NeoGenomics, Inc. (NEO) Q4 2014 Earnings Report, Transcript and Summary

Greetings, and welcome to the NeoGenomics' Fourth Quarter and Full Year 2014 Financial Results Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder this conference is being recorded. It’s now my pleasure to introduce your host, Mr. Doug VanOort, Chairman and CEO of NeoGenomics. Thank you sir, You may begin.

Thank you, Kevin. Good morning. I'd like to welcome everyone to NeoGenomics' fourth quarter and full year 2014 conference call and introduce you to the NeoGenomics team that's here with us today. Joining me in our Fort Myers headquarters we have a full room with Steven Jones, our Executive Vice President for Finance; George Cardoza, our Chief Financial Officer; Rob Shovlin, our Chief Operating Officer; Steve Ross, our Chief Information Officer; Fred Weidig, our Principal Accounting Officer and Jerry Dvonch, our Director of External Reporting. Dr. Maher Albitar, our Chief Medical Officer and Director of R&D is joining us from our Irvine, California lab. 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. I’ll begin our call today with some very brief remarks about our fourth quarter and full year’s performance and then share our plans for 2015 in the future. Then Steve Jones will review our quarter four financial results and lead us through a question-and-answer session period. We ended the year with another strong quarter and are very pleased with the company’s performance for both the fourth quarter and the full year 2014. For the fourth quarter we grew revenue by 36% above the top end of guidance to an annualized revenue run rate of $100 million. That $100 million level was a five year goal that we had said five years ago and is both a milestone and a significant accomplishment for us. We improved base NEO EBITDA to record levels despite Medicare reimbursement cuts to FISH testing. We achieved net income and earnings per share above the top-end of our guidance and we continued our fast pace of innovation for the launch several additional immunohistochemistry, FISH and molecular tests to maintain the most comprehensive cancer focused test menu in the country. In a few moments we’re going to take a look ahead at plans for 2015 and beyond. So it’s appropriate to first take a brief look back at the full year 2014 or for a second. Last year, we grew revenue by 31% and improved our adjusted EBITDA to a record $9.2 million despite the dramatic reduction in reimbursement for Medicare FISH testing. We invested in automation and information technology and continued to drive down our costs per test. We significantly improved our market presence in the clinical trial segment both through our own direct channel and through our partnership with Covance and we now have approximately $7.5 million in awarded business most of which we expect to result in revenue over the next two to four years. We significantly broadened our next generation sequencing test menu with the introduction of 23 targeted cancer profiles for hematologic and solid tumors, a new 315 gene discovery profile for solid tumors and a cancer exon profile to sequence over 4,800 protein coding genes. We introduce a continued stream of cutting edge molecular and FISH tests and test panels and many new tests using immunohistochemistry and in-situ hybridization. We acquired PathLogic and began the integration process, including closing a couple of facilities and consolidating some operations into our Irvine Lab. And finally we raised $34 million in a follow-on equity financing reduced our day sales outstanding by 20% and ended the year with a strong balance sheet with $34 million of cash and no debt other than capital lease obligations. So looking back at 2014 we can say without qualification that the company exited the year stronger than ever before. But perhaps more importantly we can also say without qualification that we’re more excited than ever about the opportunities that lie ahead. We believe that 2015 is a year in which NeoGenomics can distinguish itself in the marketplace and that’s what we intend to do. We have four main areas of focus this year, invest in our people take market share and drive growth, invest in innovation and further improve efficiency and reduce our cost of testing. The common denominator for our 2015 plans is focus. We are focused on executing ROI and are prepared. We have a deep organization, very capable individuals, excellent process management, outstanding quality systems and the drive and determination to win and so we are excited about 2015. And on a strategic and longer term basis we are very excited about the opportunity to help transform the practice of medicine. Clearly Genomics is already changing the practice of medicine and we expect over the next several years Genomics will transform and revolutionize healthcare. NeoGenomics is operating at the forefront of that transformation with the broadest menu of oncology related molecular and genetic tests in the industry. If you know about our company you already know that personalized or precision medicine is based on genomics and its core personalized medicine depends on genetics and molecular testing to understand the precise genetic structures of disease, to target precise therapies and to eventually developed preventative approaches to disease and disease management. As the science evolves so are the technologies and techniques. Next generation sequencing has added a powerful tool for a higher quality examination of underlying genetic abnormalities, improving bioinformatics; analytical techniques are allowing us to develop more and better tests and novel therapeutics. The volume and complexity of data generated by these technologies are requiring both extraordinary information technology capabilities and a specialized medical and informatics expertise to make the information usable. At the same time additional tools and techniques are being developed to further automate this complex testing. Many of these technologies will use new computer tools and mathematical algorithms and imaging technologies. These will allow higher quality diagnostic processes to be delivered at an even lower cost. At NeoGenomics we are increasingly referring to these as smart medicines and to these tools as a part of the smart laboratory information system. For example, our investments and development efforts in support vector machine technology and automation are designed with this in line. This is the future of healthcare. And this is exactly where NeoGenomics is operating today and we intend to continue operating as a leader in smart medicine. We are positioned well to win in this environment. We have a similar focus in oncology, a comprehensive testing menu, highly productive teams, a determination to develop and launch new cutting edge genetic and molecular tests and a strong and loyal client base. Even as we deliver the highest quality testing on a daily basis we are constantly assessing, investing and repositioning ourselves to be a key player in the future of precision medicine. So in 2015 we intend to operate our core business as we have in the past with focus, commitment to grow and take market share and to be responsible operators. But we are also going to increase our investment in several key areas. The first is clinical trials and the development of deeper collaborations with pharmaceutical companies. Clearly recent strategic deals announced over the past several months highlight the opportunity for companies such as NeoGenomics in clinical trial testing. We believe that clinical trials testing offers strong growth opportunities and will keep us at the forefront of explaining scientific developments in precision medicine. We are working with Covance as part of our five year partnership and are building our clinical trials book of business as projects continue to be awarded to us. But we are still in the early stages of building this business and we will not rely on the Covance partnership alone as our channel into the pharmaceutical industry. Over the next several months we intend to add scientific and commercial business development resources to aggressively target growth in this area. We expect these clinical trials growth initiatives will add about a $1 million to our costs in 2015, but we believe we will see return on our investment within relatively short-term time frame. The second area of investment is the next-generation sequencing. Molecular testing is growing quickly and is now nearly 25% of our test mix and 13% of our revenue. That volume is 15 times larger today than it was just four years ago. Given this exclusive growth, we expect molecular testing to approximate 20% to 30% of revenue within two to three years. We are continuing to develop new cutting edge molecular test many using next-generation sequencing. We will continue expanding our sequencing lab in Irvine. This year we’ll add more instrumentation to keep up and stay ahead of our volume demands. In fact, this will be the fourth time we’ve expanded that lab over the past three years. We’re also adding scientific bio-informatics and medical staff resources focused on molecular testing and adding to our client reporting capabilities. As part of this, we expect to add significantly to our R&D capabilities this year to stay at forefront of developments in molecular testing. Plasma-based testing is the other key area of investment this year. Plasma-based testing is sometime is referred to as cell-free DNA testing or liquid biopsies. We’ve been offering plasma-based tests or liquid biopsies or hematological cancers for several years and are now working on liquid biopsy tests for solid tumor cancers and incorporating next-generation sequencing technologies into these test offerings. We have strong capabilities in this area with Dr. Albitar and his experienced R&D team. Dr. Albitar ran one of the first molecular labs in the country at MD Anderson and has been the pioneer in plasma-based testing for over 15 years. We’re also collaborating with an increasing number of academic institutions. Our patent portfolio in this area is growing as well. We recently filed two provisional patents in plasma-based testing and in the process of filing a third. In fact, our work over the past two years to develop the prostate cancer test is a good example of our development efforts in plasma-based testing. This test is currently being offered to a select group of academic center urology departments and a few leading community based urology practices as we continue together information to support our broader commercial launch later this year. One final comment about our strategies relates to mergers and acquisitions. As you may know, we’ve been hunting for good M&A candidates very seriously for over a year now. We had hoped to complete more transactions by now, but it’s much more important to be discriminating than it is to meet a particular time based goal. We’ve looked and we passed on many deals. Key reasons we’ve passed are because the economics didn’t work well enough or we judged the risks of integration and compliance to be too high, but we’re still looking. We continue to believe that scale is important to more effectively achieve our objectives and you should expect us to continue to work hard to develop and execute M&A transactions that advance our strategies. I’ll summarize by emphasizing that we’re very pleased by our company’s performance and even more excited about the future. This is an exciting time in precision medicine and the benefits for cancer patients and for our healthcare system continue to multiply. We are operating at the forefront of this revolutionary change in healthcare and we’re excited to be able to continue to carve out a reputation as a leader in our field. I’ll turn it over to Steve to comment on the financial results.

Thanks, Doug. Before we open it up for questions I would like to briefly touch on a few financial highlights for the fourth quarter and the full year 2014. We’re pleased to have reported $25 million of revenue in quarter four, a 36% increase over quarter four ’13. Approximately $22.5 million of this revenue was derived from base NEO and $2.5 million from PathLogic. As a result of the National Correct Coding Initiative or NCCI policy changes for Medicare FISH testing that were implemented in January 2014, we recognized approximately $1.1 million less revenue from Medicare FISH test in quarter four and we would have otherwise recognized. Despite these FISH impact we are pleased to report that our average revenue per test for base NEO was still approximately $468 in the quarter or just a 0.4% reduction from quarter four 2013. We were able to do this because we’ve vastly improved cash collections in the back half of 2014. This allowed us to recognize more revenue for the same test than we were previously able to recognize and in turn allowed us to almost fully offset the revenue reductions from the NCCI FISH policy change. This is an extraordinary accomplishment by our billing team that worked hard to install new lean billing processes and fully operationalize the new billing system in 2014. Base NEO gross margins were 48.2% and PathLogic gross margins were 25.2% which blended to a consolidated 45.9% for the quarter which was in the middle of our forecasted guidance. Quarter four adjusted EBITDA from base NEO and PathLogic were $3.2 million and negative $402,000 respectively which combined for a consolidated adjusted EBITDA of $2.8 million, an amount that was affectively unchanged from Q4 2013 despite the FISH cuts. As Doug mentioned the base NEO adjusted EBITDA of $3.2 million was a new quarterly record for us. Quarter four net income for base NEO and PathLogic were $1.5 million and negative $460,000 respectively which combined for consolidated net income of $1.05 million or $0.02 per share. This compares to $857,000 of net income or $0.02 per share in quarter four 2013. We have been systematically deploying NEO’s control, quality and operating systems to PathLogic and we are just beginning to realize some revenue and other operating synergies, but there has been more to this [ph] than we originally anticipated. We remain as confident in this business as before but expect the turnaround to profitability will take one or two quarters longer than we originally anticipated. We finished the fourth quarter with 445 full-time equivalent employees and contract doctors, an increase of approximately 8 FTEs from September 30th. Turning now to our full year 2014 results, our consolidate revenue was $87.1 million which consisted of $82.2 million for base NEO, a 24% increase over 2013 and $4.9 million for PathLogic from the date that the acquisition was completed on July 8 through December 31. For the full year we recognized approximately $4.5 million less Medicare FISH revenue as a result of the NCCI FISH policy change. The base NEO average revenue per test was only down 4.2%. We are able to offset this reduction in revenue per test with a 4.7% reduction in average cost of goods sold per test, which allowed our base NEO gross margins to actually improve by 25 basis points in 2014 despite the FISH revenue reductions. As a result of our strong cash collections in 2014 we were able to reduce our accounts receivable, expressed in terms of day sales outstanding by almost 20% in 2014 from 94 days at 12/31/13 to 75 days at 12/31/14. Our strong cash collections also allowed us to generate nearly $9.5 million of consolidated cash flow from operations, a 324% increase over the $2.2 million we posted in 2013. To put this in to context we lost $4.5 million in revenue to price reductions in 2014 but still increased gross margin in our base business and more than quadrupled our cash flow from operations. We are very proud of our teams for these accomplishments. Our capital spending was higher than normal in 2014 as we invested in facilities upgrades, next generation sequencing automation and information technology. It is worth nothing however that cash flow from operations would have covered nearly all of the $9.6 million of CapEx in 2014 had we chosen not to lease finance about $5.9 million of this CapEx. Thus our cash flow before financing or free cash flow if you will was effectively breakeven for the year, which is the first time, we accomplished this all important milestone on a full year basis. We finished the year with nearly $34 million in cash on hand and nearly $44 in working capital by far and away the strongest financial position we have ever been in. To summarize in 2014 we purchased PathLogic, the cash portion of which was $5.8 million. We paid down $4.3 million of non-leased bank debt, we purchased $3.8 million of capital equipment and cash and we made $3.6 million in cash lease payments and we still have almost all of the $34 million we raised in the August follow-on offerings to pursue growth initiatives and M&A. Before opening the call up for questions I would like to touch briefly on the AMA FISH codes that went into effect on January 1, 2015 and their impact on the guidance we issued this morning. With these new codes the AMA has changed the billable unit for FISH testing from billing by FISH probe to billing by FISH probe staining procedure, and has introduced new multiplex FISH CPT codes that cover situations where two or more probes are included in each probe staining procedure. This has effectively reduced the number of billable units for each FISH test by half or more because most FISH probe staining procedures contain at least two probes and some have as many as three or four probes. We believe that CMS made some fundamental errors in the way in which they calculated 2015 reimbursement level for these new codes especially the new multiplex FISH codes which are the primary codes we will bill moving forward. Despite the fact that billable units were cut in half or more by the new FISH billing constructs but labs such as NEO still have to buy the FISH reagents on a per probe basis. However, CMS ignored the recommendations of the AMA’s relative value unit update committee or RUC to increase the supply cost for each new multiplex FISH test and instead arbitrarily cut the supply cost input dramatically from the new multiplex FISH codes. Thus the next effect is a reduction in in billable units and a reduction in the reimbursement per unit that was previously in effect. We believe that FISH reimbursement errors were made in part because of confusion created by the new AMA coding framework and the timing of the RUC recommendations did not match the timing of the new coding framework. Essentially we believe that CMS did not have enough time to analyze understand and complete this comment and rule making process. We believe we are already a low cost provider of FISH testing we’re committed to reducing our FISH testing costs even further so that we can continue to make this critical testing available to our clients because it’s important for patient care. However we expect many other labs will be unable to perform the more expensive FISH test in 2015 including those tests using FDA approved FISH test kits. For those investors wanting more detail on this issue a copy of the letter we sent to CMS in November 2014 outlining our concerns is available by clicking the link entitled new 2015 CPT codes on the homepage of our website. Since the 2015 plan was published in November we’ve had numerous conversations with CMS and others have expressed their deep concerns as well. In fact a letter signed by approximately 10 different Congressmen and Senators have been sent to CMS on the issue. We believe that CMS now understands how errors may have been made but they have said that there is nothing they can do to fix the 2015 published rates. We believe that they will reexamine this as a part of the 2016 rate setting process. The first draft to the 2016 rule should be published in July and we’re optimistic that CMS will correct this error then. We will continue to work with others to help CMS correct these errors so that FISH testing can continue to be widely available as an important element in precision medicine. In the meantime however we are stuck with the rates that are in place for 2015 we believe that many of the private players may use CMS’ artificially low rate as a benchmark in setting their own rates for these new FISH codes. Thus although most of our private players have not yet completed their processes to price these new FISH codes we’re expecting some impact to our private payer FISH reimbursements in 2015 as well. Therefore we have been conservative in our revenue guidance for 2015. Included in the $103 million to $108 million from revenue guidance for 2015 is an estimated $6 million to $8 million reduction in FISH revenue from all payers as a result of the new FISH codes. This assumption is based on an estimated 30% to 40% reduction in private player FISH reimbursements per test and further 15% to 20% reduction in Medicare FISH reimbursements per test which is incidentally on top of the approximately 40% of reduction in Medicare FISH reimbursements we recognized in 2014 from the NCCIS. We believe that $6 million to $8 million reduction in revenue is a responsible estimate based on what we know at this time. We expect that on a full year basis we can offset approximately one-third to one-half of the impact to gross margin of these FISH price reductions through growth initiatives, increased productivity in our lab and additional cost reduction activities. However these cost reductions and growth initiatives will not overcome the negative impact of FISH impacts right away. We will provide quarterly revenue guidance in full year and quarterly earnings per share guidance after we have more clarity from the private payers on where they are pricing the new FISH codes. At this point I would like to close down our formal remarks and open it up for questions. Incidentally if you’re listening to this conference call via webcast only and would like to commit 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 questions.

Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions]. Our first question today comes from Amanda Murphy from William Blair. Please proceed with your question.

Good morning guys. Thanks for all the details. Just had a follow-up question on some of the metrics for the quarter, specifically costs per tests. I know you mentioned a lot of things around investments and what not but that’s was the first quarter that we’ve seen that increase so can you talk a little bit about that and then following that through to this year I mean obviously there are a lot of moving parts so that how should we think about that metric trending given all the thinking assessment, how to think about that from Q1 to Q4 realizing you’re not giving guidance specifically but just generally how to model that would be helpful?

Yeah Amanda, let me try to answer your question. So when we think about cost per test we think about it on a little bit longer term basis. We’re very focused on driving down our cost per test. We think we can do that still in the 8% to 10% annual kind of basis. But there’s going to be quarterly changes as a result of more automation initiatives. For example in the fourth quarter we spent a lot of time and energy validating several pieces of new equipment installing new information technology software that will automate the processes in the future. We’ve got a good portfolio of cost reduction activities, so we continue to believe that we can reduce this but we will have quarterly swings and I think for the year we have reduced our cost per test by about 4.5% or 4.7% or something. So you should expect that to continue to come down with scale as well.

Got it, and then we get asked a lot about reimbursement and obviously you had a couple of years your FISH drama but is there - if you look at the - schedule and your book of business, is there anything else we should be aware of that maybe coming down the pipe here, for this I guess for 2016 now and then obviously you talked about the molecular side of the business and where that might go with the risk there around kind of all the panel execution and their efforts to have a molecular texting reimbursements to private payer.

Okay Amanda so let me try to answer that one. You’re right there’s been a lot of drama on the FISH reimbursement side. As we internally think about what Medicare has done over the past several years they have surprised us by cutting more than we had expected in a variety of ways that we didn’t anticipate. We think that there’s not a heck of lot more to cut quite frankly I mean they have cut things very, very substantially in almost every single one of our testing modalities at this point. And we can go through test modality by test modality, I think you’re aware of that. So I think the first point I would make is that we believe that Medicare made an error in the FISH reimbursement for 2015. We think they understand that they made an error and we hope and we think that they will increase FISH reimbursement going forward so we don’t know. I think in other areas they have taken a fair amount of reimbursements cuts. In the past they have cut flow cytometry quite a bit several years ago, has been increasing, there are some questions about whether they could cut that again but they’ve increased this year. So we don’t know.

In fact Amanda I would add if you look at the flow cuts that happened in 2005 they cut it by 50% and here we are ten years later and they have increased it by 130% since then so what the AMO seems to be is kind of pretty hard stop assess the data and then start adding backward appropriate and if you look at 2006 to 2009 and historical perspective most of the Medicare reimbursement rates on physician fees scheduled for the types of test we did have nice increases this year and it was a glorious period for us at that time because our revenue actually was moving faster than our units. In the last four to five year our units that have been growing much faster than our revenue we are cautiously optimistic that beginning in 2016 that relationship is going flip back and we are going to start seeing revenue increases in excess of our unit increases and as you well know we have been growing units anywhere from 25% to 35% on quarter on average over the last few quarters.

So just maybe build on just by saying in summary we are hoping that we are going to be in a stable reimbursement environment going forward and I would point out that as you know that 50% of our business is under client billing sort of reimbursement arrangement which is much more stable. So we are hopeful that we are going to be in a better reimbursement environment going forward.

There is also one silver lining in that Medicare now has a percentage of our payer mix under 20% and it was almost 45% just four years ago. I would expect as a result of these latest FISH reimbursement reductions Medicare as a percentage of our total will continue to go down and so their ability to have a material impact on our overall business continues to go down here.

And not to really spend too much time on this question but I would say one other thing that molecular testing Amanda, to get to your question, we are in this era of precision medicine as we’ve talked about and I think that trend is going to be for more reimbursement for molecular test because these are very important tests, they save the healthcare system money and Medicare has been increasing the number of molecular tests they are reimbursing for and we expect commercial pairs to do the same.

Got it, okay and then just off line so R&D spend it came a little bit lighter than we were looking. I am just curious like broadly what the - is there given obviously one of your key strategic focus point is that introduction of new testing?

I just want to go on record here that the analyst community is asking us to spend more on R&D. We had a sort of very interesting thing happening and we’ve discuss this before we book a lot of stock-based compensation competition in to R&D because our California medical doctors can’t be employees because of a hooky law that prohibits the corporate practice in medicine in California. And so we have to pay them as contractors and because they are not employees we have to use different variable accounting for any warrants or stock options we issue therein. So when our stock price goes down from one quarter to the next inline the positive adjustment to our expenses and we had our stock price came down fairly considerably from September 30th to December 31. So the stock based compensation impact to R&D made look like we didn’t spend very much in Q4 on a normalized basis. We continue to spend about the same amount and we do expect as Doug mentioned in his remarks to take that up by at least $1 million this year.

Got it, thanks a lot.

Thank you.

[Operator Instructions]. Our next question today comes from Debjit Chattopadhyay from ROTH Capital Partners. Please proceed with your question.

Hey Good morning guys and thanks for the questions here. Could you update us on the status of the Covance relationship and in terms of your guidance I mean how much of that Covance is baked in or at what point do you expect that to disappear if at all?

Hi, Debjit. Thanks for the question. So we value our Covance relationship we are about a year plus into a five year relationship with them. We had a very good relationship, we are working very hard together as you know. I think we’ve talked about before Covance actually has a lab within our lab in the Fort Myers facility here and we continue to work with them, we continue to market with them and we continue to be awarded new studies. I think one of the things we said in our remarks was that given the environment here we are not relying only on the Covance relationship as our channel into what we believe is a very good opportunity for us in clinical files testing. So we are in the process of hiring several people to help us on the business development side and in other areas in clinical trials and we expect that a lot of our growth here in the future is going to be driven by our own efforts.

Great and then you're more than halfway through the first quarter, so I'm just wondering what kind of trends you're seeing both from Covance and your core business and the reason why you didn't put out an outlook for the first quarter yet.

We actually do not have the private payer fixed reimbursement levels yet for nearly all of our private payers. And so right now we're just accruing revenue based on very conservative estimates. We expect that the private payers will begin finalizing their decisions to price these FISH cuts here over the next month or to. When they came out with the new IFC [ph] codes and the new molecular codes it took two to three quarters to get it fully rolled through the private payers and so we will likely be pretty conservative with our revenue recognition policies in Q1 here and the analysts should take that into consideration. Does it mean that we won't get paid, we will definitely get paid but it just take a little bit longer to get paid because we're have to resubmit claims that were previously denied because they didn't recognize the FISH codes and that sort of things. As a result of that we expect our DSO to actually go up here in Q1 and I don't have a good level for you but they've come down so dramatically than we have some room to expand those. And I would expect us to be fairly conservative in our overall revenue practices here in Q1.

And then on the prostate cancer test launch for the second half or whenever you are ready to do that, in terms of publications, what are you planning to establish the value proposition of the test and more in terms of more in terms of the pharmacoeconomic benefit of the study so you can drive future of your negotiations.

Dr. Albitar, would you like to talk a little bit about the publications and we can take some other comments about the commercialization.

Right. so we are working on doing the pivotal trials in the quarter almost [indiscernible]. So our publications depends on the speed in which we report these patients. Our speed is acceptable with our existing peers, faster but these things takes done. So we are now, at 200, approximately 200 so and as soon as we've report 800 or even less then that we would have a greater and clearer ideas of what publication we have already put out. We are very confident that so far that yes it's performing very well and it is very difficult to speculate on the exact date for the publication because of the recruitment period for patients. So as we will have I will go deeper to report our 315 patients study that we recently finished it should be coming out also soon as well.

Yeah and thank you, Dr. Albitar. I’ll just add maybe one other thing as many of you know we were fortunate enough to have recruited Rob Shovlin here as our Chief Operating Officer about four-five months ago now. and Rob has extensive experience in prostate cancer testing and is already beginning to work on developing additional relationships so that he would accelerate the sample collection and the sample processing for our pivotal validation work and to begin the commercialization work that we expect for the second half. So we're feeling pretty good about where we are at the prostate cancer test going forward.

And one last question back to the CMS drama on FISH. So the fixed $8 million revenue shortfall that you had already modeling in, how much of that is associated with the private payers and what fraction comes from CMS? And if CMS does change their outlook in July would that be believable considering what happened in July and in November of last year thanks so much and I'll get back in the queue.

Two excellent questions. We previously stated in our Q3 10-Q that we expected a further when we work through the math $1.2 million to $1.8 million of reduction from Medicare FISH, so let’s call $1.5 million. So approximately $1.5 million more from Medicare and remainder would be from private payers. As I mentioned in my remarks, we expect about 30% to 40% reduction in private payer FISH. The more and latent private payers, we’ll realize the value of these tests, it makes no sense to reduce $400 FISH test reimbursement to so low that there is going to be a lot of back in forth with the private payers. We’ll get through this, we think of the $6 million to $8 million number as a responsible estimate at this point in time based on what we know. It’s always subject to some change, but we feel like that’s a pretty good overall estimate that we can operate in from now.

Debjit, one other final point, we’ve had extensive conversations I guess with the industry and with CMS. And we believe that CMS will go through a comment and rule making process. It’s difficult for them for 2015 because of the timing of the AMA code changes and the RUC process. But we believe that they’re going through the comment and rule making process more rigorously this year. And so we would expect that when they publish 2016 preliminary guidance here relative to the, relative value units and so forth that it will be what we hope that it will be more substantive and more steady?

Yes, it’s interesting, a lot of the smaller FISH players will not be able to continue to offer FISH test. As you may know it’s illegal to offer test to anybody below your costs under the various federal regulatory framework. And so AMS has actually setup a scenario where the private payer are going to try to take some sort of percentage of CMS rates and mandate those. But it would be basically illegal for a number of us to operate at rates put forth by the private payers. And so we’ll be able to have very candid conversations with the private payers and it’s going to be a given take and a little back and forth and we expect when CMS finally does adjust the rates in to more correct level that we’ll be able to go back and correct the impressions with the private payers as well.

Thank you so much.

Thank you.

Thank you. Our next question today is coming from Bill Bonello from Craig-Hallum. Please proceed with your question.

Good morning, guys, just a couple of questions. First of all, just a clarification on your comments on the conservative revenue recognition. Without giving in to the minutes I mean how do we think about that, do you just book revenue at a much greater discount relative to your sort of bill charges or something how do you actually go about recognizing the revenue in a conservative fashion?

So we actually have a pretty good idea by payer, what we’re going to get paid for each test and it’s usually based on historical experiences. In this particular scenario, we will probably putting pretty conservative revenue recognition policies at least for our major private payers on Q1. It will not be surprising at all if we finish the first quarter with less revenue than we had in the fourth quarter. We don’t have enough clarity to say we’re going to do that for sure. But from the analyst perspective and the analyst community you guys should be conservative in your Q1 estimates here because until we have more clarity we’re just not ready to take much risk on that. What we wouldn’t want to do is overestimate revenue and then have it corrected in subsequent periods.

Perfect, okay that’s in that sort of guidance for Q4 to Q1. It’s very helpful I just want to make sure we weren’t all out there with unrealistic numbers. The second question just related to PathLogic. You mentioned that the synergies maybe will take a couple of more quarters to realize than what you had initially expected. When you look at the opportunity today, do you still - the cross-selling opportunity, do you still think it’s as robust as it was when you did the deal and in fact kind of informed what M&A you might be willing to do going forward, because there are other PathLogic type acquisitions where you’re not necessarily specifically acquiring something in oncology, but you see a cross-sell opportunity?

So thanks for the question Bill. We are as confident now as we were before about the opportunity at PathLogic. The timing difference relates to a couple of things. One is they were more things that we needed to change when we got in there than we had expected and we’re putting and a lot of different control processes and systems and operating techniques and changing the sales focus and all kinds of stuff. So it’s going to take a little bit longer but we’re confident. One other thing the CMS cuts in FISH required us to refocus the sales team for about three months - three weeks sort of four weeks on these other activates, so that put us a little bit behind on the commercial side. Relative to other PathLogic types of acquisitions I’m not sure we’re going to do a lot more of those particular kind of acquisitions. I mean we’ll continue to look at those, but PathLogic was a special circumstance. One it was an opportunity for us to build our specialized pathology capabilities, primarily for clinical trials, but also in that area in Northern California, where we didn’t have a lot of other presence. So, it was a special circumstance and we’ve got a good deal for the company, we’re going to make it very successful, we think the cross-selling opportunities are very good still in women’s health and renal pathology and other areas and we’re increasingly incorporating PathLogic into our NeoGenomics testing process. But I don’t think we’ll do a lot more of those more traditional anatomic pathology acquisitions in the future.

Okay, that’s helpful. And just one last question also on the M&A. When you do think about the opportunities. Are you thinking predominantly sort of toughing oncology lab opportunities or would you consider join something a little bit more transformational, I mean straight to me that you have to build the infrastructure and the management team to run a significantly larger company, are you at a point where you would feel comfortable getting something that’s large in terms of scale or should we be thinking smaller activity?

I think, you should - I think that we will consider anything that will advance our strategies and advance our interest and advance the value that we’re creating. I think we do have a good team, I think our team is quite capable of running something bigger and so we would be very open minded to a variety of opportunities.

Great. Thank you guys very much.

Thank you, Bill.

Thank you. Our next question today is coming from Jack Wallace from Sidoti. Please proceed with your question.

Hi, good morning guys and thanks for taking my questions. In regards to just follow-up to one of the earlier comments you made. The million dollars and extra spend is that just specifically going R&D or is that more of SG&A as a whole as you bring some of the more biz development types to chase some of the larger deals such as Covance?

Yeah, Jack it will be both R&D and clinical trials related. But it’s all in that clinical trials area where we expect that we’re going to have to have more people with scientific expertise and more people who understand the pharmaceutical industry and more people who understand bioinformatics next-generation sequencing. So it will be a little bit fungible, but we will hire people to help us in both of those areas.

Okay, great, thanks, that’s helpful. And then as your base business is growing and assuming you win another new deal or two, similar to that of Covance, at point you’re going to be running into capacity issues and something already expanding the Irvine lab. I mean how much more expansion do you see beyond the fourth expansion there assuming you win some of the larger deals?

Well, I think we have a quite a bit of capacity at this point. We will add in some of our areas capacity means people. And so in some areas where it’s more difficult geographically to attract the kinds of and types of people that we need we may choose to open another facility for FISH interpretation or cytogenetics analysis just like we’ve done in Tampa and in Fresno recently. But I think we have enough lab capacity for the next year and half or two years.

Obviously pending any other acquisitions if that were to come through, so, okay, that’s it from me. Thank you so much.

Okay, good. Thanks Jeff. It looks like we have gotten a few question from webcast, people who emailed in that these we pretty much discussed all the subject matter in these, so I think we are ready to wrap it up here.

Okay, good. So thanks Steve. So it looks like just one more hopped in. Operator looks like we have one more question.

Your next question is coming from [indiscernible]. Please proceed with your question.

Yeah, hey guys, can you hear me.

Yeah we can.

First of all congratulations on a nice growth number. I have been watching your story since last little while and you have done a good job growing the top line. A quick question here in terms of may be Q1, I don’t think you are giving guidance but I know you have a facility up in Nashville and Nashville was kind of hit with some nice storms did that have any significant impact on your business as you move into 2015?

Yeah, we are trying to avoid the Northeast recently. There is a lot of weather around the Northeast in particular and it’s gotten down in Nashville, it’s not a significant impact to our business at this point.

Excellent, I just want to ask a quick question, just getting a lot of headlines though. Number two you are talking about some acquisitions and some M&As since reimbursement cuts, plus really as you have a tremendous organic growth rate of 23%. If you didn’t get the reimbursement cuts where would that 23% have gone, would it have been higher than that or is the reimbursement cuts apples-to-apples on that organic growth rate in the press release of 23%?

That’s a great question. If you add back the $4.5 million of revenue that we lost because of the Medicare FISH cut last year it would have implied an organic growth rate of about 35% last year which was actually slightly - just around the same amount as our overall volume growth last year. So it would have been pretty impressive. We look forward greatly to the day when our revenue will grow as fast as our units again.

No, I guess, you have been on my radar and you have done a tremendous job for me the 23% in this environment is tremendous and the apples-to-apples in my model is even higher, so I want to give you credit. And the last question I think you guys enjoy this and this is how we actually started the call. Tell me again why R&D isn’t higher. It seems like you are in such a tremendous growth area for me that, no offence [ph] I want R&D to be higher so and maybe it’s just a onetime blip and with that I will thank you for your time. I will jump back in queue and probably do a follow-up call with you offline. But again talking a little bit about R&D spend going forward and what’s in the R&D pipeline at a very high level. Thanks guys.

Okay, we have a very productive R&D department, but let me turn it over to Dr. Albitar to make a comment on that.

I love your comment and your question. We are very small because of our experience with the R&D. We are very smart in where to invest in the R&D and definitely we are spending on that. Doug already mentioned smart medicine and smarter product and in my opinion this is a huge area for innovation that we are going into and that’s integrating higher informatics with the high capability technology including gene sequencing including integrations of other modality of testing in order including the FISH a little bit more of immediate cash and our investment in SBM or the machine learning system is a great opportunity for us to integrate that R&D and the innovations using multi-testing modalities into offering a unique offering in laboratory medicine. So we are working on multiple avenues including bioinformatics and next gen sequencing as a matter of fact we are even finding, in process of finding - on improving the sensitivities of next-gen sequencing. And so far next-gen sequencing was used for routine testing but not for follow up tests. More importantly since we are focusing on liquid biopsy as well as - testing increasing the sensitivity of next-gen sequencing is very important area we are investing in it at this time and we will be spending more time and efforts for the next year and so on. So I hope I answered your question.

Yeah, you did it. Thank you very much for your time. Thank you very much for your answer and keep up the good work. You guys are really doing a good job. You are really executing. Take care guys, thanks again.

Okay, thank you. Okay, so as we end the call, I want to recognize all 445 NeoGenomics team members around the country for their dedication and commitment to building a really world-class cancer genetics' testing program. And on behalf of our whole team here, I want to thank you for your time joining us this morning for our quarter four 2014 earnings call, and let you know that our first quarter 2015 earnings call will be held on or around April 28, 2015. So thank you for listening. Those of you who are investors or considering an investment in NeoGenomics, thank you for your interest. Goodbye.

Thank you. That concludes the conference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.