NeoGenomics, Inc. (NEO) Q4 2015 Earnings Report, Transcript and Summary

Greetings, and welcome to the NeoGenomics' Fourth Quarter and Full-Year 2015 Financial Results. 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. It is now my pleasure to introduce your host, Douglas VanOort, Chairman and Chief Executive Officer for NeoGenomics'. Thank you, Mr. VanOort, you may begin.

Thank you, Mitchell. Good morning, everyone. I would like to welcome everyone to NeoGenomics' fourth quarter 2015 conference call and introduce you to the NeoGenomics team that's here with us today. Joining me in our Fort Myers headquarters, we have Steve Jones, our Executive Vice President for Finance, George Cardoza, our Chief Financial Officer, Rob Shovlin, our Chief Growth Officer, Steve Ross, our Chief Information Officer, Fred Weidig, our Controller and Principal Accounting Officer, and Jessica King, our Manager of SEC Reporting. Dr. Maher Albitar, our Chief Medical Officer and Director of R&D, is joining us from our Aliso Viejo lab in California. Before we begin our prepared remarks, Steve Jones, will read the standard language about forward-looking statements.

This conference call may contain forward-looking statements which represent our current expectations and beliefs about our operations, performance, financial condition, and growth opportunities. Any statements made on this call that are not statements of historical facts are forward-looking statements. These statements by their nature involve substantial risks and uncertainties, certain of which are beyond our control. Should one or more of these risks or uncertainties materialize or should the underlying assumptions prove incorrect, actual outcomes and results could differ materially from those indicated in the forward-looking statements. Any forward-looking statement speaks only as of today and we undertake no obligation to update any such statements to reflect events or circumstances after today.

Thank you, Steve. NeoGenomics is a transformed and much stronger company since we last spoke with you in late October. To more fully explain the extent of that transformation, I'll share some brief remarks about quarter four as a bridge to 2016, then discuss our progress integrating Clarient, and conclude with comments about our plans and expectations for 2016. Steve will then review our quarter four and full-year financial results and lead us through a question-and-answer period. We ended 2015 with strong underlying results in the fourth quarter. These were achieved despite the enormous effort we expended to complete the Clarient acquisition and plan for the integration of a company 20% larger than NeoGenomics. As you know, volume growth is a key dynamic in our business. We're pleased to report that volume growth in our base business, which excludes Clarient and PathLogic acquisitions, was once again very strong and increased over 25% compared with quarter four last year. Importantly, that test volume growth accelerated during the quarter with December's growth rate being the best of any month in 2015. We're pleased that this strong momentum has continued into the first several weeks of 2016. Quarter four volumes increased in all of our testing services. Molecular testing continued to grow rapidly and comprised about 25% of our test mix in the quarter. The fastest growing subset of molecular testing is our unique NeoTYPE multimodality test panels that combine molecular FISH and immunohistochemistry tests and target specific cancer types, and this testing line grew 75% on a year-over-year basis in quarter four. Flow cytometry and immunohistochemistry testing also grew at very high rates. We believe that our oncology focused testing menu is the most comprehensive in the industry, and clients have increasingly chosen to avail themselves of a fuller range of our testing services. This dynamic drove same-store sales growth to comprise about half of our total volume growth in the fourth quarter and for the full-year 2015. Geographically, we grew our market share most in the Western and Central regions, but the Eastern region grew as well. Our increasingly strong presence in managed care and with hospital purchasing organizations and with larger buyers is helping us with our regional and national growth strategies. We intend to expand our managed care contract base and continue to partner with large buyers and providers in the upcoming year. Given the strong volume growth we've experienced so far this year and an excellent pipeline of near-term opportunities, we have a high degree of confidence about our growth prospects in 2016. Our laboratory operations also continued to run smoothly in quarter four. Even with the strong volume growth in our base business, service levels were very solid. We also maintained good cost control and operational control as we reduced average cost per test in our base business by 11.5% compared with quarter four last year. Productivity gains by our laboratory personnel were strong as we achieved an 11.7% year-over-year increase in productivity in our base business in the fourth quarter. As perspectives, for the full-year 2015, we increased testing volume in our base business by 25% but increased our full-time equivalent employee count by only 9%. Everyone in our lab is incentivized to reduce cost per test, meet turnaround time requirements, and achieve our quality goals. This is one reason we were able to absorb $8.1 million of FISH reimbursement reductions in 2015 and still increase adjusted EBITDA versus the prior year. This focus on cost control, productivity improvements, and high quality service positions us well as we begin to integrate NeoGenomics and Clarient operations into one company. Even though we spent enormous time on these integration activities, we continued our emphasis on innovation during the fourth quarter of 2015. We expanded our offering of liquid biopsy test during the quarter and now offer 16 different liquid biopsy tests or test panels. These tests are enabled by proprietary techniques for high-sensitivity Sanger and next-generation sequencing. We also continued to invest heavily in the development of our liquid biopsy prostate cancer test during the quarter, and we are compiling results from a study of over 2,500 patient samples. We are currently offering this test commercially and expect to market it aggressively in the second half of this year after we published the recent study results. We continued to make excellent progress with our flow cytometry, support vector machine automation initiative and are on track to launch this in selected areas of our business in the next few months. This machine learning tool has potential benefits for our laboratory, for clients, and for our ability to use Big Data to improve the efficiency and effectiveness of flow cytometry testing. In addition, Clarient launched PDL1 testing services as a companion diagnostic to new immunotherapies. The FDA approved PDL1 tests are growing rapidly to be an important part of our company's immunohistochemistry test offering. In total, NeoGenomics launched over 70 new or enhanced tests during 2015. This continual and rapid pace of innovation has helped keep our company at the forefront of science and medicine as it relates to oncology, and we are committed to maintain this leadership position in 2016 and beyond. While we maintain discipline to keep our business healthy, we also focused a significant amount of management time on integration activities in quarter four. We are well aware that our ability to achieve synergies and fully realize the opportunity to transform NeoGenomics depends on a successful integration. As you might imagine, we've been working very hard to do just that. NeoGenomics and Clarient operated with some differences in culture, processes, and approach even though the test offerings were very similar. Therefore our approach to the integration process has been deliberate, extensive, and comprehensive. Our general approach was to set rules and objectives, organize integration teams, engage people from all around the company, and ensure activities with tightly structured and led. We've had a high degree of engagement and positive support from employees across the company. I'm very pleased to report that while we still have much to do; we're making excellent progress and are on track with our goals and plans. For example, in the past few months, we've been active in a number of areas. We've engaged in extensive communication activities with all of our approximately 900 employees, including town hall style meetings with virtually every employee, and written weekly communications throughout most of the past four months. We have developed a combined company 2016 strategic and operational plan which has been communicated throughout the company. This also forms the basis for 2016 employee incentive plans in which every single employee in our company will have a meaningful incentive for our success. We evaluated, restructured, and reorganized the entire sales and marketing organization of the combined company within three weeks of closing and held the national sales meeting complete with initial training. This new commercial organization is extremely professional and experienced. We fully expect all 34 sales representatives and five regional managers to operate at the high standards of productivity that we have experienced in the past. In the lab, we evaluated standard operating procedures and processes in virtually every one of our testing disciplines and compared practices and results of each organization. We've already agreed to the best practices and approaches that we will use in each testing area. We've also reorganized the leadership of our operations team and have defined clear responsibilities and accountabilities to standardize best practices between NeoGenomics and Clarient. We've also integrated our information technology team and now have a clear understanding and agreement on our strategy to integrate our laboratory information management systems. Within three weeks of closing, we successfully internalized over 90% of the molecular testing that Clarient previously send out to other labs by re-routing this testing to the NeoGenomics Irvine facility. We're now moving ahead aggressively with detailed plans to redesign Clarient's 75,000 square foot facility in Aliso Viejo, California, to accommodate all operations performed today in the NeoGenomics Irvine, California facility, and we expect to complete the move by the end of this year. We've also focused a lot of attention on billing. As you may have seen in our proxy filings, Clarient traditionally had accounts receivables days sales outstanding of over 100 days and voice of customer feedback on their billing practices was not good. We quickly installed new leadership for Clarient's billing operations and have made billing a major focus area. So far we've analyzed the issues, developed plans, hired key personnel, trained people, and are rapidly implementing new processes and procedures to improve the operations. Overall, I'm pleased to report that we're on track with our goals and that progress is very good. So far everything is going smoothly with no big surprises. Customer retention has been excellent and we're well on track to achieve our goal of realizing at least $6 million in cost synergies this year. We're very excited about our plans and opportunities. In 2016, obviously the successful integration of Clarient is foremost in our plans for the year. Creating a one company culture with a common understanding of values and behaviors and attributes of high performance is critical to the successful integration. It's also critical that we retain all of our clients, integrate our laboratory information technology, systems, and realize the cost savings that we planned. At the same time, we are focused on growing the company by deploying our high performance sales teams and investing in our biopharma and clinical trials business. And we will continue to lead with the most comprehensive oncology focused testing menu in our industry. Successful achievement of those plans will result in an exciting and transformational year for NeoGenomics. Our financial guidance released this morning is for revenue to increase from $99.8 million to approximately $240 million to $250 million, which implies 145% increase at the midpoint of that range. Adjusted EBITDA is expected to increase from $9.7 million to approximately $33 million to $38 million, which implies 267% increase at the midpoint of the range. We expect profitability to improve each quarter in 2016, as we realize our planned cost reductions. For example, even though we have already achieved significant cost synergies, operating costs in quarter one will be higher because of severance and other cost that will have been eliminated by the end of the quarter. Before we turn it over to Steve to discuss the quarter four and full-year financial results in detail, I'd like to summarize my remarks by saying simply that we are more excited than ever about our company and about the opportunities that lie ahead. 2016 will be a transformational year for NeoGenomics. And we believe we are emerging as one of the world's leading cancer testing and information companies. The company is stronger than ever and we are well-positioned to continue winning in the marketplace. Now, we're going to turn the floor over to Steve Jones, our Executive Vice President for Finance, to review our fourth quarter results in more detail and lead us through a Q&A session.

Thanks, Doug. Before we open it up for questions, I would like to briefly touch on a few financial highlights from the quarter. We are pleased to report $27.3 million of revenue in quarter four, a 9% increase over the prior year, despite an 11.7% decrease in average revenue per test in our core genetic and molecular testing business, which includes both NeoGenomics and Clarient. Approximately $25.5 million of this revenue was derived from the core business and $1.8 million from PathLogic. As discussed in the earnings release this reimbursement reductions decreased revenue by $2.1 million in the quarter and $8.1 million for the full-year 2015. Gross margin in the core business was 48%, but the consolidation of the lower margin PathLogic business brought consolidated gross margin down to 44.8%, a slight reduction from the 45.9% consolidated gross margin reported in Q4 2014. SG&A costs increased $7.3 million in fourth quarter as compared to the prior year. However, $4.7 million of this increase was related to one-time transaction cost associated with the Clarient acquisition, and $1.6 million of this increase was related to increases in non-cash stock-based compensation, which was driven by 37% increase in our stock price in the fourth quarter. Thus the increase in SG&A from operating activities was only $987,000, a 9.7% increase over Q4 2014, which is in line with a 9% increase in revenue. Given the reduction in cost per test and the continued control in SG&A, consolidated adjusted EBITDA increased to a record $2.9 million, despite the loss of $2.1 million of revenue from the FISH price reductions, more than 90% of which would have dropped to adjusted EBITDA and bottom-line. Quarter four consolidated GAAP net loss available to common shareholders was negative $1.6 million and diluted EPS was negative $0.03 per share. This compares to GAAP net income of $1 million and diluted EPS of $0.02 per share in quarter four 2014. However, we believe that in order to compare the net income related to the true operations of the company on a more consistent basis across periods, it is appropriate to adjust GAAP net income to exclude: one, non-cash amortization of intangibles, such as the customer list we acquired with the PathLogic and Clarient acquisitions; two, the non-cash stock-based compensation expenses that are mostly driven by changes in the company's underlying stock prices in given quarter; three, any other income or loss item, such as the one-time payment we received from LabCorp to amend our agreement with Covance to eliminate their exclusivity provisions; four, any acquisition-related transition and non-recurring expenses; five, one-time cost associated with terminating financing arrangements; six, the deemed preferred stock dividends required by GAAP accounting; and seven, the amortization of the beneficial conversion feature related to the preferred stock as is required by GAAP accounting. Moving forward, we will refer to this measure as adjusted net income and we'll include a table in each for our earnings releases with how adjusted net income and adjusted earnings per share are calculated. In the fourth quarter of 2015, adjusted net income was $2.9 million, a 166% increase over adjusted net income of $1.1 million in last year's fourth quarter. And adjusted diluted EPS was $0.05 per share compared to $0.02 per share in quarter four 2014. We finished the quarter with about 900 full-time equivalent employees, contract doctors, and temps, which includes approximately 410 employees and contract doctors from Clarient. Before we open it up for questions, I would like to comment briefly on the GAAP accounting treatment required for the Series A Redeemable Preferred Stock we issued at GE as part of the acquisition, as well as provide some further context around the financial guidance we issued this morning. GAAP accounting for the Series A Redeemable Preferred Stock is going to require us to incur two significant non-cash charges in each period, while the preferred stock is outstanding, which will significantly reduce GAAP net income available to common shareholders. First, GAAP requires us to expense the implied compounded annual dividends in each year that would be required to grow the initial $73.2 million down market value of the preferred stock, which incidentally was calculated by a third-party evaluation specialists to the final maximum potential liquidation value of a $191 million in near-term, if no redemption occur. This $191 million final value would only result if all of the escalating PIC dividends accrued during the entire 10-year period. This equates to a 10.06% dividend rate per year, while the preferred stock is outstanding, which in turn comes out to about a $7.4 million of deemed preferred dividend in 2016. The second charge relates to something known as a beneficial conversion feature or BCF associated with preferred stock. Since the shares of our stock traded above the $7.50 conversion price on the date of issue there is "a $44.7 million" beneficial conversion feature that we must record to be in compliance with GAAP. This BCF must be amortized over the shortest possible conversion feature period, which in our case is three years from the issue date. Thus, in order to fully amortize this $44.7 million BCF in three years, we will have to book a non-cash GAAP accounting charge of $14.9 million in each of next three years so long as our preferred stock is outstanding, which will further reduce GAAP net income available to commune stockholders. As a result, we have recommended that analysts prepare their estimates using adjusted net income and adjusted diluted earnings per share figure to designate such adjusted figures as primary when reporting on the Fact Set, First Call, or any other organizations to compile and publish analyst consensus estimates. Based on the magnitude of these non-cash charges related to the preferred stock accounting and the approximately $7.3 million of expense we will incur to amortize customer list and other intangibles, we expect that our GAAP diluted EPS will be approximately $0.35 to $0.40 per share, lower than our adjusted EPS in 2016. As discussed in our press release, we are currently projecting adjusted net income to increase from $4 million in 2015 to approximately $7 million to $12 million in 2016, and adjusted diluted EPS to increase from $0.06 per share in 2015 to $0.07 to $0.12 per share in 2016. Embedded in these projections is an assumption that our average revenue per test in our core clinical testing business, will increase by 3% to 4% across all payers to our mix of testing. This estimate of AUP increases factors in the reductions of flow cytometry and digital pathology reimbursement as an offset to the increases in FISH and IHC reimbursement that we'll put into effect this year. At this point, I'd 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 submit a question, please feel free to email us at sjones@neogenomics.com, during the Q&A session, and we will address your questions at the end if the subject matter hasn't already been addressed by our calling listeners. Operator, you may now open up the call for questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Amanda Murphy with William Blair. Please proceed with your question.

Hi, good morning. Thanks for all the detail --

Good morning.

-- on the acquisition. I just had, I know it's kind of early days but I just was curious as you’ve interacted with customers on both sides of the coin, I know you've spoken to some opportunities to drive some revenue synergies and that sort of thing ultimately. So I guess what's the reaction been from the customer base both from a Clarient and Neo legacy perspective?

Amanda thanks for the question. First of all, we're very pleased with the reaction from customers of either company. I think the NeoGenomics clients are very pleased that we're going to be able to bring the digital pathology and immunohistochemistry capabilities that Clarient is so capable at to them, and the Clarient customers are very pleased that we have now a much broader molecular menu to offer to them, and so we're very pleased with the reaction, we've just gotten emails from people in fact in the last few days also congratulating us on our selection of sales team. So I think overall we're very pleased with the customer reaction.

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

Yes, so the cost synergies are -- every bit is good as we thought before. We've already effected cost synergies in sales and marketing, test send outs, as I think I had mentioned. We've reduced some management positions. I think over the longer-term, we’ll see more clearly the extent of the cost reductions as we integrate the facilities. So that will fully occur around the end of 2016. We will make a lot of progress during 2016, but as we integrate the facilities fully, I think that we will see other synergies develop. We also through the year will be gaining synergies in things like purchasing and productivity and other areas as well.

Got it. Okay and then just last one for me. Obviously you’ve had quite an impressive track record in terms of lowering cost per test over time, and I think you spoke to some initiatives that are ongoing as well. But if you think about that concept over again kind of the longer-timeframe, do you feel that you can continue that type of magnitude of reductions? What else is there? I know, you mentioned the missing learning, but what else is there in terms of driving productivity improvements, separate from the synergies.

Yes, cost reductions is a journey, and so the journey really includes a lot of quality improvements, also includes a lot of automation improvements, and we don't have today a defined list for the next several years, but that's the same case as we've been in for the last four or five years and we've always managed to reduce our cost through these kinds of constant continual improvements in quality and automation. I think that there is a lot of improvements yet to be had in this area. The bigger that we get, the volume does have an impact on cost per test reductions, we're doing a lot of work on the systems side. There's the ability to further automate the operations of the laboratory, eliminate paperwork, all that kind of stuff. So we've got a long list of ideas that we think can take us for several years into lower cost per test.

Just one quick -- sorry, one quick last question. You're not still being impacted by the customer that was insourcing at this point, are you?

Yes, that customer is pretty much annualized at this point.

Our next question comes from the line of Bill Bonello with Craig-Hallum. Please proceed with your question.

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

Yes, Bill thanks for the question. So first of all, I don't want to jinx it. But so far we've not lost any customers. And the reaction, as I mentioned, of course has been very good. Now, I will say that we have not made a lot of changes to our service offerings yet with clients either, so obviously we're going to try very hard to make this seamless to clients, but as we make changes, there is always that possibility where we’ve been through this before, this is not our first RODEO in terms of integration. So we think we know where the land mines are and we fully intend and everyone in the company knows that rule number one is to retain our client. So I think we can manage through it pretty well, but there is some risk as we move forward, and we're not ready to change that assumption that we laid out a few months ago.

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

Bill, we have an aggressive policy across all Senior Executives that NeoGenomics and our sales people will find non-compete and non-solicitation. In the case of sales reps domicile in California non-competes are not enforceable. So it’s just related to the non-solicitation agreement. Clarient did not have a similar policy but only four Clarient sales reps have left with us, a four total reps, two of which came from Clarient have left and it was really not expected to be a big dealer, we have much exposure on that. I'm pleased to report that all of the remaining Clarient reps have now come over to Neo with its policies and procedures and time-to-time agreements that all the rest of our sales rep have. And so we're very consistent in the way we apply that policy, and we think it will help protect us on moving forward basis.

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

Yes, GE, Bill thanks for pointing that out. So, yes, PathLogic is clearly underperforming. It did experience negative gross margin, it lost a lot of money in quarter four. This has our attention, there's no quick. Even though we're focused very much on Clarient, this does have our attention. I will mention one thing on the positive side before I address the question more fully and that's that we have experienced some benefit from PathLogic in the Neo core business. So there are many clients in Northern California that have become clients of NeoGenomics that probably wouldn't have at this point if it were not for PathLogic and that's relatively meaningful. Now, I will say that we're taking action. We have had some management changes at PathLogic in the fourth quarter. We are very focused on volume growth there and we have a whole list of actions that are on my desk as we speak to try to fix that problem. And we are committed to reducing the negative impact. It's not lost on us that we have terrific results in the more of the core business and PathLogic is dragging it down. So we will take action, we're committed to do so, and I think you'll see that.

Our next question comes from the line of Paul Knight with Janney Montgomery Scott. Please proceed with your question.

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

Sure, thanks, Paul. We're pleased that the 2016 physician fee schedule corrected the errors in FISH reimbursement that were introduced in 2015 as part of the adoption of a new FISH CPT code. We worked very hard with industry participants well obviously, CMS, and it appears that they heard us. In fact, the national rate for the technical component of multiplex FISH testing, which is build using CPT code 88374-TC was increased 87% in 2016 versus 2015. That will help cover a lot of other decreases that happened and is probably the largest driver of the 3% to 4% increase in AUP that we're projecting. The reimbursement for IFC or immunohistochemistry was also -- it was also severely cut in previous years was increased by about 20% to 30%. There is a lot of different codes that you report IFC within, depending on the code, it could be as low as 15% or 20% or as high as 30% to 35%. So these two increases will offset the 20% or so decrease in reimbursement for flow cytometry that CMS put in, and the 20% or so decrease in reimbursement for digital pathology services. When you boil it all down, since this is NEO's largest test and IFC's Clarient largest test, we expect the reimbursement to increase to more than offset the flow in digital pathology decreases. Since the FISH increases are clearly correcting a previous year error that was imposed when the new FISH codes were introduced, we also are expecting that many of the private payers that have not already done so will increase their FISH reimbursements in 2016. When all is said and done, we are expecting a 3% to 4% increase in overall average revenue per test across all payers in the core genetic and molecular testing businesses, which we think will result in about $7 million to $9 million of incremental revenue across both companies.

So let me just build on what Steve said and may be take a longer-term view on the pricing environment. So we believe that CMS has now reviewed most of the pathology codes and adjusted a lot of them as they've gone through that review process over the last four years or so. And I think it's important for you to understand that even FISH, even though Steve mentioned that we'll experience big increase in 2016, over the long-term FISH reimbursement is still down over the last four years. And so we have sustained a decline in just about every one of the codes that we bill under. And we're hoping that the worst is behind us and we believe that it is as those codes have all now been reviewed and we're hopeful that that's the case.

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

Hope so. Well last question would be regarding the panel regulations I think data accumulations starts this year. Do you think PAMA is a positive or no impact, what's your view on PAMA for your business?

We actually don't think it will be a very big impact to us at all. About 75% of the tests we bill are billed utilizing the physician fee schedule and only about 25% are billed using PAMA or using a Clin Lab fee schedule, which is what PAMA is focused on, but the PAMA is really focused on Medicare tests and Medicare is only going to be about 16% of our combined company CMS. So we have 25% of 16% of revenue exposed to PAMA or 4% of total revenue. And when you really boil it down further more than half of that is from molecular testing and they just reset all of the molecular codes in 2013, so we don't expect them to aggressively reset the molecular codes. The remaining call it 40% or so is from cytogenetics testing, which is a very manual test. We're probably the most efficient in the United States of doing this, because we use a lot of automation and it's still may be a 30% margin business. So if CMS wants to put all the less automated cytogenetics players out of business they'll reduce cytogenetics further, we don't see more than may be a 20% to 30% reduction narrow over a multiyear period, because it is such a manual process. So we think overall our exposure to PAMA is very limited here.

[Operator Instructions]. Our next question comes from the line of Drew Jones with Stephens. Please proceed with your question.

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

Yes. I think we're going to differ how many on that anymore detail, because we're really just starting to get payments in from tests that we've submitted in 2016. And it's just too early to extrapolate anything. In our revenue guidance we assume that about half of the payers, the commercial payers that had not already increased their FISH reimbursement rates would file a suit and increase their FISH reimbursement via similar percentages. So we didn't assume it would happen across the board. The data still have to prove it out and we will report back you in Q1.

Okay. And then you got a chance to kind of crawl through the customer list at Clarient. Are you in a position now to give us a little bit better view on customer overlap?

Yes. There is definitely some customer overlaps. There is a number of customers where Clarient would do the solid tumor work with the IHC work and we would do the heme work or the molecular work. We are working -- we actually already have one standardized price list that we're rolling out to folks. For those customers who are on contract, we need them to sign a new formal contract that applies to both companies. And that process is well underway now. I would tell you just to echo Doug's earlier points; clients are ecstatic about getting access to the full menu from one company. There will be a period here for about nine months while we're integrating our LIS system that people will get two bills, if they want to order something they were previously ordering from Clarient, something that they were previously ordering from NEO. But we are working as rapidly as possible to integrate the LIS systems and the lot of very smart people are focused on that and we think we got a pretty good plan for it.

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

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

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

And in fact, just echoing on a point that Bill Bonello brought up about revenue distractions earlier, most of the revenue distractions that we expect to encounter this year have more to do with the fact that the NeoGenomics folks who had Clarient written accounts in their pipeline and the Clarient folks who had NeoGenomics account in their pipeline are no longer having such robust pipelines. And so it will take a while for that to build their pipeline. So it's hard to really put a fine point on this. But yes, there will be some period where the growth rate won't be as great as it was as there is less in the pipeline at this point. But I will say that we're getting very good traction from very large clients and hospital systems that are very, very interested in the combined company offerings.

Our next question comes from the line of Jeff Bernstein with Cowen Prime. Please proceed with your question.

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

Sure, Jeff thanks for the question. So we're very excited about the clinical trials business. As you know I think or as we disclosed Clarient had a clinical trials business that was probably 10 times bigger than what we had at NeoGenomics even though we are making a lot of progress at NeoGenomics growing that business is been a focus for GE well, GE was an owner of Clarient. So right now what we're doing is we've evaluated the business, we think it's a very solid business, we're recruiting commercial people as we build that sales team in the biopharma area and we're generally have an investment team and attitude toward biopharma. I think we're going to grow a terrific business there. I mentioned, I think PDL1 as an example. So there Clarient is doing a heck of a business now in PDL1 and that's an example of something that we think is very exciting for us, where we can perform the clinical trial for the biopharma company as a companion diagnostic and then offer the tests commercially and clinically. And so we like that business, we think it's got a lot of growth opportunity for us, we have great plans and a vision to make it a big important partner.

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