million at December 31, up approximately $3 million from the balance of September 30. Our AR balance expressed in terms of DSOs was 94 days as of December 31 versus 86 days as of September 30. As Doug mentioned, we have been putting in a new billing system over the last few months, and this has diverted significant attention away from the normal billing duties. The good news is that we know exactly where the issues are and we are focused on getting them fixed.

We had $4.8 million of cash on December 31 and $5.7 million of availability under our working capital line of credit, for a total liquidity of $10.5 million as compared to $12.2 million of total liquidity at September 30. We also recently filed, and have already had declared effective, a $100 million S3 shelf offering that we can take advantage of market conditions on an opportunistic basis if the opportunities arise. Our cash flow from operations in Q4 was negative $505,000. However, we had to fund payroll of $915,000 on the last day of the year, which obviously impacted this number. We purchased $2.1 million of PP&E in the quarter. However, we were able to lease finance approximately $1.6 million of this amount. So the net use of cash from investing activities was $525,000.

Before discussing the guidance we issued this morning, I want to briefly touch on the significance of our full-year results. We were very pleased to have achieved a $2 million increase in net income and a 42% growth in adjusted EBITDA on revenue growth of just 11%. As a result of our focus on increasing productivity, and reducing costs, we were able to increase gross margin by 300 basis points from 44.8% in 2012 to 47.8% in 2013, despite the fact that average revenue per test decreased by 7.3% over the year.

Turning now to guidance we issued this morning for the first quarter of 2014 and for the full year. For the full year, excluding the impact of the NCCI edit issue, we expect revenue of $73 million to $77 million, with earnings of $0.05 to $0.07 per share. We are also providing a preliminary estimate of the impact that a negative resolution of the NCCI issue would have on this full-year guidance. At this time, we preliminary estimate that a negative resolution would reduce revenue by approximately $3 million and net income by approximate $0.04 per share. We believe these impacts would be more concentrated the first half of the year, as we would likely be able to mitigate some of the impact by redesigning our work processes to comply with the new billing requirements, as the year unfolds.

Excluding the impact of the NCCI edit issue, which remains unresolved, in quarter-one, we are expecting $18.8 million to $19.3 million and $0.01 to $0.02 per share of net income. We preliminarily estimate that a negative resolution of the NCCI issue would have the effect of reducing revenue by approximately $1 million and net income by $0.02 per share in quarter-one.

At this point, I'd like to close down our formal remarks and open it up for questions. Incidentally, if you are listening to this conference call via webcast only, and would like to submit a question, please feel free to email 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.

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

(Operator Instructions). Trey Cobb, Stephens.

Congratulations on the quarter. I know the NCCI guidelines came out of left field for you. Have you had any additional conversations with CMS regarding the change? And given this is fairly unprecedented, what are you expecting in terms of timelines for a potential resolution?

Well, we have sent correspondence to CMS as well as to NCCI. We have not heard back yet. We've talked with the American Clinical Laboratory Association. There are a number of people that are trying to understand and get clarification from CMS at this point. We don't know when we might receive that clarification, frankly. We are doing everything we can. We would like to resolve this, obviously, as soon as we can, and we will issue an 8-K as soon as we have clarification.

Okay. Thanks for that. And then maybe if you could walk us through what conversations you've had, if any, with private payors regarding the change. Assuming the change remains, so we'd be looking at a case similar to Myriad, where private payors don't necessarily follow CMS's lead because they see the incremental value in the test?

Yes. Steve, do you want to handle that?

Sure. So, Trey, we don't believe any of the private payors are going to handle it. We haven't heard anything from any of them. This is bad policy, in our opinion, because it will preclude people from getting the testing they need, which informs really expensive therapy. And Doug provided the example with Herceptin in his remarks, but there's a dozen more examples where that came from, that are $75,000 -- $100,000 treatments that are informed by a $400 to $600, maybe $800 FISH test. And I think, generally, our experience has been the commercial payors get that economics, and they have embraced this kind of testing as part of the overall lifecycle -- health economic lifecycles.

So, right now, we haven't had any discussions with anybody and nobody's mentioned anything to us. Nobody has reached out to us and said they're going to impose similar guidelines. I think when you look at the specific language in the policy manual, just before they get to the FISH language, they talk about IHC using similar kind of language where they are trying to limit things to one staining procedure. And then they appear to have mimicked the same language for FISH, but there's not even really a staining procedure for FISH.

And so, from our perspective, it just appears like somebody was trying to put the construct they were developing for IHC into FISH, and it's an apples and oranges kind of question. So we're hopeful we can get it resolved; we just haven't heard anything back yet.

Great. Thanks for the color and for taking my question.

Thank you, Trey.

Amanda Murphy, William Blair & Company.

Amanda, you're on mute.

Sorry, I was on speaker, not mute; but this is working. Okay. So, just a follow-up to that question previously. So, in terms of the private payor impacts, have you seen any effect previously -- so if you think about IHC and some of the other costs that you faced, have those flown through to the private side in the past?

Not really. I mean, we don't do a lot of IHC currently, but we have not seen any real impact from private payors along the lines of what Medicare has done. I assume you mean with respect to the NCCI edits or the new codes?

I was just saying in general, stating that that's a good question that people have in the space. And so, obviously, the FISH stuff is relatively new, so I was just curious about kind of prior experience. Have you seen cuts that you faced historically flow through to the private side, whether it be 12 months out or whatever, but at some point?

Yes. Let me ask George to handle that one.

Yes. This is a little unique, because in this case, Medicare is really varying from the AMA CPT code guidelines. That's why I see they put this G code structure in place. And they're really building a similar, where they're kind of diverging from the standard AMA CPT code practice. So, most of the commercial is in a lineup with the AMA, which is kind of the standard in the healthcare industry. And what Medicare goes down a different path, it's not necessarily that the commercials are going to line up behind them. I think, if anything, the commercials are going to stay with the AMA code guidelines.

Got it. And then it seemed to me that one of the -- obviously, FISH was kind of one of the last potential issues from a reimbursement perspective, just given that it was under review this year. So does this -- I mean, this in some ways mitigates that, right? I mean, it's obviously not the code-specific changes, but at least from a potential change that they may or may not have, in terms of number of probes you can bill. So, is that the right way to think about it, if I think about FISH for next year, for example, and you're kind of taking some of it now?

I guess, Amanda, the proper way to answer that is to tell you that if we knew what Medicare was going to do, we would be very, very happy. We believe it may mitigate what Medicare does next year, but we just don't have any other than just informed speculation. We don't have any basis to make any statements about that. I think, from our perspective, we have -- one good thing that's come out of this is we have a much more active and open dialogue with Medicare as a laboratory industry in total. And so I think we are much more able to initiate the kinds of dialogues that need to be had quickly, and respond to things.

Yes. I just might add that we've been working very hard to diversify our company, and we'll continue to do that. And I tried to make some comments about all of the various ways that we are diversifying through product line extension, clinical trials and so forth. And so we are trying to reduce risk of any concentration with a client or a particular type of test.

Got it. Okay. And then just last one. You had mentioned something about cautious ordering from hospitals and pathologists. I was curious if you could provide a little more color on exactly what may be driving that, how long that may impact you?

Well, what we've seen, and some of this is anecdotal, we tried to put a number on it for you, and said we think it's dampened our volume growth by 2% or 3%. But anecdotally, a lot of hospitals and community-based pathologists are asking questions about what is the most cost-effective way to test and treat patients? And that's a function of the healthcare environment that we are in. We're trying to be responsive to that by offering tests that we think are concise. We gave the example of our concise molecular disease panels; that's an example of that. But clearly, the pathology community, the hospital community, and most providers are trying to be cost effective, and there's not as much -- there's always a comment about, is there a overutilization of testing? And we are seeing that come into more control.

Got it. Thanks, guys.

Matt Hewitt, Craig-Hallum Capital Group.

Good morning, gentlemen, and congratulations on the good year. A couple of different questions. First, Covidien. How should we be thinking about that revenue stream ramping in 2014? I would assume it's negligible at the moment, but how will that layer on as the year progresses?

Yes, Matt, I think you mean Covance.

Oh, I'm sorry, yes.

Yes. So, thanks for the question. Yes, so we're very happy about how that's starting. The process is going to take a little while. Because what we first have to do is we have to get our laboratories aligned, we have to train the sales force, and then we have to initiate conversations with pharmaceutical companies. And then RFPs are issued and so forth. So this process takes months to get started.

We are very pleased with the initial response we've had from pharmaceutical companies, and we are working very well with the Covance team. We would expect to begin to execute some projects with pharmaceutical companies in partnership with Covance, beginning in the third quarter. Now some might start before that. We are starting to get inquiries by pharmaceutical companies directly to us as well. And we expect that some of those will start even before the end of the first half.

I might mention that we just got an order from one pharmaceutical company just in the last week for next-generation sequencing. So, we -- which we have up and running, by the way, for that purpose. So, it's starting.

Great. That's great. Secondly, and a little bit different focus, you had mentioned last year that one of your large oncology practices had moved to terminate the contract. Maybe an update on that. But more importantly, you were going to -- and I think this kind of folds into your diversification comments -- but you were going to focus on additional opportunities in that large oncology practice market. Could you maybe provide an update on how that's progressing?

Yes. Sure, Matt. So we continued to have a partnership with one large oncology practice, and I can't really comment further on how that's going to turn out. We provide, I think, a pretty good service for them, and we have a good relationship.

Relative to other like kinds of arrangements, we've had recent success with that same model, where we will help a large oncology practice to perform certain kind of testing that they might want to perform, and it's economical for them. And then we, in partnership with them, would perform the other kinds of testing that they wouldn't be able to do because of the sophistication of the testing or so forth. So we have had some success there.

Now that there has been some clarification, as we mentioned, of the OPPS reimbursement issue that appeared last year, there is more receptivity out there in the marketplace to engaging in dialogue about these kinds of partnerships. And we are continuing to do that.

Okay, great. And then maybe one last one from me. What -- and I realize that you're learning as much as you can and as quickly as you can -- but regarding this new reimbursement change, what will that mean from an M&A perspective? Will that create additional or more near-term opportunities for you on the M&A front?

Well, Matt, I would say that we have -- we've been entertaining a number of potential M&A opportunities. I think that the industry is ready for more consolidation. As you know, and as we have mentioned to all of our investors, we intend to be a consolidator. We do have, as Steve mentioned, a shelf registration statement ready with $100 million ready to go. And so we expect that, yes, there's going to be even more opportunities as we look forward.

Okay, great. Thank you.

Paul Nouri, Noble Equity Funds.

Hey, thanks for taking the question. Looking at first-quarter guidance, I was a bit surprised how strong it is, given the bad weather. Does that not affect you guys as much, because your labs are in Florida and California?

Yes. No, it affects us. We're whining about it.

Okay. So you're having that pretty good growth despite the weather?

Yes. There is some seasonality to our business, and Steve and George may comment on that. But quarter-one is typically pretty strong for us, and we are trying to sort out the weather impacts. But we think it's continued to be pretty strong and that's reflected in our guidance.

Paul, I might just add -- Florida is still about 30% of our total revenue stream, and all the snowbirds come to Florida in the first quarter timeframe. And so we tend to have a much more robust first quarter certainly in the Florida markets, which aren't affected by the snow. I think that's probably offsetting some of the -- we have seen some impact. Certainly, there's been days where people couldn't even get to the doctor's office up north, and that has impacted some of our Northeast sales.

And turning to M&A opportunities, are you looking for more new technology to fold into your current distribution? Or are you also looking for distribution in new regions of the --?

Yes, Paul. So, in M&A, we are looking at a variety of opportunities. So one would be a classic case where we would acquire a company, and that we would have some redundancy and some cost synergies, and maybe some additional market penetration, moving our molecular testing menu into a client base that maybe they weren't allowing or didn't have molecular testing for -- those kinds of synergies.

We would also look at diversification efforts, where there also were some synergies. We would also look for new testing technologies. But in that case, we are being a little bit more cautious, because we are sensitive to the effect of -- to the dilutive effect if we were to issue shares or pay a lot of money for something that didn't have a lot of accretion opportunity for us. So we're going to be diligent about looking for acquisitions. And also, you can expect us to be responsible in integrating.

And does the $100 million shelf kind of indicate that that's the upper limit of the acquisition you're looking at?

No, we thought that was a responsible first step.

Okay. And then turning to the sequencing that you're going to get into a bit this year, are you targeting tests that already have reimbursable codes?

Steve, do you want to take that one?

Sure. So, you have to separate out Medicare from the commercial payors to answer this question appropriately. Medicare requires Z codes for all of their molecular testing. We currently have active Z codes that have been filed and have signed using quote/unquote "sequencing analysis" in the Z code application for several of those codes. There's also several codes that we don't get paid for from Medicare.

But so, for those that we have an active Z code with sequencing analysis, it is our belief that we can submit for reimbursement using the same codes that we do for bidirectional Sanger sequencing. And that's what we intend to do. Now, until somebody comes out and tells us otherwise, we think that that's totally along the lines of what Medicare intended. They've actually gone out on record and said that the testing should be reimbursed independent of the platform it's being tested on.

With respect to the commercial payors, we submit using the CPT codes that were created last year. And I would say in this instance for molecular, the commercial payors are actually behind Medicare a little bit reimbursing on that. And that is what's impacting some of our molecular collections. We're having a lot of trouble with certain commercial payors, getting them to pay for tests that even Medicare is paying for. This will all work itself out over time. I think there were so many upheavals and changes in molecular testing last year, it's just -- we've got to get the word out to everybody.

Okay. And then a final question, in the fourth quarter this year, I guess you're reconfiguring the Florida lab for the Covance joint venture, as well as better reconfiguring at the increased workflow. Was that at all a drag on margins this quarter? And as we go into the back half of 2014, are we going to see that kind of turn around?

Well, I would say that it did not help us to get productivity improvements and cost reductions that we may otherwise have gotten. And that's going to be the case in quarter-one as well. We're moving departments around and moving instrumentation around, and we've got a lot of people engaged in this activity. So, we will not get -- we don't expect to get a lot of productivity improvements in our Fort Myers facility in the first quarter. But we should be able to realize those as that reconfiguration is completed.

Okay, thanks.

Jack Wallace, Sidoti & Company.

Thanks for taking my questions. Quick question with the average cost per test coming down, the estimate would be 8% to 10% for the next year. Is that off the fourth-quarter figure? Or is that the year-end 2013 figure?

Yes. That'd be off the fourth-quarter figure. Very good point.

And then so to kind of piggyback on the previous question there, is the idea there that you're going to see a good impact in the second and third quarter there with the Florida lab becoming more fully operational? And with the fourth-quarter, the sequential drop in average cost per test, how much of that was volume-related? And how much of that was other cost initiatives?

It probably will be more backend-loaded this year because of the issues Doug described. And, George, do you have a feel for volume versus --?

Yes. The main thing we are doing with the Florida lab is the ability to handle increased volume. So we think as the volumes increase, that's going to give us a lot of leverage with our new Florida facility. So we do think we are going to -- as we grow, be able to continue to process greater and greater volumes more efficiently. So, it is very tied in with our growth, but we do expect the lean initiatives to drive a lot of cost savings.

Just to give you a flavor for this, Jack, there is -- we figured out that it took about 600 steps to do an average flow cytometry test. By reconfiguring our Florida lab, we think we can get that down to 100 to 150 steps. I'm talking about physical steps that a technologist has to walk. And all those kind of things pile up with a lot of cost savings when you add them up together.

Okay, thanks. That's helpful. And then was NeoSCORE in the guidance for full-year 2013?

We do expect some revenue from NeoSCORE this year. We don't expect a lot of revenue from it, we are being conservative. It would be inappropriate for us to comment on how much of that guidance would apply to NeoSCORE, but not much.

Okay, thanks. That will be all for me.

Thank you, Jack.

Grant Zeng, Zacks Investment Research.

Thanks for taking my call. My question is for the Covance collaboration. What's the pricing strategy for the companies that compare the two that following the details? Thank you.

We have a price list that we negotiated with Covance for all of the clinical trials. We will be acting as a subcontractor to Covance. So we'll basically jointly bid on projects together. If Covance is awarded, then we would sub to Covance on the piece of the proposal that we help prepare that applies to us. We would bill Covance, and Covance, in turn, would bill the end customer.

The price list that we have is generally a little bit higher than the average clinical price list, because there's substantially more data-handling requirements for these clinical trials. And so we actually believe that we will be able to get equal or better margins on the clinical trial work than what we're currently getting.

Okay. Thank you.

Operator, are there other questions?

Thank you. We have a follow-up question coming from the line of Paul Nouri. Please proceed with your question.

Turning back to M&A for a second, are you finding that the deals you are looking at are difficult to close because of a valuation gap? Or is that not the case?

Well, they're all different. I mean, obviously, we wouldn't want to overpay, and there's always a negotiation there. Not so far. Now, I think the issues that we are dealing with right now are trying to understand better the impact to our Company, how we might integrate. And there are also some issues with the companies that we are talking with. They've got some things to get resolved. So we are a little bit in a watchful waiting period, I guess.

We think we can do some meaningful M&A this year. We are working very hard at it. We are engaged now in a number of different discussions. And I don't think valuation is going to be a big issue. I think people's valuation expectations have come more in line, given the environment that we are operating in.

And you've mentioned before that you're winning business, you're taking accounts. Is it kind of broad-based? Or is it from the big two or more of the niche lev?

Oh, it's fairly broad-based, I would say. We -- this is a very competitive environment. We have very good competitors. And we are just trying to do our job every day, and deliver really high quality service, and have a very good menu. We have been able to get clients' attention, in many cases, because we walk in with new products. We say, hey, have you heard about this that we just released? And that gets people's attention.

And so, we've been able to get our foot in the door more places than we ever have before. And I think our reputation for service and quality, and being an innovative lab is helping us.

Okay, thanks a lot.

(Operator Instructions). Debjit Chattopadhyay, Emerging Growth Equities.

Thanks for taking my question. Just a couple of questions on the prostate cancer tests here. Knowing that 15% of prostate cancer patients have PSAs less than 4 nanograms per ml, can the NeoSCORE be modified? Or what was the cut-off for the PSA that were selected in the panel and NeoSCORE?

Dr. Albitar, you want --?

Our PSA does views information, cannot come to PSA, but that is one of the multiple biomarkers in the test. Just look at all of our tests for PSA.

No, but the patient sample that was in the 120 samples that you had or you analyzed, what was the cut-off for that? Was that a 3 nanogram or 4 nanograms cut-off?

There is no cut-off at all in our selection of our patients, so any patient that is clinically considered for questions for part of our prostate cancers was included in the significant trials.

And did you break down the number of patients with -- that were missed? And also ones that were missed, how many of those were high-grade prostate cancer patients?

That's very difficult to answer because it depends on whether we are talking about high-grade missed or low-grade missed. In general, our test is very good and does not miss significant number of cases that are at high-grade. I can't give you the exact numbers because the exact number is really based on the additional data we just finalized. We need to publish the data before I give you the exact answer.

Okay. And one last question on the launch of the NGS. How should we look at pricing of the test? I mean, it's clearly not whole genome sequencing, so it's probably not going to be around that $5700 mark from -- as you see from foundation medicine. So do you think it's going to be more in terms of what they are collecting, what foundation is collecting? And is this primarily meant for the clinical trial market? Or would you have active interest from physicians as well? And thank you so much.

(multiple speakers) Steve?

We expect to have a lot of interest from our clinicians. In fact, we are already getting a lot of inquiries about that. We will probably use a different strategy than foundation medicine. I think the last time I checked they had 237 genes in their foundation, one solid tumor panel, and over 700 genes in their gene panel. Our first two tests, as Doug mentioned, will be a 48-gene solid tumor profile panel. Many of the genes in there are the ones that are already reimbursed. And then we will also be offering a 16-gene NDS panel.

For those of you that have followed us for a while, you might recall we launched a 13-gene bidirectional sequencing NDS panel last July, which has been a very successful product for us. So we'll be extending it. It will actually be two separate products that get at two separate kinds of questions on that.

Overall, we are very excited about what NGS can do for us, not just in terms of increasing revenue and penetration into the molecular market, but what it can do for us to rationalize the cost structure of providing molecular tests. The one benefit of NGS testing is it allows you to batch sample much more effectively than you can in bidirectional SANG or sequencing, which tend to be more one-off-based.

Dr. Albitar, do you want to add anything to that?

Mixed gene sequencing, as we indicated previously, is we believe it is a technology that is very useful. And again, we'd like to emphasize that it can be used either to test many genes in one shot or it can be used to test many patients for one gene in one shot. So we are using the technology along these lines to improve efficiency in general. And it's great technology, and we are moving very fast on utilizing this technology to increase efficiencies. So there are multiple ways, I think, over the year you're going to hear way more innovative ways of utilizing mixed gene sequencing in our Company.

I've got a few email questions here that we just want to clean up, and then we're going to cut this off, as we've been going on a long time here. First question is, can you give us an idea of what you are expecting average revenue per test to be in 2014?

Of course, the answer to this question will depend on how the NCCI edit issue gets resolved. If it's resolved favorably, we expect the average revenue per test to settle out around $455 to $460 on average for the full year. That's about a 5% to 6% reduction from full-year 2013 numbers. A large part of this reduction comes from the mix shift that will happen after mid-May, when a large customer will begin to in-source their FISH testing.

If the NCCI edit does not get resolved favorably, will be -- we believe there will be another approximately $18 to $24 decrease in our average revenue per test this year. That's probably as far as we can go right now.

Next question we got deals with IR. What IR activities are you planning on?

We're going to be at the BTIG Conference in Salt Lake City, March 18th and 19th. We'll be at the Deutsche Bank Conference in Boston, May 7th and 8th; and we'll be at the Craig-Hallum Conference in Minneapolis on May 28th.

Let me see. I also have a question here about international expansion. Some molecular diagnostic companies are expanding aggressively into Latin America and Central America; is such expansion possible for NEO? And what are the regulatory hurdles?

We've looked at international expansion a number of times. I think reimbursement is always the key question there. We believe our first international expansion will be with Covance, helping them support their international client clinical trials. We called it, we will be doing all of the pathology reads for the anatomic pathology testing associated with their trials globally. In fact, we intend to help them in Shanghai and Geneva starting maybe even early -- as early as later this year.

Doug, do you want to add anything to that?

No, I think you've got it, Steve.

Okay. That's the last question I have by email, and we're kind of 10 minutes beyond the appointed hour here. So, we're going to go ahead and wrap things up. Doug?

Okay. Thank you, everyone. So, as we end this call, I'd like to recognize all 320 NeoGenomics team members around the country for their dedication and commitment to building a world-class cancer and genetics testing program. And on behalf of our entire NeoGenomics team, I want to thank you for your time joining us this morning for our quarter-four 2013 earnings call, and let you know that our first-quarter 2014 earnings call will be on or around April 25th of 2014.

So, for those of you listening that are investors or thinking about investing in NeoGenomics, we thank you for your interest in our Company. Good bye.

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