Neogenomics Inc (NEO) 2015 Q1 法說會逐字稿

Greetings, and welcome to the NeoGenomics first-quarter 2015 financial results call. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host today, Mr. Doug VanOort, Chairman and CEO for NeoGenomics. Thank you, sir. You may begin.

Thank you, LaTonya. Good morning. I'd like to welcome everyone to NeoGenomics' first-quarter 2015 conference call and introduce you to the NeoGenomics team that's here with us today. Joining me in our Fort Myers headquarters, we have Steve Jones, our Executive Vice President for Finance; Steve Ross, our Chief Information Officer; Fred Weidig, our Controller and Principal Accounting Officer; and Jerry Dvonch, our Director of External Reporting. Dr. Maher Albitar, our Chief Medical Officer and Director of R&D, is joining us from our Irvine, California lab. George Cardoza, our Chief Financial Officer; and Rob Shovlin, our Chief Operating Officer, are off-site with our sales team today and unable to join us.

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 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.

Okay. Thanks, Steve. I'd like to begin our investor call this morning by focusing on the exciting growth opportunities available for NeoGenomics, describe some key dynamics for 2015, and then comment briefly on quarter-one results. We've asked Dr. Albitar then to provide a brief summary of several key initiatives in innovation. And then Steve will review our quarter-one financial results in more detail, and lead us through a question-and-answer period.

Many investors are keenly aware, from personal experience or because of their interest level about the many medical and scientific advances in cancer care, and ask us about the opportunities those advances present for NeoGenomics. As we all know, precision medicine -- driven by scientific breakthroughs in genetic and molecular technology -- is transforming cancer care, and will continue to do so for many years to come. NeoGenomics is clearly operating at the forefront of that transformation, and the market opportunities for us are very large.

Those opportunities are being created because of innovation enabled by rapid changes in technology, the world's rapidly improving understanding of the genetic and molecular characterization of cancer, more precise testing, new tailored therapies, and better information and analytical methods. NeoGenomics is pursuing those opportunities in a unique way. We have built an infrastructure to operate profitably with a strong and sustainable existing business, and we are simultaneously pursuing huge growth markets.

We believe this confuses some investors. Should NeoGenomics be thought of as an emerging company pursuing a large market opportunity, or as an established company dealing with Medicare reimbursement headwinds? We thought it would be helpful to explain more about our growth opportunities and give you our perspective so that you can better understand the large markets we're pursuing. Because the key growth markets are enabled by new technology, we have been investing steadily and thoughtfully. We are attempting to balance longer-term growth opportunities while demonstrating some level of nearer-term profitability.

Here are some examples of the nature of our growth investments. We are investing in developing and maintaining the most comprehensive oncology-focused test menu perhaps in the world. This has enabled us to become a one-stop shop for our pathologist, oncologist, and hospital clients, and is helping us increase our market share. We continue to invest in the most advanced instrumentation available for our molecular lab, our digital imaging instrumentation, our FISH and flow cytometry labs, and in information technology. This gives us the flexibility to serve leading academic centers as well as community-based hospitals.

We invest in the development and commercialization of new cutting-edge molecular and genetic tests, such as our recent introduction of PD-1 and PD-L1 tests for immunotherapeutics. This allows us to serve pharmaceutical companies and oncologists working on clinical trials of new drugs. And we have and continue to invest in liquid biopsy testing, also referred to as cell-free DNA testing and also as plasma-based testing, including our prostate cancer test. These tests have exciting benefits for patients, treating physicians, and for healthcare costs.

We have been investing in machine learning algorithms to enable smarter, more efficient medicine in areas such as flow cytometry and new techniques to improve the sensitivity of next-generation sequencing, for which we've just filed a provisional patent. These are new growth areas where we can carve out a proprietary position for ourselves. And we are investing in an expansion of our test offering now into inherited cancers, and cancer susceptibility testing, using next-generation sequencing. This opens up a new market and new opportunities. Dr. Albitar will briefly describe a few of these initiatives in a few moments.

From an investor perspective, some of the newer technologies would likely each be valued at more than the current market value of our entire Company if they were housed individually in separate companies. We recently read about a new company with less than 5% of NeoGenomics' revenue and a much smaller molecular testing menu with a market capitalization higher than NeoGenomics. Clearly there is confusion about our potential.

In addition to our investments in cutting-edge technologies, we already had a solid, existing infrastructure, competitive advantages, and a proven model and delivery system which are allowing us to win market share today, and we believe will allow us to make strong market share gains in the future.

For example, our year-over-year volume growth rates over the last 16 quarters have ranged from a high of 75% to a low of 13%, for an average of 35% volume growth. Over the last four quarters, our volume has grown 31% on average, despite the insourcing of testing by our largest customer.

We are winning market share because of the breadth and depth of our product offering, and also because of the quality of our services, which is strong and getting stronger.

For example, we currently are under contract with over 100 managed care plans and just signed a new, five-year contract with the National Blue Cross/Blue Shield Association in the first quarter, which we hope will open up new, large territories of business for us. We have spent years developing our payer network. It's an important asset for us, and we believe it sets us apart from our competitors.

We still maintain the most robust pathologist partnering programs in the industry, which allows pathologist clients to perform professional component services as we perform the technical work in our labs. And we are one of the only companies to offer comprehensive training for our clients, including webinars and on-demand Web training covering a wide range of relevant topics, self-assessments, and certification programs.

Another growth opportunity we continue to be excited about is in clinical trials and biopharmaceutical testing. Although still a minor part of our business, we have been awarded more business in the first three months of this year than in all of 2014 combined. We're hiring business development people and enhancing our capabilities in this area, and we have expectations for strong growth here for many years to come.

We believe that to be a sustainable, high-quality company which is built to last, we need also to be a low-cost provider. So far, our increasing scale and focus on quality and process management has resulted in a 60% improvement in lab productivity over the past five years, and helped to drive our average cost of goods sold down by 27% over the same five-year period. This is important. We continue to invest in automation and process improvements to drive our costs even lower, and we expect this trend to continue.

Low cost is important because Medicare's relentless reimbursement reductions are having an impact on our entire industry. Some of our competitors are selling their businesses, eliminating capacity, and scaling back. In this environment, only the strongest, lowest-cost providers will be successful, and we intend to be one of those. We told you that we intend to be an industry consolidator, but we haven't made any acquisitions since raising $34 million in August of last year. That is not for lack of trying.

We have submitted formal offers for three companies in the last nine months, and either walked away in due diligence or walked away because we did not feel like we could responsibly meet the seller's price expectations. Given the reimbursement pressure, we expect more M&A opportunities to become available. We intend to maintain a disciplined approach to evaluate and execute transactions, giving us the best opportunities for long-term success. And we reiterate our belief that scale is important in our industry, and our intention to make smart acquisitions to maintain a low-cost capability and otherwise advance our strategies.

We have one other perspective about the reimbursement reductions. CMS has now either directly cut reimbursement for existing tests or assigned lower reimbursement rates to new CPT codes for the vast majority of the tests we offer. As a result of these dynamics, Medicare represented only about 18% of our payer mix in quarter one compared with over 43% just four years ago. Moving forward, we expect Medicare reimbursement policies to have a smaller impact on our business than they have in recent years.

We've managed to grow quickly, even though our average reimbursement has fallen by 30% over the past five years. At some point, many of us expect that overwhelmingly aggressive reimbursement pressure to abate somewhat. In a more stable reimbursement environment, we believe that our market capabilities combined with increased scale, new automation, and process improvements, will yield an even stronger growth in revenue and good incremental profit for our Company.

Let's move the commentary now to focus on the nearer-term horizon in 2015. In our last call, I shared with you our desire to set ourselves apart this year. We are aggressively building our teams by attracting talented people, making significant organizational changes to create an even more performance-driven culture, driving down further the cost of testing, and investing in the areas of biggest growth opportunity. And we're making progress in each of these areas. We expect that our investments in growth will fuel healthy volume growth rates for the rest of the year.

We set volume records in the first quarter despite bad weather in the northern US and insourcing by our largest customer. Even in the last three weeks, we have had three new, successive, all-time high daily volume records, and we're starting the second quarter well. And our pipeline of prospective new accounts is as healthy or healthier than ever before, with over a dozen very large account opportunities within our site.

We expect reimbursement rates to remain the low this year. We believe the rates we experienced in the first quarter will continue for the most part, but we have been successful recently in negotiating higher reimbursement rates with a couple of our largest contracted commercial insurers, and we hope those efforts will have some effect as the year progresses.

We also continue to provide information to Medicare to support more reasonable and appropriate reimbursement levels, particularly for FISH and for next-generation sequencing. We have been providing complex and highly valuable genetic and molecular test results, even though we often are not getting paid appropriately, and sometimes we are not getting paid at all. This is not right, and must be corrected in the future.

Central to our argument is that our services often will cost less than 3% of the cost of cancer therapy, and will determine whether a particular therapeutic will be affected. In many cases, tests that cost a few hundred dollars can determine the effectiveness of $100,000 drug treatments.

There is no economic justification for payers not to reimburse these tests at reasonable levels. Logically, there ought to be more personalized medicine testing, not less. Specifically, we are hopeful that the errors which led to the FISH reimbursement declines in 2015 are corrected for 2016. We're also hopeful that next-generation sequencing tests will gain reimbursement status, and that will help drive revenue growth in that area.

Finally, I'd like to share some thoughts about quarter one. Clearly we faced some strong headwinds in the first quarter. Medicare's reduction in FISH reimbursement and the collateral confusion and reductions by commercial insurance carriers impacted the financial performance. Medicare reduced FISH reimbursement rates by about 45% in 2014, and another 20% in 2015, and many commercial insurance carriers benchmarked those rates and effectively reduced prices for FISH by 60% in the past quarter.

We know that errors were made in Medicare's calculations for reimbursement rates, and we're hoping that corrections will be made in 2016. However, for the first quarter, these FISH cuts reduced our revenue by $2.1 million and reduced our adjusted EBITDA by nearly that same amount. Despite those cuts, we reported revenue 27% higher than last year, and adjusted EBITDA only $165,000 lower than quarter-one last year on a consolidated basis.

Clearly, our underlying business is very strong. Volume growth in the base Neo business grew by 27% from last year, even as our largest client insourced all of the FISH testing which we previously performed for them. Without the effect of that insourcing, volume would have been up 36%.

Driven by volume gains and slightly lower cost per test, adjusted EBITDA in the base Neo business of $1.8 million was slightly higher than last year despite the price declines. We reduced our cost per test about 4% in the quarter. Our target reduction by year-end is closer to about double that level. We're working hard on our cost structure, and we have a sizable pipeline of cost reduction opportunities, which we expect to realize over the coming quarters.

Volume growth helps reduce costs for testing because of the benefits of scale. It's noteworthy, for example, that we've added only 7% more people in our base business in the past year, even as our volume has increased by 27%. Our goal is to maintain the current momentum in growth and productivity in such a way as to move us back into profitability by the third quarter of this year.

I would now like to introduce Dr. Albitar. As you know, Dr. Albitar is our Chief Medical Officer and Director of R&D. He has been a leader in our Company for three years and has made an enormous impact, but I think the best of Dr. Albitar is yet to come. He would like to share some brief thoughts with you about some areas that he and his teams are currently focused on.

Dr. Albitar?

Thank you, Doug. Advances in clinical and basic research are leading to major achievements in management, treatment, and outcome of cancer. Precision medicine is no longer a distant goal; it is being practiced by many oncologists. Precision medicine is defined as a process of managing treatment and management of the disease with the genetic makeup of cancer, as well as the host. High throughput technology is making it possible to provide extensive molecular information on the tumors and the host to design targeted therapy.

The pace of advances is practically too fast for CMS and some insurance companies. This is creating a reimbursement challenge for advanced companies such as NeoGenomics that are leading in precision medicine. Despite this challenge, NeoGenomics continues to develop and offer state-of-the-art testing to guide day-to-day treatment decisions for individualizations, as well as helping new drug development. We believe that taking advantage of some new advances in genomics and developing and offering new precision testing will not only improve patient care, but will also reduce the cost of healthcare and reduce suffering, and spare patients the problems with going through unnecessary procedures or undergoing therapies that will not work.

So as this goes, our current innovation initiatives are geared towards the following. First, hematologic cancers. Most of the hematologic cancers are diagnosed in [moratory pipe] or marrow aspiration biopsy. A bone marrow biopsy is painful and very uncomfortable procedure. Furthermore, bleeding and infection can be a serious complication of this procedure. NeoGenomics is offering NGS-based liquid biopsy of plasma-based testing to reduce the need for formal biopsies. NeoGenomics offer a full menu of hematologic testing using, therefore, blood plasma or liquid biopsy to reduce the need for formal biopsy and to monitor hematologic diseases in bone marrow and lymphatic system.

Our liquid biopsy testing in hematologic is fully validated, and we have shown in numerous applications that it is as reliable as bone marrow biopsy. For example, we reported at the last ASH meeting that our NGS testing using peripheral blood plasma or liquid biopsy is reliable for confirming or ruling out myelodysplastic syndrome.

A majority of bone marrow biopsies are performed to rule out myelodysplastic syndrome. It is estimated that 600,000 bone marrow biopsies are performed in the US annually. We believe that our current offering could reduce the number of bone marrow biopsies by more than half when fully adapted. As in most new technologies in related to medicine, it takes time for adaptations with dissemination of information. NeoGenomics is focused on marketing and educating the medical community about our offering of liquid biopsies as an alternative to bone marrow biopsy.

Our second initiative is in the field of solid tumors. And like the hematologic diseases, the utilization of liquid biopsies in solid tumors depends on the stage of the disease and should be used carefully, as we are doing with our prostate cancer testing. Our NeoLAB prostate test uses plasma and urine instead of prostate tissue biopsy. We currently are offering this prostate cancer test in addition to [adjust the format] in order to gather further information in advance of a commercial launch.

In addition to our NeoLAB prostate test, we are working on other applications for cell-free DNA testing as new technologies are approaching. For example, we have developed a new, proprietary approach to increase the sensitivity of next-gen sequencing. We have filed [provisional patent] on this new technique that increases sensitivity of NGS by twenty- to thirtyfold and we are currently collaborating with academic centers to validate the use of this technique in liquid biopsy to monitor patients with solid tumors. So, efficacy of therapy can be monitored with our techniques for traditional solid tumor biopsies.

Our third initiative is focused on germline testing. Up until now, as you know, NeoGenomics has focused on somatic mutation in cancer. We are now expanding our cancer testing to include germline and hereditary cancer susceptibility testing. This will complement our current testing. We are finalizing the validation and soon will be launching breast and ovary cancer susceptibility, as well as colon cancer susceptibility, namely Lynch Syndrome testing. This offering will be consistent with our philosophy of [defining] the cancer and they host. This is a very important -- for example, the presence of germline mutation in BRCA1; or, for that measure, in p53 in addition with cancer, has significant impact on selecting therapy and determining prognosis and management of the cancer.

Our fourth initiative is focused on smart medicine. We continue to develop and adapt machine learning approaches, based on SVM -- support vector machine -- technology to improve laboratory detailed analysis, presentation, and reporting. This is applicable to generic laboratory data, but particularly useful with high-throughput data like NGS and flow cytometry data. This will allow us to better interpret and utilize such data.

So, in summary, we are very excited about our new lines of testing and offering. We believe that these new advances in medicine will improve patient care and at the same time reduce costs. And we already are prepared to lead in this field.

Doug?

Okay. Thank you very much, Dr. Albitar.

Now we're going to turn the floor over to Steve Jones, our Executive Vice President for Finance, to review our first-quarter results in more detail. Steve?

Thanks, Doug. I will be brief here, so we can get into Q&A. We are pleased to have reported $23 million of revenue, a 27% increase over quarter one, despite the 10.8% decrease in average revenue per test in base Neo as a result of the 2015 FISH reimbursement changes that went into effect in January. Approximately $20.7 million of this revenue was derived from base Neo, and $2.3 million from PathLogic.

Because of the large impact on our financial results caused by the FISH reimbursement reductions, I'd like to provide a more detailed explanation of this issue, briefly. As we discussed on our last call, the American Medical Association released new CPT codes for FISH testing in the fall of 2014 that changed the way a FISH test is billed.

In the past, FISH tests were billed based on the number of DNA probes included in the particular FISH test. In the new structure, FISH tests are billed based on a new concept called a, quote, probe staining procedure, unquote. And new multiplex FISH CPT codes were introduced that cover situations where two or more probes are included in each probe staining procedure.

This has effectively reduced the number of billable units for each FISH test by half or more, because most FISH probe staining procedures contain at least two probes, and some have as many as three or four probes.

However, the issue is not the new codes or definitions that were established. The issue is that proper reimbursement was not established for the new codes. We believe confusion was created by the late timing of the new CPT codes and coding structure by the AMA, and errors were made in the way in which the 2015 reimbursement levels for these new codes were calculated. In establishing reimbursement rates, CMS assumed that the number of supplies was cut in half because the billable units were cut in half.

In our opinion, this is obviously an error. Labs still have to use the same amount of these expensive supplies. Even the AMA's relative value unit update committee, or RUC, had recommended to increase the supplies cost for each new multiplex FISH test.

Unfortunately, CMS ignored the Committee's recommendation and published the low rates without allowing for comment by the industry. Essentially, we believe that CMS did not have enough time to analyze, understand, and complete its comment and rulemaking process. Many commercial insurance payers follow CMS' published reimbursement rates and benchmark their rates based on the Medicare fee schedules, particularly when a new code is introduced.

Because of these dramatic changes in the new codes, the reimbursements we received (technical difficulty) from private payers were all over the map in the first quarter. We have now met with some of our important payers who have also concluded that the Medicare fees are not appropriate, and they have agreed to adjust their reimbursements to us.

For example, one larger payer has agreed to increase their multiplex FISH reimbursement from $70 per billable unit to $280 per billable unit beginning on June 1. The net effect of all these changes is that FISH reimbursement by Medicare and commercial insurance have been reduced by 60% to 65% from the levels seen in 2013.

We said on our last call that we thought the reduction to our revenue from these FISH changes would likely be $6 million to $8 million on a full-year basis in 2015. In quarter one, we estimate the impact from these FISH changes was $2.1 million, but before any further adjustments from private payers, we would likely be near the top-end of that range, or an $8 million impact for the full year.

However, we are optimistic that other insurance companies will also start to revise upward their reimbursement rates as the year progresses. We are also hopeful that Medicare will increase the 2016 FISH reimbursements in the draft rule, which we expect to be released in July.

In addition to the revenue reductions from the new FISH coding changes, we were also impacted in quarter-one by the continued insourcing of FISH tests by our largest customer. This trend started in quarter two of last year, as we've previously discussed, and this very large oncology client has now effectively insourced all of their FISH testing. But the year-over-year impacts will not be fully annualized (technical difficulty) until later this year. In the first quarter, we recognized $1.5 million less revenue from this large client than in quarter-one 2014.

In spite of the FISH reimbursement cuts and the insourcing which reduced our revenue by approximately $3.6 million combined in quarter one, base Neo revenue still grew by 14%; and consolidated revenue, including PathLogic, grew by 27% on a year-over-year basis. Put differently, we incurred an 11% decrease on our average revenue per test, lost $1.5 million of revenue to customer insourcing, yet were still able to grow revenue by 27% in the first quarter. This speaks to the strength of our business.

We were able to achieve this revenue growth through exceptional volume gains. Base Neo test volume growth was 28% in quarter one. However, if you were to adjust our volume growth to remove the effects of the customer insourcing, our base Neo volume growth was approximately 36%. We exited the first quarter on a very strong pace, and trends in April have been equally a strong.

Base Neo gross margins were 43.6%, and PathLogic gross margins were 22% in the first quarter, which blended to a consolidated gross margin of 41.4% for the quarter. Although we suffered a 10.8% decrease in average revenue per test for base Neo, gross margin only decreased by 430 basis points because we were able to reduce our average cost of goods sold per test by 3.5% year-over-year.

Quarter-one adjusted EBITDA for base Neo and PathLogic were $1.8 million and negative $246,000, respectively, which combines for consolidated adjusted EBITDA of $1.5 million. Adjusted EBITDA on our base business was actually up $81,000 year-over-year despite the loss of $2.1 million of revenue from FISH price declines, more than 90% of which would have dropped to adjusted EBITDA and the bottom line. On a consolidated basis, including PathLogic, adjusted EBITDA was just $165,000 below last year's first quarter. Again, this speaks to the strength of our business.

Quarter-one net income for base Neo and PathLogic were negative $410,000 and negative $351,000, respectively, which combined for a consolidated net loss of negative $760,000, or negative $0.01 per share. This compares to positive $102,000 of net income or $0.00 per share in Q1 2014. As we mentioned in the press release, we expect to return to profitability in the second half of the year. We finished the quarter with 452 full-time equivalent employees, contract doctors, and temps, an increase of approximately 4 FTEs from December 31.

Before we open it up for questions, we would like to reiterate our previously issued revenue guidance of $103 million to $108 million of consolidated revenue for the full year.

At this point, I would like to close down our formal remarks and open it up for questions. Incidentally, if you're listening to this conference call via webcast only and would like to submit a question, please feel free to email us at SJones@NeoGenomics.com during the Q&A session, and we will address your question at the end if the subject matter hasn't already been addressed (technical difficulty).

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

(Operator Instructions). Bill Bonello, Craig-Hallum.

Good morning, guys. Looks like a really nice quarter. Just have a couple of questions. The national contract with Blue Cross/Blue Shield, is that something new? And how does it open up opportunities for you?

Yes, Bill, we signed a contract with the National Blue Cross/Blue Shield Association in the first quarter, and we're hopeful that that's going to open up new business opportunities for us. Essentially it allows us to talk with, in a more collaborative way, the various Blue Cross/Blue Shield plans that we are not currently contracted with. So we are very excited about that. We are beginning to engage various plans. We've had good conversations, and we're hoping that that opens up new markets for us.

Okay. And I assume on that, that there are some Blues that you are contracted with. This just gives you a hunting license with the ones you aren't, or are you not contracted with any?

Yes, no, Bill, we currently have, I think, about 15 or 16 Blues plans under contract. So this allows us to essentially talk with and hopefully contract with the other Blues plans that we are currently are not contracted with.

Okay. Perfect. And then just a second question. On PathLogic, can you just comment a little bit qualitatively on whether you are starting to see some of the cross-selling benefits that you had anticipated? And then just from a profitability standpoint, when you would expect that business to swing to EBITDA positive, and what kind of margin it could have over time.

Okay, yes, thanks, Bill. PathLogic, as we I think mentioned last time, is a turnaround. And we have been working pretty hard on it. We have now deployed many of the NeoGenomics quality systems and processes. We are about ready to launch a new barcoding system, for example, that should help with the tracking and the measurement and quality processes there. So we're beginning to put a lot of our core processes in place, and we are very encouraged by that.

Now, we are beginning the cross-selling work. We have trained now the bulk of our NeoGenomics sales team, and we have trained the PathLogic sales team on the Neo products, and vice versa. And that's beginning to happen. Now, one of the biggest opportunities for us there is in the area of women's health. And we are beginning to -- in fact, I think within the last couple of weeks we began to get our first women's health samples from core NeoGenomics clients sent to PathLogic. So, that transition and cross-selling opportunity is happening.

Now, I think over the longer term, we are transitioning PathLogic to be our specialized anatomic pathology center of the Company. And so we, as you know, [pace] NeoGenomics is very good in solid tumor cancers and hematologic cancers. There are a lot of other testing areas in which PathLogic pathologists and processes will come to play. And we are hoping -- in fact, we are already seeing some clinical trials work go to PathLogic, as been directed by our work with the pharmaceutical industry.

So I think the turnaround is happening. It's a little slower than we expected. There was more to do than we thought. But I would guess that we would begin to see much better results in the second half of this year.

Excellent. I'll hop back in the queue. Thank you.

Drew Jones, Stephens Inc.

Looking at the molecular growth, obviously a big success story for you guys. Can you quantify a little bit where it's coming from? Is it new customers? Is it menu expansion? Is it deeper penetration of current customers? Maybe quantify it a little bit.

Well, yes, we're adding a lot of customers, Drew. So one of the attractions, frankly, to our new clients is the breadth of our menu, and molecular is a big part of that. So, we've got a lot of new test offerings, new products in the molecular area that Dr. Albitar can actually talk a little bit about. But we've also had a lot of good success in what we call our NeoTYPE offering. So, NeoTYPE molecular tests are panels or profiles of tests that are categorized by disease, and they often contain maybe 8 genes to 14 genes, but they are very targeted. And we are targeting the driver genes.

It's a more cost-effective way for hospitals and oncologists and pathology groups to understand the nature of the cancer and to develop treatment methodologies. So that's been growing very, very rapidly, and we're using next-generation sequencing for those as well. So, it's a broad growth. It's not confined to one geographic area, and it includes the NeoTYPEs, but our molecular volume I think grew by over 50% in the quarter versus last year.

Great. And then understanding there are a lot of variables with FISH testing right now, and then trying to keep track of that, can you talk a little bit about your volume growth versus maybe the industry growth in 1Q, after the reimbursement cuts?

We have anecdotal information about that. I think -- we think we're taking a lot of market share. We think that some competitors have been surprised by the FISH cuts. And some competitors -- many of them are cutting back their staff. We were, I think, prepared -- we weren't happy about it, but we were prepared for the FISH cuts. And our intention is to keep our heads down, keep growing our market share, providing good service, and we think that's the right thing to do in this environment.

Drew, I might just add here we're seeing a lot of growth in what we would call our esoteric FISH panels. For instance, our non-breast FISH tissue test grew the fastest of all the FISH types in the first quarter. And so, Dr. Albitar and his team have done just a great job. We have over 50 individual FISH panels available for order to our clients. And people are getting much, much more refined in what they're requesting in order to help really pinpoint the diagnosis.

And what we're seeing is NGS being used in combination with FISH -- indeed, we offer it in our own corrugated panels -- to really pinpoint the precise genetic mutations. The breadth and depth of our FISH menu continues to be a huge competitive advantage for us.

Thanks, guys.

Amanda Murphy, William Blair.

Just a quick question on the insourcing that you mentioned. So, obviously that was -- has been going on and -- I'm just curious; is there any more risk there from that particular client? I think you said they have insourced all of FISH now. But is there anything else that you are doing for them at this point? And then just generally, is that something that is an ongoing trend, or not at this point?

Yes, so that particular client is very good client of ours. We have a very good relationship. We perform all of their cytogenetics testing. We do some overflow work for them when they can't perform flow and some other things, and we do some molecular testing for them as well. I think that -- our sense is that no one is really looking at insourcing molecular testing right now, because a lot of people don't get paid for it, quite frankly.

The other thing is on cytogenetics, is there a risk that they would insource that? I guess, maybe. But, frankly, it's not a very high profit margin area for us. Our costs are very low. It's very hard to attract the right people. Same thing with molecular testing. So, there's always a risk that people will insource things, but we have I think very high quality of service. We have very highly trained people. It's not easy to replicate the labs and the technology that we have.

Doug, I'd just add here, we're actually seeing it go the other way. A lot of hospitals that did some FISH testing are now saying, hey, we're [taking back things] of business, given the reimbursement levels.

So in the last three months, we have been asked in a number of cases in both hospitals and pathologists, to come in and look at taking over FISH testing for folks. To harp on a theme that Doug outlined in the script, we think scale is going to be really, really important in the brave new world of FISH reimbursement trends. We already have one of the largest-scale FISH operations in the United States, and we intend for it to continue to grow and be an important part of our business.

Got it. And then obviously you've spent a lot of time talking about molecular testing and the cost use in there to your business, but what's your view on reimbursement for those tests? I guess specifically next-gen sequencing, given that CMS and some other MACs are working on essentially pricing some new codes there. Is that -- just generally trying to get a sense of your views on reimbursement for that specific segment over the next few years here?

Yes, so I think Dr. Albitar said it best. He said that the science is moving at a very fast clip, and it's hard for the payers to keep up. And we're seeing that, for sure. We have been encouraged recently by the dialogue that we've had with some of the key payers relative to next-generation sequencing. We believe that they are really trying to understand it, and trying to determine how to develop reimbursement policies for it.

And we are beginning to have conversations with them. We're beginning to explain what we're doing. And we believe that there will be reimbursement established for these things. Right now it's not great, to be honest. But we're hoping that we can continue to do this. These are very cost-effective and very good tests for the healthcare system, and so we're hopeful that there will be reimbursement established as we look forward.

Yes, and Amanda, as you well know, CMS is in the process of pricing the new codes for next-generation sequencing. There's three codes in particular. And the earliest -- the reason we're getting from industry sources is the earliest they're going to have a price for any of these is next year. And so it's entirely possible that unless you have a specific local coverage determination for a specific type of NGS test, they are not going to broadly reimburse NGS testing.

So what do we do? We have a number of different things we can do. We can confirm our NGS testing from Medicare beneficiaries using other, more established molecular modalities. We're examining that. And so there's a lot of different things we can do. But clearly the notion that something should get paid $0 this year because CMS hasn't accurately or adequately done their homework to put in place reimbursement is something that -- the industry is not going to bear it. And so the pressure is building by the quarter for CMS to do something.

And I genuinely think that most of the MACs really want to do the right thing here. They understand the importance of this test.

Okay. And then just last one, a bit higher level -- and I know you talked about this a little bit in the remarks. But obviously there's a lot of discussion around lab/CRO combinations and you obviously have established relationships and are doing well there. But just curious if you can give a bit more context about the Covance relationships, the longevity there that you may see. And then just might we see any more announcements, or are you working on anything there in the pipeline with other CROs or pharma companies?

Okay. Let me try to address that, Amanda. Thanks for the question. So, we can say that the relationship that NeoGenomics has with Covance, that partnership, remains in effect. And, in fact, we've had -- it's like business as usual for the first quarter, and continues to be. Now, I think we said this last time, but let me reemphasize this. We are not going to have the growth opportunities available for NeoGenomics in the biopharmaceutical area rest only upon our relationship with Covance.

We are -- and in fact, in the first quarter, we attracted an executive to help us manage that business. We are actively recruiting for business development people. Dr. Albitar and several of our other key people are talking with the pharmaceutical industry, making presentations, developing techniques with them to help them and their clinical trials work.

So, we are moving in this area. I think that there has been evidence, obviously, that the pharmaceutical industry thinks that there's some benefit from having relationships with molecular testing companies and anatomic pathology providers.

I don't know whether that trend is going to continue. We have two instances of that operating right now, and we think maybe it will. And to the extent we can partner with pharmaceutical industry players, we would love to do that.

I would just offer up, we don't need to work through CROs to be successful in this business. Doug touched on this, but there are a number of large pharmaceutical opportunities approaching us now because of the broad molecular menu that Dr. Albitar has put together. And it gives us multiple ways to play, and that is something that we are actively pursuing.

Okay, thanks very much.

(Operator Instructions). Debjit Chattopadhyay, ROTH Capital Partners.

Just following up on Amanda's question here, you have indicated there has been robust growth in the clinical trial-related business in the first quarter. Now, was this a joint Covance-Neo effort? Or [big fashion] this was all Neo? So if this was a Neo-Covance kind of collaborative effort, how sure are you on the monetizability of this? And I think you had put forward a number of, like, $7.5 million as of the end of the first quarter. So if you could update that based on the number -- the business won so far.

Sure. Let me try to address that, Debjit. If I don't get it, then ask again. So, first of all, let me just clarify that clinical trials is still a small part of our business. So when we say that our goal is to triple it this year, it's still pretty small. Let me just say that up front. The second thing I would say in direct response to your question, the growth in awards that we had in quarter one came as a result of both the partnership that we have with Covance, and to some extent our Neo direct opportunity -- or work.

Now, let me add one thing to that. When we say that those awards came from the partnership, I would just emphasize that our people, even through the partnership, are doing a lot of work to solidify those awards. Dr. Albitar is often involved in -- and our other people are often involved -- in getting those awards solidified, in partnership with Covance. So, I don't know what's going to happen with the Covance partnership. So far it's business as usual, and we are continuing to work pretty closely with them.

Let me ask the same question a different way. How much of your $103 million to $108 million guidance for the year factors in some of the Neo-Covance business wins in clinical trials?

So, Debjit, we appreciate the thought that goes into that question, but it would be not responsible for us to break down our guidance by business area. There are some areas that are going to do better than others, and some areas that are going to do a lot worse than others. And we have stated broadly on the last call that we expect our clinical trials business to grow significantly more rapidly than it has in the past, but we're just not at a place where we're going to break that down.

You had also mentioned PD-1 and PD-L1 test launch in the first quarter. And I have [early] mornings earnings calls from both Merck and Bristol-Myers to highlight how important those products are for those companies. So, are you seeing adoption for these tests more on the patient management level, or are you seeing more on the clinical trials segment, given the huge number of PD-1 and PD-L1 focused trials underway right now?

So, we are seeing requests for them from, of course, clinical trials from pharmaceutical companies, as well as from individual clinical practice groups and physicians. As a matter of fact, we are in process of updating our NeoTYPEs, and we are then including the PD-1 and PD-L1 into our NeoTYPE for filing of cancer. Because, as you know, now it is being utilized not only for melanomas, for lung cancers, ovarian cancer, and other types of tumors. And the clinicians really like to see the data and evaluations for PD-L1 in particular so they can see what options they have.

And one last thing. Could you update us on the timing of the prostate cancer test launch, and also on the enrollment since your year-end 2014 update?

Yes, let me try to do that for you, Debjit. So we are making progress. I think we have now over 300 samples in the door and tested; but the momentum, we are very encouraged about. So we've just signed up several big urology groups to participate in the patient registry. We are, right now, inking a contract with another big group for an extension of our clinical trial in this area. And I think the momentum is very good.

In terms of the commercial launch, I think we said around mid-year-ish. I think it may slip a month or so. But I think in the second half of the year, we should be able to launch something.

All right. Thank you so much, guys.

Bill Bonello, Craig-Hallum.

Thanks. A couple of follow-ups here. First of all, can you tell us a little bit about -- on the CMS side, I assume the next opportunity would be when they put out the proposed fee schedule this summer? And can you just tell us what you guys or the industry is doing in advance of that to -- what kind of access you have? How you are able to educate them in advance of that draft fee schedule?

Well, Bill, yes, relative to FISH specifically, I'm not sure if we commented on this much before. But I will say that we were very fortunate to have been granted an audience with CMS several months ago. I think it was in early January. They were terrific about listening to our concerns. And we established a dialogue with, we thought, the key players there. We have engaged them a bit since that time. We believe that they are starting the process, if not having started it a little bit ago, for the 2016 rates. And we have been in some dialogue with them about that.

So, we're hopeful that something is going to be changed. Obviously, to us, it's an error. It wasn't necessarily their fault. I think the timing of this was difficult for CMS, but we're hoping very much that the FISH reimbursement gets fixed.

I think you should rest assured, Bill, that they know exactly how the industry feels about this. In addition to us, others have weighed in. There have been letters written from Congresspeople about the issue. There have been numerous industry initiatives, both from things like the American Clinical Lab Association and even some of the oncology-related trade associations. I believe I've seen some stuff from ASCO and whatnot, and ASH coming around as well. So, this is something that's got a lot of focus in the industry.

Excellent. And will you be able to share with them, hey, here's what some of the commercial payers have done? They initially followed you, but when we were able to have discussions with them, here's what they did with rates.

Bill, we're using every argument we have.

Okay. And then just a separate follow-up. Amanda might have asked this, and maybe I just missed it. But do you think we saw the worst or the greatest amount of impact from the insourcing in Q1? I know it doesn't fully anniversary until the year progresses. But it would you expect the impact to go down as the year progresses?

Well, certainly in quarter three and quarter four, it will.

Okay.

The year-over-year impact in quarter three and quarter four will go down.

Okay. And then the final thing was just on the acquisitions, just wondering if you could elaborate a little bit more about the kinds of things that you might be looking at. Would you be keeping your focus to cancer genetics? Would these be the broader-based, maybe potentially profitable, or soon-to-be-profitable companies? Or are you looking more in the area of adding certain tests and technologies? What are you trying to find?

Focused on cancer genetics, focused on high technology, focused on high growth, focused on increasing scale for our business so that we can get the efficiencies and synergies. And maybe something that could accelerate our entry into some of these new areas that Dr. Albitar and I talked about.

Okay. And are there acquisitions of size out there? Or are we thinking of these being things that you bite off with $10 million, $10 million there, kind of opportunities?

I think it's fair to say, Bill, that it's a little bit all of the above.

Okay. Thank you.

Thank you, Bill. I think we're going to wrap it up.

We have one more quick follow-up.

Drew Jones, Stephens.

Just a quick one. The germline testing -- is that a natural evolution of the product menu? Or is that something where you're responding to customer demand?

Both. As you know, frequently we do testing here when we are profiling the cancer, and we feel might cause mutations that appear to be germline. And it is very important to explore that and see whether it is germline or somatic. So, the client admires that, but at the same time I think it is also very important currently with current interest, especially in BRCA1 and BRCA2, for our business to grow. And currently we can offer this testing. There are a lot of [decatheses] out there that aren't very reliable. We can access and define what's really a pathogenic variant. And so also it is both our goal for -- to cover both avenues.

And what's the time line to having the test ready?

We are almost there; within a month or two.

Thank you, Dr. Albitar.

A month or two is for the clinical validation. We've still got to develop marketing plans and so forth.

Okay. Drew, thank you very much for that question.

So I'm going to wrap it up now. And as we end this call, I'd like to recognize we have 452 NeoGenomics team members around the United States today, and thank them for their dedication and commitment to building this world-class cancer genetics testing program.

And on behalf of all of our team, I want to thank you today for your time, joining us for our quarter-one 2015 call, and let you know that our second-quarter 2015 earnings call will be held on or around July 23. For those of you listening that are investors, or considering an investment in NeoGenomics, we thank you for your interest in our Company.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and have a great day.