Neogenomics Inc (NEO) 2015 Q2 法說會逐字稿

Greetings and welcome to the NeoGenomics second-quarter 2015 financial results conference call. 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 for NeoGenomics. Thank you. You may begin.

Good morning. I'd like to welcome everyone to NeoGenomics' second-quarter 2015 conference call and introduce you to the NeoGenomics team that is here with us today. Joining me in our Fort Myers headquarters we have Steve Jones, our Executive Vice President for Finance; George Cardoza, our Chief Financial Officer; Rob Shovlin, our Chief Operating Officer; Steve Ross, our Chief Information Officer, and Fred Weidig, our Controller and Principal Accounting Officer. Dr. Maher Albitar, our Chief Medical Officer and Director of Research and Development, 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 operations, performance, financial condition, and growth opportunities. Any statements made of 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. Thanks Steve. I'll focus my comments in this morning's conference call on growth and cost reduction initiatives, including the numerous opportunities we are pursuing in the second half of the year and in 2016. Steve will then review our Quarter 2 financial results and lead us through a Q&A period.

This morning, we released results for the second quarter which showed revenue growth of 18% over last year. Half of that was driven by the inclusion of Path Logic, and half from the core NeoGenomics business. Our company has grown rapidly in a variety of environments over each of the past five years, and we believe we can continue to grow strongly for the foreseeable future.

I'll comment first on the key growth dynamics impacting Quarter 2 in our base business, excluding Path Logic, and put them in context with our longer-term growth prospects. I'll discuss Path Logic in a few minutes.

Second-quarter growth in our base business was once again broad-based. It came from all major geographic regions with the western and central regions of the country experiencing the largest increases. Growth also came from all testing categories with molecular testing experiencing the fastest growth.

In Quarter 2, test volume in our base business increased 21% over last year's level. Volume growth fluctuates from quarter to quarter depending on particular dynamics, but has averaged approximately 30% during the past four years. Quarter 2 core volume growth would have been 28% were it not for our largest customer that began performing their own FISH testing in-house in mid-2014. Since the ramp up of their in-house testing occurred in the second half of last year, our year-over-year growth rates won't return to more normal levels until the end of this year.

We are pleased that core volume growth is healthy and consistent with levels in previous quarters. It also indicates that we continue to gain market share.

Momentum of volume growth was also encouraging. Testing volume grew by 12% on a sequential basis from Quarter 1, and test counts compared with last year increased as the quarter progressed and were up about 28% for the last month of the quarter. We believe this momentum will continue as our pipeline of new account opportunities continues to be very strong.

Growth was also broad-based by testing modality. Molecular profile panels grew by over 130% and single marker molecular tests grew by over 33% compared with last year. Flow cytometry grew by over 30%, and even FISH and cytogenetics grew at double-digit rates despite the insourcing of FISH testing by that one large customer.

Obviously, underlying volume growth trends in our core business are very strong. Volume, however, has been growing faster than revenue due to the lower reimbursement rates for FISH testing, which caused a nearly 11% reduction in average price per test. As you will recall, Medicare reduced FISH reimbursement rates by about 45% in 2014 and another 20% for 2015. Many commercial insurance carriers set their rates based on Medicare's benchmark, and effectively reduced prices for FISH by about 50% this year. As a result, our revenue and profit were impacted by about $2.1 million in Quarter 2.

As we explained last quarter, we believe that the low 2015 rates resulted from errors in pricing the new FISH CPT codes that went into effect this year. We are pleased that CMS' proposed FISH rates for 2016, which were just released, correct for these errors. Under these proposed rates, Medicare's multiplex FISH reimbursement rates increase by 80% to 90% for 2016, back to more appropriate levels. This should also help to increase reimbursement by commercial insurance payors that are indexed to Medicare rates.

Pricing in other parts of our business, whether analyzed by test type, customer type or by payor group, was stable compared with last year. About 50% of our revenue is billed directly to hospitals, about 20% to commercial insurance carriers, and 20% to Medicare. Based on our mix of payors and testing, we are more hopeful that, for the first time in five years, average reimbursement rates for our mix of testing services will begin to increase in 2016 and in future years.

Strategically, we believe that the huge reimbursement changes our industry experienced over the past several years has taken a toll. NeoGenomics has been able to weather the storm by getting much more efficient, but we know that smaller labs and hospital systems are increasingly considering closing some lab operations. While this has been painful for the industry, on a longer-term basis, we believe there will be opportunities for efficient high-quality providers like NeoGenomics to gain market share.

Despite reimbursement turbulence, our revenue is increasing because we are growing our customer base and more fully penetrating existing customers. Based on recent customer surveys, we believe that our market share gains are being driven by superior service levels, a comprehensive menu of cancer testing services, continued innovation, a highly productive sales team, and a strong managed-care payor network. And in each of these areas of differentiation, we are making further improvements.

During the second quarter, our service levels improved to the best levels in years, even with increased volume growth, as our investments in automation, organizational development and lean processes are paying off.

Also, our comprehensive cancer testing menu became even more comprehensive in Quarter 2 as we continue to invest in and launch new tests. Just this week, we announced the offering of a new line of germline cancer predisposition tests, including BRCA1 and BRCA2 testing for familial breast cancer and Lynch syndrome testing for colorectal cancer. We believe that combining this type of testing with our disease-specific cancer profiling will enable physicians to practice better precision medicine and influence therapy selection.

This week, we also issued a press release announcing the expansion of our multimodality cancer profile test. We are now offering tumor type-specific cancer profiling tests for head and neck tumors, pancreatic cancer, liver cancer, sarcoma, and for cancers of unknown primary using a variety of testing methodologies, including next-generation sequencing, FISH and immunohistochemistry. This targeted multimodality testing approach is another key differentiator for NeoGenomics and is increasingly being accepted by clients as a medically effective and cost-effective methodology. Clients like the fact that it allows us to use the gold standard for each marker and then aggregate the results in one report. We are not aware of any other companies that offer advanced multimodality testing for a full range of different cancer types.

Those are good examples of the importance of innovation to our Company. We believe investment in innovation has a number of benefits. One benefit is that we are able to offer a range of testing for each client. That is meaningful to our volume growth because, during this past quarter, about half of our volume growth came from selling more tests to existing clients. Another benefit is that launching new tests makes our sales team more productive as they are able to constantly describe, teach and provide new state-of-the-art solutions to physicians.

Innovation also is increasing our ability to attract academically oriented cancer centers to our Company and we added several leading centers to our client list in Quarter 2. Innovation isn't contained just to new tests.

We are also continuously improving upon existing products in our portfolio. For example, lung cancer diagnosis and evaluation is frequently based on scant materials obtained by needle biopsy. We implemented a new testing procedure that allows us to use next-generation sequencing to perform complete testing for translocations when enough tissue is not available for FISH testing.

Another example is the dramatic improvement of our flow cytometry services over the last few years. Information technology workflow and supplier partnership initiatives have driven the quality of our services higher and our costs way lower. And we have attracted many new clients to our service. For example, our Tech-Only flow services average six to eight hours of turnaround time per test and our new clients have told us that we have the best flow program in the industry.

Our highly productive sales team is also a key driver of our market share gains. At the end of the quarter, we had 37 total employees devoted to sales and marketing activities with 30 dedicated specifically to sales activities. We are selective about our team, have attracted some of the best talent in the industry, and continue to invest heavily in their training and development.

Growth in our markets can also be fueled by participating in commercial insurance networks and large purchasing organizations. This is an area of strength and also an area of further opportunity. While we currently are under contract with over 125 insurance plans, we are working hard to add more plans and hospital buying groups. Our agreement with the National Blue Cross Blue Shield Association announced last quarter has allowed us an opportunity to meet with several significant regional insurance plans, and we expect these activities to open up large opportunities for future growth. I believe we are making very good progress in this area.

There are three important areas of future growth where we are investing and making progress but where we haven't yet realized gains -- clinical trials, our new NeoLAB test offerings in liquid biopsies led by our proprietary test for prostate cancer, and Path Logic.

In clinical trials, we continue to invest and build our team and infrastructure. We have been awarded roughly $8 million in clinical trial projects as a result of our five-year agreement with Covance, but the momentum there is beginning to slow. We continue to have discussions with Covance about the impact of their acquisition by LabCorp, but this clearly has been disruptive to our partnership. But as we said before, we are determined to develop a good clinical trials business with or without Covance.

We are making progress with our prostate cancer liquid biopsy test development. We have nearly 500 patient samples in-house as part of our new study which we hope to analyze and publish results for in the second half of this year. We now expect to commercially launch this new liquid biopsy test in 2016.

As you may recall, just over a year ago, we acquired a small anatomic pathology lab in Sacramento, California called Path Logic for $6 million. At that time, the company was unprofitable with about $10 million of annual revenue. We acquired the company in order to expand our specialized pathology services and to meet the requirements of Covance's pharmaceutical clients for those services.

We have made excellent progress improving Path Logic's quality and services and the lab is something that we are very proud of. However, so far, we haven't been able to sell and market their specialized pathology services to our NeoGenomics clients around the country. This resulted from delays integrating the two laboratory information systems and improperly training the NEO sales force to sell Path Logic products. We do have concrete plans in place to expand this business and are managing it closely. However, we now expect it will take until about the end of the year to increase revenue at Path Logic to achieve a breakeven level of profitability.

I'm going to comment very briefly about another important aspect of our business, and that is cost discipline. As we described in the past, our belief is that a sustainable high-quality lab company needs 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 over 30% over the same five-year period.

We made more progress in this past quarter. Our average cost of goods sold per test improved to its lowest levels in our history in the quarter. The cost per test reductions were driven by substantial productivity gains and lower cost of supplies.

Productivity improved as we've only added about 1% to our employee count since the start of the year, even as our sequential six-month volume growth in our base business increased by 15%. Those gains occurred as our measures of quality and service also improved. As is the case in most businesses, high-quality processes are also low-cost processes, and our business is no exception.

The cost per test reductions we achieved in this past quarter were broad-based across all test types. Our laboratory operations teams are working hard to lower our costs through automation, supplier cost reductions, streamlining our processes and other quality improvement and lean initiatives. Several important projects have now been completed and are paying dividends, and we believe that additional projects will further drive down costs in the future. We believe that we can continue to make productivity gains and improve our cost per test by 8% to 10% in the second half of this year, which should average out to a 6.6% to 8% reduction in cost per test on a full-year basis.

Clearly, there are strong benefits of scale in our business. Adding volume to well-managed and efficient processes drives down cost per test. We have capacity for additional volume and will continue to drive volume growth and look for acquisitions that can further capitalize on the benefits of scale in our business.

We have told you that we intend to be an industry consolidator. You may be getting tired of hearing this, but we really have been active in pursuing a number of initiatives and opportunities here. We just haven't found an acquisition yet that we believe would deliver enough benefit to our company and its shareholders.

Given the reimbursement pressure and general dynamics in our industry, we expect more M&A opportunities to become available. We will continue to actively pursue these opportunities and we will maintain a disciplined approach to evaluate and execute transactions, giving us the best opportunities for long-term success. We reiterate our strong belief that scale is important in our industry and smart acquisitions can make us more competitive and otherwise advance our strategies.

I'll summarize my remarks by emphasizing that our focus is on growth, innovation and operational excellence. We have been gaining market share and we have a lot of growth opportunities available to us. We have been keeping pace with the extraordinary advances in medicine and science and continue to offer new, value-added tests to physicians to help them diagnose and treat patients. And we have been steadily investing in our business and continue to improve our productivity and cost effectiveness.

Our short-term goal continues to be maintaining 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. Our long-term goal, as we have said before, is to be America's premier cancer testing laboratory, and we believe we are beginning to achieve this lofty goal. We are very excited about our Company and its prospects.

Now we are going to turn the floor over to Steve Jones, our Executive Vice President for Finance, to review our second-quarter results in more detail and lead us through a question-and-answer session. Steve?

Thanks Doug. Before we open it up for questions, I would like to briefly touch on a few financial highlights and then discuss the proposed reimbursement rates that came out for 2016 from Medicare recently.

In the second quarter, we are pleased to have reported $24.3 million of revenue, an 18% increase over Q2 2014 despite the 10.6% decrease in average revenue per test in base NEO's operations which were largely as a result of the FISH reimbursement changes that went into effect on January 1. Approximately $22.4 million of this revenue was from base NEO and $1.9 million from Path Logic.

We talked at length on the first-quarter call about the draconian cuts to FISH reimbursement by CMS, so I will not go into a lot of detail here. But to give you some context, our average revenue per Medicare FISH test has gone down approximately 23% from last year, and our average revenue per commercial insurance FISH test has gone down almost 49% on a year-to-date basis versus the prior year. This is on top of the 45% or so reduction in Medicare FISH reimbursement we experienced in 2014 as a result of the NCCI initiatives. These are massive changes to have to absorb in such a short time and we are cautiously optimistic that the recently released preliminary rulemaking for the 2016 physician fee schedule will get us back to more realistic FISH pricing.

Earlier this year, we said that we estimated the reduction to our revenue from these reimbursement changes across all payors would likely be $6 million to $8 million on a full-year basis in 2015. Given that we now have had $2.1 million negative impact in both the first and second quarters, we now expect the full-year impact on revenue to be $8 million to $9 million in 2015.

In addition to the revenue reductions caused by lower FISH reimbursements, we were also impacted in Quarter 2 by the continued insourcing a FISH tests by our largest customer. As Doug mentioned, this very large oncology client started insourcing FISH tests in the second quarter of 2014. They have now largely completed this process but the year-over-year impacts will not be fully annualized in our results until later this year. In the second quarter, we recognized $1 million less revenue from this large client than in Q2 2014.

In total, the FISH reimbursement cuts and the insourcing reduced our revenue by approximately $3.2 million in Q2 from what it otherwise would have been. However, base NEO revenue still grew by 9% and consolidated revenue, including Path Logic, grew by 18% on a year-over-year basis.

As mentioned in the earnings release, our consolidated gross margin, including Path Logic, expanded by 300 basis points from the levels reported in Quarter 1 to 44.4%. This expansion was made possible by a 9% reduction in cost per test in our base business versus Q1, which is the largest sequential reduction in cost per test in corporate history.

On a year-over-year basis, our base business gross margin only compressed by 250 basis points from last year's second quarter despite the 10.6% reduction in average revenue per test driven by the FISH reductions. Clearly, our lean initiatives are bearing fruit.

Another bright spot for us was in our ability to control SG&A costs in our base business. Although base NEO revenue increased by nearly $1.8 million, our base NEO SG&A costs were only up $40,000 relative to Q2 of last year. On a consolidated basis, the $1.1 million increase in SG&A was almost entirely due to the incorporation of Path Logic's results into our results this quarter.

Given the reduction in cost per test and the tight control on SG&A, adjusted EBITDA in our base business was actually up over $1 million 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 the adjusted EBITDA and the bottom line. On a consolidated basis, including Path Logic, adjusted EBITDA was up $325,000 versus last year's second quarter, even after including negative $709,000 of adjusted EBITDA of the Path Logic.

Quarter 2 net income for base NEO and Path Logic were positive $645,000 and negative $821,000 respectively, which combine for consolidated net loss of negative $176,000, or approximately $0.00 per share. This compares to $274,000 of net income or $0.0001 per share in Q2 2014. As Doug mentioned, we expect to return to profitability in the third quarter.

We finished the second quarter with 456 full-time equivalent employees, contract doctors and temps, an increase of approximately three FTEs from March 31.

Before we open it up for questions, we would like to briefly touch on our revised full-year revenue guidance we issued this morning as well as briefly discuss our views on the proposed rulemaking for the 2016 physician fee schedule issued by CMS on July 8. Given the larger than expected FISH reimbursement declines we have realized in the first two quarters and the delays in unlocking any meaningful revenue synergies from Path Logic, we are lowering our full-year 2015 revenue guidance to $100 million to $103 million from the previous guidance of $103 million to $108 million. For context, we are on a run rate at Path Logic that is $3 million to $4 million lower than what we expected it to be at the beginning of this year, and the FISH impacts are running higher than we thought they would be when we issued our original guidance. However, our base business is strong and it is in line with where we expected it to be.

With respect to the recently released preliminary rulemaking for the 2016 physician fee schedule, there is both good news and bad news. I need to emphasize that this is just a preliminary rule that is now subject to a 60-day comment period. The final rule is not usually published until early November and as we have seen in previous years, things could change.

On the good news front, multiplex FISH rates and immunohistochemistry rates had nice increases. Specifically, the technical component of automated multiplex FISH, which is built using CPT code 88374-TC, and which is one of our primary FISH billing units, is scheduled to increase 89.9% on a national basis before adjustments for geographic differences. The technical component of manual multiplex FISH billed using CPT code 88377-TC is scheduled to increase 135.6%. The technical component of IHC for the first marker, which is billed using 88342-TC, is scheduled to increase 31.1%, and the technical component of additional markers, additional IHC markers, billed using 88341-TC is scheduled to increase 38.2%.

On the bad news front, flow cytometry first marker billed using CPT code 88184 is scheduled to decrease 38.1%, and flow cytometry additional markers billed using CPT code 88185 is scheduled to decrease 69%. The technical component of morphology billed using CPT code 88360-TC is scheduled to decrease 18.7%.

While we are pleased to see Medicare fix the FISH reimbursement, we were not pleased to see such a large decrease in flow cytometry. Incidentally, this flow reimbursement is lower than what initially came out on July 8 because there was a subsequent release to addendum B of the new rule a few days later.

For those of you that would like more information on this topic, we have posted a table with the implied 2016 Medicare rates from the proposed rule on the home page of our website. You'll be able to find this under the title on the homepage entitled Reimbursement Updates.

Overall, we estimate that if these preliminary rules remain unchanged in the final rule, we would have an approximate $4 million to $6 million increase in revenue for our mix of testing after factoring in how we believe the private payors may respond to these rates. This is a very preliminary estimate and we reserve the right to refine this as more data becomes available.

At this point, we would like to close down the 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 questions at the end if the subject matter hasn't already been addressed by our call-in listeners. Operator, you may now open up the call for questions.

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

Good morning, guys. Just a couple of follow-up questions here. First of all, just making sure I sort of understand the nuts and bolts of the guidance, when you gave your initial revenue guidance last quarter, you stressed that you didn't have complete clarity on what the commercial payors' actions would be relative to FISH and so you had to make your best estimate. And obviously that proved to be not quite conservative enough. At this point, do you believe you have a pretty comprehensive view of where the rates have settled across all the payors?

Yes, we do, Bill. We are running about 49% on the commercial payor FISH reimbursement, 49% reduction versus last year, which is about 10% higher than what we originally thought. While we did have some success with getting a couple of the larger payors to increase their FISH rates, most of the payors have just decided that they are indexed to Medicare or they're benchmarks against Medicare. And it's been hand-to-hand combat with a lot of them. We have over 800 commercial payors in our mix, and you can't get to them all. But on the good news front, once Medicare raises the rates in 2016, we will have ample ammunition to go back to those payors and suggest that they really need to raise their rates.

Sure. Okay, that makes sense. But we shouldn't expect any -- in future quarters at this point, that shouldn't really be subject to revision, what the impact is from the FISH fees?

No, I think we've pretty well got it scoped out at this point.

Okay. If I am looking at the numbers correctly, it looked like there was a pretty significant year-over-year and maybe sequential reduction in the revenue per requisition at Path Logic this quarter. I guess I don't know year-over-year because I didn't have last quarter's, but relative to where it's been certainly last quarter and the last couple of quarters, is something going on there? Has there been either a loss of some high-value business? Have there been rate cuts on that side of the business? What accounts for that?

It's a little bit of both. We did lose one hospital system that had a relatively attractive price. But also one of the things we have is we have an electron microscopy department out there, and those codes were cut for 2015. So it is a little bit of both in terms of the Path Logic AUP.

Okay. And the sequential, presumably the sequential decrease was related to the Medicare price set, right, but that would've been to the lost customer or something?

That would be fair to say, yes.

Okay. Great. And then just one point of clarification on Doug's comments. You talked about having 500 samples now in -- on your -- for your liquid biopsy. I guess I wasn't specifically sure if that was prostate-specific that you're talking about, or if you could just clarify on that?

Yes. That was in reference to our latest work to develop our prostate cancer test. We have reported on that before. Actually Rob Shovlin, our Chief Operating Officer, has been working on the commercial aspects of that. Rob, do you want to make a couple of comments about that?

Sure. So historically on the earnings calls, we have focused mostly on the development of assay, and we've accomplished quite a lot on that front. Dr. Albitar and the R&D team published a paper in 2014, which was our first study in prostate cancer with 141 patients, and that was published in genetic testing and molecular biomarkers. But we followed that up with a second study of 319 patients. That was accepted as a poster at ASCO in 2014, and that study has now been submitted to a journal for publication as well.

And so the study we are talking about today is a third study in prostate cancer where we have a goal of 800 patients and we've accrued about 500. Since the last earnings call, we've had several more sites that are now participating in that study, so we are accruing cases at a faster rate.

Personally for me, I started focusing more of my time on the commercial launch. And as you can imagine, there are a lot of details to consider, especially since we are entering a brand-new market for NeoGenomics. Given that we don't have a lot of existing presence or any presence in urology, it's important that we make a great first impression there. So we are working on that commercial plan as well and shifting our focus to commercialization from development.

Okay. Great. That's very helpful. Thank you.

Thank you Bill. Let me just follow up really quickly about your question about Path Logic. So it's taken us longer to get the revenue synergies that we wanted at Path Logic. There are a couple of reasons for that. One is integrating the lab information system, and the second is getting our NeoGenomics sales force all geared up and trained. We have a lot of actions going on here. We have a lot of sales contests. We have a lot of training programs going on. And we are really hoping to move the top line.

We have made a lot of progress on Path Logic in terms of the laboratory. We really feel good about the laboratory. We've just come through an excellent inspection of that lab, and I think we are making a lot of progress with Path Logic. We just haven't seen it in our financial results yet.

Thank you.

Debjit Chattopadhyay, ROTH Capital Partners.

Hey, good morning guys. Thanks for the questions here. Firstly, on the proposed CMS changes to the rates going forward, so what can NEO and the industry do, or is doing, to make sure that CMS does not repeat the 2000 fiasco?

Thanks for the question. So we are doing a few things. First is we are making sure that CMS knows that they are doing the right thing on the FISH corrections for 2016. A number of labs and providers are trying to communicate with CMS to let them know that those rates for 2016 for FISH are appropriate.

Relative to the flow cuts, we have just understood these within the last week or so, and we're still trying to understand exactly why they cut them, what the components of those reductions are. We will be sure to comment to CMS about those cuts.

Quite frankly, a 70% cut is very disruptive to the whole industry. We would really argue very closely and very vehemently with CMS that if they're going to cut something, they ought to make it into a three- or five-year sort of process to give the industry time to absorb these cuts and to pursue alternative strategies. We continue to have dialogue with CMS, ACLA does, CAP does, and it's a process.

Okay. Great. And then have you guys already reached out to managed care or do you think you're going to basically wait until the November ruling comes in before you can actually have a formal discussion with managed care regarding 2016?

So, as we learned last year, there can be changes between the preliminary rule and the final rule. It probably is best to wait until the final rule is out and then we can bang the table on it. So I think we are having conversations generally with managed care, but we will get much more specific and intentional after the final rule comes out.

And moving onto Path Logic, the synergies that you were expecting from that acquisition, it's not clearly materialized on selling their businesses, their tests, into your core customers, but how come -- what is your thought on the other way around, selling NEO's core practice businesses to the Path Logic accounts?

Yes, actually, we are making some progress there. So in northern California, we did not have a big presence before at NeoGenomics. And we have been making a number of presentations to hospital systems there and to clients explaining, for example, our molecular menu. We are beginning to make progress penetrating some of those accounts for the NEO core services. We would like to be sort of a one-stop shop for those clients, and to be able to offer them Path Logic services as well as NeoGenomics.

We are trying to sell to existing NeoGenomics clients the specialty pathology services that Path Logic offers. Those would include renal pathology and women's health and dermatology or dermatopathology consults and things like that. We haven't made progress there yet, but I think we will.

And then the prostate cancer test, I believe you basically have now doubled the number of patients you have technically enrolled in the study from your previous quarter call. When you say 2016 launch, when do you think that launch is likely to materialize? Are you going to wait for a big national conference like the ASCO or the ASCO G or something like that or do you think it could happen pretty early in 2016 considering this test is now being potentially more than a year delayed?

It's Rob. So, on the commercialization, again, for those others on the call, urologists and primary care physicians need a test that can better discriminate which patients are likely or unlikely to have cancer and which are likely to have high-grade disease. And we believe our tests can have a real impact on these patients' lives.

As I was saying to Bill, we are being very deliberate with the planning here because we are entering a new market and we want to live up to the high standards set by NeoGenomics. It's our core business and we want to make a great impression. So we are being deliberate with that planning process, but I would expect that it would be in the early part of 2016. Probably best time is May, when the American Urological Association meeting occurs, to have something out so you can make a big splash at that meeting. ASCO happens around the same time, but the initial push would be in the urology community, followed by more general practitioners.

And one last question on the clinical trials business segment. You mentioned $8 million in business won already. Has that started to reflect in your topline, or that's more of a second half in 2016 story at this point?

It's just beginning, actually. So we continue to believe that the clinical trials business is a real opportunity for us. And the awarded business takes a little time to have the investigator sites all up and running and that sort of thing, as you know. So it's beginning.

We are also starting to make progress developing our direct-to-pharmaceutical channel. We've made some important hires in that area, and so we would expect that the business would ramp up as we go forward here.

Thank you so much and good luck.

Amanda Murphy, William Blair.

Hi, good morning. I just had a few more questions on the FISH situation. So I think -- so what you're saying based on your answer to Bill's question was that, in terms of the guidance, basically that you are ending up not getting back as much as you thought from private pay. Is that the right way to think about the difference?

I think the best way to think about it is the private pay was a little bigger than we thought. And we made some progress on some of the larger guys, but getting to the bulk of the insurance companies and getting any meaningful changes is likely not going to happen until we get the final rule for 2016 published. We have had discussions with numerous of them, but to get smaller insurance companies who are hell-bent on having a benchmark to Medicare to even engage you in a conversation like this takes quite a lot of energy.

Okay. And then the amount that you've quantified for 2016 in terms of at least the initial benefit from all the changes, can you just talk a little bit, and I guess maybe specifically around, well, as I guess both FISH as well, kind of what that Medicare benefit vis-a-vis the private pay. I'm just trying to get a sense of what you are specifically assuming on the private pay in terms of them maybe giving you some back from 2015 versus the kind of a straight Medicare benefit.

It's an estimate, and it's a preliminary estimate at that. But if you take the technical component going up by 90% on the multiplex automated FISH, and you assume that the private payors were below Medicare to begin with, almost all of them, our initial estimates are somewhere on the order of half of them that we would get from Medicare we would get from the private payors. And again, that's just a preliminary estimate based on where we are at now.

And on the flow cytometry, we don't think it will go down as much as Medicare because the private payors are well below Medicare. In some cases on flow, it depends on where you are and what exactly the markets are. But maybe it's a third to a half of the impact on the flow cytometry on the commercial side, a third to half of the impact of Medicare on the commercial side.

But you've got also look at IHC going up by 30% and you've got to look at morphology going down. You've got to put it all into the blender and range bound it and come up with a decent range. And we may get some of these a little wrong but we are hoping on average we will come out about where we think we're going to be. We generally try to be very conservative, as you know, on these types of estimates.

Got it. Okay. And then I guess another one on reimbursement. So just thinking forward, what else is out there? So you've got PAMA, which maybe as you generate more revenue off the clinical lab fee schedule, that could be potentially risk for you. I'm just trying to frame out what's kind of left here. I know that obviously 2016 looks better with these FISH increases, but maybe longer-term thinking about what else is on the table potentially.

So Amanda, the clinical lab fee schedule for next year at least came out absolutely flat with this year, for the mix of business that we performed at least. We think that if you look at our mix of payors, right now about half is client bill under contract. And so if you look at just the Medicare piece of that, they have taken a hit, a cut, on just about everything that we do.

Now, flow cytometry was the last one that we've talked about that we knew was on the "mis-valued code list", and so they are looking at that obviously, as we discussed, for 2016. I'm not sure what else there is to cut.

Just to give you guys a little context, if you look at 2006 to 2009, I call those the glorious years where average revenue per test was increasing 4%, 5%, 6% and even 7% one year on average for our mix of testing. If you look at 2010 through 2015, we've seen cumulative reductions to raw average revenue per test more than 30% in that six-year period. And that is something -- you can't keep doing that forever. So we are, I don't know, cautiously optimistic, maybe even optimistic that the worst is over and that we are going to see at the worst stable pricing, and at the best, nice nudges upward.

Medicare is actually very reasonable. They want to get the policy right. When they over-cut something, they usually put it back. When they changed around flow cytometry reimbursement in 2005, they increased it pretty aggressively over the next three years after everybody screamed bloody murder and they realized they got the policy wrong and labs were selling themselves. I think they watch capacity in the system very closely, and when capacity starts to get out of the system, everybody realizes they've probably got it wrong.

And we have a great relationship with Medicare and we don't want to single them out. At the end of the day, we actually really do believe that they are trying hard to get the policy right. And we would like to be a source for them to help input their thinking and influence their thinking. So we are going to comment on all these things, but we just can't see a scenario where there's any further draconian cuts and anything to do at this point in time. It wouldn't make sense.

Let me just build on one aspect of that. It's not all bad. I mean, flow cytometry, let's just take that as an example. We think we have a low-cost position, and we have a terrific product. Already hospitals are closing down there flow labs and we are beginning to benefit from those things. So we would expect in the future to have a lot more volume growth in instances where hospitals look at it and say we just -- it's unprofitable for us to keep running flow. So that's a case where our low-cost position is going to, even as revenue per test declines, our profitability would be the -- the impact would be mitigated because of the volume growth.

Got it, okay. And then just last one for me on the clinical trials commentary. Was any of the guidance reduction kind of related to the comments about momentum slowing? And maybe just if you could give us a little more clarity around what that means going forward in terms of is it going to nothing or is it just not quite in line with your expectations?

The guidance reduction was all about Path Logic and FISH, as Steve mentioned. Our clinical trials business is about where we thought it would be, and it's about on our budgeted number for the year. We actually are gaining momentum in our clinical trials revenue on a month-by-month basis. And it's slower gross than we expected, but it's growth nonetheless.

Okay, thank you very much.

(Operator Instructions). Jeff Bernstein, Concept Capital.

Just back on the expected $4 million to $6 million potential increase from the CMS rate increase in 2016, can you talk about what the fall-through ought to look like to the operating income on that?

So when you have a price increase, the only incremental expenses on it are the commissions on selling it and on the incremental bad debt. And we would expect somewhere on the order of 90% of 92% of that to fall through to adjusted EBITDA and net income.

Great. So we should be seeing the benefits of the leverage here that's building underneath.

We certainly hope so. In fact, if you combine rate increases with continued reductions in cost per test, interesting things start to happen.

And in the flow cytometry cuts, I think you guys have some pretty advanced flow stuff that you do. Is that what this is focused on, or this is just generic flow overall?

The way flow cytometry is billed is you get one rate for the first marker, and then you get a much lesser rate for additional markers. Medicare has limited the number of markers you can bill to 24, so we typically bill 24. In most of the complex heme cancers that we do flow cytometry on, medical standards, the gold standard is to do somewhere between 28 and 31 markers. In other applications of flow cytometry, you wouldn't bill as many markers. But the heme cancers, generally you want to look at that. And so you'll see us do 24 panels usually pretty consistently on our Medicare cases. And so when they reduce the price on the additional marker by 70%, it has a pretty big impact on our overall business.

There are other uses for flow cytometry like HIV. There's some HIV testing, and there's other uses that have less than 23 or 24 markers, but for us it's mostly just cancer and the heme cancers.

Got you. So heme cancers are kind of a big growth area. So as we are trying to just wrap our brains around kind of what the madness behind the method is at CMS, it still sort of feels like they are kind of taking blunt instruments to whatever areas are growing quickly out there. Is that still basically what's going on here?

I think CMS does scrutinize tests, which are gaining in volume much more so than others. Yes. We don't really know what criteria go into their definition of mis-valued codes, but FISH was a mis-valued code three years ago. Flow cytometry was for the last couple of years. Those were based on, we believe, the growth in those test types. None -- after flow, I'm not sure of any mis-valued code items on their radar screen that we perform.

And we did a little work on -- they scheduled -- published all these Excel tables with the rules, and we did a little work on the supplies cost inputs, and it looks like they have dramatically reduced the allowable reagent costs for flows in the 2016 assumptions. And obviously one of the first things we will be doing is assessing where they think it should be versus what's real and practicing. We believe we'll be able to write a pretty good comment letter if we have a different point of view on that.

Okay. That's great. Thanks so much.

Operator, I think there's no more questions in the queue, and we haven't received any further questions via email. So Doug, I'll turn it back to you to wrap us up.

Okay, Steve, thank you. So as we end the call, we would like to recognize all 447 NeoGenomics team members around the country for their dedication and commitment to building a world-class cancer genetics testing program. On behalf of our NeoGenomics team, I want to thank each and every person on the phone for your time joining us this morning for the Quarter 2 2015 earnings call. I'll let you know that our third-quarter 2015 earnings call will be on or around October 22 of this year. So for those of you listening or are investors or are considering an investment in NeoGenomics, we thank you for your interest in our Company. Goodbye.