Neogenomics Inc (NEO) 2015 Q4 法說會逐字稿

Greetings and welcome to the NeoGenomics fourth-quarter and full-year 2015 financial results.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Douglas VanOort, Chairman and Chief Executive Officer for NeoGenomics. Thank you, Mr. VanOort, you may begin.

Thank you, Michelle. Good morning, everyone. I would like to welcome everyone to NeoGenomics' fourth-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; George Cardoza, our Chief Financial Officer; Rob Shovlin, our Chief Growth Officer; Steve Ross, our Chief Information Officer; Fred Weidig, our Controller and Principal Accounting Officer; and Jessica King, our Manager of SEC Reporting. Doctor Maher Albitar, our Chief Medical Officer and Director of R&D is joining us from our Aliso Viejo Lab in California.

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 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.

Thank you, Steve.

NeoGenomics is a transformed and much stronger company since we last spoke with you in late October. To more fully explain the extent of that transformation, I'll share some brief remarks about quarter four as a bridge to 2016, then discuss our progress integrating Clarient, and conclude with comments about our plans and expectations for 2016. Steve will then review our quarter-four and full-year financial results and lead us through a question-and-answer period.

We ended 2015 with strong underlying results in the fourth quarter. These were achieved despite the enormous effort we expended to complete the Clarient acquisition and plan for the integration of a company 20% larger than NeoGenomics.

As you know, volume growth is a key dynamic in our business. We're pleased to report that volume growth in our base business, which excludes Clarient and Path Logic acquisitions, was once again very strong and increased over 25% compared with quarter four last year. Importantly, net test volume growth accelerated during the quarter, with December's growth rate being the best of any month in 2015. We're pleased that this strong momentum has continued into the first of several weeks of 2016.

Quarter four volumes increased in all of our testing services. Molecular testing continued to grow rapidly and comprised about 25% of our test mix in the quarter.

The fastest-growing subset of molecular testing is our unique NeoTYPE multimodality test panels that combine molecular FISH and immunohistochemistry tests in target-specific cancer types. This testing line grew 75% on a year-over-year basis in quarter four. Flow cytometry and immunohistochemistry testing also grew at very high rates.

We believe that our oncology-focused testing menu is the most comprehensive in the industry, and clients have increasingly chosen to avail themselves of a fuller range of our testing services. This dynamic drove same-store sales growth to comprise about half of our total volume growth in the fourth quarter and for the full year 2015.

Geographically, we grew our market share most in the western and central regions, but the Eastern region grew, as well. Our increasingly strong presence in managed care and with hospital purchasing organizations and with larger buyers is helping us with our regional and national growth strategies. We intend to expand our managed-care contract base and continue to partner with large buyers and providers in the upcoming year.

Given the strong volume growth we've experienced so far this year and an excellent pipeline of near-term opportunities we have a high degree of confidence about our growth prospects in 2016. Our laboratory operations also continued to run smoothly in quarter four. Even with the strong volume growth in our base business, service levels were very solid. We also maintain good cost control and operational control as we reduced average cost per test in our base business by 11.5% compared with quarter four last year.

Productivity grains by our laboratory personnel were strong, as we achieved an 11.7% year-over-year increase in productivity in our base business in the fourth quarter. As perspective, for the full year 2015, we increased testing volume in our base business by 25% but increased our full-time equivalent employee count by only 9%. Everyone in our lab is incentivized to reduce cost per test, meet turnaround time requirements, and achieve our quality goals.

This is one reason we were able to absorb $8.1 million of FISH reimbursement reductions in 2015 and still increase adjusted EBITDA versus the prior year. This focus on cost control, productivity improvements and high-quality service positions us well as we begin to integrate NeoGenomics and Clarient operations into one company.

Even though we've spent enormous time on these integration activities we continued our emphasis on innovation during the fourth quarter of 2015. We expanded our offering of liquid biopsy tests during the quarter and now offer 16 different liquid biopsy test or test panels. These tests are enabled by proprietary techniques for high sensitivity Sanger and next-generation sequencing.

We also continued to invest heavily in the development of our liquid biopsy prostate cancer test during the quarter. And we are compiling results from a study of over 2,500 patient samples. We are currently offering this test commercially and expect to market it aggressively in the second half of this year after we publish the recent study results.

We continued to make excellent progress with our flow cytometry support vector machine automation initiative, and are on track to launch this in selected areas of our business in the next few months. This machine learning tool has potential benefits for our laboratory, for clients, and for our ability to use big data to improve the efficiency and effectiveness of flow cytometry testing.

In addition, Clarient launched PD-L1 testing services as a companion diagnostic to new immunotherapies. The FDA-approved PD-L1 tests are growing rapidly to be important part of our Company's immunohistochemistry test offering.

In total, NeoGenomics launched over 70 new or enhanced tests during 2015. This continual and rapid pace of innovation has helped keep our Company at the forefront of science and medicine as it relates to oncology, and we are committed to maintain this leadership position in 2016 and beyond.

While we maintain discipline to keep our business healthy we also focused a significant amount of management time on integration activities in quarter four. We are well aware that our ability to achieve synergies and fully realize the opportunity to transform NeoGenomics depends on a successful integration. As you might imagine we've been working very hard to do just that.

NeoGenomics and Clarient operated with some differences in culture, processes,, and approach even though the test offerings were very similar. Therefore, our approach to the integration process has been deliberate, extensive and comprehensive.

Our general approach was to set rules and objectives, organize integration teams, engage people from all around the Company, and ensure activities were tightly structured and led. We have had a high degree of engagement and positive support from employees across the Company. I'm very pleased to report that while we still have much to do we're making excellent progress and are on track with our goals and plans.

For example, in the past few months we've been active in a number of areas. We've engaged in extensive communication activities with all of our approximately 900 employees, including town hall style meetings with virtually every employee, and written weekly communications throughout most of the past four months.

We've developed a combined Company 2016 strategic and operational plan which has been communicated throughout the Company. This also forms the basis for 2016 employee incentive plans in which every single employee in our Company will have a meaningful incentive for our success.

We evaluated, restructured and reorganized the entire sales and marketing organization of the Combined Company within three weeks of closing, and held a national sales meeting, complete with initial training. This new commercial organization is extremely professional and experienced. We fully expect all 34 sales representatives and 5 regional managers to operate at the high standards of productivity that we have experienced in the past.

In the lab we evaluated standard operating procedures and processes in virtually every one of our testing disciplines and compared practices and results of each organization. We've already agreed to the best practices and approaches that we will use in each testing area. We've also reorganized the leadership of our operations team and have defined clear responsibilities and accountabilities to standardize best practices between NeoGenomics and Clarient.

We've also integrated our information technology team and now have a clear understanding and agreement on our strategy to integrate our laboratory information management systems. Within three weeks of closing we successfully internalized over 90% of the molecular testing that Clarient previously sent out to other labs by rerouting this testing to the NeoGenomics Irvine facility. We are now moving ahead aggressively with detailed plans to redesign Clarient's 75,000-square-foot facility in Aliso Viejo, California, to accommodate all operations performed today in the NeoGenomics Irvine, California facility, and we expect to complete the move by the end of this year.

We've also focused a lot of attention on billing. As you may have seen in our proxy filings, Clarient traditionally had accounts receivable days sales outstanding of over 100 days, and voice of customer feedback on their billing practices was not good. We quickly installed new leadership for Clarient's billing operations and have made billing a major focus area. So far we've analyzed the issues, developed plans, hired key personnel, trained people, and are rapidly implementing new processes and procedures to improve the operations.

Overall, I'm pleased to report that we're on track with our goals and that progress is very good. So far, everything is going smoothly with no big surprises. Customer retention has been excellent and we are well on track to achieve our goal of realizing at least $6 million in cost synergies this year.

We're very excited about our plans and opportunities in 2016. Obviously the successful integration of Clarient is foremost in our plans for the year. Creating a one-company culture with a common understanding of values and behaviors and attributes of high performance is critical to the successful integration. It's also critical that we retain all of our clients, integrate our laboratory and information technology systems, and realize the cost savings that we planned.

At the same time, we are focused on growing the Company by deploying our high-performance sales team and investing in our biopharma and clinical trials business. And we will continue to lead with the most comprehensive oncology-focused testing menu in our industry. Successful achievement of those plans will result in an exciting and transformational year for NeoGenomics.

Our financial guidance released this morning is for revenue to increase from $99.8 million to approximately $240 million to $250 million, which implies a 145% increase at the midpoint of that range. Adjusted EBITDA is expected to increase from $9.7 million to approximately $33 million to $38 million, which implies a 267% increase at the midpoint of the range.

We expect profitability to improve each quarter in 2016 as we realize our planned cost reductions. For example, even though we have already achieved significant cost synergies, operating costs in quarter one will be higher because of severance and other costs that will have been eliminated by the end of the quarter.

Before we turn it over to Steve to discuss the quarter four and full-year financial results in detail I'd like to summarize my remarks by saying simply that we are more excited than ever about our Company and about the opportunities that lie ahead. 2016 will be a transformational year for NeoGenomics and we believe we are emerging as one of the world's leading cancer testing and information companies. The Company is stronger than ever and we are well positioned to continue winning in the marketplace.

Now, we're going to turn the floor over to Steve Jones, our Executive Vice President for Finance, to review our fourth-quarter results in more detail and lead us through a Q&A session.

Thanks, Doug. Before we open it up for questions I would like to briefly touch on a few financial highlights from the quarter.

We are pleased to report $27.3 million of revenue in quarter four, a 9% increase over the prior year, despite an 11.7% decrease in average revenue per test in our core genetic and molecular testing business, which includes both NeoGenomics and Clarient. Approximately $25.5 million of this revenue was derived from the core business and $1.8 million from Path Logic.

As discussed in the earnings release, FISH reimbursement reductions decreased revenue by $2.1 million in the quarter and $8.1 million for the full-year 2015. Gross margin in the core business was 48%, but the consolidation of the lower-margin Path Logic business brought consolidated gross margin down to 44.8%, a slight reduction from the 45.9% consolidated gross margin reported in Q4 2014.

SG&A cost increased $7.3 million in the fourth quarter as compared to prior year. However, $4.7 million of this increase was related to one-time transaction costs associated with the Clarient acquisition and $1.6 million of this increase was related to increases in non-cash stock-based compensation, which was driven by a 37% increase in our stock price in the fourth quarter. Thus, the increase in SG&A from operating activities was only $987,000, a 9.7% increase over Q4 2014, which is in line with the 9% increase in revenue.

Given the reduction in cost per test and the continued control in SG&A, consolidated adjusted EBITDA increased to a record $2.9 million despite the loss of $2.1 million of revenue from the FISH price reductions, more than 90% of which would have dropped to adjusted EBITDA in the bottom line. Quarter four consolidated GAAP net loss available to common shareholders was negative $1.6 million, and diluted EPS was negative $0.03 per share. This compares to GAAP net income of $1 million and diluted EPS of $0.02 per share in quarter four 2014.

However, we believe that in order to compare the net income related to the true operations of the Company on a more consistent basis across periods, it is appropriate to adjust GAAP net income to exclude: one, the non-cash amortization of intangibles, such as the customer list we acquired with the Path Logic and Clarient acquisitions; two, the non-cash stock-based compensation expenses that are mostly driven by changes in the Company's underlying stock price in any given quarter; three, any other income or loss items, such as the one-time payment we received from LabCorp to amend our agreement with Covance to eliminate the exclusively provisions; four, any acquisition-related transaction in nonrecurring expenses; five, one-time costs associated with terminating financing arrangements; six, the deemed preferred stock dividends required by GAAP accounting; and seven, the amortization of the beneficial conversion feature related to the preferred stock that is required by GAAP accounting.

Moving forward, we will refer to this measure as adjusted net income, and will include a table in each of our earnings releases with how adjusted net income and adjusted earnings per share are calculated.

In the fourth quarter of 2015 adjusted net income was $2.9 million, a 166% increase over adjusted net income of $1.1 million in last year's fourth quarter, and adjusted diluted EPS was $0.05 per share compared to $0.02 per share in quarter four 2014. We finished the quarter with about 900 full-time equivalent employees, contract doctors and temps, which includes approximately 410 employees and contract doctors from Clarient.

Before we open it up for questions, I would like to comment briefly on the GAAP accounting treatment required for the Series A redeemable preferred stock we issued at GE as part of the acquisition, as well as provide some further context around the financial guidance we issued this morning. GAAP accounting for the Series A redeemable preferred stock is going to require us to incur two significant non-cash charges in each period while the preferred stock is outstanding, which will significantly reduce GAAP net income available to common shareholders.

First, GAAP requires us to expense the implied compounded annual dividends in each year that would be required to grow the initial $73.2 million fair market value of the preferred stock, which, incidentally, was calculated by a third-party valuation specialist. Two, the final maximum potential liquidation value of $191 million in year 10 if no redemption record. This $191 million final value would only result of all of the escalating PIC dividends accrued during the entire 10-year period. This equates to a 10.06% dividend rate per year while the preferred stock is outstanding, which in turn comes out to about a $7.4 million of deemed preferred dividend in 2016.

The second charge relates to something known as a beneficial conversion feature, or BCF, associated with the preferred stock. Since the shares of our stock traded above the $7.50 conversion price on the date of issue, there is, quote-unquote, a $44.7 million beneficial conversion feature that we must record to be in compliance with GAAP. This BCF must be amortized over the shortest possible conversion feature period, which in our case is three years from the issue date.

Thus, in order to fully amortize this $44.7 million BCF in three years, we will have to book a non-cash GAAP accounting charge of $14.9 million in each of the next three years so long as the preferred stock is outstanding, which will further reduce GAAP net income available to common stockholders. As a result, we are recommending that analysts prepare their estimates using adjusted net income and adjusted diluted earnings per share figures, and designate such adjusted figures as primary when reporting them to FactSet, First Call, or any other organizations that compile and publish analyst consensus estimates.

Based on the magnitude of these non-cash charges related to the preferred stock accounting, and the approximately $7.3 million of expense we will incur to amortize customer lists and other intangibles, we expect that our GAAP diluted EPS will be approximately $0.35 to $0.40 per share lower than our adjusted EPS in 2016.

As discussed in the press release, we are currently projecting adjusted net income to increase from $4 million in 2015 to approximately $7 million to $12 million in 206, and adjusted diluted EPS to increase from $0.06 per share in 2015 to $0.07 to $0.12 per share in 2016. Embedded in these projections is an assumption that our average revenue per test in our core clinical testing business will increase by 3% to 4% across all payers for our mix of testing. This estimate of AUP increases factors in the reductions to flow cytometry and digital pathology reimbursement as an offset to the increases in FISH and IHC reimbursement that were put into effect this year.

At this point I would like to close down our formal remarks and open it up for questions. Incidentally, if you are listening to this conference call via webcast only and would like to submit a question, please feel free to e-mail us at sjones@neogenomics.com during the Q&A session and we will address your questions at the and if the subject matter hasn't already been addressed by our phone analysts. Operator, you may now open up the call for questions.

(Operator Instructions)

Amanda Murphy, William Blair.

Hi, good morning. Thanks for all the detail on the acquisition. I know it's early days but I just was curious, as you interacted with customers on both sides of the coin, I know you've spoken to some opportunities to drive some revenue synergies, and that's a good thing ultimately. What's the reaction been from the customer base, both from Clarient and Neo legacy perspective?

Amanda, thanks for the question. First of all, we are very pleased with the reaction from customers of either Company. I think the NeoGenomics clients are very pleased that we are going to be able to bring the digital pathology and immunohistochemistry capabilities that Clarient is so capable at, to them. And the Clarient customers are very pleased that we have now a much broader molecular menu to offer to them.

We're very pleased with the reaction. We've just gotten e-mails from people, in fact in the last few days, also congratulating us on our selection of the sales team. I think overall we're very pleased with the customer reaction.

Got it. And then, again, I know it's early and it sounds like you're still pretty comfortable with the synergy estimates that you've laid out prior to the closing. But just thinking about longer term, is there anything that you're seeing in terms of potential upside to those numbers over time. I'm obviously, not necessarily looking for a number specifically but just anecdotally would be helpful.

The cost synergies are every bit as good as we thought before. We've already affected cost synergies in sales and marketing, test send outs, as I think I mentioned. We've reduced the management positions.

I think over the longer term we'll see more clearly the extent of the cost reductions as we integrate the facilities. That will fully occur around the end of 2016. We will make a lot of progress during 2016 but as we integrate the facilities fully, I think that we'll see other synergies develop. We also, through the year, will be gaining synergies in things like purchasing and productivity and other areas, as well.

Got it, okay. And then just last one for me, obviously you've had quite an impressive track record in terms of lowering cost per test over time. And I think you spoke to some initiatives that are ongoing, as well. If you think about that concept over, again, a longer time frame do you feel that you can continue that type of magnitude of reduction? What else is there? I know you mentioned the missing learning but what else is there in terms of driving productivity improvements, separate from the synergies?

Cost reductions is a journey. The journey really includes a lot of quality improvements. It also includes a lot of automation improvements. And we don't have today a defined list for the next several years. But that's the same case that we've been in for the last four or five years and we've always managed to reduce our costs through these kinds of constant, continual improvements in quality and automation.

I think that there's a lot of improvements yet to be had in this area. The bigger that we get, the volume does have an impact on cost per test reductions. We're doing a lot of work on the systems side. There's the ability to further automate the operations of the laboratory, eliminate paperwork, all that kind of stuff. So, we've got a long list of ideas that we think can take us for several years into lower cost per test.

One quick last one -- you're not still being impacted by the customer that was insourcing at this point are you?

That customer has pretty much annualized at this point.

Okay. All right, thanks very much.

Bill Bonello, Craig-Hallum.

Great, thanks. A couple questions, one a follow-up to what Amanda was asking about on the customer reaction, maybe coming from the other angle. In your initial bridge that you provided towards the 2016 EBITDA there was an assumption of some decent customer attrition. Just curious what your thoughts are on that at this point. And is it too early to really have a read, Doug, from your having integrated a bunch of labs in the past? Is losing business something that doesn't happen until a few months after the businesses are combined? Or how should we be thinking about that?

Yes, Bill, thanks for the question. First of all, I don't want to jinx it. (laughter) But so far we've not lost any customers and the reaction, as I mentioned before, has been very good.

Now, I will say that we have not made a lot of changes to our service offerings yet with clients, either. Obviously we're going to try very hard to make this seamless to clients. But as we make changes there's always that possibility.

We've been through this before. This is not our first rodeo in terms of integration, so we think we know where the land mines are. And we fully intend, and everyone in the Company knows, that rule number one is to retain all our clients. So, I think we can manage through it pretty well but there is some risk as we move forward. And we're not ready to change that assumption that we laid out a few months ago.

Okay. And then just on that same line, can you tell us at all, what sorts of non-competes do the salespeople have, those that may not be sticking around, either because they chose to leave or because you chose that they would leave? It seems like sometimes in the past when we've seen business lost, it's a group of sales guys going off and forming their own new company and taking some existing customers with them. So, how protected are you from that?

Bill, we have an aggressive policy across all senior executives at NeoGenomics, and all salespeople, where people will sign non-compete and non-solicitation. In the case of sales reps domiciled in California, non-competes are not enforceable so, it's really just a non-solicitation agreement. Clarient did not have a similar policy, but only four total reps, two of which came from Clarient, have left. And it was really not expected to be a big deal where we have much exposure on that.

I am pleased to report that all of the remaining Clarient reps have now come over to Neo with its policies and procedures and signed the kinds of agreements that all the rest of our sales reps have. We are very consistent in the way we apply that policy and we think it will help protect us on a moving forward basis.

Great. And then on a different topic, Path Logic, I think we asked about this on the last call, as well, but I want to come back to it because the trends appear to be getting worse. The revenue there continues to drop. If I am doing my math right the business actually has a negative gross margin. What can you do about that to eliminate that drag or reaccelerate the growth? Or are there other options?

Yes, gee, Bill, thanks for pointing that out. (laughter) So, yes, Path Logic is clearly underperforming. It did experience negative gross margin, it lost a lot of money in quarter four. This has our attention, there's no question about it. Even though we're focused very much on Clarient, this does have our attention.

I will mention one thing on the positive side before I address the question more fully, and that's that we have experienced some benefit from Path Logic in the Neo core business. There are many clients in Northern California that have become clients of NeoGenomics that probably wouldn't have at this point if it were not for Path Logic. And that's relatively meaningful.

Now, I will say that we're taking action. We have had some management changes at Path Logic in the fourth quarter. We are very focused on volume growth there. And we have a whole list of actions that are on my desk, as we speak, to try to fix that problem.

We are committed to reducing the negative impact. It's not lost on us that we have terrific results in more of the core business and Path Logic is dragging it down. So, we will take action, we're committed to do so and I think you'll see that.

Excellent. Things sound like they're going great. Thanks a lot.

Paul Knight, Janney Montgomery Scott.

Hi, Steve. Can you talk about your views, the management views, as well, on the CMS pricing environment? Obviously your projecting an average price increase of 3% to 4%. But could you give some color around where you think, not only this year, but where that environment is after?

Sure, thanks, Paul. We're very pleased that the 2016 physician fee schedule corrected the errors in FISH reimbursement that were introduced in 2015 as part of that adoption of the new FISH CPT codes. We worked very hard with industry participants to lobby CMS and it appears that they heard us.

In fact, the national rate for the technical component of multiplex FISH testing, which is billed using CPT code 88374-TC was increased 87% in 2016 versus 2015. That will help cover a lot of other decreases that happened and is probably the largest driver of the 3% to 4% increase in AUP that we're projecting.

The reimbursement for IHC, or immunohistochemistry, that was also severely cut in previous years, was increased by about 20% to 30%. There's a lot of different codes that you report IHC with, and depending on the code it could be as low as 15% to 20% or as high as 30% to 35%. These two increases will offset the 20% or so decrease in reimbursement for flow cytometry that CMS put in., and the 20% or so decrease in reimbursement for digital pathology services.

When you boil it all down, since FISH is Neo's largest test, and IHC is Clarient's largest test, we expect the reimbursement increases to more than offset the flow in digital pathology decreases. Since the FISH increases are clearly correcting a previous year error that was imposed when the new FISH codes were introduced, we also are expecting that many of the private payers that have not already done so will increase their FISH reimbursements in 2016.

When all is said and done, we're expecting a 3% and 4% increase in overall average revenue per test across all payers in the core genetic and molecular testing businesses, which we think will result about $7 million to $9 million of incremental revenue across both companies.

Let me just build on what Steve said, maybe take a longer-term view of the pricing environment. We believe that CMS has now reviewed most of the pathology codes and adjusted a lot of them, as they've gone through that review process over the last four years or so.

And I think it's important for you to understand that even FISH, even though Steve mentioned that we'll experience a big increase in 2016, over the long term FISH reimbursement is still down over the last four years. So, we have sustained a decline in just about every one of the codes that we bill under. We're hoping that the worst is behind us, and we believe that it is, as those codes have all now been reviewed, and we're hopeful that, that's the case.

It's interesting, if you go back and look at it over the last six years, we suffered about a 36%, 37% cumulative reduction in average revenue per test, yet our gross margin is about where it was in 2010. So, we've done as much as we possibly could to offset those cuts with cost reductions and productivity increases. And now that we're going to have an era of what we believe will be two to three years of price stability, any further reductions in cost per test should accrue to our bottom line.

A last question would be, regarding the panel regulations, I think data accumulation starts this year. Do you think PAMA is a positive or no impact? What is your view on PAMA for your business?

We actually don't think it will be a very big impact to us at all. About 75% of the tests we billed are billed utilizing the physician fee schedule, and only about 25% are billed using the Clin Lab fee schedule, which is what PAMA is focused on.

But the PAMA is really focused on Medicare tests, and Medicare is only going to be about 16% of our Combined Company payer mix. So, we have 25% of 16% of revenue exposed to PAMA, or 4% of total revenue. And when you really boil it down further, more than half of that is from molecular testing, and they just reset all of the molecular codes in 2013 so we don't expect them to aggressively reset the molecular codes.

The remaining, call it, 40% or so is from cytogenetics testing, which is a very manual test. We're probably the most efficient in the United States at doing this because we use a lot of automation, and it still may be a 30% margin business. So, if CMS wants to put all the less automated cytogenetic players out of business, they'll reduce cytogenetics further. But we don't see more than maybe a 20% to 30% reduction there over a multi-year period because it is such a manual process. So, we think overall our exposure to PAMA is very limited here.

Thank you.

(Operator Instructions)

Drew Jones, Stephens.

Thanks. Steve, you just touched on this but could you give us some more granularity on trends with commercial payers on FISH testing right now, maybe what percentage or less to still make a move back up?

I think we're going to defer commentating on that in any more detail because we're really just starting to get payments in from tests that were submitted in 2016. It's just too early to extrapolate anything. In our revenue guidance we assumed that about half of the commercial payers that had not already increased their FISH reimbursement rates would follow suit and increase their FISH reimbursement by a similar percentage. So, we didn't assume it would happen across the board The data still has to prove it out and we will report back to you in Q1.

Okay. And then as you guys have gotten a chance to crawl through the customer list at Clarient, are you in a position now to give us a little bit better view on customer overlap?

There's definitely some customer overlap. There's a number of customers where Clarient would do the solid tumor work or the IHC work and we would do the heme work or the molecular work. We are working -- we actually already have one standardized price list that we're rolling out to folks. For those customers that are on contract we will need them to sign a new form of contract that applies to both companies, and that process is well underway now.

I would tell you, just to echo Doug's earlier point, clients are ecstatic about getting access to the full menu from one company. There will be a period here for about nine months while we're integrating our LIS system that people will get two bills if they want to order something they were previously ordering from Clarient and something they were previously ordering from Neo.

But we are working as rapidly as possible to integrate the LIS systems. There's a lot of very smart people focused on that and we think we've got a pretty good plan for it.

Okay. And just thinking about it from another direction, if you exclude the CRO revenue from Clarient what percentage of revenue came from customers that you guys weren't touching previously?

We don't have a real good handle on that just yet. I'm not sure that it's going to be that relevant anyway, to go into because we're scrambling the egg pretty quickly here. Some stuff that, for instance, Clarient molecular used to get sent out and now it's being sent to NeoGenomics. Is that Clarient revenue or is that NeoGenomics revenue? It gets a little hard to make those kinds of distinctions.

I would say, Drew, that both organizations knew each other's clients, even if we weren't getting work from them.

In fact, just to echo one point that Bill Bonello brought up about revenue distractions earlier, most of the revenue distractions that we expect to encounter this year have more to do with the fact that the NeoGenomics folks who had Clarient accounts in their pipeline, and the Clarient folks who had NeoGenomics accounts in their pipeline are no longer having such robust pipelines. It will take a while for that to build their pipelines.

It's hard to really put a fine point on this but, yes, there will be some period where the growth rate won't be as great as it was because there's less in the pipeline (inaudible) folks. But I will say that we're getting very good traction from very large clients and hospital systems that are very interested in the combined Company offerings.

Thanks, guys.

Jeff Bernstein, Cowen Prime.

Hi, thanks for taking my question. Can you guys just give us a quick update on clinical trials with the combined companies now?

Sure, Jeff, thanks for the question. We're very excited about the clinical trials business. As you know, I think, or as we've disclosed, Clarient had a clinical trials business that was probably 10 times bigger than what we had at NeoGenomics, even though we were making a lot of progress at NeoGenomics growing that business. This has been a focus for GE, while GE was an owner of Clarient.

Right now what we are doing is we've evaluated the business. We think it's a very solid business. We're recruiting commercial people as we build that sales team in the biopharma area. And we're generally having investment theme and attitude toward biopharma.

I think we're going to grow a terrific business there. I mentioned, I think, PD-L1 as an example. Clarient is doing a heck of a business now in PD-L1. That's an example of something that we think is very exciting for us, where we can perform the clinical trials for the biopharma company as the companion diagnostic, and then offer the test commercially and clinically.

So, we like that business. We think it's got a lot of growth opportunity for us. We have great plans and a vision to make it a big, important part of our company.

Great, thanks very much.

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Okay, Michelle, thank you very much. As we end the call, we'd like to recognize all, almost 900 now, NeoGenomics team members around the country for their dedication and commitment to building a world-class cancer genetics testing program. And on behalf of our NeoGenomics team I want to thank you for your time in joining us this morning for our quarter four 2015 earnings call, and let you know that our first-quarter 2016 earnings call will be on or around April 28, 2016. For those of you listening that are investors or considering an investment in NeoGenomics, we want to thank you for your interest in our company. Good-bye.

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