NeoGenomics, Inc. (NEO) Q2 2013 Earnings Report, Transcript and Summary

Greetings, and welcome to the NeoGenomics Second Quarter 2013 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Doug VanOort, CEO for NeoGenomics. Thank you, Mr. VanOort. You may now begin.

Thank you, Christian. Good morning. I'd like to welcome everyone to NeoGenomics' Second Quarter 2013 Conference Call and introduce you to the NeoGenomics team that's here with me today. Joining me this morning are Steven Jones, our Executive Vice President for Finance; George Cardoza, our Chief Financial Officer, Bob Gasparini, our Chief Scientific Officer; Steve Ross, our Chief Information Officer; Fred Weidig, our Director of Finance and Principal Accounting Officer; and Jerry Dvonch, our Director of External Reporting. Dr. Maher Albitar, our Chief Medical Officer, is joining us from our Irvine, California office by phone. Before I 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 statement speaks only as of today, and we undertake no obligation to update any such statements to reflect events or circumstances after today.

Okay. Thank you, Steve. I'll begin our call today with some remarks about our performance in the second quarter of 2013, discuss some important initiatives and comment briefly on the recently issued proposal by CMS. I'll then turn the meeting back over to Steve to discuss our financial results in more detail. Second quarter profitability was solid, as our operations continued to execute well. However, we were disappointed that test volume growth and revenue were slightly below our expectations. The revenue shortfall versus our estimates was caused by 3 things: the molecular reimbursement fee reductions; a couple-month delay in the start of a clinical trial; and more cautious ordering by our clients. We did make excellent progress with cost-reduction initiatives, and we're pleased to report earnings of $0.01 per share despite a $1.6 million or $0.04-per-share impact to profit versus last year, caused by lower average revenue per test. We also made excellent progress developing and introducing new tests to drive revenue growth well into the future. Second quarter revenue of $15.6 million was flat with both last year and last quarter. Testing volume grew by about 13% from quarter 2 of last year. Average revenue per test fell by over 11%, due largely to the impact of the TC Grandfather Clause expiration at the beginning of the second half of last year and to recent changes in molecular reimbursement levels by our Medicare carrier. We nearly made up for the price reductions with our steady operating cost-reduction efforts. Second quarter gross margin was about 46% as a result of productivity gains and process improvements. We also maintained tight control of operating expenses despite targeted investments in sales, R&D and information technology. Adjusted EBITDA was 11.7% of sales and was about the same as in last year's second quarter, despite the reductions in average revenue per test. Our balance sheet is in good shape as a result of the quarter 1 stock offering. Although the accounts receivable balance is higher than we like, our teams are focused on implementing a new billing system in the next 3 months, and that should give us an ability to streamline our operations and speed the collection process. We ended the quarter with over $11 million of cash and debt capacity available to us. It's our custom during these investor calls to update you on several of our key initiatives. I explained in our last call that we have 5 key categories of objectives: people, quality, growth, innovation and performance. We're making very good progress in accomplishing these objectives, and the organization is aligned and working together well. Our quality and performance initiatives are making a difference. Our best practice teams are really engaged and are executing a great variety of projects to improve the way we work. These projects range from small changes in laboratory layout to changes in supplies management, to major changes in automation. The work of our best practice teams is also being integrated with our Lean initiatives. Our teams recognize that being Lean is a process. And even as they implement process improvements, they are identifying additional improvements that can be made. As a result, we expect to continue to drive process improvements and reductions in our cost of testing continuously and into the foreseeable future. These changes require support from our information technology teams. And information technology is an area of important opportunity for us. In information technology, we believe we have an advantage in as much as we have one standard laboratory information system, and we own the source code for that LIS and have the ability to modify and enhance our systems. We're fortunate to be in control of our own system because we have a long list of requests for system enhancements, ranging from improvements in the way our clients receive information from us, to billing system and process changes, to operational changes resulting from our efforts to create a Lean workflow and automate our processes. In fact, until recently, our appetite for additional system enhancements had strained our IT organizations' capability to produce. As a result, we are ramping up our investment in information technology. We recently changed our organizational approach, execution process and brought in additional resources. We believe these investments are smart investments. And we intend to launch a steady stream of powerful system enhancements in the second half of this year with important benefits to cost, quality and growth. Quality and performance initiatives help to drive the cost per test in quarter 2 lower by over 9% compared with last year's second quarter. Innovation is very important to our company, and we have an extremely productive R&D team. During quarter 2, we launched an additional 11 molecular tests and tumor profiles. Our tests are orderable individually or in disease profiles and cover a wide range of testing for oncology. As an example, we recently launched a number of clinical molecular tests for the comprehensive profiling of myelodysplastic syndrome, or MDS. We believe our tests are the most advanced and comprehensive profiling tool available for this hard-to-diagnose disease. You will likely see more press releases from us announcing the launch of novel new tests in the future as we seek to capitalize on our strengths in molecular testing. Now with a menu of approximately 65 molecular tests and profiles, a comprehensive portfolio of FISH tests, new immunohistochemistry tests and a digital image analysis product, we believe that NeoGenomics has one of the most extensive oncology-focused testing menus in America. We believe that our focus on innovation is increasingly building our reputation as a leader in oncology. One benefit of this is in clinical trials. While clinical trial testing serves biopharmaceutical clients rather than oncologists and pathologists, the precision allowed by genetic and molecular testing is critical to many drug development programs. As a byproduct of our focus on innovation, we have steadily been growing our clinical trials business. We have strong capabilities in testing for clinical trials, and we are looking to grow this side of our business in the future. We're also continuing initiatives to develop a few important proprietary tests. The most interesting of these is a test we continue to develop for prostate cancer, which is performed on blood plasma and urine rather than on prostate tissue biopsies. As we've described, there are 2 goals for this test: first is to diagnose the presence of cancer in patients with BPH; the second is to be able to distinguish high-grade from low-grade prostate cancer in patients with prostate cancer. During the quarter, we submitted a paper for publication and made arrangements to increase the size of our validation set. We continue to be excited about the potential for this test and expect to launch the test in the first half of next year. Obviously, growth is critical to NeoGenomics. Despite all of our new product offerings, we realized that test volume growth has slowed over the past few quarters. Although our sales team has been quite productive, we have taken action to make it more productive and larger. During the second quarter and in the subsequent weeks, we've hired 5 very talented and experienced sales representatives. We feel fortunate that many qualified sales professionals are seeking out employment opportunities with NeoGenomics. With some active management of representatives with low rates of productivity, we now have 26 sales professionals and the strongest sales team we've ever had. We expect to end quarter 3 with between 27 and 28 sales professionals, and we are expecting even stronger productivity from our team. While we have commented exhaustively about the impact of the TC Grandfather Clause expiration, we have not commented on a more nuanced change that has occurred in client ordering patterns as a result of the TC Grandfather and more macroeconomic dynamics. As a result of the TC Grandfather expiration, hospitals are now being built for inpatient and outpatient testing instead of Medicare. Many hospitals are then being reimbursed substantially less from Medicare than what they are charged by the laboratories, as Medicare has set the reimbursement levels extremely low for certain tests. As a result, hospitals have been more actively searching for ways to reduce their standout testing costs. And even in the critical cases of oncology testing, there has been more reluctant ordering than in the past. Some larger clients have also experimented with in-sourcing certain tests. In-sourcing by hospitals and physicians clients has affected our business historically as well. In fact, about $450,000 per quarter of immunohistochemistry revenue was in-sourced about a year ago. And clients both in-sourced and outsourced, depending on many factors. The combination of ordering reluctance and modest in-sourcing has put some pressure on our volume growth. But we believe that our expanding menu of products will enable us to perform a larger share of testing for our clients and that our competitive strengths will allow us to continue to add new clients. We believe that our volume growth will accelerate in quarter 3 and again in quarter 4 as a result of these factors. We also believe that changes in reimbursement may serve to accelerate the consolidation of our industry, and we are taking a more active approach to exploring acquisition opportunities. Many of you have called to ask about the new proposed rules for calendar year 2014 that the centers for Medicare and Medicaid or CMS issued on July 8. This 652-page proposal was unexpected by the lab industry and, if enacted, would have significant implications for the industry and for cancer patients. The proposal seeks to change both the clinical lab fee schedule and the physician fee schedule. Essentially, CMS proposes to completely overhaul the clinical lab fee schedule over a 5-year time period, as well as cap the physician fee schedule at what Medicare pays hospitals under payment structures referred to as the OPPS or APC systems. Many of the tests targeted for reduction under the physician fee schedule, such as FISH and flow cytometry, are used for the diagnosis and monitoring of critically ill cancer patients. And these tests are absolutely essential to patients receiving proper care. The proposal is in graph form, allows a 60-day comment period and targets issuance of a final ruling in early November for adoption on January 1 of 2014. It's early in the process, and we're still analyzing the potential effects on NeoGenomics and our industry. There are parts of the proposal that are unclear to us and to the rest of the laboratory industry. We are concerned that CMS might not understand the essential nature of genetic testing as it applies to oncology or the cost to perform these tests, and that access to these essential genetic tests for Medicare patients would be severely threatened if their proposal was enacted as drafted. One example -- one interpretation of the proposal suggests that reimbursement rates would be well below the cost of testing even for NeoGenomics and other efficient labs. No company can offer products for sale at prices well below its costs to produce these products. And if these tests were unavailable, we believe that critically ill cancer patients would not receive proper care and appropriate care. We do not understand CMS' reasoning in proposing this change and, we believe, is fundamentally flawed. You should know that Medicare represents about 25% of our payor mix. You should also know that many commercial insurance payers have used the Medicare reimbursement rates as a benchmark for their own reimbursement rates in the past. Fortunately, most of our commercial payor contracts have fixed rates for the key services we provide for some fixed term. But over time, the Medicare rates would likely influence the commercial payor rates. We don't believe that Congress or CMS wants cancer care to severely deteriorate, and we are planning to help explain the cancer genetic testing process and the important benefits that our testing provides to improve the quality and cost of oncology care in this country. We're teaming with the American Clinical Laboratory Association, the College of American Pathologists and others to analyze the proposal and respond to CMS. Laboratories, pathologists and oncologists are united in their opposition to this proposal, believing it to be an assault on cancer patients and laboratories. Bottom line, it's early in the process, but we're still analyzing the proposal, and it's too early to speculate on the implications for NeoGenomics or the industry. To summarize my comments, I'd like to make a few points. We believe that NeoGenomics currently offers both high-quality and low-cost cancer genetic testing services. And we believe that we can lower our costs continuously for the foreseeable future. Historically, we have been successful growing our business through a variety of difficult economic environments. Growth is as important now as it ever was, and we believe we can accelerate our growth in the coming quarters. We have a comprehensive oncology-focused product portfolio, perhaps, the most comprehensive in America. Our tests are important and are medically necessary. And we are constantly innovating and developing new tests, including some very exciting proprietary tests, which can drive growth over the long term. Our teams remain excited about the company and its prospects, and we are focused on continuing our growth momentum in the coming quarters. I'll now turn it over to Steve to comment more fully on our financial results.

Thanks, Doug. I'll start by reviewing some of our financial and operating metrics for the second quarter, and then we want to open it up for questions. Second quarter revenue was $15.6 million, unchanged from Q2 last year. Test volume grew 12.7% versus last year. As in previous quarters, growth in molecular testing led the pack with 53% volume growth and 25% revenue growth. Average revenue per test, overall, was $480, an 11% decline from Q2 2012, primarily as a result of the expiration of the TC Grandfather Clause and the changes to the molecular reimbursement finalized this past quarter. The sum of these 2 impacts totaled almost $1.6 million or approximately $49 per test. Absent these impacts, revenue would've been 10.2% higher than the second quarter of last year. For those of you that tracks such things, our average revenue per molecular test was about $190 per test in Q2, which was down about 19% from Q2 last year, and we have now fully rolled through the molecular reimbursement cuts from Medicare and made appropriate assumptions for what the private payors will do for our molecular testing mix. Gross profit was $7.2 million, a 3% decrease from last year. Considering a large decrease in average price per test, we were quite pleased to hold margins in this area constant. As we have discussed, we have created a number of best practice teams to really go after improving our efficiencies and ringing out incremental cost savings. Average cost of goods sold per test was $260 versus $286 in Q2 2012 and $262 in Q1 2013. As Doug discussed, we believe we can make further improvements in these metrics by year-end. Turning now to SG&A. Total sales and marketing expenses increased by $37,000 or 2% versus quarter 2 last year and was up by about $40,000 from the first quarter of this year. As Doug mentioned, we have added 5 experienced sales professionals to our sales and marketing teams since the end of Q1, 3 of which were replacements and 2 were new. All of these hires occurred at the very end of the quarter or after the quarter ended. We're also expecting to add 1 to 2 additional sales rep during quarter 3, so investors should expect our sales and marketing expenses to go up in the coming quarters. General and administrative expenses were unchanged from last year, and R&D expenses increased by $89,000 or 17% versus Q2 2012. This increase in R&D spending is directly related to the significant increase in our molecular test expansion activities and the activities associated with the development of our new prostate cancer test. Total SG&A expense was up just $124,000 or 2% year-over-year. It was actually down $290,000 or 4% from the level posted in Q1, mostly as a result of decreases in stock-based compensation. Net income for the quarter was $273,000 or $0.01 per share compared to net income of $551,000 or $0.01 a share in quarter 2 2012. This decrease in profitability is due entirely to the loss of approximately $1.6 million of revenue from the unit price decreases that accompanied the TC Grandfather expiration and the molecular reimbursement changes. Depreciation and amortization was $1.1 million in the second quarter, and noncash stock-based compensation was $202,000, which resulted in adjusted EBITDA of approximately $1.8 million, essentially unchanged from the $1.9 million reported last year, despite the decreases in average revenue per test. We finished the quarter with 293 full-time equivalent employees and contract doctors as compared to 282 at March 31, and 268 at December 31 of last year. Our accounts receivable balance net of allowance for doubtful accounts was $16 million at June 30, up approximately $400,000 from the balance at March 31. Our AR balance in terms of days sales outstanding was 93 days as of June 30, up 3 days from the level we reported at March 31. The increase in DSO was mostly due to the fact that we are in the process of implementing a new billing system, which is scheduled to go live shortly, which has distracted our focus on collections somewhat. In terms of our overall liquidity, as of June 30, we had $4.6 million cash on hand and $6.8 million of availability under our working capital line of credit, which results in $11.4 million of total liquidity as compared to $10.4 million of total liquidity at March 31. Our cash flow from operations in Q2 was $1.9 million as compared to negative $1.3 million last quarter and $1.1 million in quarter 2 last year. We purchased $1.1 million of PP&E in the quarter. However, we are able to lease finance approximately $1 million of this amount, plus the net use of cash from investing activities was only $370,000. Although revenue was flat to Q1 and our DSO increased slightly, our liquidity -- our overall liquidity improved smartly in Q2. Indeed, we were able to pay down approximately $1 million of our revolving credit facility balance during the quarter. The revolver balance was only $3.2 million at June 30, which is the lowest it has been in years. Turning now to the guidance we issued this morning for the third quarter. In Q3, we are expecting revenue of $15.8 million to $16.4 million and 0 to $0.01 per share of net income. We've begun to hire additional personnel, so we expect that our SG&A expenses are going to go up modestly from the Q2 levels. For the full year, we are resetting our guidance to $63 million to $66 million, with earnings of $0.01 to $0.04 per share. At this point I'd like to close down our formal remarks and open it up for questions. [Operator Instructions] Operator, you may now open up the call for questions.

[Operator Instructions] Our first question comes from the line of Matt Hewitt with Craig-Hallum.

This is actually Dylan sitting in for Matt. Just a few for you real quick. Just kind of parlaying of the hiring of the sales professional commentary, how long does it typically take for new salespeople to ramp up the business? And do you guys have a predefined goal for how -- in terms of dollar amount that you would like them to achieve?

Yes, thanks for the question. I'll make a couple of points here. One is that in the past, we've hired sales representatives that did not have a lot of experience in our particular industry or in atomic pathology and genetics space. So in that case, we would expect 6 to 12 months before they would really be at a pace of productivity that would be acceptable to us, then we put them through a lot of training. In this case, we mentioned that we've hired some sales professionals recently. These people are all very talented, very experienced, most of them know our industry, know our product lines, and we would expect them to be productive almost from the get go. I mean, obviously, we've put them through a little training, teach them about the NeoGenomics way, but we would expect in the first 3 or 4 months that we're going to see some benefits.

That's great. And then back -- going back to last quarter, you guys commented that you hired a couple business development people to pursue the larger oncology practices. Any color on how that's been going over the past quarter? And do you guys anticipate any to close by the end of the year?

Yes. So we're making a lot of good progress. And these people are working on both oncology practices and working through big pathology groups to try to help them gain new oncology practices that testing would come to NeoGenomics through the pathology groups. We are very happy with the 3 people that we've hired in this area. Unfortunately, the CMS proposal has cast some uncertainty over the notion of oncology groups bringing in some flow testing and some other testing, and so there has been a little bit of a hold on that particular aspect of the program. Nonetheless, I mean, we had all 3 of these people get together with our teams last week, and they're very excited about the opportunities broadly for business development. They each have a nice pipeline of large accounts, and in fact, we're starting to close a few of those. And they're working very nicely with the territory business managers that we have in the field.

Doug, I would add to that, some of the new just regular sales reps we hired at our "oncology business development matters" have brought some relationships with oncology practices as well. And so we're getting traditional lab testing business from some of the new reps as well.

Okay. Great. And then last one for me. Just noting from the press release, you've announced 60 new molecular tests over the past 6 quarters. Would you be willing to break out any one or a couple of tests that have been performing exceptionally well for the past 6 quarters?

Well, I would tell you that about 10 tests make up 80%, 85% of our revenue volumes. Those are the KRASs, JAK2s, EGFRs, the Bcr-Abls, and those kinds of tests. The profiles are relatively new phenomenon for NeoGenomics. We have had a lot of interest in our MDS profile. It's really very early on in the days. We also have a lot of traction with the CLL panel. I'd say the panels, in general, get bigger and bigger -- the ordering patterns get bigger and bigger every quarter, but we haven't seen the "explosion" in uptake rates for the panels yet, but we still have 53% year-over-year volume growth in molecular in general. So the core molecular tests outside of the panels and the profile tests are really -- still got a lot of traction in the marketplace.

Our next question comes from the line of Amanda Murphy with William Blair. Amanda Murphy - William Blair & Company L.L.C., Research Division: First question is on your comments on the hospital volumes dynamics, I guess -- I mean, there's quite a lot going on in terms of the hospital market, where they're obviously buying more doc practices, in-sourcing through volume. But then you also have whatever reimbursement changes actually happened and then reforms sort of layered on top of all of that. So I'm curious, kind of how do you see this all evolving over the longer term in terms of how the volumes are going to flow from between the hospitals, between reference labs and between the independent labs?

Thanks. It's a great question. It's not a question that we can give you a specific crystal ball answer, or our crystal ball is nothing better than anyone else's. Generally, we are seeing a lot of dynamics. If you just break it down some of those things into their component parts, when a hospital buys doc practices, specifically oncology practices, it's going to be good for us because our volumes go up materially. I've mentioned before that we had one case where the hospital bought a 9-person, 9-doctor hema practice, and our lab volumes doubled in 1 month. So that's generally a good trend as hospitals begin to in-source more and more stuff that is a negative trend for us. But we are not seeing big uptake rates in the in-sourcing of the critical high difficulty testing. I mean, I'm not aware of really any hospitals that have in-sourced this. Maybe one large academic center, and I was playing around with that, but many of the hospital start with the IHC going towards that, and then they'll move the flow as they get more and more comfortable. A lot of hospitals, generally, they will just have the pathology practice due to professional interpretation of the flow and will send the test flow somewhere else. And so that's a little bit more of a mixed bag. Over time, I think what's going to happen is you're going to see not just hospitals aggregating the bigger groups but oncology practices. One of the things the investment community hasn't focused on not as much as how much rapidly the hematology oncology industry is rolling up. There are aggregations of hema practices happening all over the country, and I think this is a direct response to ObamaCare. That will have implications for laboratory testing as well. Amanda Murphy - William Blair & Company L.L.C., Research Division: And then on the reimbursement side, I guess 2 questions. One, just in your discussion with the lab industry folks and other labs out there, I mean, do you have any idea why Medicare is going after some of the codes are going after? And then I guess another question is, would it make sense that ultimately -- I think you talked about this a little bit, but that as -- so the codes are cut, that, that volume will ultimately flow back out of wherever it's been enforced into?

Well, I mean, Amanda, we don't really know why Medicare is picking on oncology testing or the other codes that they've targeted in the past. It doesn't really make a lot of sense to us why they would target FISH testing, for example, when FISH testing is critical to diagnose and monitor cancer patients. I mean, we just don't get it. So I don't think we really understand, although we, the industry and NeoGenomics, hopes to have some time with CMS over the next month or 2 as we explore these issues. I think that relative to what's been in-sourced and whether things pop back out to the lab industry from physician groups that have in-sourced in the past, I think that will happen. What we have a sense for is that physician groups, clinician groups, are less -- are more reluctant now to in-source because they don't know what the reimbursement is, and the reimbursement rates for a lot of the immunohistochemistry histology costs has been cut so much, that I don't think there's a great rush to in-source. There is one other thing that's happened. The GAO just scored the impact of physician self referral, and I think that will give Congress some ammunition to think a little bit more about whether they want to close down the start exemption.

Amanda, one important sort of nuance, this is a technical nuance, but the FISH codes on the hospital outpatient prospective payment system really have not been vetted at all, those are very, very few hospitals that ever provide FISH internally, and so they always send those out. So the -- while Medicare changed the way hospitals get reimbursed for those tests after the expiration of TC Grandfather -- literally 95% of the hospitals in the U.S. are probably covered hospitals are more grandfather than the TC Grandfather. So when they started making hospitals absorb the price -- absorb the cause of those FISH tests, none -- those codes haven't been really vetted. The hospitals always use outside lab. And so we have a situation where we have FISH codes on the hospital outpatient prospective payment system that have been around for years but nobody's really using much and having been vetted. And then you have the left hand of Medicare saying, "hey, we want to use that as a new benchmark for the physician fee schedule." It just doesn't make any sense. The costs for providing FISH are substantially higher than it was on the OPPS system, and we are hopeful that calmer heads and rational heads will prevail in Medicare. Amanda Murphy - William Blair & Company L.L.C., Research Division: Got it. Then just last one. On the competitive landscape. So some of the other independent labs talks about, I guess, moving more aggressively into the hospital pieces of the world, whether it be professional services or reference numbers. Or have you seen any changes in terms of your business from the competitive standpoint from the independent guys?

Well, as I think you know very well, Amanda, our business has always been very, very competitive. And we haven't necessarily seen more strong competitive behavior. In fact, we're -- as I mentioned in my remarks, we're actually quite -- feel quite fortunate that a lot of the sales representatives from other companies have been actively coming to us saying, "We'd like to work with NeoGenomics." So we think we've got some pretty good competitive strengths, and I haven't seen a noticeable change in the competitive landscape against us. I mean, what we see competitively is that, although this is anecdotal, most of our competitors, we think, are losing volume and reducing costs. And we're trying to be -- taking an opposite perspective here, we believe that bigger is better, we're trying to grow, we're trying to be aggressive about growth, and we're trying to be aggressive about reducing our costs but doing it in terms of a process management fashion.

One interesting trend, as a result of TC Grandfather, Amanda, is that a lot of hospitals are showing our hema practices, that use to do the bone marrow in the hospital setting, they don't want to no longer do them. And so they're pushing it back into the hematology and oncology clinics. And so we see -- actually have a lot of interest from hematology and oncology clinics, who are just beginning to in-source the bone marrow draws and how we can help them. We have a team up training one large hema practices this week. And so a lot of competitors may want to get in a hospitals business -- hospitals don't want those outpatient bone marrows very much anymore because of the OPPS issue, which we have discussed.

Our next question comes from the line of Mark Zinski with Unique Plan Assessments.

Just first question is just looking for an opinion, answer regarding Medicare. There certainly have been like an increasing backlash by doctors, who, you're seeing, were not even going to take Medicare patients anymore. It's still a small percentage of the overall doctor population, but it is growing rapidly. I guess the opinion I'm looking for is, do you sense any kind of kind of seismic shift in terms of reaction to the Medicare cuts, are docs just getting set up with it? And do you think that, that's potentially bringing some more political activism, I guess?

Well, yes, we have a sense for that for sure from the physician community and absolutely from the CMS recent proposal on July 8. Their laboratories, physicians, pathologists are all extremely united, completely aligned and are going to push back hard with CMS on this recent proposal. But we believe that there was a brewing sense from physicians that the CMS has gone too far.

Okay. And now is that impact -- or I should say are the recent CMS proposals materially impacting your acquisition strategy? I mean, are you thinking we want to reduce our Medicare exposure? Or is that not a big factor in your acquisition thinking?

Well, in terms of our acquisition thinking, what we are doing is we're trying to be aggressive. We're trying to be aggressive about considering a great variety of alternatives. There's a lot of uncertainties, so we're being very careful about our thinking here. We would like to diversify a little bit away from the Medicare risk. It's a little difficult when you're an oncology company because cancer is a disease of the elderly, so that's just -- that's what it is. But there are very interesting opportunities for us, for example, in clinical trials. I mentioned that. And there are other ways that we can potentially diversify given the very strong genetic and molecular platforms that we have. So, yes, we will consider all of the above, Mark.

Okay. And then just to confirm, you're expecting that the prostate cancer test to potentially be brought to market in the first half of 2014, is that correct?

That's correct. Dr. Albitar, do you -- would you like to make a comment on that?

Yes, I mean, we are very confident with our tests, that clearly, always, you need to do additional patients and accumulate more detail and this is what we are doing. But as a target date, it is very much solid date for launching the test on the first quarter or first half of 2014, yes.

And then finally just in terms of the geographical expansion out west, do you have indicated that you thought you have some room to expand more out there. I'm just wondering how you're progressing on that front.

We are making progress. We've hired a couple of people out there, and our volumes that are flowing through, our Irvine lab keeps growing pretty nicely. We've just hired an experienced sales representative from one of our competitors that has been in the California market for quite some time. And we're making, I think, pretty decent progress out of this.

Our next question comes from the line of Debjit Chattopadhyay with Emerging Growth Equities.

So I'm just trying to rationalize the second half guidance here. So you're adding a bunch of new sales -- to the sales team. You've added about 60 new tests, but you've cut the guidance by 5% at the low end of the prior range. Now is that because you're expecting a significant decline in revenue per test going into the end of the year or are you just kind of positioning yourself for a big lead in the second half of the year?

It is something we have spent quite a lot of time thinking about. We don't have specific granular views nor would we give those as part of the guidance. But I can tell you on the volume side, we expect volume to increase nicely in the second half of the year. And as Doug mentioned in his remarks, we expect the year-over-year volume growth actually to start increase in the second -- in the third and fourth quarters. We had previously estimated that we would have some of those large oncology initiatives. And it's looking more and more doubtful that, that will happen until there's more clarity around what the Medicare rates are. And the other piece of this is molecular reimbursement came in substantially higher in terms -- or substantially lower in terms of what we had originally expected. We saw a full 19% reduction in average revenue per test versus prior years, and I think the industry was more thinking broadly in the 13% to 15%. But by the time we forecasted that out over our mix and we rolled in, well, the expected private payor reactions would be, it was a bit higher than what we had expected. So those are kind of some of the components of it. What you really pulled it down though, our guidance for the second half of this year is really more based on we need to get back to having everybody's expectations be something that we can deliver on. This is the first quarter in many, many, many quarters where we were even below the -- slightly below or near the bottom of the range. And so we want to just does have the map, makes sense to everybody and not continue to be talking about something that is probably very, very unprobable at this point in time.

So with the average revenue per test at around $480 right now, do you think a $450 number is what you're like modeling right now? Because, I mean, at the back of the envelope, that's where it comes down to about $450 for -- in average.

No, I would take some of the volume growth estimates down. I think $470 to $480 is a reasonable estimate for the balance of this year. We're not given any guidance on 2014 until we see what Medicare does. Obviously, there would be some potential there for changes there. But given some of the change to ordering patterns of hospitals and whatnot that Doug touched on, I think we are pulling in our overall volume views in the second half of this year. Doug, do you want to add anything?

I think you got it.

Okay.

The in-sourcing confidence that you had mentioned in the press release and you went through even in the prepared remarks, could you kind of elaborate on what -- is that more of the single market kind of tests or does that impact your [indiscernible] business as well because, I mean, clearly, as patients for lab needs assistance, the single market has already served the purpose. So the broader market is moving towards old panels. So does that -- I mean, is it the in-sourcing impacting that or is this primarily a single market kind of thing?

Well, actually the in-sourcing that we referred to in the past has really been not molecular. It's been more histochemistry and a little bit of flow cytometry and that sort of thing. So as you might imagine, bringing in an in-sourcing molecular testing currently is very complex, and there are not a lot of people that have that kind of expertise. So there aren't -- and plus, the recent reductions in reimbursement for molecular testing, if you're buying a kit and trying to perform the test, molecular test on a one-off basis based on a kit cost, you're going to lose money.

A question on next-gen sequencing, I mean, how are you positioning yourself? I mean, I understand that there are reimbursement challenges and there is [indiscernible], but you can get from next-gens but is this clearly emerging and maybe 2, 3 years down the road it's going to become a major threat to your conventional molecular testing? So what's the company doing to be a frontrunner in next year?

We will be a frontrunner. So, Dr. Albitar, do you want to take that?

Yes. There's going to be the next-gen sequencing is a platform that we already adapted. But today, we are not offering it as a routine work. We offer it only for clinical trial work. That's mainly because what you just said regarding reimbursement and the we resolve these issues and have figured out how the reimbursement is going to be. But I personally believe, and we as a company, that next-gen is the way for the future for molecular testing, and we are on top of it. There are multiple utilities for that conventional molecular testing to actually perform. But again, it is a methodology that we, as a company, is leader in moleculars, focused on adapting the best approach and the state-of-the-art approach. So we are on top of it, and we are very interested in spending time, money and efforts into it.

Our next question comes from the line of Jack Wallace from Sidoti & Company. Jack Wallace - Sidoti & Company, LLC: I have a couple of quick questions here. One, as you're talking about the guidance, lower for the next year and given the comments you made about the average revenue, price per test, those would imply the growth in volume some in the mid to high teens. Obviously, there's -- with all the uncertainty surrounding what's going to happen in 2004, (sic) [2014] with the CMS cuts. If you're to assume normalized data, would you assume that this is how the new lower level of volume growth that you're going to see going forward after having such high volume growth in the 40, mid-30, 50% you had in the last couple of quarters in the last year?

Well, let me make a couple of comments. Steve will probably comment as well. So we said that we can accelerate our growth from where it was in quarter 2. We expect that we'll be able to do that in quarter 3 and quarter 4. So I think your number is not unreasonable. But frankly, we've said all along that we'd like to target volume growth in the 20% range. And we don't see any reason to necessarily change that. Jack Wallace - Sidoti & Company, LLC: Okay. That's helpful. And then terms of where that volume growth is going to be coming from, looks like the ecology -- large oncology groups, any kicks from new wins there, it's going to be pushed off until the rate cut situation is going to be decided, and probably that's what happens for Q1. What other kinds of many new accounts or maybe upselling from existing accounts -- or I guess, how are those 2 pieces of the mix going to figure into the volume growth?

Well, we're going to get some volume growth from the new representatives that we just hired. And we did eliminate some representatives that weren't productive. Hopefully, you got that through my -- or should I be nice in my remarks about that. I think we have a more productive sales team, and that's going to help. We also have some new products that are rolling out. So we've introduced a lot of new products over the last couple of years. We've talked a little bit about our image analysis product. We have not aggressively rolled that out yet because we needed to get our -- some systems things in order to allow us to handle a lot of volume. So -- and that's just one example. So there are a number of reasons that we're expecting our volume growth to begin to accelerate, and we -- I think we feel pretty good about that.

Yes, I would add that one of the nice new trends that we're beginning to see is a lot of interest directly from hematology oncology groups. As a result of our very broad and very deep molecular menu, we now have a substantially more advanced molecular offering. And almost every other lab, probably every other lab in the U.S. and that is attracting interest just for traditional trend on molecular testing from large oncology groups. Now once you get your foot in the door there, it's a lot easier to begin to grow that. And so some of that's coming as a result of molecular, some are just coming with the new reps and the oncology business development managers that we're seeing. So while we may not see the large kinds of what we call laboratory collaboration initiatives, where we help them in-source flow. We are seeing nice uptick from that. And regard to the hospital in the pathology group, as we get broader and deeper on our menu offering, we wind up taking a more meaningful share of wallet in each client. It's rare that our share of wallet goes down. It's much more common that our share of wallet will go up as we get in and work these clients a little harder. Jack Wallace - Sidoti & Company, LLC: Okay. That's certainly helpful. And then just 2 quick questions for you, and I'll probably ask some other questions offline. One, regards to the average cost of test, matching that reduction year-over-year is great. I think even Q4 of last year as the base, the goal is to have a 10% reduction. And then in Q4 of this year, to about 6.2% reduced from Q4. Do you see the 10% goal being attainable so far?

From Q4 to Q4, yes, we think that, that's very attainable. I think whether or not we'll get all the way to that is another question, but we're certainly making good strides on that. We've got a lot of initiatives that will continue that trend. Jack Wallace - Sidoti & Company, LLC: Great. And then one last question regards to the CMS rate cuts. Well, let's assume the worst case scenario, the cuts come in largely as described. Will this mean that additional hospitals, like the other labs, will then go ahead and not service the Medicare patients or should they intentionally be walking away from the 25% of your revenue mix?

We just don't know. It's too early to speculate. We can give you some examples, but what -- this is how great it is. So breast cancer is the most common form of cancer in women. And in some types of breast cancer that are referred to as HER2 positive, The HER2 positive breast cancer patients represent about 20% -- 15% to 20% of all breast cancer patients, and the HER2 positivity makes that cancer more aggressive. So there's a companion diagnostic for this. It's a FISH test that is a companion diagnostic to herceptin. Now herceptin therapy costs about $70,000 a year. The FISH test currently is reimbursed by Medicare at about $400 per year -- $400 per test, sorry. So under one interpretation of the CMS proposal, the $400 per test would be reduced to about $75 per test. So that -- so just to put it in perspective the supplies costs for HER2 FISH test are about $100. So Medicare wants to reimburse it at $75. Our supplies costs alone are about $100. If you add the cost of transporting the sample and reviewing it by the pathologist and putting it on the instrument, and all of that sort of stuff, who's going to do that test? So the question is, if the test is not available, if the lab is not going to offer the test, what are you going to do? Give a $70,000 herceptin treatment to every breast cancer patient when you know that 85% of the time it's not going to be effective? It doesn't make any sense. So -- or maybe you don't offer herceptin at all, then you'll have a lot more patients that are going to die early. I don't think either of those 2 scenarios are appropriate or maybe even understood by CMS. And so we believe that once they understand the dynamics that there's -- they'll say, well, this doesn't make any sense because it doesn't make any sense to us.

Our next question comes from the line of Kevin DeGeeter with Ladenburg Thalmann. Kevin DeGeeter - Ladenburg Thalmann & Co. Inc., Research Division: Some of my questions have been answered, but maybe just 2 quick ones here again. Can you give a little bit of granularity on the 12.7% test volume growth in the quarter? In terms of rough order of magnitude, what portion of that was coming from new products, however you want to define that, versus legacy, is it 50-50 on the growth side, is it 90-10? One way or another, just some order of magnitude would be helpful.

Well, I mentioned that molecular led the pack. The molecular growth, the volume growth of molecular was 53%. That was probably close to half or maybe a little more than half of the overall volume growth. We have continued to stay strong, strong growth in our heme products and our flow products. So yes, I think we're seeing a decrease in volume in the IHC, as Doug mentioned, products and some of the more traditional pathology tests. So really, molecular and FISH, and hem FISH in particular, continue to be the strongest growers for us. Kevin DeGeeter - Ladenburg Thalmann & Co. Inc., Research Division: Okay. And I want to go back into the probably the M&A for a moment. In terms of at least for the remainder of 2013, what type of risks are you willing to take on as company with the potential M&A candidate? What I mean by that is at least for the variables that we have visibility on at the moment, maybe CMS in 2014 aside, are you willing to take on that reimbursement risk, when you're considering an acquisition? Is it -- or are you -- maybe technology risk that's a concern for you. But I want to kind of balance out Doug's comments that the company remains interested in being aggressive on the M&A front with the number variables that are out there for almost many assets if you're considering an acquisition here.

Yes, Kevin, let me see if I can get at your question. So I would say, first of all, that I used to do a lot of M&A in my past, and I've done some good ones and some bad ones, and the bad ones are not good. We're not going to do bad deals. Every deal is different. Every deal has its own level of risks. There's reimbursement risk, there's people risk, there's all kinds of risks. So we're going to be -- we're going to try to be very smart about it but we're also going to be very aggressive about it. So there are a lot of potential opportunities for us to acquire out there. And we'll look at each one individually and try to understand the impact on the market. For us, whether there's testing that we can deliver to that company, whether there's testing that can be brought to NeoGenomics, what kind of cost synergies are available, what's the reimbursement risk, there's reimbursement risk in a lot of the lab industry today. So we -- I think you can count on us being as diligent about analyzing a deal as we can be.

One of the things that Doug never liked to talk to much about is his experience on Corning Life Sciences, when they put together both Quest and Covance, it was Doug and his colleague, they bought 100 companies and put those 2 companies together before they spun them out. And approximately 70 of those M&A deals became what is now Quest Diagnostics today. That level of experience in laboratory M&A, I don't think you'll find another CEO in the United States in a lab company that has done that before. And so we're very blessed to have his experience and expense and his guidance in this. And I have a high degree of confidence having worked with Doug side by side for the last 5 years, that we won't make any big boo-boos here. Kevin DeGeeter - Ladenburg Thalmann & Co. Inc., Research Division: Okay. That's a fair point. There may be one more for me, and then I'll get back in queue as well.

Kevin, I think we'll try to wrap it up here. We're at the appointed hour here. Kevin DeGeeter - Ladenburg Thalmann & Co. Inc., Research Division: Fair enough. I'll take more offline.

Okay, thanks so much. Okay.

All right. Thank you, everyone. So I'll just wrap this up by saying that we'd like to recognize all 293 NeoGenomics team members around the country for their dedication and commitment to building a world-class genetic testing program. And on behalf of our entire team, I'd like to thank you for your time joining us this morning for our quarter 2 2013 earnings call and let you know that our quarter 3 2013 earnings call will be held on or around October 25 of this year. For those of you listening that are investors or thinking about investing in NeoGenomics, we thank you for your interest in our company. Goodbye.

Ladies and gentlemen, this does conclude today's conference. You may disconnect your lines at this time, and we thank you all for your participation. Good day.