NeoGenomics, Inc. (NEO) Q1 2015 Earnings Report, Transcript and Summary

Greetings, and welcome to the NeoGenomics' First Quarter and 2015 Financial Results Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host today, Mr. Doug VanOort, Chairman and CEO for NeoGenomics. Thank you sir, you may begin.

Thank you, Tanya. Good morning. I'd like to welcome everyone to NeoGenomics' first quarter 2015 conference call and introduce you to the NeoGenomics team that's here with us today. Joining me in our Fort Myers headquarters we have Steve Jones, our Executive Vice President for Finance; Steve Ross, our Chief Information Officer; Fred Weidig, our Controller and 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. George Cardoza, our Chief Financial Officer; and Rob Shovlin, our Chief Operating Officer. Our off-site with our sales team today and unable to join us. 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.

Okay, thanks, Steve. I like to begin our investor call this morning by focusing on the exciting growth opportunities available for NeoGenomics describe some key dynamics for 2015 and then comment briefly on quarter one results. We’ve asked Dr. Albitar then to provide a brief summary of several key initiatives and innovation. And then Steve will review our quarter one financial results in more detail and we just through a question-and-answer period. Many investors are keenly aware from personal experience or because of their interest level about the many medical and scientific advances in cancer care and ask us about the opportunities those advances present for NeoGenomics. As we all know precision medicine driven by scientific breakthroughs in genetic and molecular technology is transforming cancer care and we’ll continue to do so for many years to come. NeoGenomics is clearly operating at the forefront of that transformation and the market opportunities for us are very large. Those opportunities are being created because of innovation enabled by rapid changes in technology. The world’s rapidly improving understanding of the genetic and molecular characterization of cancer, more precise testing new tailored therapies and better information and analytical methods. NeoGenomics is pursuing those opportunities in a unique way. We have built an infrastructure to operate profitably with the strong and sustainable existing business. And we’re simultaneously pursuing huge growth markets. We believe this confuses some investors, should NeoGenomics we thought of as an emerging company pursuing a large market opportunity or as an established company dealing with Medicare reimbursement headwinds. We thought it would be helpful to explain more about our growth opportunities and give you our perspective. So that you can better understand the large markets we’re pursuing. Because the key growth markets are enabled by new technology, we have been investing steadily and thoughtfully. We’re attempting to balance longer-term growth opportunities, while demonstrating some level of near term profitability. Here is some examples of the nature of our growth investments. We’re investing and developing and maintaining the most comprehensive oncology focus test menu perhaps in the world. This is enabled us to become a one stop shop for our pathologist, oncologist and hospital clients and as helping us increase our market share. We continue to invest in the most advanced instrumentation available for our molecular lab. Our digital imaging instrumentation, our FISH in flow cytometry labs and in information technology this gives us the flexibility to serve leading academic centers as well as community based hospitals. We invest in the development and commercialization of new cutting edge molecular and genetic test, such as our recent introduction of PD-1 and PD-L1 test for immunotherapeutics. This allows us to serve pharmaceutical companies and oncologists working on clinical trials of new drugs. We have and continue to invest in liquid biopsy testing, also referred to as cell-free DNA testing and also as plasma-based testing, including our prostate cancer test. These tests have exciting benefits for patients treating physicians and/or healthcare costs. We have been investing in machine learning algorithms to enable smarter more efficient medicine in areas such as flow cytometry and new techniques to improve the sensitivity of next-generation sequencing for which we just filed a provision of patent. These are new growth areas where we can carve out a proprietary physician for ourselves. And we are investing in an expansion of our test offering now into inherited cancers and cancer susceptibility testing using next-generation sequencing. This opens up a new market and new opportunities. Dr. Albitar will briefly describe a few of these initiatives in a few moments. From an investor perspective, some of the newer technologies with likely each be valued at more than the current market value of our entire company that they will held individually and separate companies. We recently read about a new company with less than 5% of NeoGenomics revenue, and a much smaller molecular testing menu with a market capitalization higher than NeoGenomics. Clearly there is confusion about our potential. In addition to our investments in cutting-edge technologies we already have a solid existing infrastructure competitive advantages in a proven model and delivery system which are allowing us to win market share today. And we believe will allow us to make strong market share gains in the future. For example, our year-over-year volume growth rates over the last 16 quarters have ranged from a high of 75% to a low of 13%. For an average of 35% volume growth, over the last four quarters, our volume has grown 31% on average despite the in-sourcing of testing by our largest customers. We are winning market share because of the breadth and depth of our product offering and also because of the quality of our services, which is strong and getting stronger. For example, we currently are under contract with over a 100 managed care plants, and just signed a new five year contract with the National Blue Cross Blue Shield Association in the first quarter, which we hope will open up new large territories of business for us. We have spent years developing our payer network, it’s an important asset for us and we believe it sets us apart from our competitors. We still maintain the most robust pathologist partnering programs in the industry, which allows pathologist clients to perform professional components services as we perform the technical work in our labs. And we are one of the only companies to offer comprehensive training for our clients including webinars and on-demand web training, covering a wide range of relevant topics self assessments and certification programs. Another growth opportunity we continue to be excited about is in clinical trials and biopharmaceutical testing. Although still a minor part of our business we have been awarded more business in the first three months of this year than in all of 2014 combined. We are hiring business development people and enhancing our capabilities in this area and we have expectations for strong growth here for many years to come. We believe that to be a sustainable high quality company, which is built a last we need also to be a low cost provider. So far our increasing scale and focus on quality and process management has resulted in a 60% improvement in lab productivity over the past five years and helped to drive our average cost of goods sold down by 27% over the same five year period. This is important. We continue to invest in automation and process improvements to drive our cost even lower and we expect this trend to continue. Low cost is important because Medicare’s relentless reimbursement reductions are having an impact on our entire industry. Some of our competitors are selling their businesses eliminating capacity and scaling that. In this environment only the strongest lowest cost providers will be successful. And we intend to be one of those. We told you that we intend to be an industry consolidator but we haven’t made any acquisitions since raising $34 million in August of last year. That is not for a lack of train. We have submitted formal offers with three companies in the last nine months and either walked away and due diligence or walked away because we did not feel like we could responsibly need the seller’s price expectations. Given the reimbursement pressure we expect more M&A opportunities to become available. We intend to maintain a disciplined approach to evaluate and execute transactions giving us the best opportunities for long-term success. And we reiterate our belief that scale is important in our industry and our intention to make small acquisitions to maintain to low cost capability and otherwise advance our strategies. We have one other perspective about the reimbursement reductions. CMS is now either directly cut reimbursement for existing tests or a signed lower reimbursement rates to new CPT codes for the vast majority of the tests we offer. As a result of these dynamics Medicare represented only about 18% of our payer mix in quarter one compared with over 43% just four years ago. Moving forward we expect Medicare reimbursement policies to have a smaller impact on our business than they have in recent years. We’ve managed to grow quickly even though our average reimbursement has fallen by 30% over the past five years. At some point many of us expect that overwhelmingly aggressive reimbursement pressure to abate some what. In a more stable reimbursement environment we believe that our market capabilities combined with increased scale, new automation and process improvements will yield and even stronger growth in revenue and good incremental profit for our company. Let’s move the commentary now to focus on the near term horizon in 2015. In our last call I shared with you our desire to set ourselves apart this year. We are aggressively building our teams by attracting talented people making significant organizational changes to create an even more performance driven culture driving down further the cost of testing and investing in the areas of biggest growth opportunity and we’re making progress in each of these areas. We expect that our investments in growth will fuel, healthy volume growth rates for the rest of the year. We set volume records in the first quarter despite bad weather in the Northern and U.S. and in sourcing by our largest customer. Even in the last three weeks we’ve had three new successive all time high daily volume records and we’re starting the second quarter well. And our pipeline of perspective new accounts is healthy or healthier than every before with over a dozen very large account opportunities within our sight. We expect reimbursement rates to remain low this year. We believe the rates we experience in the first quarter will continue for the most part. But we have been successful recently in negotiating higher reimbursement rates with a couple of our largest contracted commercial insurers and we hope those efforts will have some effect as the year progresses. We also continue to provide information to Medicare to support more reasonable and appropriate reimbursement levels particularly for FISH and for next generation sequencing. We have been providing complex and highly valuable genetic and molecular test results even though we often are not getting paid appropriately and sometimes we’re not getting paid at all. This is not right and must be corrected in the future. Central QR argument is that our services often will cost less than 3% of the cost of cancer therapy and will determine whether a particular therapeutic will be effective. In many cases FISH Tech cost a few hundred dollars can determine the effectiveness of $100,000 drug treatments. There was no economic justification for payers not to reimburse these tests at reasonable levels. Logically there have to be more personalized medicine testing not less. Specifically we’re hopeful that the errors which led to the FISH reimbursement declines in 2015 are corrected for 2016, we’re also hopeful that next generation sequencing test will gain reimbursement status and that will help to drive revenue growth in that area. Finally, I like to share some thoughts about the quarter one. Clearly, we faced some strong headwinds in the first quarter, Medicare’s reduction in FISH reimbursement in the collateral confusion and reductions by commercial insurance payers impacted the financial performance. Medicare reduced FISH reimbursement rates by about 45% in 2014 and another 20% in 2015 and many commercial insurance payers benchmarked those rates and effectively reduced prices for FISH by 60% in the past quarter. We know that errors were made in Medicare’s calculations per reimbursement rates. We’re hoping that corrections will be made in 2016. However, for the first quarter these FISH cuts reduced our revenue by $2.1 million and reduced our adjusted EBITDA by nearly that same amount. Despite those cuts, we reported revenue 27% higher than last year and adjusted EBITDA only $165,000 lower than quarter one last year on a consolidated basis. Clearly, our underlying business is very strong. Volume growth in the base NEO business grew by 27% from last year even as our largest client in sourced all of the FISH testing, which we previously performed more than. Without the effect of that in sourcing volume would have been up 36%. Driven by volume gains and slightly lower cost per test adjusted EBITDA in the base business – base NEO business of $1.8 million, was slightly higher than last year despite the price declines. We reduced our cost per test about 4% of the quarter our target reduction by year end is closer to about double that level. We’re working hard on our cost structure and we have sizable pipeline and cost reduction opportunities, which we expect to realize over the coming quarters. Volume growth helps reduce cost per testing because of the benefits of scale. It’s noteworthy, for example, that we’ve added only 7% more people in our base business in the past year even as our volume has increased by 27%. Our goal is to maintain the current momentum in growth and productivity in such a way as to move us back into profitability by the third quarter of this year. I would now like to introduce Dr Albitar. As you know, Dr Albitar is our Chief Medical Officer and Director of R&D, he has been a leader in our company for three years and has made an enormous impact, but I think the best is Dr. Albitar is yet to come. He would like to share some brief thoughts with you about some areas that he and his teams are currently focused on. Dr. Albitar?

Thank you, Doug. Our finances increased and [indiscernible] are leading to major achievements in management, treatment and outcome of concept. Precision medicine is no longer a distinct goal, it has been practiced by many oncologists, precision medicine is defined as the process of matching treatment and management of the disease with the genetic makeup of cancer, as well as the host. Our two particular technology is making as possible to provide extensive molecular in formulation on a tumors and the host to defined targeted therapy. The base of advances is practically too fast for CMS and some insurance company. This is creating a reimbursement challenge for advanced companies such as NeoGenomics that are leading in precision medicine. Despite this challenge NeoGenomics continue to develop and offer state-of-the-art testing to guide day-to-day treatment decisions for individual divisions, as well as helping in new drug development. We believe that taking advantage of the new advances in Genomics and developing and offering new precision testing will not only improve patient care, but will also reduce the cost of healthcare and reduce suffering and spare patients the problems was going through unnecessary procedures or undergoing therapies that will not work. So at this goal our current innovation initiatives are viewed as the following. First, Hematologic cancers, most of the hematologic cancers are diagnosed and monitored by bone marrow aspiration and biopsy. The bone marrow biopsy is painful and very uncomfortable procedure, rather more bleeding and infection and the serious complication of this procedure. NeoGenomics is offering NGS based liquid biopsy of plasma-based testing to reducing needs of bone marrow biopsy. NeoGenomics offer a full menu of hematologic testing using peripheral blood plasma or liquid biopsy to reduce the need of bone marrow biopsy and to monitor hematologic diseases in bone marrow and lymphocytic systems. Our liquid biopsy testing in hematology is full validated and we have shown in numerous applications that it is rely upon – it is as reliable as bone marrow biopsy. For example we reported at the last ASH meeting that our NGS testing using peripheral blood plasma or liquid biopsy is reliable for confirming or rolling out myelodysplastic syndrome. A majority of bone marrow biopsy is outperforms to roll out myelodysplastic syndrome. It is estimated that 600,000 bone marrow biopsies are performs in the U.S and evaluates. We believe that our current offerings could reduce the number of bone marrow biopsies by more than half were in fully adaptive. I think mostly in new technologies in related to medicine it takes time for adaptations with dissemination of information. NeoGenomics is focused on marketing and educating the medical community of both our offering of liquid biopsies as and alternative to bone marrow biopsy. Our second initiative is investing of solid tumors, unlike hematologic diseases the utilization of liquid biopsies in solid tumors depending on the siege of the disease and should be used carefully as we are doing with our perceived cancer system Our NeoLAB prostate test uses plasma and urine instead of prostate tissue biopsy, we currently are offering this prostate cancer test in a patient registry format in order to guide a further information in advanced of a commercial launch. In addition to our NeoLAB prostate test we are working on other application or solifidian testing and new technological approach. For example we have developed a new proprietary approach to increase the sensitivity of next-gen sequencing. We have filed for [indiscernible] on this new technique that increase sensitivity of NGS by 20 to 30 polls [ph] and we are currently collaborating with academic centers to validate the use of this technique in liquid biopsies to monitor visions with solid tumors. So efficacy of therapy can be monitored resulting each traditional solid tumor biopsies. Our sales initiative is focus on germline testing, I would like to now as you know NeoGenomics has focus on some magic mutation in cancer. We’re now expanding our cancer testing to include germline and territory cancer susceptibility testing. This would compliment our current testing we’re finalizing the validation and soon will – would be launching breast and ovary cancer susceptibility as well as colon cancer susceptibility namely Lynch syndrome testing. This offering will be consistent with our cause of the widely distinctive and the host, this is a very important for example the purpose of germline mutation in BRCA1 also that made us in TP53 in addition with cancer has significant impact on selecting therapy and determining prognosis and management of the cancer. Our first initiative is focus on smart medicine. We continue to develop and adapt machine learning approaches based in SDM support vector machine technology to improve laboratory detail analyzers, presentation and reporting this is the applicable to generic laboratory data that particularly useful with high throughput data like NGS into flow cytometry data. This will allow us to better interrogate and utilize such data. During summary, we’re very excited at both our new lines of distinct and offerings. We believe that these new advisory medicine will be improve the healthcare and at the same time a reduced cost and we are already in prepared to leading this year. Doug?

Okay, thank you very much, Dr. Albitar. Now we’re going to turn the floor over to Steve Jones, our Executive Vice President for finance to review our first quarter results in more detail. Steve?

Thanks Doug, I’ll be brief here so we can get into Q&A, we’re pleased to reported $23 million of revenue, a 27% increase over quarter one despite the 10.8% decrease in average revenue per test in base NEO as a result of the 2015 FISH reimbursement changes that went into affect in January. Approximately $20.7 million of this revenue was arrived from base NEO in $2.3 million from PathLogic. Because of the large impact on our financial results caused by the FISH reimbursement reductions I like to provide a more detailed explanation of issue briefly. As we discussed in our last call, the American Medical Association introduced new CPT codes for FISH testing in fall of 2014, it change the way a FISH test is build. In the past FISH test were build based on the number of DNA probes included in the particular FISH test. In the new structure FISH test are build based on a new concept called a growth probe staining procedure on codes and new multiplex FISH CPT codes were introduced the cover situations where two or more probes are included in each probe staining procedure. This is 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. However the issue is not the new codes or definitions that we’re established. The issue is that proper reimbursement was not established from the new codes. We believe confusion was created by the late timing of the new CPT codes and coding structure by the AMA and errors will made in the way in which the 2015 reimbursement levels for these new codes were calculated. In establishing reimbursement rates, CMS assumed that the number of supplies was cut in half because the billable units were cut in half. In our opinion this is obviously an error labs still have to use the same amount these expensive supply. Even the AMA’s relative value unit update committee or RUC had recommended to increase the supply cost for each new multiplex FISH test. Unfortunately CMS ignored the committee’s recommendation and published the low rate without allowing for comment by the industry. Essentially, we believe that CMS did not have enough time to analyze, understand and complete this comment and rule making process. Many commercial insurance payers filed CMS published the reimbursement rates and benchmark with their rates based on the Medicare fee schedules. Particularly when a new code is introduced because of these dramatic changes in the new codes, the reimbursements we have received from private payers were all over the map in the first quarter. We are now met with some of our important payers they have also concluded that the Medicare fees are not appropriate and they have agreed to invest their reimbursements to us. For example one larger payer agreed to increase their multiplex FISH reimbursement from $70 per billable unit to $280 for billable unit beginning on June 1. And that effect of all these changes that is the FISH reimbursement by Medicare and commercial insurance has been reduced by 60% to 65% from the level seen in 2013. We said on our last call, that we thought the reductions to our revenue from these FISH changes would likely be $6 million to $8 million on a full year basis in 2015. In quarter one, we estimate the impact from these FISH changes was $2.1 million thus before any further adjustments from private payers, we would likely be near to top end of that range, were an $8 million impact for the full year. However, we’re optimistic that other insurance companies will also start to revise upward the reimbursement rates as the year progresses. We’re also hopeful in Medicare will increase the 2016, FISH reimbursement in the graph, which we expect to be released in July. In addition to the revenue reductions from the new FISH coding changes we were also impacted in quarter one by the continued in sourcing of FISH tests by our largest customer. This trend started in quarter two of last year, as we previously discussed and as very large oncology client has now effectively increased all of their FISH testing. But the year-over-year impact will not be fully annualizing for later this year. In the first quarter, we’ve recognized $1.5 million less revenue from this large client than in quarter one 2014. Despite the FISH reimbursement cut and the in sourcing which reduced our revenue by approximately $3.6 million combined in quarter one base NEO revenue still grew by 14% in consolidated revenue including PathLogic grew by 27% on a year-over-year basis. Put differently, we incurred in 11% decrease in our average revenue per test, loss $1.5 million of revenue to customer in sourcing that we’re still able to grow revenue by 27% in the first quarter. This speaks to the strength of our business. We’re able to achieve this revenue growth through exceptional volume gains. Base NEO test volume growth was 28% in quarter one. However, if we are to adjust our volume growth that we move the effect of the customer in sourcing our base NEO volume growth was approximately 36%. We exited the first quarter on a very strong phase and trends enabled have been equally a strong. Base NEO gross margins were 43.6% and PathLogic gross margins were 22% in the first quarter, was blended to a consolidated gross margin of 41.4% for the quarter. Although, we suffered at 10.8% decrease in average revenue for test for base NEO gross margin only decreased by 430 basis point because we’re able to reduce our average cost of good sold per test by 3.5% year-over-year. Quarter one adjusted EBITDA for base NEO and PathLogic grow $1.8 million and negative $246,000 respectively, which combines the consolidated adjusted EBITDA of $1.5 million. Adjusted EBITDA on our base business was actually up $81,000 year-over-year despite the loss of $2.1 million of revenue from FISH price declined. More than 90% of which would have dropped to adjusted EBITDA in the bottom line. On a consolidated basis, including PathLogic adjusted EBITDA was just $165 below last year’s first quarter. Again, this speaks to the strength of our business. Quarter one net income for base NEO and PathLogic were negative $410,000 and negative $351,000 respectively, which combined for consolidated net loss of negative $760,000 or negative $0.01 per share. This compares to positive $102,000 net income or $0.00 per share in Q1 2014. As we mentioned in the press release, we expect return to profitability in the second half of the year. We finished the quarter with 452 full-time equivalent employees, contract doctors and temps, an increase of approximately four FTEs from December 31. Before we open it up for questions we would like to reiterate our previously issued revenue guidance of $103 million to $108 million of consolidated revenue for the full year. At this point, I would like to close down our formal remarks and open it up for questions. Incidentally, if you are listening to this conference call via webcast only and would like to 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 call for questions.

Thank you. At this time we will conduct a question-and-answer session. [Operator Instructions] Our first question today comes from Bill Bonello with Craig-Hallum. Please proceed with your question.

Hi, good morning guys. Looks like a really nice quarter.

Thanks, Bill.

Couple of questions, the national contract with Blue Cross Blue Shield, is that something new and how does it open up opportunities for you?

Yes, Bill, we signed a contract with the National Blue Cross Blue Shield Association in the first quarter and we’re hopeful that that’s going to open up new business opportunities for us. Essentially it allows us to talk with, in a more collaborative way the various Blue Cross Blue Shield plans that we are not currently contracted with. So we’re very excited about that. We’re beginning to engage various plans. We’ve had good conversations and we’re hoping that that opens up new markets for us.

Okay and I assume then that there are some blues that you are contracted with, this just gives you a hunting license with the ones you aren’t or are you not contracted with any?

Yeah. No, Bill we currently have, I think about 15 or 16 Blues plans under contract. So this allows us to essentially talk with and hopefully contract with the other Blues [ph] plans that we currently are not contracting with.

Okay, perfect. And then just a second question. On PathLogic can you just comment a little bit qualitatively on whether you are starting the see some of the cross selling benefits that you had anticipated and then just from a profitability standpoint when you would expect that business to swing the EBITDA positive and look kind of margin it could have overtime?

Okay, yes, thanks, Bill. PathLogic is we – I think, mentioned last time is the turn around. And we have been working pretty hard on it, we have now deployed many of the NeoGenomics quality systems and processes, we’re about ready to launch a new barcoding system, for example, that should help with the tracking and the measurement and quality processes there. So we’re beginning to equip a lot of our core processes in place and we are very encouraged by that. Now we are beginning to cross-selling work, we have trained now the bulk of our NeoGenomics sales team and we’ve trained the PathLogic sales team on the Neo products and vice versa. And that’s beginning to happen. Now one of the biggest opportunities for us there is in the area of women’s health. And we’re beginning to – in fact I think with in the last couple of weeks we began to get our first women’s health samples from core NeoGenomics clients sent to PathLogic so that transition of cross-selling opportunity has happened. Now, I think over the longer term we are transitioning PathLogic to be our specialized anatomic pathology center of the company. And so we as you know base NeoGenomics is very good in solid tumor cancers at the hematologic cancers, there are lot of other testing areas in which PathLogic pathologists and processes will come to play and we’re hoping, in fact, we’re already seeing some clinical trials work go to PathLogic has been directed by our work with the pharmaceutical industry. So I think the turnaround is happening, it’s little slower than we expected, there was more due than we thought, but I would guess that we would begin to see much better results in the second half of this year.

Excellent, now I’ll back in the queue. Thank you.

Thanks Bill.

Our next question comes from [indiscernible] with Stevens & Company. Please proceed with your question.

Thanks, good morning guys.

Good morning.

Looking at the molecular growth, obviously, big success quarter for you guys. Can you quantify a little bit where its coming from is it new customers, is it menu expansion, is it deeper penetration of current customers maybe quantify a little bit?

Well, yes, we’re adding a lot of customers grew. So one of the attractions frankly to our new client is the breadth of our menu and molecular should be part of the that. So we’ve got a lot of new test offerings. New products in the molecular area that Doug, Albitar can actually talk a little bit about. But we’ve also had a lot of good success and what we called NeoTYPE offering. So NeoTYPE molecular test our panels or profiles of test that are categorized by disease and they often contained maybe 8 genes to 14 genes, but they are very targeted and we’re targeting the driver genes, it’s a more cost effective way for hospitals and oncologists and pathology groups to understand the nature of the cancer and to develop treatment methodologies. So that’s been growing very, very rapidly. And when you think next-generation sequencing for those as well. So its broad growth, it’s not confined to one area, geographic area and it includes the NeoTYPEs, but our molecular volume I think grew by over 50% in the quarter versus last year.

Great. And then understanding their lot of variables with this that thing right now and then trying to keep track of that. Can you talk a little bit about your volume growth versus maybe the industry growth in 1Q after the reimbursement cut?

We have anecdotal information about that. I think we think we’re taking a lot of market share. We think that some competitors have been surprised by the FISH tests and some competitors many of them are cutting back their staff, we were I think prepared, we weren’t happy about it, but we’re prepared for the FISH test and our intention is to keep our heads down, keep growing our market share providing good service and we think that’s the right thing to do in this environment.

I might just add here. We’re seeing a lot of growth in what we would call our [indiscernible] FISH panel for instance our non-breast FISH tissue test grew the fastest of all the FISH types in the first quarter and so. Dr. Albitar and his team have done just a great job. We have over 50 individual FISH panels available for order to our clients. And people are getting much, much more refined and what the requesting in order to help really to pinpoint the diagnostics and what we’re seeing is NGS being used in combination with FISH and deem we operated on our own targeted panels to really pinpoint this precise genetic mutations and so the breath and depth of our FISH menu continues to be a huge competitive advantage for us.

Thanks guys.

Thank you, Rick.

Our next question comes from Amanda Murphy with William Blair. Please proceed with your question.

Hi, thanks guys. Just a quick question on the enforcing that you mentioned, so obviously that was on – it’s been going on and I was just curious is there are any more risks there from that particular clients and I think is a baseline for all our FISH now, but is there anything else that you are doing – at this point and then just generally is that something that is an ongoing trend or not at this point?

Yes, so that particular client is very good client of ours, so we have a very good relationship. We perform all of their cytogenetics testing. We do some overflow works for them when they can’t perform flow and some other things and we do some molecular testing for them as well. I think that, our sense is that no one is really looking at in-sourcing molecular testing right now because a lot of people – could pay for us quite frankly. The other thing is on cytogenetics is there a risk that they would in-source that I guess maybe, but frankly it’s not a very high profit margin area for us. Our cost are very low, is very hard to attract the right people, same thing with molecular testing. So it is always a risk that the people will in source things, but we have I think very high quality of service, we have very highly trained people, it’s not easy to replicate the labs in the technology that we have.

You know, I just add to your risk have seen it goes the other way a lot of hospitals they did some FISH testing are now saying, hey, we are thinking of exiting the business in reimbursement levels. So in the last three months, we have been asked in a number of cases in new both hospital ramp and all are just so come in and look at taking over FISH testing for folks and one of the team as Doug outlined in the script, we think scale is going to be really, really important in the crazy world of FISH reimbursements. And we already have one of the largest scale FISH operations in the United States and we intend for its continued growing being important part of our business.

Got it. And then, obviously we have spent a lot of time talking about molecular testing and the contribution there to your business spent. What’s the – what’s the view on reimbursement for the test, I guess specifically Next-Gen contain given that [Indiscernible] and some of the macro working on essentially pricing some of these codes there, is that – so just, just trying to get a senses of your views on reimbursement for product segment over the next few years here?

Yeah, so I think Dr Albitar, said at best, he said that the science is moving at a very fast clip and it’s hard for the payers to keep up and we’re seeing that for sure. We have been encouraged recently by the dialogue that we’ve had with some of the key payers, relative to Next Generation Sequencing, we believe that they’re really trying to understand it and trying to determine how to develop reimbursement policies for it. And we are beginning to have conversations with them or beginning to explain what we’re doing and we believe that there will be reimbursement, established for these things. Right now, it’s not great, to be honest, but we’re hoping that we can continue to do this and these are very cost effective and very good test for the healthcare system and so we’re hopeful that there will be reimbursement established as we look forward.

Yeah and Amanda, as you well know, CMS is in the process of pricing the new codes for the Next Generation Sequencing. There is three codes in particular and the earliest read that we’re getting from industry sources at the earliest, they’re going to have a price [Indiscernible] next year and so it’s entirely possible that unless you have a specific local coverage determination for a specific type of NGS test, they’re not going to broadly reimburse NGS testing. So what do we do? We have a number of different things we can do. We can confirm our NGS testing from Medicare beneficiaries, using other more established molecular modalities, we’re examining that and so there is a lot of different things we can do but clearly the notion that company should get paid zero dollars this year because CMS hasn’t accurately or adequately done their homework to put in place reimbursement and the industry in not going to bear it and so the pressure is building by the quarter for CMS to do something and genuinely think that most of the max really want to do the right thing. They understand the importance of this test.

Okay, and then just last one, a bit higher level and I know you talked about this a little bit in the remarks, but obviously there is a lot of discussion around kind of lab CRO combination there that you may see, and then just you might we see anymore announcements or are you working on anything there in the pipeline with other CROs or pharma companies.

Okay, let me try to address that Amanda, thanks for the question. So we can say that the relationship that NeoGenomics has with Covance that partnership remains in effect and in fact we’ve had – in fact business as usual for the first quarter and continues to be. Now, I think we said this last time, but let me reemphasis this, we are not going to have the growth opportunities available for NeoGenomics in the biopharmaceutical area rest only upon our relationship with Covance. We are – and in fact in the first quarter, we attracted an executive to help us to manage that business. We are actively recruiting for business development people, Dr. Albitar and several of our other key people are talking with the pharmaceutical industry, making presentations, developing techniques with them to help them in their clinical trials work. So we are moving in this area. I think that there has been evidence obviously that the pharmaceutical industry thinks that there is some benefit from having relationships with molecular testing companies and the anatomic pathology providers. I don’t know whether that trend is going to continue. We have two instances of that operating right now. And we think maybe it will and to the extent that we can partner with pharmaceutical industry players, we would love to do that.

Yes. I would just offer up, we don’t need to work through CROs to be successful in this business. Doug touched on this but there are a number of large pharmaceutical opportunities approaching us now because of the broad molecular menu the Dr. Albitar has put together and it gives us multiple ways to play and that’s something that we are actively pursuing.

Okay, thanks very much.

Thank you.

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

Hi, good morning, guys.

Good morning.

Just following up on Amanda’s question here. Do you had indicated that there has been a robust growth in the clinical trial related business during the first quarter. Now was this joined Covance efforts or a big fashion of this was all NEO? So if this was a NEO Covance kind of collaborative efforts, how sure are you on the monetize ability of this? And I think you had put forward a number of like 7.5 million as of the end of the first quarter that you could update us on the number of the business won so far?

Sure, let me try to address that and if don’t get it then ask again. So first of all let me just clarify that clinical trial is still a small part of our business. So, when we say that – it’s our goal is to triple it, this year, it’s still pretty small. Let me just say that upfront. Second thing I would say in direct response to your question, the growth in awards that we had in quarter one came as a result of both the partnership that we have with Covance and to some extent our NEO direct opportunity or work. Now let me add one thing to that. When we say that those awards came from the partnership, I would just emphasize that our people even through the partnership are doing a lot of work to solidify those words. So, Dr. Albitar is often involved in – and/or other people are often involved in getting those – those awards solidify in partnership with Covance. So I don’t know what’s going to happen with the Covance partnership. So far its business is usual and we’re continuing to work pretty closely with them.

Let me ask the same question in a different way. How much of your $103 million to $108 million guidance for the year factors came some of the NEO Covance business – business trends and clinical trials?

So, Doug, we appreciate the thought that goes into that question, but it would be not responsible for us to break down our guidance by business area or the other some areas that are going to do better than others and some areas that are going to do a lot worse that others. And we’ve stated broadly on the last call that we expect our clinical trials business to grow significantly more rapidly than as in the past, but it’s not a place where we’re going to break that down.

Okay. You had just also mentioned PD-1 and CD1, PD-L1 test launch in the first quarter and as of today morning’s earnings calls from both Merck and Bristol-Myers the kind of highlights how important those products are for those companies. So are you seeing adoption from these tests more on the patient management level? Or are you seeing more on the clinical trial segment given the huge number of PD-1 and PDL1 focused trials underway right now?

Both, so we are seeing request from them from of course clinical trials and from pharmaceutical companies as well as from individual clinical practice groups and physicians and as a matter of fact we are in process of updating along the year and we are – including the PD-1 and PDL-1 into our NeoTYPE for fighting breast cancer, so as you know, which is being utilized we have 24 malignance as for lung cancers of ovarian cancer and other types of tumors. And the clinicians really like to see the detail and evaluations from CDL1 in particular and so we can see what options we have.

And one last thing, could you update us on the timing of the prostate cancer test launch. And also on the enrollment since year-end 2014 update?

Yes, let me try to do that for Doug. So we’re making progress. I think we have now over 300 samples in the door and tested, but the momentum we’re very encouraged about. So we just signed up several big urology groups to participate in the patient registry. We’re right now inking a contract there is another big group for an extension of our clinical trial in this area. And I think the momentum is very good. The in terms of the commercial launch I think we said around mid-year-ish I think it may slip a month or so, but I think in the second half of the year, we should be able to launch something.

All right, thank you so much guys.

Our next question is a follow-up from Bill Bonello with Craig Hallum. Please proceed with your question.

Thanks. A couple of follow-up here. First of all, just can you tell us a little bit about on the CMS side I mean I assume the next opportunity would be really put out the proposed fee schedule this summer? And can you just tell us what you guys or the industry is sort of doing in advance of that what kind of assets you have how you are able to educate them in advance of that throughout fee schedule.

Well, Bill, yes, relative to FISH specifically, I’m not sure, if we commented on this much before, but I will say that we were very fortunate to have than granted an audience with CMS several months ago. I think it was in early January. They were terrific about listening to our concerns and we establish the dialogue with we thought the key players there. They – we’ve been engaged them a bit since that time. We believe that they are starting to process its not and started at little bit ago for the 2016 rates. And we’ve been in some dialogue with them about that. So we’re hopeful that something is going to be changed obviously to us it’s an error. But wasn’t necessary their fault, I think, the timing of this was difficult for CMS but we’re hoping very much that the FISH reimbursement gets fixed.

I think you should best assure Bill that they know exactly how the industry feels about this, in addition to us others have laid in there have been letters written from Congress people about the issue, there been numerous industry initiatives both from things like the American Clinical Laboratory Association and even some of the oncology related trade associations which we seeing some stuff from ASCO and what not and ASH coming around the corner, as well. So this is something that’s get lot of book to me in the industry.

And will you be able to share with them hey here’s what some of the commercial payers have done, they need initially power due but when we were able, when we were able to have discussions with them kind of here’s what they did with rate.

Bill we’re using every argument we have.

Okay and then just a separate follow-up may I have the mind of us and that’s immediate business they put, do you think we saw the worst or the greatest amount of impact from the end sourcing in Q1, I know, it doesn’t fully anniversary until the year sort of progresses, but would you expect the impact that sort of go down as the year progresses?

Well certainly in quarter three and quarter four, it will.

Okay.

Year-over-year impact in quarter three and quarter four will be done.

Okay, and then the final thing with just on the acquisitions just wondering if you could elaborate a little bit more about the kinds of things that you might be looking would you be keeping your focus to cancer genetics, would these be broader based may be potentially profitable or assuming to be profitable companies are you looking more in the area of adding certain tests and technologies, what are you trying to find?

Focused on cancer genetics, focused on high technology, focused on high growth, focused on increasing scale, for our business, so that we can get the efficiencies in synergies. And may be something that could accelerate our entry into some of these new areas that Dr. Albitar and I talked about.

Okay, and are there acquisitions of signs out there, or are we thinking of these being things that you side off with $10 million here or $10 million there kind of opportunity.

I think it’s fair to say Bill that it’s a little bit all of the above.

Okay. Thank you.

Thank you, Bill. I think we’re going to wrap it up.

Sure.

We have one quick follow up.

Our next follow-up is from Drew Jones with Stephens. Please proceed with your question.

Thanks guys. Just a quick one, the germline testing, is that a natural evolution of the product menu or is that something where you’re responding to customer demand?

Both. As you know frequently we do testing when we are profiling the cancer and we came across mutations that appear to be germline and it is very important to explore that and see whether it is germline or somatic so the client advice that. But at the same time, I think it is also very important currently with the current intervals especially in BRCA1 and BRCA2 for us and for our business to grow and currently we can offer the specialties. There are a lot of databases out there that are very reliable. We can access and define what’s – and really pathogenic variant and so it is both our goal for to pick up on both avenue.

And what’s the timeline to having the test ready?

We are almost there, within a month or two.

Okay, thank you Dr. Albitar.

A month or two is for the clinical validation, you know we still got to develop marketing plans and so forth. Okay, Drew, thank you very much for that question. So I’m going to wrap it up now and as we end this call, I’d like to recognize we have 452 NeoGenomics team members around the United States today and we thank them for their dedication and commitments to building this world-class cancer genetics testing program. And on behalf of all of our team, I want to thank you today for your time joining us for our quarter one 2015 call and let you know that our second quarter 2015 earnings call will be held on or around July 23. For those of you listening that are investors or considering an investment in NeoGenomics, we thank you for your interest in our company.

Thank you. That concludes today’s teleconference. You may disconnect your lines at this time and have a great day.