Neogenomics Inc (NEO) 2014 Q3 法說會逐字稿

Greetings, and welcome to the NeoGenomics third-quarter 2014 financial results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Doug VanOort, Chairman and CEO of NeoGenomics. Please go ahead.

Good morning. I'd like to welcome everyone to NeoGenomics third-quarter 2014 conference call, and introduce you to the NeoGenomics team that's here with us today. Joining me in our Fort Myers headquarters, we have George Cardoza, our Chief Financial Officer; Rob Shovlin, our new Chief Operating Officer; Steve Ross, our Chief Information Officer; and Jerry Dvonch, our Director of External Reporting.

Steve Jones, our Executive Vice President for Finance, is joining us remotely from North Carolina; and Dr. Maher Albitar, our Chief Medical Officer and Director of R&D, is joining us from our Irvine, California lab.

Before we begin our prepared remarks, Steve Jones 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 expectations, performance, financial condition and growth opportunities. Any statements made on this call that are not statements of historical fact are forward-looking statements. These statements by their nature involve substantial risks and uncertainties, certain of which are beyond our control.

Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual outcomes and results could differ materially from those indicated in the forward-looking statements. Any forward-looking statement speaks only as of today and we undertake no obligation to update any such statements to reflect events or circumstances after today.

Okay, thank you, Steve. We'll begin our call today with some brief remarks about overall performance in the third quarter, provide an update on some key initiatives, and then discuss some recent changes in our organization. Steve Jones will then conclude our formal remarks by reviewing our financial results in more detail.

Quarter-three was another great quarter for NeoGenomics, with many significant accomplishments. We acquired PathLogic on July 8 as the Company's first acquisition. We successfully raised $34.5 million in the largest equity financing in the Company's history. We recorded a record level of revenue.

We grew volume in the base business by 33%. We collected a significant amount of cash and dropped our DSOs sharply. We continued our fast pace of innovation with several new and novel test launches, and we invested in future growth and cost reduction initiatives. In fact, we can say without qualification, the Company is stronger than ever before.

I'll start by briefly reviewing the new consolidated Company, which includes PathLogic's financials from the date of acquisition. Then, in order to understand the business more fully, I'll separately discuss NeoGenomics' base business, excluding PathLogic, and standalone PathLogic in more detail.

For the new consolidated Company, we reported results that were at the top end of our previously issued guidance range for both revenue and earnings per share. Revenue was $23.2 million compared with guidance of $22 million to $23.5 million. And excluding one-time deal costs and costs related to the exiting of our bank credit facility, earnings per share was at the top end of the range at $0.01 per share. So, overall, the Company's results were on track with our expectations.

Now let's focus on the performance of NeoGenomics' base business, which excludes the impact of PathLogic. NeoGenomics' base business performed very well in the third quarter. We were pleased once again with the market share gains which drove the 33% test volume growth. The gains continued to be broad-based, with increases geographically coming from each of our three main regions of the country. Each region grew volume by at least 25% compared with last year, and our sales team continues to do a great job.

The market share gains resulted in the third quarter revenue growth of 23% compared with last year. On a year-to-date basis, nearly half of the revenue growth compared with last year resulted from customers that are brand-new in 2014. Revenue growth was especially strong, recognizing that there was a $1.2 million reduction in revenue caused by the still unresolved National Correct Coding Initiative, or NCCI, FISH edit matter, which affected FISH billings to Medicare.

CMS has still not provided any guidance to the lab industry, despite past assurances that guidance would be provided. Had we accounted for the NCCI edits in a different and less conservative manner, NeoGenomics' base business revenue growth would've been 30%.

New products contributed greatly to our growth. As a measure of innovation effectiveness, new products that were introduced in the last three years accounted for 58% of the NeoGenomics' base business revenue growth during the third quarter. Molecular test volume continued to grow most dramatically, and molecular testing revenue increased by close to 90% as a result of strong volume growth and a change in mix to more higher-priced tests.

With respect to gross margin, our base business was impacted on a dollar per dollar basis by the $1.2 million reduction in FISH revenue from the NCCI matter, and obviously that lowered margin. We made several investments which added to cost and impacted gross margin in the quarter, but we are confident they will help us to grow and to realize increased productivity and improvements in cost per test in the future.

For example, we opened a small lab in Fresno, California and immediately staffed it with a set of genetic technologists team, anticipating future volume growth. We expanded our Irvine lab facility to add molecular testing capacity. We invested significantly in state-of-the-art automation. These reduced gross margin in the third quarter, but we expect the pace of productivity gains and cost reductions to accelerate in coming quarters.

Selling, general and administrative costs increased significantly, but approximately $1 million of the increase was due to one-time deal-related costs and increased non-cash stock-based compensation expenses that resulted from the 57% increase in our stock price during the quarter. The remaining and underlying increases in SG&A relate primarily to investments to grow our sales team, and our information technology capabilities. These investments will help us to grow and reduce costs going forward, and we believe the payback on these investments will be very strong.

Adjusted EBITDA for NeoGenomics' base business was a record $2.9 million, a 32% improvement compared with last year. Adjusted EBITDA would've been $4 million, an increase of 85%, were it not for the unresolved NCCI matter. We continue to hope for clarification one way or the other from CMS on this matter before the end of the year. Importantly, our cash collections were exceptionally strong, as they actually exceeded revenue by over $2 million in the quarter and drove DSOs down to 72.5 days.

I'd like to switch now to comment on PathLogic's performance during the quarter. We are delighted to report that there have been no surprises for us in our $6 million acquisition of PathLogic. During our due diligence and integration planning, we realized that a lot of changes needed to be made for the acquisition to achieve our profitability objectives, and we are making good progress.

We have already executed a number of changes to the cost structure and have reduced the monthly loss by about two-thirds from July to September. We are also beginning to implement a number of short and longer-term growth initiatives. As we've said before, we expect to achieve breakeven around year-end and profitability early next year.

For the quarter, PathLogic had revenue of $2.3 million and an operating loss of $367,000; but for perspective, PathLogic's operating loss as a standalone company in last year's third quarter was $993,000. All in all, combining NeoGenomics' base business with PathLogic, we reported $23.2 million of revenue, $2.6 million of adjusted EBITDA, and including all the one-time costs, a slight loss of $291,000.

In previous investor calls, we have described our key areas of focus, and so we will continue with that format here. Obviously, getting lean is a key objective. I mentioned some investments to increased capacity and improved productivity already, and I'd like to comment a bit more on them now.

First of all, I am pleased to report that, given our current pace of growth, we have already begun to absorb the additional capacity enabled by opening the Fresno, California lab and immediately staffing it with a team of highly skilled technologists at the beginning of the third quarter. In addition, we spent a lot of time and money engineering and validating some state-of-the-art lab equipment that will allow us to automate several lab processes. We are now beginning to process samples using it, and expect it to help us drive cost reductions when it's fully operational later this fourth quarter.

We also are now completing specific cost, capacity and automation initiatives in Irvine to improve costs for our solid tumor FISH and molecular testing processes. We remain committed to being the low-cost provider in each of our core testing modalities, and we believe these initiatives will re-accelerate our improvements in average cost of goods sold per test in coming quarters. While changes in cost per test are sometimes lumpy from quarter-to-quarter, we remain committed to improve average cost per test by 8% to 10% on an annual basis through 2015.

Growth is another key focus area for our Company. We are very pleased with the productivity of our high-performance sales team. We ended the quarter with 27 sales professionals and are proud of the quality, experience, professionalism and character of our representatives. Clearly, this is the best sales team we've ever had and they are winning market share.

New product have helped our sales team gain new accounts and more deeply penetrate existing accounts. They also help establish and enhance our reputation as a leader in cancer testing. Since the beginning of the year, we have added or revised approximately 40 new molecular and FISH-based tests, and converted another 23 to next-generation sequencing.

New products are a result of our continued focus on innovation and we continue to make great progress on the innovation front. Just within the last couple of weeks, we announced new molecular tests that enhance our reputation as a leading provider of oncology molecular testing in the United States. We launched our multimodality solid tumor discovery profile, which analyzes 315 genes for mutation using next-generation sequencing, and includes nine FISH tests to analyze translocations, amplifications and deletions that might be missed by next-generation sequencing.

This discovery profile is designed to meet the needs of investigators and clinicians who are interested in testing large numbers of genes and numerous translocations and gene amplifications. It also meets the needs of pharmaceutical companies engaged in clinical trials.

This multimodality testing is unique in the industry. It provides testing for mutations in the largest list of solid tumor-related genes in the industry, and provides the Gold Standard FISH testing for detecting therapy-related abnormalities, such as ALK translocations, and HER2 and met amplifications, each of which is required to be confirmed by FISH prior to initiating expensive therapy.

We also recently launched two first-in-kind tests. The first predicts acquired resistance and susceptibility to Bruton Tyrosine Kinase, or BTK inhibitors. The second is a lymphoma profiling test to predict susceptibility to BTK inhibitors for treatment of lymphoma and Chronic Lymphocytic Leukemia, or CLL. BTK inhibitors are a new non-cytotoxic targeted therapy, and a number of Phase III studies are ongoing. In fact, these tests are a good example of the compelling value proposition of the genetic testing.

New targeted therapies can be very effective and quite expensive. And these tests help physicians choose the right therapy for the right patients. They substantially improve cancer care and help avoid therapies that would not be effective.

Diversifying our business is also an important focus area, as we balance our risk profile and take advantage of new opportunities. We're diversifying our product mix, our client base, and even our payor mix. For example, Medicare revenue was only about 20% of total revenue in quarter-three this year compared with 43% just three years ago.

Our exclusive strategic alliance with Covance's central laboratory is an exciting diversification initiative. We're jointly bidding on a number of requests for proposal for clinical trials and are building our book of business. Although we didn't realize any significant volume from this alliance in the third quarter, we are now beginning to see some clinical trial specimens be tested in our labs, and expect that to ramp up over the coming quarters. We are on track to develop joint capabilities with Covance on a worldwide basis, as we helped install capabilities at the Covance location in Shanghai, China this past quarter.

In addition to our work with Covance, we are engaging directly with several pharmaceutical firms, particularly in the area of molecular testing based on our next-generation sequencing testing platform. And we believe we are making good progress here as well.

The PathLogic acquisition gives us diversification opportunities as well. I described our integration of PathLogic to our Board of Directors two weeks ago, and said, so far, so good. To the best of our knowledge, we have not lost one customer, and the Company's performance has improved in both the top and bottom line each month since we have owned it.

Along with cost-related synergies, we are now beginning to execute on cross-selling revenue opportunities to offer PathLogic's test to NeoGenomics' existing client base, and to offer NeoGenomics' world-class molecular and genetic services to PathLogic's existing client base. We are excited about the PathLogic acquisition and are confident that we can achieve our targets as originally planned.

I also want to mention several recent changes we've made to strengthen our team. We recently named Rob Shovlin to be our Chief Operating Officer. Rob has a great deal of leadership experience in our industry, and is initially focused on commercial operations and strategies, including development of our prostate cancer test. We have never had a Chief Operating Officer position before, and we are looking forward to Rob's contributions to our commercial and operating teams.

Rob Horel has led our sales and marketing organization for three years now, during which time we've strengthened our team and grown our business dramatically. Rob Horel is now going to lead the PathLogic business as the Vice President and General Manager, and will integrate that Company into NeoGenomics.

In addition, we just named Bruce Crowther to serve as an independent member of our Board of Directors. Bruce served as Chief Executive Officer for Northwestern Community Hospital for over 20 years and will be a valuable resource to our Company.

In summary, we are pleased with the Company's performance in quarter-three and we have never been so excited about the opportunities that lie ahead for NeoGenomics. We are growing and gaining market share, and we are getting leaner through good process management and control. We are also developing new products and businesses for the future. Indeed, our Company is stronger than it's ever been.

This is an exciting time for precision medicine in general, and the benefits for cancer patients and for our healthcare system continue to multiply. We are at Ground Zero of this revolution that is taking place in our industry, and we are excited to be able to continue to carve out a reputation as a leader in our field.

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

Thanks, Doug. I'll start by reviewing some of our financial and operating metrics for the third quarter, and then we want to open it up for questions. Since Doug has already reviewed a lot of the financial information in detail, I want to just fill in a few blanks here.

Our average revenue per test for base NEO was approximately $463, a 7.5% reduction from Q3 2013, but a 1.9% increase from the $455 we reported for Q2. However, investors should be aware that our cash collections were so strong in the quarter that our prior period revenue adjustments were much higher than normal. Prior period revenue adjustments arise when we collect more cash than we originally booked for a test.

In quarter-three, we had $1.2 million of prior period revenue adjustments, which is an all-time record for us. This amount was about $620,000 higher than the levels reported in the second quarter, and resulted in approximately $14 more in average revenue per test in the quarter than in quarter-two, as a more accurate representation of our average revenue per test for base NEO would be closer to $450. In order to be conservative, analysts should model base NEO average revenue per test no higher than this $450 per test level, which is the same guidance we gave in Q2.

We believe the NCCI FISH matter cost us approximately 580 basis points on our base NeoGenomics gross margin. We were pleased that our 3.9% year-over-year improvement in average cost of goods sold per test was able to make up for a good deal of this impact. While we are disappointed to only report a 46.4% gross margin for the base NEO in the quarter, we can report that we began to see a nice rebound in base NEO gross margins, as some of the productivity measures Doug discussed began to take hold later in the quarter. Indeed, we expect our base business gross margin to improve in the fourth quarter.

As we have discussed previously, productivity improvements tend to be lumpy, as you have to make investments before you can realize the benefits. Please also keep in mind that on a year-to-date basis, our average cost per test has improved by 7.5%, and we remain committed to our goal of an 8% to 10% reduction on an annual basis.

PathLogic gross margin was at a 26.5% for the quarter but we also saw nice increases in PathLogic gross margin as the quarter progressed. For the fourth quarter, we believe that base NEO gross margins will be in the 47% to 49% area, and PathLogic gross margins will be in the 28% to 32% area. This would suggest combined margins in the 45% to 47% range are possible.

We finished the third quarter with 372 full-time equivalent employees and contract doctors for base NEO, an increase of 10 employees from June 30. The PathLogic acquisition added an additional 65 employees in early July; thus we now have approximately 437 full-time equivalent employees in the consolidated Company.

Our consolidated accounts receivable balance, net of the allowance for doubtful accounts, was $18.3 million at September 30, which is $500,000 less than where it was as of June 30, even after adding in the AR balance of PathLogic to our consolidated results. If you're scratching your head right now, that's because this is definitely unusual given our growth.

We completed an acquisition and grew consolidated revenue by $2.5 million or 12% sequentially from Q2, and still managed to collect more than we booked in revenue. And this is the second quarter in a row that our billing team has accomplished this. This is truly an awesome accomplishment by our billing team, and we are deeply thankful for having such an extraordinary team of dedicated professionals.

As a result, our consolidated accounts receivable balance expressed in terms of days sales outstanding was 73 days as of September 30, down from 83 days at June 30 and 95 days at March 31. You certainly don't see that every day.

The superior level of collections allowed us to generate $3.2 million of consolidated cash flow from operations in the third quarter, which is on top of the $4.3 million we generated in Q2. On a year-to-date basis, we have now generated $8.5 million total cash flow from operations, which has been enough to cover the entire purchase price of PathLogic, all of the one-time transaction fees and credit facility extinguish fees, and all the capital expenditures paid in cash.

If you remove the $5.8 million portion of the PathLogic purchase price that we paid in cash, and included the $4.7 million of CapEx that we lease-financed instead, we effectively have had a positive free cash flow of approximately $1 million on a year-to-date basis. This is the first time in our corporate history that we have been able to achieve positive free cash flow on a sustained basis.

We purchased $2.2 million of property plant and equipment in the quarter. However, we were able to lease-finance approximately $1.5 million or 66% of this amount; thus the net use from the purchase of capital expenditures was only $755,000. As Doug mentioned in his remarks, we did an equity transaction during quarter-three. We sold 8.05 million shares of stock at a price of $4.60 per share. After deducting the fees and expenses for the offering, we netted approximately $34.5 million.

We haven't really used any of the proceeds of this offering as of yet, as we had $34.4 million of cash on-hand as of September 30, even after paying off the bank line. Since we had cash on our books, we didn't think it made much sense to continue paying the interest on the debt; thus we terminated the bank facility in August. We expect that we may replace it with another credit facility when we get a little more clarity around our next acquisition.

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

(Operator Instructions). Amanda Murphy, William Blair & Company.

Just a question on the cash collection. So obviously, quite interesting, just given I think some other labs who talk about having challenges there. So, could you just -- I mean, maybe give a little more color on what exactly allows you to -- or what was the driver there? Is it a specific test or --? Obviously, your billing team is working quite hard, but just trying to get a sense of how much more of a tailwind that could be for you going forward?

Well, our billing team did a lot of hard work. I mean, we've had a lot of focus meetings; we've had a kaizen event. They have redesigned a lot of their processes. We actually even had outside consultants come in. But the entire billing team just deserves credit for what really has been an amazing accomplishment by the group.

So, your -- at 72.5 days, in terms of how much lower can we take it, their goal is to make that first number a 6. And I wouldn't put it past them right now, given how well they're doing. But obviously, there's limits to how good they can get. So -- but really, just a lot of hard work, a lot of focus by everybody here, and really a terrific accomplishment for the team, so.

Yes, we also implemented a new billing system at the end of last year, and we've transitioned most of our customers to that. And we expect to get, I think, even some more benefits as a result of operating that.

Got it, okay. And then on the next-gen side, so obviously, that's I guess new paths to next-gen specifically are becoming more important for you. So, in the context of the billing discussion, what are your thoughts on some of the new next-gen codes that are coming next year from CMS? Is that potentially a risk, just given that -- at least of the new passcodes that were introduced a couple of years ago, people have had some issues getting paid for those. So do those codes -- are those codes potentially at risk? And then also maybe talk about those new products in context of the new FDA regulations as well -- or draft, I should say.

(multiple speakers) So why don't I take the first one of those. Doug, you can take the second. You know, Amanda, as we've talked before, every time the government does anything there is risk. Until we see what the actual levels of reimbursement are on the new next-generation sequencing codes, we really just can't comment with any amount of certainty.

So I think we should put it into the category of we are cautiously optimistic that CMS is going to realize the full value of this very powerful technology. And we believe that the private payors will not be far behind on this, but we've got to see what the reimbursement levels are before we can really form a full opinion.

Got it, okay. And then just last one, I guess keeping on the reimbursement theme for a minute. Obviously, FISH -- we talked about that a lot in terms of the NCCI edits. But what are you guys thinking for the final FISH rates here? Is there any noise around whether you think you'll keep the increase that CMS has proposed for 2015?

Again, I would put that in the category we are expecting to get a lot more clarity around the reimbursement levels for 2015 when the CMS posts the draft physician fee schedule. They normally do it in November; they did it in late November last year, but there was a government shutdown that delayed them by about 16 or 17 days. Could be as early as this coming week but we just don't know.

I think we are very cautiously optimistic. The AMA has reported some new multiplex FISH codes that realize the value of this very powerful technology that would be an improvement over the NCCI FISH edits that were put in place last year. And as we discussed on the last call, the relative value units were increased by about 30% on the CPT codes 88367 and 88368, which are going to be the first probe staining procedure under the new AMA's guidelines.

And so we think that we're going to have some relief on the first probe staining procedure, and we think that we will probably get an increase for the multiplex stains as well. But until we see the reimbursement levels that come out, it's just hard to comment specifically.

Okay. Got it. Thanks very much.

Thanks, Amanda.

Debjit Chattopadhyay, ROTH Capital Partners.

Thank you for taking the questions. Could you guys, for our own edification, could you comment on the trends from the biopharma business segment? I mean what kind of tests do they order, I mean, pricing and impact to the bottom line, say, versus your core business?

Yes. I can take a crack at that, and then maybe Doug or Albitar has some comments as well. So, as you know, Debjit, as we mentioned, we are just getting started in the clinical trials business here, relative to building our business, both with Covance and through our own direct efforts.

Generally, what we see is that the pricing is higher than in our regular clinical business. And there are a number of special things that we need to do, obviously, for pharmaceutical companies. I mean, we've had to build our infrastructure in IT; we've had to build a variety of other infrastructure for reporting and so forth. So our costs can be a little bit higher as well, but we think the margins overall will be better in that business than in our clinical business.

We've gotten a lot of interest in the next-generation sequencing platforms and tests that Dr. Albitar has launched. We continue to have a lot of interest in that as well as in FISH-based testing. And as I said, we're starting to get some traction in building the book of business, but it's pretty early.

And specifically on the Covance alliance, the facility expansion of Fort Myers and you mentioned Shanghai. What kind of volume growth was baked into those facility expansions?

Well they're a little different. So the facility expansion here in our -- are you talking about the lab-within-a-lab in Fort Myers, Debjit? Or the facility expansion in Irvine?

The lab-within-a-lab in Fort Myers, which I guess was more specific to Covance.

Yes. So we built a little lab-within-a-lab for Covance here; it's about 700 or 800 square feet. They can do some basic histology and a little immunohistochemistry testing. It has a fair amount of capacity -- in conjunction with our lab. So the idea is that samples would be accessioned in Covance's lab-within-a-lab here. There would be some basic work done. And then the FISH cytogenetic flow and other testing would be moved out into the NeoGenomics lab. So we have a lot of capacity. As you know, we've just revised and renovated our whole Fort Myers facility.

Great. (multiple speakers) Sorry --?

And in Shanghai, we have created some capability for Shanghai to do similar kinds of testing that we have done, understanding that the pathology reads and interpretation for any work done in China, and even some of the technologists' work, can be done in the US, because you can't take samples out of China. So we've got to do some of the basic wet lab work and other work with the samples there, and then the other work will be done through our facilities as we move the images around.

And one last question. On next-gen sequencing, so how does your panel currently compare with the foundation? One. And in terms of reception of the previously released hotspot mutation testing or advanced mutation testing, how does that uptick from biopharma clients and clinicians thus far? And thank you so much for the questions.

Okay. Dr. Albitar, would you like to answer that?

Yes. Our next-generation sequencing, the most recent panel, which we just released, test for mutation in Exxon in 315 genes, which are exactly the same panel as foundation legacy. However, we believe our panel is better because for translocation, large deletion, large amplifications, we are using, instead of using the next-gen sequencing, which is not the standard today for confirming these abnormalities, we are using the FISH.

So for point of mutation or indirect small deletions, small insertions, next-gen sequencing is becoming the standard and we feel very comfortable with that. But for the HER2, for example, or the ALK, for all practical purpose, FISH is the standard. But more importantly, all the clinical trials that use for validating therapy for these abnormalities are based on FISH testing. There is no evidence as of today that if you were to take these abnormalities by next-gen, they're going to respond the same way as if they are detected by FISH.

So that's the answer to your first question. The second question in term of our model disease and specific balance. We are getting a lot of really interesting test at all levels from physicians, practicing physicians, as well as from insurance companies as well, or health organizations.

We still continue to recommend disease-specific panels that as you see in times, I think for there are a lot of academic centers as well as some practicing physician interested in larger panels. So that option is available for them, if they want that.

Thank you so much.

Thank you, Debjit.

Bill Bonello, Craig-Hallum.

Thanks for taking my call. Two questions. First, what have you seen in terms of early response to your digital pathology product?

We've been working on the digital pathology product for a long time, frankly. And it was difficult for us to really engineer the thing, because what we are doing is a little different than what a lot of other companies are doing, because we are allowing physicians working remotely to sign out these images and this work. And so we've got to go through and make sure that the speed of the image changes and so forth are appropriate.

We have successfully overcome the challenges there, and we think we've got a very, very competitive product right now. We've been out there in the last couple of months talking with prospective clients as well as existing clients that didn't send us the digital pathology work. And the feedback is very good.

We are continuing to work on this to make sure that we have the best product in the market. We have a little bit more work to do, but right now the product is very competitive and we are starting to get some traction there. But the biggest benefit for us, Bill, is not only in getting the digital image analysis work, but also in getting all of the other work as we try to be a one-stop shop for our clients.

Great. And then just maybe a little bit more color or sense of what you're seeing or thinking in terms of additional acquisition opportunities. And in particular, I would be kind of curious what you've learned thus far from the PathLogic acquisition? And if that makes you think differently at all about what you are or are not interested in acquiring?

Yes. Good question, Bill. Thanks for that. We did learn a lot from the PathLogic acquisition. And we have learned a lot from some due diligence activities. I think that we are in a pretty good position as a company to be able to review, analyze and execute transactions at this point. So that was a good exercise for us.

We have been actively engaged in talking with people in the industry, and we continue to do that. What we have learned is that we are going to be very selective in two areas. One is, strategically, the acquisition has got to make sense for us. We are more interested in sort of high-growth and high-technology sorts of companies, very much like we are.

And the second thing we have learned is that the economics have got to work. And I think we promised investors, when we raised money in this recent financing, that we would both be deliberate, but we would move quickly for the right opportunity. And so we are sort of in that process. Right now we are talking with people, but you can count on us to make sure that the strategy and the economics make sense.

Okay. That is very helpful. That was all I had this morning, thanks.

Good, Bill. Thank you.

Drew Jones, Stephens.

Can we just get an update on SES FISH volumes, kind of where we stand there?

Yes, so, sure, Drew. So a Florida cancer specialist has been performing and beginning to perform their own FISH testing in their own laboratories. And they have been taking their FISH testing, increasing that volume for the last five months -- four months or so. And so our volume was affected in quarter-three by some reduction in FISH testing, because FCS is in-sourced, and they are continuing to do that. So we know that; we are forecasting that. And we are growing our business through it.

And then I guess just taking all things into account, given the strength in molecular, are you guys still comfortable with the 20% volume growth you've talked about for 2015?

Yes, Drew, I don't think -- I'm going to answer that and maybe Steve can answer it too. But we have not given any guidance yet for 2015 generally. And -- but I would say we are comfortable with whatever we said before. I think we said 20%; I think we said we would try to reduce our cost with the goal of 8% to 10% cost per test, I think those things are still very much in the picture. Steve (multiple speakers) --?

That's exactly right. We are maintaining the 20% volume growth that we first put out there in the February call. Certainly we will exceed that this year, and we see no reason why we wouldn't meet or exceed that next year as well. And we are also committed to being a low-cost provider, and we think that's a really important part of any lab strategy in this sort of changing landscape.

With respect to financial guidance for 2015, we will come out, like we've done in previous years, in the February call with a full set of expectations around what we think -- we just have to digest with the reimbursement level is going to be before we can do that.

Thanks, guys.

Thank you.

Amanda Murphy, William Blair & Company.

So I just had a couple quick follow-ups. On the margin side, I guess two there. You talked about PathLogic, obviously, the opportunity to expand margins there. Can you give us a perspective on where, ultimately, you think those margins can go? Is that -- do you think it could go up to your level? Or just kind of given the more solid tumor nature of the business, is it going to be ultimately lower?

So we think that the base PathLogic business, before you add in all of the NeoGenomics molecular and other kinds of testing, is very much capable of getting into the mid -- the low to mid-30s gross margin. When you start adding in revenue synergies by selling our FISH tests and Cytogenetics and other things like that into their business, the egg starts to get scrambled. But the core anatomic pathology business that we purchase from them is certainly very much low to mid-30s business. And we hope even higher.

I wouldn't model more than that for now until we get a little bit more experience with it. However, we think a lot of the revenue synergies are indeed going to come from higher margin FISH tests and other tests like that. And so it will be less and less of a drag on the overall corporate gross margin or consolidated gross margin as time progresses.

And then just another quick one on the margins. So, the prior period adjustments, is the right way to think about that then to back that out of the margins, so you kind of get -- because that goes straight to profit, right? So you can get some more of an underlying growth margin?

Yes, you know, there's always a range of prior period adjustments that we have in any given quarter. This was a particularly strong quarter, which is why we mentioned it. As George mentioned, there's still room to do good things in our Accounts Receivable base. We don't want people trying to model prior period adjustments in future periods.

And so I would tell you that there's always -- there's all but two quarter since inception there's been a positive impact on prior quarter -- prior period revenue. And so we have always had this in our gross margin.

To answer your question specifically, yes, it is incremental gross margin when we have exceptionally strong periods. But we don't really believe -- we are not going to continue to have exceptionally strong periods, so it's hard to make those adjustments and have something be apples-to-apples on a moving-forward basis.

Got it. And just last one, and I'll let you guys go. But earlier, I asked about the FDA regulation, I don't know if you got to that. Just curious on your perspective there. And obviously, the industry is taking a pretty strong stance. So curious what your thoughts are, especially given some of the newer tests you're moving to launch.

Yes. This is a difficult one. I don't know if everyone is up to speed, but the FDA has proposed some guidance to establish a whole regulatory framework around laboratory-developed tests. And the bulk of our tests are laboratory-developed tests.

This is a proposal. The draft is subject to comment. I think the comment period ends in either end of January or beginning of February. The guidance is expected sometime probably in the summer of next year, but I would say that this draft guidance took four years to deliver. So we are not really sure when the final rule will be promulgated.

We are strongly opposed to this. Under this framework, the FDA is proposing that laboratory tests are devices as opposed to procedures. And we are already regulated by -- under CLIA and by all kinds of -- all the states and so forth, so it's another regulatory framework for us.

The problem is here that the -- you know, there are about -- we have heard as many as 100,000 laboratory-developed tests in this country. And it would be very difficult for the lab industry -- and it would be also be very difficult for the agency to handle the sheer magnitude of the reporting that would potentially be required by this new regulation. Because the FDA would require that all of these laboratory-developed tests be somehow reported to the Agency.

There are a lot of questions about this. There's not a lot of clarity. Right now questions like what counts as a laboratory-developed test? What of those tests would require pre-market review? What test might be grandfathered? All of that sort of stuff.

We'd also say that right now, there's a lot of controversy. There's controversy both from a policy perspective and a legal perspective, in terms of whether FDA has the authority to regulate laboratory-developed tests. The American Clinical Laboratory Association, which we are a member; the American Medical Association, the American Hospital Association, and a host of other organizations are all opposed to this.

Obviously, we are playing a role in our industry's response, keeping a close watch on this. And the only other thing we could say is that we'll keep you posted on the status of the guidance as we learn more. Scientifically and medically, it's very harmful.

And Dr. Albitar, you may have a point here on this from a scientific or medical perspective.

Yes. From a medical perspective, we in the lab, we practice medicine. We do not manufacture devices. It is all -- it is constantly improving, constantly changing. And it is no different than physicians when the physician comes and treats with physicians. To me when the FDA comes and says you have to follow these -- you have to freeze what you're doing in the lab, certain things according to what you submitted to us, it is really freezing medicine, it is freezing advances.

And our experience with IVD kind of products for testing really speak volumes about how efficient that approach is. No question in my mind, I think there are some who are abusing the LDT, but it is the same thing. There are some abusing, there's no guarantee that with FDA regulation that abuse will not really have -- would be there or would not have a different color.

It does make sense that the industry would regulate outcome, which meaning of the value of the test is not how you do the test. The same way it is when looking at regulating the outcome of patient care. So there are a lot of details we don't know, and it depends on how the FDA go with this, will make -- we'll see how this evolves.

But if -- my opinion if any lab is prepared for this, it would be us, because we do very rigorous validation and very rigorous investigations and research into everything we develop and profile. So the devil is in the detail, but we are prepared.

Got it. Thanks very much.

Thank you. We have time for one last question. Our last question comes from Jack Wallace from Sidoti & Company.

Thanks, guys. Quickly here, do we expect there to be any acquisitions by year-end? And are you looking at a pipeline of targets, or maybe one or two larger ones?

Yes, Jack. So I can say that we are talking with a number of different players. I would say that there is nothing in the pipeline that is sufficiently far in the pipeline that we would expect to close something in the next couple of months. So we are working on it. These things, as you well know, have their own sort of course. And you can count on us to be working on it, but we can't forecast when or if these things will close.

Okay, thanks. And then sorry if I missed it from earlier, is there any update on the NEO score -- or the formerly NEO score test, the prostate test that's in development?

Yes. We are continuing to make a lot of progress on our additional validation of this test. At this point, we've signed up a number of urology groups. We are in dialogue with a number of others. As you know, we continue to target about 800 to 1000 patients to put through this additional validation.

We, I think, probably have 90 or so samples already completed. And we are working very hard on it. And I would add also that in addition to Dr. Albitar's fabulous work on this, we now have Rob Shovlin on our team. And Rob has extensive experience in this whole area, from a variety of companies in which he has led or worked with. And so he and Dr. Albitar are teaming together, and we will, I think, move smartly on this going forward.

Okay, great. Thanks. That will be all for me.

Okay.

Thank you. I will now turn the call back over to Doug VanOort for closing comments.

Hey, Doug, before we close up here, I do have one question that's come in via email that hasn't been covered before. Can you give us a rough breakdown of the rest of the payor mix? And if you're seeing anything encouraging/concerning from payors, aside from the lack of clarity from CMS on NCCI?

Our payor mix is running about 48% client bill right now, about 30% private payor, and about 20% Medicare. The remaining 2% is accrued revenue for the most part. There is a very, very small percentage of what we would call patient pay, but that typically runs like less than half of 1%.

In terms of what we are seeing, we are encouraged that the private payors have started to formally recognize the new moldy Xcodes; that created a little bit of consternation late last year and earlier this year. That continues to work itself out. And we continue to get more and more regional contracts that put us on contract with an even greater proportion of our private payor claims.

That's the last of the email questions that's come in. Doug, can you wrap us up?

Okay, Steve, thank you. So as we end the call, I do want to recognize all 437 NeoGenomics team members around the country for their dedication and commitment to building a world-class cancer genetics testing program. And on behalf of our whole NeoGenomics team, I want to thank each and every one of you who have joined our time here together for our quarter-three 2014 earnings call, and let you know that our fourth-quarter 2014 earnings call will be on or around February 12th of 2015.

For those of you listening that are investors or are considering an investment in NeoGenomics, we thank you for your interest in our Company. Good bye.