Neogenomics Inc (NEO) 2016 Q2 法說會逐字稿

Greetings and welcome to the NeoGenomics second-quarter 2016 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, Mr. Douglas VanOort, Chairman and CEO of NeoGenomics. Thank you Mr. VanOort, you may begin.

Thank you Tim, and good morning. I'd like to welcome everyone to NeoGenomics' second-quarter 2016 conference call, and introduce you to the NeoGenomics team that's here with us today. Joining me in our Fort Myers headquarters is Steve Jones, our Executive Vice President for Finance, George Cardoza, our Chief Financial Officer, Fred Weidig, our Controller and Principal Accounting Officer, Jessica King, our manager of SEC reporting, Rob Shovlin, our Chief Growth Officer, and Steve Ross, our Chief Information Officer. We also have Dr. Maher Albitar, our Chief Medical Officer and Director of R&D, 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 risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual outcomes and results could differ materially from those indicated in the forward-looking statements. Any forward-looking statements speak only as of today and we undertake no obligation to update any such statements to reflect events or circumstances after today.

Thanks Steve. In this morning's conference call, I'll make some brief comments on our second-quarter performance, update you on the status of our integration, and conclude by sharing some of our plans as we look forward to the remainder of this year and to 2017.

NeoGenomics reported very strong financial results in Quarter 2. We were particularly pleased with our performance because we are in the midst of a significant integration initiative and our people are extremely busy with those activities.

Once again, revenue growth continued to be excellent, driven by market share gains in our clinical business and by strong growth in our biopharma and research business. Adjusted EBITDA was about three times higher than last year as a result of revenue growth and strong employee productivity.

We are also pleased that our integration activities are moving forward exactly as planned, and we are on track to achieve our key integration milestones. After nearly seven months of Clarient ownership, we can still say so far so good. And now with greater visibility about the integration and the reimbursement environment for 2017, we are excited about our prospects as we look ahead to the future.

Steve will describe our financial performance in more detail in a few minutes, but I'd like to give you a high level review and comment on some trends and dynamics. Revenue and volume growth dynamics in the second quarter were excellent. Clinical test volumes in the base Neo business, excluding Clarient and PathLogic, grew by about 32%, which exceeded our expectations. The base NeoGenomics volume growth was driven mostly by new clients.

Clarient test volumes stabilized and were flat to last year. As you know, new products are important for our growth and Clarient's volume stabilized partly due to the recently introduced immunotherapy related testing for PD-1 and PD-L1. These tests have been well received by many clients across our Company. Overall, client retention has continued to be excellent.

Although we reported that average reimbursement per test declined by 5% from last year, this was caused by the inclusion of Clarient's mix of business. On a pro forma basis, average revenue per test in the clinical business was actually up about 2% from last year. This is the first time in many years that we've had a year-over-year increase in average reimbursement, and even if it is minor, the fact that it up is a welcome relief. This pro forma increase is primarily related to increases in FISH reimbursement as Medicare made corrections to last year's FISH rates. The reimbursement stabilization, along with the recently released 2017 proposed physician fee schedule by Medicare, gives us more confidence that we are now in a period of greater stability and reimbursement.

We are very pleased with the biopharma revenue in Quarter 2. Revenue in this business can be a bit bumpy, but we had a good bump this quarter. Revenue was up nearly 30% year-over-year on a pro forma basis and nearly 34% sequentially from Quarter 1. Clearly, testing related to development of immunotherapeutic drugs are driving some of the growth in this business.

We are beginning to gain momentum in the biopharma business as we've begun to win new clients and get more repeat business. A broader and more diversified client base, greater number of projects and a broader and deeper product offering can make this business less volatile from quarter to quarter, and that's what we are working to achieve.

The combined expertise of Clarient and NeoGenomics has resulted in a strong value proposition to pharmaceutical companies. We're bullish about this business on a long-term basis and are investing to make it an even more important part of our Company.

Our commercial teams throughout the Company continue to work on a healthy list of growth opportunities. In the clinical business, our sales team has been building and/or rebuilding their pipelines and forecasts for new business is solid. In particular, the opportunities for growth with large oncology groups and larger hospitals and academic centers is picking up good momentum.

The clinical sales team continues to work hard on growth despite spending a significant amount of time devoted to integration related activities. In fact, we had expected a slowdown in volume growth as our sales team is spending a lot of time training existing clients for changes in product and service offerings, but that wasn't the case in this past quarter.

We also made changes and added to the biopharma sales team over the past several months. We are pleased with the quality and experience level of our new biopharma commercial team. Pipelines are now beginning to grow as we have executed significantly more contracts and statements of work in the last three months than in the first three months of the year. There is some lag time between signing these arrangements and generating revenue, but this activity suggests good growth in the future.

As with our commercial teams, the Company's operations teams were full with activity during the quarter. They maintained good levels of service as we continue to grow testing volume and also managed the complexity of merging different practices and processes as we integrated the Clarient and NeoGenomics operations.

Cost per test in our core clinical genetic testing business was down about 4% from last year. We had strong performance in labor productivity, but it was offset by some inefficiencies in supply usage for test validations and other matters mostly related to integration work. These temporary inefficiencies will soon be behind us as we fully implement our combined best practices and merge operations.

We ended the quarter with about 925 employees. That's up about 3% from the year-end level, while our volume is up over 10% from the year-end level. Clearly, our people are more productive even though we just started the integration process and haven't yet combined our laboratory testing facilities or other operations.

Adjusted EBITDA increased 281% over last year's second quarter as a result of the solid operational efforts. In fact, adjusted EBITDA as a percentage of sales was 14.5%, which is a record high for our Company.

Cash flow from operations was also strong at $5 million for the second quarter and $12 million for the first half of the year.

Looking ahead now to the rest of 2016, we believe the key for NeoGenomics' success is focus and execution. We know exactly what we need to do, and we are focused on the things that matter most -- creating a one company high performance culture, providing great quality and service for our clients, and integrating Clarient extremely well.

Culturally, we are making progress to bring everyone together as one high-performance team, but we have a lot of work to do. We have some of the very best people in our industry and it's our job to positively manage cultural change to keep everyone engaged and to keep our teams focused on our clients and their patients. We have a number of tools and processes in place to help us manage and monitor the pace of change, and we are feeling good about the combined company's culture.

As you know, quality and service is the bedrock of our Company. We are laser focused on the needs of our clients, our payors, and most of all, the patients we serve. With the Company more than twice the size it was just eight months ago, we are investing in more systems and resources to continually raise the bar on quality and service not only for ourselves but for our competitors.

We know that our success for the rest of 2016 and in the future generally depends on how well we execute the integration of Clarient and NeoGenomics. Great execution requires great teamwork and there's a lot of great teamwork happening throughout our Company. Those teams involve sales, medical, lab operations, IT, finance, billing, and others, and they are doing an excellent job executing our integration plans. So far, I couldn't be more pleased with our progress.

We've now updated and revised many of our laboratory and customer-facing IT systems to incorporate best practices of each company. We've made many changes in systems, processes, organizations and in roles and responsibilities, and those activities have been well planned and executed.

Now we are in the early stages of migrating Clarient clients to the NeoGenomics laboratory information and billing systems, and that is also going well. That client migration will continue over the next few months and we are rigorously implementing and monitoring this activity. Our goal is to have all of our clients using a single laboratory information system, a single billing system, a single uniform service offering, and a single test menu in the fourth quarter.

We expect, especially during this client migration phase, our sales operations, marketing, medical, and other teams to be predominantly focused on a well executed integration. Other objectives, such as reducing cost per test and attracting new clients, are secondary to our primary objective of achieving outstanding client retention during these few months. We will return to those traditionally strong operational activities after integration is complete. Our objective is to retain 100% of our clients through both of these processes, even though none of us know that -- even though none of us know the lab integration on this scale that has ever come close to 100% client retention, we believe we have a good shot at it.

Even as we are migrating clients, we are also making changes to our 78,000 square foot Aliso Viejo facility in order to fully combine our Irvine operations into it around the end of the year. We are investing over $3 million in our Aliso Viejo facility to make it truly a state-of-the-art laboratory.

As we look a little further ahead, I must say that we are very excited about 2017 and beyond. We must keep in mind that NeoGenomics is still a young company, and while we reported a good quarter, we know that it's important to stay focused on our vision and future strategic opportunities.

Much of the work we are doing now and in the remainder of this year is to position the Company for very strong performance in 2017. With all of our clients and operations utilizing common systems and platforms, and with our facilities having been consolidated, we will be positioned to make sizable improvements throughout the Company.

We believe that cost and revenue synergy realization should be well within the range we originally estimated with the potential for approximately $20 million to $30 million of synergies to be achieved by 2018. Perhaps just as importantly, we have an emerging clarity for strategies to allow NeoGenomics to be the leading cancer testing and information company in the world.

We aim to separate NeoGenomics from the rest of the industry when it comes to quality and service. We want to invest and grow our biopharma business, develop and grow multiple new revenue streams in big data and informatics, and continue to be a leader in new test development.

As I end my remarks, I want to share a comment made by one of our key people couple of days ago. This person came into my office and said "Even though we've grown incredibly these past eight years, I am more excited than I have ever been about our future." And personally, I couldn't agree more.

Now we're 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 Q&A session.

Thanks Doug. Before we open up for questions, I want to briefly touch on a few financial highlights. We are pleased to report $63.1 million of revenue, a 159% increase over the prior year, and this was driven primarily by the inclusion of Clarient results but also by strong growth in the core or base NeoGenomics clinical business. Approximately $54.2 million of this revenue was derived from clinical genetic testing, $2.1 million from PathLogic, and $6.8 million from biopharma and research.

Incidentally, this will be the last quarter we are able to break out the base NeoGenomics growth rate separately because we are now actively migrating the Clarient clients and joint accounts onto the NeoGenomics LIS system.

Consolidated gross margin was 45.3%, a 90 basis point increase from the 44.4% reported in Q2 last year. This increase in gross margin was driven by the 4.4% decrease in average cost per clinical genetic test as well as strong margin growth in the biopharma business.

Consolidated SG&A costs increased by $15.6 million, or 145% from Quarter 2 last year. However, as we discussed in the press release, $2.5 million of this increase was due to non-cash stock-based compensation and non-cash amortization of intangibles directly related to the Clarient acquisition. Importantly, SG&A as a percentage of total revenue fell to 41.8% from 40.3% in Quarter 2 2015.

Given the reductions in cost per test and the economies of scale we achieved on the cash portion of our SG&A expenses, consolidated adjusted EBITDA increased by 281% to a record $9.2 million. Importantly, adjusted EBITDA margin grew by 460 basis points year-over-year from 9.9% in Quarter 2 last year to a record 14.5% this year. This level is also $1 million higher than the $8.2 million of adjusted EBITDA we reported in Q1.

Second-quarter GAAP net loss available to common shareholders was negative $5.2 million and GAAP diluted EPS was negative $0.07 per share. This compares to GAAP net loss available to common shareholders of $176,000 and diluted EPS of $0.00 per share in last year's second quarter. However, as we discussed in the press release and in previous earnings calls, 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 or loss available to common shareholders to exclude, one, the cash amortization -- the non-cash amortization of intangibles such as the customer list acquired with the PathLogic and Clarient acquisitions; two, non-cash stock-based compensations that are partially driven by changes in the Company's underlying stock price in any given quarter; three, the deemed preferred stock dividends required by GAAP accounting which are a non-cash charge; four, the amortization of the beneficial conversion feature related to the preferred stock that is also required by GAAP accounting and is also a non-cash charge; and five, other one-time or nonrecurring income or loss items, of which there were none in Quarter 2. We refer to this measure as adjusted net income and on a per share basis adjusted diluted earnings per share, and we have included a table with how this is calculated in our earnings release.

In the second quarter, adjusted net income was $3.7 million, a 577% increase over the $504,000 for last year's second quarter. And adjusted diluted EPS was $0.04 per share compared to $0.01 per share in Quarter 2 2015.

Before opening it up for questions, I would like to comment briefly on the 2017 draft rule for the physician fee schedule that was released by CMS on July 7. Overall, we were very pleased with the implied reimbursement rates in this preliminary rule. If the rule holds up through the final rulemaking process in November, and we have no reason to believe that it won't, the net results will be in line with our previous expectations and should result in approximately a 1% reduction in average revenue per test in 2017. Considering that we have reduced average cost per test by approximately 5% to 7% per year over the last five years, we believe we will be able to absorb these reductions in 2017. Keep in mind also that Medicare is now only 16% of our overall payor mix.

Among other highlights, we are pleased that there were no significant reductions in the technical component of FISH or IHC testing, each of which had significant increases in 2016. Thus, CMS appears to have upheld the 2016 rate increases. We will, however, receive a 19.3% decrease in the technical component of flow cytometry for a Medicare test, but this was expected. For those investors who would like more detail on the implied rates for 2017, please refer to the appendix of the Company overview presentation that is posted on the IR section of our website.

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

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

Good morning guys. Just a couple of quick questions. You covered most everything. Good quarter. One, just wondering, any color on cross-selling activities that you can give? In particular, are you having any success yet capturing IHC revenue from legacy Neo customers?

Thanks for the question. We have not begun in earnest selling and cross-selling each other the Clarient book of business to NeoGenomics customers or vice versa, except that we are getting some traction in the molecular space and in the IHC area for things like PD-L1 and PD-1. So Clarient has a very strong reputation and product offering in IHC. We are starting to take advantage of that but we've got a lot of room to grow with digital pathology products and other IHC-related products with the Neo clients. And we have started selling to Clarient clients the molecular menu of NeoGenomics. But I think we've got a long way to go there to grow our volume in both areas.

Perfect. And then any chance you would give us a sense of how much of the $20 million to $30 million of synergies are yet to be realized versus what's already reflected in the results?

We've said that we expect $6 million to $8 million of synergies this year, and we've also said that we expect sort of 80% of the total synergies will be cost related, and another 20% or so will be revenue synergies. It's really hard to isolate what's a pure synergy versus what's an increase in productivity that results in reductions in cost per test, but I think, as just a going in entry point, I think it's probably fair to say we are approaching half of what we said we would do for this year through the first half of this year.

(multiple speakers)

Sorry? I cut you off.

Obviously the bulk of the $20 million to $30 million is ahead of us.

Excellent. That's all we had. Thank you.

Amanda Murphy, William Blair.

Good morning. I just had a question on the comments you made about kind of where the source of the growth was for the legacy business. I guess, just taking a step back for a second, if you think about tech only as a market, how penetrated are you in that space? And can you also talk a bit about kind of underlying same-store sales growth that you're seeing as well?

Sure, thanks for the question. So, the growth in the base Neo business was quite wide-ranging. So it occurred in most of our geographies. It occurred in most of our product lines. It was not just tech-only; it was really almost every product line. In fact, flow cytometry grew very well. Molecular continued to grow very well.

And I think that, in terms of penetration of our tech-only products, we have a long ways to go. I think we've got a good market share, but this is a big, big market, as you know. It's a $5.5 billion market. And we think that between our flow cytometry and immunohistochemistry and FISH tech-only programs, we've got a very good product line. And we're trying to make it better all the time, and we think we can continue to penetrate accounts, not only with that but with our comprehensive menu.

Got it. Okay. Is there -- if you think about geographical expansion or penetration, is there a particular area that you feel is kind of underpenetrated that might be a near-term opportunity for you?

I think that our opportunities continue to be community-based healthcare systems, but increasingly, as a result of larger GPO kinds of arrangements, we are being able to penetrate these larger hospital systems that are a part of buying group. We are also beginning to penetrate academic centers more fully. So this is not really a geographic focus, but it's rather a type of client.

So if you step back and think about the evolution of our Company, we were, in the past, more focused on smaller community-based pathology practices in hospitals. While we continue to have that is a focus, we are moving upstream. And because of the breadth of our menu, we are able to add value to even some very sophisticated academic centers, and that's where we are growing as well.

Got it. And then just a couple more, one on the -- I think you implied that you have not yet lost a client. Is that fair? I just wanted to make sure I understood the commentary.

Yes, our client retention is very very strong. I don't know really of a client that we've lost as a result of integration activities. There are always one-off cases where -- and there have been through the last years where -- that you lose one client for a reason that they are acquired or something, but I don't know of one client that we've lost as a result of the integration.

And so is it fair to say then -- or I guess maybe rewording it, are you still maintaining -- I think you said originally was it $6 million in terms of a dis-synergy for the year? Are you still maintaining that, or do you think that might be conservative?

That's sort of baked into our revenue guidance for the year overall. And clearly, our sales team is distracted. They've been distracted in the first quarter. They've been distracted in the second quarter. They are distracted now, because what we are doing is we are changing our LIS systems and products. And so you are seeing the distraction in our numbers right now. So, I guess you could say that we would have had even better growth had our team not been distracted.

I think it's important for the analysts to understand that we are migrating all of the Clarient clients and the joint clients that used both our systems from having to use the Clarient LIS system at all onto the new NeoGenomics system, which has been fairly significantly improved to incorporate the best functionality of what Clarient had to offer. But when you are teaching clients a new system, there's a period where the sales reps need to go talk to the pathologist and the accounts and get them comfortable with it and answer their questions, and those are sort of time intensive activities that we think will be a distraction for the balance of this year, and we hope to complete this activity later in the fall, maybe in the November time frame. But this is -- we are entering the period where the most customer-facing activities are going to occur. And that's an important piece of this. So while we are very bullish about the growth prospects, we also need to be very focused, as Doug mentioned, on retaining clients first and foremost.

Okay. Thanks very much.

Drew Jones, Stephens Inc.

Good morning guys. I was hoping to dial a little bit more into the CRO strength in the quarter. Was that legacy Neo when you say pro forma growth? And I guess are we thinking new customers? Is it more FISH-based? Is it more IT and flow like what you've seen historically with Clarient? And then could you just remind us, because we haven't talked about it in a while publicly, what does the pricing and margin structure look like for these relationships relative to the rest of the business?

Okay. So thanks for the question, Drew. So, I would step back for a minute and say we really like the biopharma business. We started to invest in it at NeoGenomics a couple of years ago, and we believe that it's a good diversification, and we are investing in it as we speak.

We find the Clarient business was a much more sizable business than we had at NeoGenomics. And we like it because it keeps us at the leading edge of innovation.

We did have to rebuild the sales team that came with the business at the beginning of the year from Clarient, and we've done that now. As you know, salespeople take a little while to generate good pipelines and forecasts, but that activity is going on right now.

So in Quarter 2, we did have some business that we were able to execute from a wide range of product lines. Now, the biggest I would say was some contracts relative to immunotherapeutics. This is a PD-L1, PD-1, which is a really growing area for us in the biopharma area as it is in the clinical business. But we also had product lines like MultiOmyx, which is something that I think we've talked about in the past, which we've had some good project and revenue activity with.

But the key thing I want everyone to understand about the biopharma business is this is a terrific business, we love it, but it is a little bumpy. And I said in the comments that we had a good bump in Quarter 2. We hope we have a lot of good bumps, but it is now about 10% of our revenue, and until we have more critical mass, it may be a bit bumpy in the future as well.

So taking what you said about 2Q lumpiness with CRO, and you talked a little bit about distractions from the integration, is there any reason to think that, the second half of the year, we wouldn't see that normal seasonal strength where that's meaningfully larger than the second -- first half of the year in terms of revenue?

No, we don't see anything in our business that causes us any pause. Now, you know from covering us for a while that Quarter 3 is usually a lot like Quarter 2. There are seasonal patterns in the business, and we don't expect that those would be any different this year. But the business is strong. We don't see anything that causes us pause. We've had the benefit of having two great quarters of exceeding guidance, and we like to exceed guidance.

And last one for me, I believe as far as the guidance is concerned, you guys assumed about 50% of your commercial payors would eventually follow CMS up in the FISH reimbursement increase this year. Where do we stand on that front?

We said that was a long-term exercise. Commercial payors do not move very quickly when it's to their disfavor, if you would. So initially many of our contracts, particularly the Medicare Advantage plans that are directly tied to the Medicare rates, those reset immediately, but some of the others, particularly perhaps in the Blue Cross world, we are actually having to talk to one at a time. I think right now it's happening about as we expected, but it does take time.

Thank you guys.

Paul Knight, Janney Montgomery.

Hi Doug and Steve. Congratulations on the quarter. Where do you all think the CMS is on their review of codes? Obviously, we have a pretty good runway for the next 12 months, but is this I think you mentioned 2% kind of normalized growth something that's visible beyond this year?

So, we actually think that everybody should just assume modest price decreases every year even though we think we are entering into a period of relative price stability. The 2% increase on a pro forma basis of average revenue per test this year is being driven by the pretty pronounced increase in FISH testing that they put through in 2016. Keep in mind they increased the technical component of FISH 87% this year to fix an error that they made in 2015. And so I don't think you're going to see many 87% increases in rates on a moving-forward basis.

We are expecting the 19.3% cut in the technical component of flow next year, and we are actually expecting another 19.3% cut in flow cytometry in 2018 as well. But when you look at our reimbursement levels for flow cytometry, the commercial payors and even the hospitals are well below the CMS levels. And one could argue that Medicare probably should reduce the flow cytometry reimbursement if they wanted to be consistent with the commercial payors, which is where Medicare wants to go. We never like to see that of course, but we are prepared to deal with it as it comes. And given that Medicare is only 16% of our overall payor mix, it doesn't have anywhere near the impact on us that it used to have when Medicare was 47% of our payor mix six or seven years ago.

And then you mentioned LIMS in the California lab build out of initiatives on building margin visibility for next year. What are the other pieces of low-hanging fruit that you see, Steve?

Paul, let me -- this is Doug. Let me try to address that. So, we made a lot of changes to our LIS system, and I must say our IT team did a great job. I think we have a very good IT system now which we are migrating clients to. And just having all of our clients on one single LIS system and one single billing system and one single offering is going to allow us to be a lot more efficient.

Now, in addition, when we put the labs together, there's going to be a lot of efficiencies. And even though we are growing, we think we can manage the change to our employment base through attrition and good growth. I think we're going to having a lot of cost reductions. But in addition to those things, there are areas like supplies, savings.

So having a much better critical mass allows us to work with suppliers to try to get the best prices and the best processes through our procurement systems. I think that's a huge opportunity.

But when we are able to have everything under one roof in a couple of big labs, we're going to be able to really leverage best practices. And you know the cost per test reductions that Steve mentioned that we have been enjoying and trying to generate for years? We are going to have that ability when we are all together to start doing that same thing again, but it's going to take a while. We have to get our -- get the labs integrated and everything in the same systems, and that will happen this year.

Thank you Doug.

Raymond Myers, Benchmark.

Thank you. My first question is for Doug. Doug, you talked about the reduction in cost per test despite some increased temporary inefficiencies for the validation work involved in the integration process. Can you give us some sense of quantifying how much of these inefficiencies were felt in Q2, and give us some sense for when you feel that those costs would be complete?

Thanks Ray. It's a good question. Let me first explain what we're doing, what this activity is. So, for supplies usage, what we are doing is Clarient had certain processes and certain supplies and tests, and NeoGenomics had certain processes and supplies and tests, and now we are creating one centralized way to do this. And so when we move to one single way to process these tests, we've got to revalidate, as a part of our quality process, all of these new tests using new supplies. And we are just burning reagents and burning time, and we are generally inefficient, both in supplies usage and in people productivity during this time frame.

Now, I'm not sure I should quantify this for you, but this activity should be tailing off in, I don't know, August kind of time frame. And we should be fully, pretty much fully done with this activity in the third quarter. So I think we should start to see some benefits of that reduction in excess validation and integration-related inefficiencies starting here in the third quarter.

Okay, thanks. That helps. And then one thing, as you go through your remarks, and the results were very good, could you discuss how the business was able to grow despite all this integration work?

Thanks for that, Ray. But we have a really good team. I think our sales team is terrific; our medical team is terrific. Everyone in our company is very focused on growth and doing the right thing for clients. And fortunately, I think quality and service still do matter in our business. And I think we have good quality and service. And there's a lot of word-of-mouth that goes on in our business, and we are certainly getting the benefits of that in terms of market share gains. And we are trying to keep our heads down and do the right thing for patients and clients.

And is this something that you think you can continue that wasn't just a one-quarter thing, but this trend of organic growth can continue, even through this LIS integration that you anticipate over the next several months?

What we said was that we expected a distraction because of all the things that we've talked about here. Now, we've been fortunate that, in Quarter 1 and Quarter 2, the distraction maybe wasn't as significant as we expected. But we are cautious. We want to make sure that people know, look, we are integrating. But we think that the same kind of dynamic that has occurred over the past that's allowed us to gain market share will continue.

Okay. That's great. And then let me finish with this question. It's the one I get the most from investors either in the story or new to the story. When they ask about the risks of the LIS integration, that's probably the factor that concerns them the most. What can you say to alleviate concerns that, when you convert to the new information system, you are not going to uncover or encounter issues and problems?

I guess I could say this, that we've already made the changes, most of the changes in our LIS system. We've already migrated the first wave of clients. And so far, it's pretty good.

I would also just add that Clarient used a very similar LIS system. In fact, the original kernel of Clarient's system was the same original kernel from NeoGenomics. We diverged from the vendor that we were using about four or five years ago. They diverged two or three years ago. But the look and feel of the system was very similar between the two, and so the amount of client reeducation work is sort of more in the intuitive camp. It's not something they are going to have to call customer service and say how do I do this? It's something they should be able to figure out pretty readily.

Okay, that's great. Thank you very much.

(Operator Instructions). Chris Lewis, ROTH Capital.

Hey guys. Thanks for taking the questions. I wanted to follow up on some of the LIS migration. I guess just a couple of things. When did that migration begin? And I know it's early but do you have any early feedback from those clients who had been converted over in terms of the reception thus far? And then when do you expect that to be completed?

Okay. So Chris, one thing I want to make sure everyone understands is we are not moving to a brand-new system that's untested. We are moving to a system that we have been using at NeoGenomics for a long time. The system has been revised, but it's fundamentally the same system. So, the risk is not like moving everything to a brand-new system that's not been time-tested. That's the first thing.

The second thing is the bulk of the changes to allow for the wave migration have been completed about six weeks ago. And so now we are going to migrate the Company's Clarient's clients in waves. We have a series of those, and we have about completed the first wave, which we spent a little bit more time on to allow for us to make sure that we are doing the right thing and get a lot of client feedback, which we are surveying clients as well as getting real-time feedback. So far, it's going very well.

Rob Shovlin is here, who is our Chief Growth Officer, so I'll ask Rob if he wants to make any comments. But overall, the migration has gone -- is going well, and we've got six or seven waves ahead of us to migrate over the next couple months. Rob, do you have any --

Yes, I would add that it's a very deliberate process. We did a lot of planning and testing preparing for wave one. We did a lot of communicating. So as we rolled out wave one with changes that had been implemented, as Doug said, weeks before, it's been a very deliberate metric for us. So we've gotten some client feedback, and most of it is just some things are slightly different. So you have to answer questions for changes. But it's not something that is drastically new, as Doug and Steve pointed out. So, the process is going very smoothly, and we've learned some things in wave one that we will apply to future waves, and we should be complete over the next few months.

Great, appreciate the color. And then switching over to the lab consolidation, I guess can you just elaborate on how that process is going? What are the key milestones that we should look for over the remainder of this year? And I believe you kind of have targeted end of year for that consolidation to be completed. Are you still on track for that? Thanks.

Thanks for the question. Yes, we are on track. Right now, what we are doing is we are renovating the Aliso Viejo laboratory; we are making a lot of changes to it. During this process, it's a bit of a choreography, because we are moving some departments to Irvine, we are consolidating some testing in Irvine in anticipation of moving it back to Aliso Viejo. So there are a lot of moving parts on this one, but it's really just construction. We are fortunate that the Irvine and Aliso Viejo labs are 8 miles apart. So we have -- we are burning up the road moving specimens back and forth a bit and will so for the next few months. But the construction is going just as planned. We are going to have one heck of a nice-looking lab in Aliso Viejo when we are done, and that ought to be around the end of the year.

Great. And then can you quantify just the amount of cost savings you expect from the impact of that consolidation in 2017?

Well, the total amount of cost savings -- we said, and I guess I'm going to stick to our script here on this one. So we've got $20 million to $30 million of cost -- of general synergies, the bulk of which are cost savings. The bulk of those will happen in 2017.

Understood.

The facilities opportunity is not anywhere near in size to the reduction in cost per test opportunity that comes with just more scale and having people operate on the same platform.

Right, okay. Thanks for the time.

Scott Billeadeau, Walrus Partners.

Thanks for taking mine. Most of mine have been answered. I guess just one question. Anything new with your partner GE and what their status is?

Well, I can tell you that we have a representative from GE Healthcare Life Sciences serving on our board, and he is terrific. We've had great, great cooperation and support and encouragement from the people at GE. We are moving off of we call it the transition services agreement, TSAs, so we are moving off of the support for IT systems and other things that GE provided us during this transition period. And by the way, we are going to save some money as we complete the transition away from these TSA agreements. But that has been terrific. GE has been really, really supportive of us. They've helped us and are helping us to open doors in the healthcare community, and we are really appreciative of their ownership.

Great. As I said, most of my questions were asked or already answered. Good quarter guys. Thanks so much.

Raymond Myers.

Thanks for taking the follow-up. I just wanted to touch on the tax rate. Can you give us a sense of what the normalized tax rate is likely to be over the next several quarters or years as you become hopefully increasingly profitable?

Keep in mind our book tax rate will be between 45% to 50%. However, right now, we are not a cash taxpayer except for various states. We still have an NOL and we are not a cash taxpayer at the federal level yet. However, for book tax, you will continue to see about 45% to 50%, the majority of which will net against our deferred tax balance.

Will that stay at that rate as you become more profitable in the years to come, or is that fixed to some other factor?

No, it will stay in that range. We expect 45% to 50% to be the range moving forward.

Unless the administration lowers business taxes, which there's a lot of talk about.

Assuming all stays the same in Washington, which is a big wildcard.

And that's a combined state, local, federal tax.

We have one question that came in over the email related to the comment about having a vision to be the leading cancer testing and information company in the world, and asking if we had any plans to grow internationally. The answer is yes we do. And what we will do is try to grow internationally first in our biopharma and research area. We think that our pharmaceutical clients would enjoy very much having us have a worldwide capability to perform clinical trials not just in the US but outside the US as well. Many of them have asked us to do that, and we will likely grow our footprint outside the US first in that area.

We have one other question here to address the preferred stock and what are our plans to take that out. Under the terms of our agreement with General Electric Corporation, we can redeem the preferred stock at any time over its 10-year life. We have been given ample incentives to do that sooner rather than later. As we discussed before, the PIC interest rate is 0% this year and then it goes up to 4% in years two through four and then it increases 1% a year thereafter. And in addition to that, GE gave us a $10 million discount if we take it out this year, which reduces it to $7.5 million next year and then $2.5 million per year thereafter.

The way we think about our opportunity with the preferred stock is that we definitely think it is in the interest of our shareholders to take that out at an appropriate point in time. Factors that we will consider when doing that is how much bank debt should we use to take it out versus how much of an equity instrument. Keep in mind the Company is actually generating quite a bit of quarterly cash flow from operations, and so our debt capacity is going up.

Other things to keep in mind are what's going on with the overall market. The markets have been extremely volatile in recent history. In fact, the discount rates that follow on offerings are being priced at are materially higher this year than they were last year. So we look at all these things, and there's a lot that goes into a decision like this. But I think, from our perspective, we don't really feel like we have to take out the preferred stock in any great hurry. We view that just that 3% difference in discount rate would more than offset the incremental discount that we get from GE this year. So from our perspective, we want to time it so we can maximize bank debt and maximize the market receptivity of the offering. And I expect we will do something in the next three years but we don't have any definitive plans at this point in time.

And keep in mind, when we do do this, we are likely going to remove 7 -- 14.7 million shares of preferred stock with something significantly less. So we think we have an opportunity on a per share basis to have whatever take-out we do be actually accretive. If we took this out with 7 million, 8 million, 9 million shares of common stock and some bank debt, that would be a very good thing for all the per share metrics moving forward.

We don't have any further questions that haven't already been addressed, so Doug, I'll turn it over to you to wrap this up.

Thanks Steve. So as we end the call, I want to take time to recognize the approximately 925 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 you all for your time in joining us this morning for our second-quarter 2016 conference call. We want to let you know that our third-quarter 2016 earnings call will be held on or around October 25, 2016. And for those of you who are listening that are investors or are considering an investment in NeoGenomics, we thank you very much for your interest in our Company. Goodbye.