Earnings Call Transcript
Nov 2 2014, 01:31
About: NEO
NeoGenomics, Inc. (NASDAQ:NEO)
Q3 2014 Earnings Conference Call
October 30, 2014 11:00 a.m. ET
Executives
Doug VanOort - Chairman and CEO
George Cardoza - CFO
Rob Shovlin - COO
Steve Ross - CIO
Jerry Dvonch - Director of External Reporting
Steve Jones - EVP, Finance
Maher Albitar - Chief Medical Officer and Director of R&D
Analysts
Amanda Murphy - William Blair
Debjit Chattopadhyay - ROTH Capital Partners
Bill Bonello - Craig-Hallum
Drew Jones - Stephens
Jack Wallace - Sidoti
Presentation
Operator
Greetings, and welcome to the NeoGenomics' Third Quarter 2014 Financial Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.
I'd now like to turn the conference over to your host, Doug VanOort, Chairman and CEO of NeoGenomics. Please go ahead.
Doug VanOort
Good morning. I'd like to welcome everyone to NeoGenomics' third quarter 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 George Cardoza, our Chief Financial Officer; Rob Shovlin, our new Chief Operating Officer; Steve Ross, our Chief Information Officer; and Jerry Dvonch, our Director of External Reporting. Steven Jones, our Executive Vice President for Finance is joining us remotely from North Carolina; and 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.
Steve Jones
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.
Doug VanOort
Okay. Thank you, Steve. We'll begin our call today with some brief remarks about overall performance in the third quarter, provide an update on some key initiatives, and then discuss some recent changes in our organization. Steve Jones will then conclude our formal remarks by reviewing our financial results in more detail.
Quarter three was another great quarter for NeoGenomics with many significant accomplishments. We acquired PathLogic on July 8th, as the company's first acquisition. We successfully raised $34.5 million in the largest equity financing in the company's history.
We recorded a record level of revenue. We grew volume in the base business by 33%. We collected a significant amount of cash, and dropped our DSOs sharply. We continued our fast pace of innovation with several new and novel test launches, and we invested in future growth and cost reduction initiatives. In fact, we can say, without qualification the company is stronger than ever before.
I'll start by briefly reviewing the new consolidated company, which includes PathLogic's financials from the date of acquisition. Then, in order to understand the business more fully, I'll separately discuss NeoGenomics' base business, excluding PathLogic and standalone PathLogic in more detail.
For the new consolidated company, we reported results that were at the top end of our previously issued guidance range for both revenue and earnings per share. Revenue was $23.2 million compared with guidance of 22 million to 23.5 million. And excluding one-time deal cost and cost-related to the exiting of our bank credit facility, earnings per share was at the top end of the range at one penny per share. So overall, the company's results were on track with our expectations.
Now, let's focus on the performance of NeoGenomics' base business, which excludes the impact of PathLogic. NeoGenomics' base business performed very well in the third quarter. We were pleased once again with the market share gains, which drove the 33% test volume growth. The gains continue to be broad-based with increases geographically coming from each of our three main regions of the country.
Each region grew volume by at least 25% compared with last year, and our sales team continues to do a great job. The market share gains resulted in the third quarter revenue growth of 23% compared with last year.
On a year-to-date basis, nearly half of the revenue growth compared with last year resulted from customers that are brand new in 2014.
Revenue growth was especially strong, recognizing that there was a $1.2 million reduction in revenue caused by the still unresolved National Correct Coding Initiative or NCCI, FISH edit matter, which affected FISH billing to Medicare. CMS has still not provided any guidance to the lab industry, despite past assurances that guidance would be provided. Had we accounted for the NCCI edits in a different and less conservative manner, NeoGenomics' base business revenue growth would have been 30%.
New products contributed greatly to our growth. As a measure of innovation effectiveness, new products that were introduced in the last three years accounted for 58% of the NeoGenomics base business revenue growth during the third quarter.
Molecular test volumes continue to grow most dramatically, and molecular testing revenue increased by close to 90% as a result of strong volume growth and a change in mix to higher priced tests.
With respect to gross margin, our base business was impacted on a dollar-for-dollar basis by the $1.2 million reduction in FISH revenue from the NCCI matter, and obviously that lowered margin. We made several investments which added to cost and impacted gross margin in the quarter, but we're confident they'll help us to grow and to realize increased productivity and improvements in cost for tests in the future.
For example, we opened a small lab in Fresno, California, and immediately staffed it with a set of genetic technologist team, anticipating future volume growth.
We expanded our Irvine lab facility to add molecular testing capacity. We invested significantly in state-of-the-art automation. These reduced gross margin in the third quarter, but we expect the pace of productivity gains and cost reductions to accelerate in coming quarters.
Selling, general and administrative cost increased significantly, but approximately $1 million of the increase was due to one-time deal-related costs and increased non-cash stock-based compensation expenses that resulted from the 57% increase in our stock price during the quarter.
The remaining and underlying increases in SG&A relate primarily to investments, to grow our sales team and our information technology capabilities. There investments will help us to grow and reduce cost going forward, and we believe the payback on these investments will be very strong.
Adjusted EBITDA for NeoGenomics' base business was a record, $2.9 million, a 32% improvement compared with last year. Adjusted EBITDA would have been $4 million, an increase of 85%, were it not for the unresolved NCCI matter. We continue to hope for clarification one way or the other from CMS from this matter before the end of the year.
Importantly, our cash collections were exceptionally strong as they actually exceeded revenue by over $2million in the quarter and drove DSOs down to 72.5 days.
I'd like to switch now to comment on PathLogic's performance during the quarter. We're delighted to report that there have been no surprises for us in our $6 million acquisition of PathLogic.
During our due diligence and integration planning, we realized that a lot of changes needed to be made for the acquisition to achieve our profitability objectives, and we're making good progress. We've already executed a number of changes to the cost structure and have reduced the monthly loss by about 2/3rds from July to September.
We're also beginning to implement a number of short and longer term growth initiatives. As we said before, we expect to achieve breakeven around year end and profitability early next year.
For the quarter, PathLogic had revenue of $2.3 million and an operating loss of $367,000, but for perspective, PathLogic's operating loss as a standalone company in last year's third quarter was $993,000.
All in all, combining NeoGenomics' base business with PathLogic, we reported $23.2 million of revenue, $2.6 million of adjusted EBITDA, and including all the one-time cost, a slight loss of $291,000.
In previous investor calls, we've described our key areas of focus, and so we'll continue with that format here. Obviously, getting lean is a key objective. I mentioned some investments to increase capacity and improve productivity already. And I'd like to comment a bit more on that now.
First of all, I'm pleased to report that given our current pace of growth we've already begun to absorb the additional capacity enabled by opening the Fresno, California lab and immediately staffing it with a team of highly skilled technologists at the beginning of the third quarter.
In addition, we spent a lot of time and money engineering and validating some state-of-the-art lab equipment that will allow us to automate several lab processes. We're now beginning to process samples using it, and expect it to help us drive good cost reductions when it's fully operational later this fourth quarter.
We also are now completing specific cost capacity and automation initiatives in Irvine to improve cost for our solid tumor FISH and molecular testing processes. We remain committed to being the low cost provider in each of our core testing modalities. And we believe these initiatives will re-accelerate our improvements and average cost to goods sold per test in coming quarters.
While changes in cost per test are sometimes lumpy from quarter-to-quarter, we remain committed to improve average cost per test by 8 % to 10% on an annual basis through 2015.
Growth is another key focus area for our company. We're very pleased with the productivity of our high performance sales team. We ended the quarter with 27 sales professionals, and are proud of the quality experienced professionalism and character of our representatives. Clearly, this is the best sales team we've ever had, and they're winning market share.
New products have helped our sales team gain new accounts, and more deeply penetrate existing accounts. They also help us establish and enhance our reputation as a leader in cancer testing. Since the beginning of the year, we've added or revised approximately 40 new molecular and FISH-based tests and converted another 23 to next-generation sequencing.
New products are result of our continued focus on innovation, and we continue to make great progress on the innovation front. Just within the last couple of weeks, we announced new molecular tests that enhance our reputation as a leading provider of oncology molecular testing in the United States. We launched our multi-modality solid tumor discovery profile, which analyses 315 genes for mutation using next-generation sequencing, and includes nine FISH tests to analyze translocations, amplifications and deletions that might be missed by next-generation sequencing.
This discovery profile is designed to meet the needs of investigators and clinicians, who are interested in testing large numbers of genes and numerous translocations and gene amplifications. It also meets the needs of pharmaceutical companies engaged in clinical trials.
This multi-modality testing is unique in the industry. It provides testing for mutations in the largest list of solid tumor-related genes in the industry, and provides the gold standard FISH testing for detecting therapy related abnormalities such as, ALK translocations and HER2 and MET amplifications, each of which is required to be confirmed by FISH prior to initiating expensive therapy.
We also recently launched two first-in-kind tests. The first predicts acquired resistance and susceptibility to Bruton Tyrosine Kinase or BTK inhibitors. The second is a lymphoma profiling test to predict susceptibility to BTK inhibitors for the treatment of lymphoma and chronic lymphocytic leukemia or CLL.
BTK inhibitors are a new non-cytotoxic targeted therapy, and a number of Phase 3 studies are ongoing. In fact, these tests are a good example of the compelling value proposition of the genetic testing.
New targeted therapies can be very effective and quite expensive. And these tests help physicians choose the right therapy for the right patient. They substantially improve cancer care and help avoid therapies that would not be effective.
Diversifying our business is also an important focus area, as we balance our risk profile and take advantage of new opportunities. We're diversifying our product mix, our client base and even our payer mix. For example, Medicare revenue was only about 20% of total revenue in quarter three this year compared with 43% just three years ago.
Our exclusive strategic alliance with Covance's central laboratory is an exciting diversification initiative. We're jointly bidding on a number of requests for proposal for clinical trials, and are building our book of business. Although we didn't realize any significant volume from this alliance in the third quarter, we're now beginning to see some clinical trial specimens be tested in our labs and expect that to ramp up over the coming quarters.
We're on track to develop joint capabilities with Covance on a worldwide basis, as we help install capabilities at the Covance location in Shanghai, China, this past quarter.
In addition to our work with Covance, we're engaging directly with several pharmaceutical firms, particularly in the area of molecular testing based on our next-generation sequencing testing platform, and we believe we're making good progress here as well.
The PathLogic acquisition gives us diversification opportunities as well. I described our integration of PathLogic to our Board of Directors two weeks ago and said, "So far so good." To the best of our knowledge, we've not lost one customer, and the company's performance has improved in both the top and bottom line each month, since we've owned it.
Along with cost-related synergies, we're now beginning to execute on cross-selling revenue opportunities to offer PathLogic's tests to NeoGenomics existing client base and to offer NeoGenomics world-class molecular and genetic services to PathLogic's existing client base. We're excited about the PathLogic acquisition, and are confident that we can achieve our targets as originally planned.
I also want to mention several recent changes we've made to strengthen our team. We recently named Rob Shovlin to be our Chief Operating Officer. Rob has a great deal of leadership experience in our industry, and is initially focused on commercial operations and strategies, including development of our prostate cancer tests. We've never had a Chief Operating Officer position before, and we're looking forward to Rob's contributions to our commercial and operating teams.
Rob Horel has led our sales and marketing organization for three years now, during which time we strengthened our team and grown our business dramatically. Rob Horel is now going to lead the PathLogic business as the Vice President and General Manager, and will integrate that company into NeoGenomics.
In addition, we just named Bruce Crowther to serve as an independent member of our Board of Directors. Bruce serves as Chief Executive Officer for Northwestern Community Hospital for over twenty years, and will be a valuable resource to our company.
In summary, we're pleased with the company's performance in quarter three, and we've never been so excited about the opportunities that lie ahead for NeoGenomics.
We're growing and gaining market share, and we're getting leaner through good process management and control. We're also developing new products and businesses for the future. Indeed, our company is stronger than it's ever been.
This is an exciting time for precision medicine in general, and the benefits for cancer patients and for our healthcare system continue to multiply. We're at ground zero of this revolution that is taking place in our industry, 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 now to comment more fully on our financial results.
Steve Jones
Thanks, Doug. I'll start by reviewing some of our financial and operating metrics with the third quarter, and then we want to open it up for questions. Since Doug has already reviewed a lot of the financial information in detail, I want to just go on a few blanks here.
Our average revenue per test for base NEO was approximately $463, a 7.5% reduction from Q3, 2013, but a 1.9% increase from the $455 we reported for Q2. However, investors should be aware that our cash collections were so strong in the quarter that our prior period revenue adjustments were much higher than normal. Prior period revenues adjustments will raise when we collect more cash than we originally booked for a test.
In quarter three, we had $1.2 million of prior period revenue adjustments, which is an all-time record for us. This amount was about 620,000 higher than levels reported in the second quarter, and resulted in approximately $14 more in average revenue per test in the quarter than in quarter two. A more accurate representation of our average revenue per test for base Neo would be closer to $450. In order to be conservative, analysts should model base Neo average revenue per test no higher than this $450 per test level, which is same guidance we gave in Q2.
We believe the NCCI FISH matter cost us approximately 580 basis points on our base NeoGenomics gross margin. We're pleased that our 3.9% year-over-year improvement and average cost of goods sold per test was able to make up for a good deal of this impact. While we're disciplined only to report a 46.4% gross margin for the base NEO in the quarter, we can report that we begin to see a nice rebound in base NEO gross margins, as some of the productivity measures Doug discussed began to take hold later in the quarter. Indeed, we expect our base business gross margin to improve in the fourth quarter.
As we've discussed previously, productivity improvements tend to be lumpy, as you have to make investments before you can realize the benefits. Please also keep in mind that on a year-to-date basis, our average cost per test has improved by 7.5%, and we remain committed to our goal of an 8% to 10% reduction on an annual basis.
PathLogic gross margin was at 26.5% for the quarter. But we also saw nice increases in PathLogic gross margin as the quarter progressed. For the fourth quarter, we believe that base NEO gross margins will be in the 47% to 49% area, and PathLogic gross margins will be in the 28% to 32% area. This would suggest combined margins in the 45% to 47% range are possible.
We finished the third quarter with 372 full-time equivalent employees and contract doctors for base NEO, an increase of 10 employees from June 30th. The PathLogic acquisition added an additional 65 employees in early July, thus we now have approximately 437 full-time equivalent employees in the consolidated company.
Our consolidated accounts receivable balance net of the allowance for doubtful accounts was $18.3 million at September 30th, which is $500,000 less than where it was, as of June 30th, even after adding in the AR balance of PathLogic to our consolidated results.
If you're scratching your head right now, that's because this is definitely unusual given our growth. We completed an acquisition and grew consolidated revenue by $2.5 million or 12% sequentially from Q2, and still managed to collect more than we booked in revenue. And this is the second quarter in a row that our billing team has accomplished this. This is truly an awesome accomplishment by our billing team, and we're equally thankfully for having such an extraordinary of dedicated professionals.
As a result, our consolidated accounts receivable balance expressed in terms of day sales outstanding was 73 days as of September 30th, down from 83 days at June 30th, and 95 days at March 31st. We certainly don't see that every day.
The superior level of collections allowed us to generate $3.2 million of consolidated cash flow from operations in the third quarter, which is on top of the $4.3 million we generated in Q2.
On a year-to date basis, we have now generated $8.5 million total cash flow form operations, which has been enough to cover the entire process price of PathLogic, all the one-time transaction fees and credit facility extinguish fees, and all the capital expenditures paid in cash. If you remove the $5.8 million portion of the PathLogic purchase price that we paid in cash, and included the $4.7 million of CapEx that we lease financed instead, we effectively have had a positive free cash flow of approximately $1 million on a year-to-date basis. This is the first time in our corporate history that we've been able to achieve positive free cash flow on a sustained basis.
We purchased $2.2 million of property, plant and equipment in the quarter. However, we are able to lease finance approximately 1.5 million or 66% of this amount, thus the net use from the purchase of capital expenditures was only 755,000.
As Doug mentioned in his remarks, we did an equity transaction during quarter three. We sold 8.05 million shares of stock at a price of 460 per share. After deducting the fees and expenses for the offering, we net it approximately $34.5 million. We haven't really used any of the proceeds of this offering as of yet, as we had $34.4 million cash on hand as of September 30th, even after paying off the bank line.
Since we had cash on our books, we didn't think it made much sense to continue paying the interest on the debt; thus we terminated the bank facility in August. We expect that we may replace it with another credit facility when we get a little more clarity around our next acquisition.
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 Q&A session, and we'll 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.
Question-and-Answer Session
Operator
Thank you. (Operator Instructions) Our first question comes from Amanda Murphy from William Blair & Company.
Amanda Murphy - William Blair
Hey, good morning.
Doug VanOort
Good morning.
Amanda Murphy - William Blair
Just a question on the cash collection; so obviously, quite interesting, just given I think some other labs who talk about having challenges there. So, could you just -- I mean, maybe give a little more color on what exactly allows you to -- or what was the driver there? Is it a specific test or -- obviously, your billing team is working quite hard, but just trying to get a sense of how much more of a tailwind that could be for you going forward?
Doug VanOort
Well, our billing team did a lot of hard work and we've had a lot of focused meeting, we've had a kaizen event. They have redesigned a lot of their processes. We've actually even had outside consultants come in. But the entire billing team just deserves credit for what really has been an amazing accomplishment by the group.
So at 72.5 days in terms of how much lower can we take it, their goal is to make that first number at six, and I wouldn't put it past them right now, given how well they're doing, but obviously there's limit to how good they can get, but really just a lot of hard work, a lot of focus by everybody here, and really a terrific accomplishment by the team.
Steve Jones
Yes, we also implemented a new billing system at the end of last year, and we've transitioned most of our customers to that, and we expect to get I think even some more benefits as a result of operating that.
Amanda Murphy - William Blair
Got it, okay. And then on the next-gen side, so obviously, that's I guess new paths to the next-gen specifically are becoming more important for you. So, in the context of the billing discussion, what are your thoughts on some of the new next-gen codes that are coming next year from CMS? Is that potentially a risk, just given that -- at least of the new passcodes that were introduced a couple of years ago, people have had some issues getting paid for those. So do those codes -- are those codes potentially at risk? And then also maybe talk about those new products in context of the new FDA regulations as well -- or draft, I should say.
Steve Jones
I'll take first one of those. Doug, you can take the second. Amanda, as we've talked before, every time the government does anything, there's risk. Until we see what the actual levels of reimbursement are on the new next-generation sequencing codes, we really just can't comment with any amount of certainty.
I think we should put it into the category of we're cautiously optimistic that CMS is going to realize the full value of this very powerful technology, and we believe that the private payers will not be far behind on this, but we've got to see what the reimbursement levels are before we can really form a full opinion.
Amanda Murphy - William Blair
Got it, okay. And then just last one, I guess keeping on the reimbursement theme for a minute. Obviously, FISH -- we talked about that a lot in terms of the NCCI edits. But what are you guys thinking for the final FISH rates here? Is there any noise around whether you think you'll keep the increase that CMS has proposed for 2015?
Steve Jones
Again, I'd put that in to the category we're expecting to get a lot more clarity around the reimbursement levels for 2015, when the CMS posts the draft position fee schedule. They normally do it in November. They did it in late November last year, but there was a government shutdown that delayed them by about 16 or 17 days. It could be as early as this coming week or we just don't know.
I think we're very cautiously optimistic. The AMA has reported some new multiplex FISH codes that realize the value of this very powerful technology that would be an improvement over the NCCI FISH edits that we're putting place last year. And as we've discussed on the last call, the relative value units were increased by about 30% on the CPT codes 88367 and 88368, which are going to be the first probe staining procedure under the new AMA's guidelines. And so, we think that we're going to have some relief on the first probe staining procedure, and we think that we'll probably get an increase for the multiplex stains as well. But until we see the reimbursement levels have come out, it's just hard to comment, specifically.
Amanda Murphy - William Blair
Okay, got it. Thanks very much.
Doug VanOort
Thanks Amanda.
Operator
Thank you. Your next question comes from Debjit Chattopadhyay from ROTH Capital Partners.
Debjit Chattopadhyay - ROTH Capital Partners
Hey, good morning gentlemen and thank you for taking the questions. Could you guys, for our own edification, could you comment on the trends from the biopharma business segment? I mean what kind of tests do they order, I mean, pricing and impact to the bottom line, say, versus your core business?
Steve Jones
Yes, I can take a crack at that, and then maybe Dr. Albitar has some comments as well. As you know that Debjit, as we mentioned we're just getting started in the clinical trials business here relative to building our business both with Covance and through our own direct efforts.
Generally, what we see is that the pricing is higher than in our regular clinical business, and there are a number of special things that we need to do obviously for pharmaceutical companies. I mean we've had to build our infrastructure in IT. We've had to build a variety of other infrastructure for reporting and so forth.
So, our cost can be a little bit higher as well, but we think the margins overall will be better in that business than in our clinical business. We've gotten a lot of interest in the next-generation sequencing platforms and tests that Dr. Albitar has launched. We continue to have a lot of interest in that as well as in FISH-based testing. And as I said, we're starting to get some traction in building the book of business, but it's pretty early.
Debjit Chattopadhyay - ROTH Capital Partners
And specifically on the Covance alliance, the facility expansion at Fort Myers and you mentioned Shanghai. What kind of volume growth was baked into those facility expansions?
Steve Jones
Well, they're little different. So the facility expansion here in are -- you're talking about the lab-within-a-lab in Fort Myers, Debjit, or the facility expansion in Irvine?
Debjit Chattopadhyay - ROTH Capital Partners
So, the lab-within-a-lab in Fort Myers, which I guess was most specific to Covance.
Steve Jones
Yes, so we built a little lab-within-a lab for Covance here. It's about 700 or 800 square feet. They can do some basic histology and little immunohistochemistry testing. It has a fair amount of capacity in conjunction with our lab.
So the idea is that samples would be accessioned in Covance's lab-within-a-lab here, there would be some basic work done and then the FISH cytogenetic flow and other testing would be moved out into the NeoGenomics' lab. So we have a lot of capacity, as you know we've just revised and renovated our whole Fort Myers facility.
Debjit Chattopadhyay - ROTH Capital Partners
Great. (Multiple speakers) Sorry …
Steve Jones
And in Shanghai, we have created some capability for Shanghai to do similar kinds of testing that we've done, understanding that the pathology reads and interpretation for any work done in China and even some of the technologists' work can be done in the U.S. because we can't take samples out of China. We've got to do some of the basic wet lab work and other work with the samples there, and then the other work will be done through our facilities as we move the images around.
Debjit Chattopadhyay - ROTH Capital Partners
Awesome. And one last question. On next-gen sequencing, so how does your panel currently compare with foundation? One. And in terms of reception of the previously released hotspot mutation testing or advanced mutation testing, how does that uptick from biopharma clients and clinicians thus far? And thank you so much for the questions.
Steve Jones
Okay, Dr. Albitar, would you like to answer that?
Dr. Maher Albitar
Yes, our next-generation sequencing is the most recent panel which we just released, test for mutation in Exxon in 315 genes which are exactly the same panel as foundation medicine. However, we believe our panel is better because for translocation, large deletion, large amplifications, we are using -- and instead of using the next-gen sequencing, which is not the standard today for confirming these abnormalities, we're using the FISH.
So, for point mutation or indels, more deletions, more exertions, next-gen sequencing is becoming the standard, and we feel very comfortable with that. But for the HER2, for example, or the ALK, for all practical purpose, this FISH is the standard and more importantly, all clinical trials that's used for validating therapy for these formalities are based on FISH testing. There is no evidence as of today that if you detect these abnormalities by next-gen, they'll respond the same way as if they're detected by FISH.
So that answers your first question. The second question in term of our moral use at specific panels, we're getting a lot of really interest in that at all levels from physicians, practicing physicians, as well as from insurance companies as well or health organizations. We still continue to recommend disease-specific panels, but at the same times I think for they're all allowed to fit academic centers as well as some practicing physicians they're interested in larger panels. So that option is available for them if they want that.
Debjit Chattopadhyay - ROTH Capital Partners
Thank you so much.
Steve Jones
Thank you, Debjit.
Operator
Thank you. Our next question comes from Bill Bonello from Craig-Hallum.
Bill Bonello - Craig-Hallum
Thanks for taking my call. Two questions; first, what have you seen in terms of early response to your digital pathology product?
Doug VanOort
We've been working on the digital pathology project for a long time, frankly. And it was difficult for us to really engineer this thing, because what we're doing is little different than what a lot of other companies are doing, because we're allowing physicians working remotely to sign out these images in this work. So, we got to go through and make sure that the speed of the image changes and so forth are appropriate.
We have successfully overcome the challenges there. We think we got a very, very competitive product right now. We've been out there in the last couple of months talking with prospective clients as well as existing clients that didn't send us to digital pathology work and the feedback is very good. We're continuing to work on this to make sure that we have the best product in the market. We have little bit more work to do but right now, the product is really competitive and we're starting to get some traction there. That the biggest benefit for us, Bill is not only in getting the digital image analysis work but also in getting all of the other work as we try to be a one-stop shop for our clients.
Bill Bonello - Craig-Hallum
Great. And then just maybe a little bit more color or sense of what you're seeing or thinking in terms of additional acquisition opportunities. And in particular, I would be kind of curious what you've learned thus far from the PathLogic acquisition? And if that makes you think differently at all about what you are or are not interested in acquiring?
Steve Jones
Yes, good question, Bill. Thanks for that. We did learn a lot from the PathLogic acquisition, and we've learned a lot from some due diligence activities. I think that we're in a pretty good position as a company to be able to review, analyze and execute transactions at this point. So that was a good exercise for us.
We have been actively engaged in talking with people in the industry and we continued to do that. What we have learned is that we're going to be very selective in two areas. One is strategically the acquisition is got to make sense for us. We're more interested in sort of high growth and high technology sorts of companies very much like we are. And the second thing we've learned is that the economics have got to work. I think we promised investors when we raised money in this recent financing that we would both be deliberate but we would move quickly for the right opportunity. We're sort of in that process. Right now, we're talking with people but you can count on us to make sure that the strategy and the economics makes sense.
Bill Bonello - Craig-Hallum
Okay. That is very helpful. That was all I had this morning, thanks.
Steve Jones
Good, Bill. Thank you.
Bill Bonello - Craig-Hallum
Thank you.
Operator
Thank you. Our next question comes from Drew Jones from Stephens.
Drew Jones – Stephens
Thanks, guys. Can we just get an update on SES FISH volumes, kind of where we stand there?
Steve Jones
Yes, so sure, Drew. So, Florida cancer specialist has been performing and beginning to perform their own FISH testing in their own laboratories. And they've been taking their FISH testing, increasing that volume for the last five months -- four months or so. And so our volume was affected in quarter 3 by some reduction in FISH testing because FCS is in source. They are continuing to do that. We know that. We're forecasting that. And we're growing our business through it.
Drew Jones – Stephens
And then I guess just taking all things into account, given the strength in molecular, are you guys still comfortable with the 20% volume growth you've talked about for 2015?
Doug VaOort
Yes, Drew, I don't think. I'm going to answer that. And maybe Steve can answer it too but we've not given any guidance yet for 2015, generally and but I'd say we're comfortable with whatever we said before. Like we set 20% everything we said, we try to reduce our cost with a goal of 8% to 10% cost per test. I think those things are still very much in the picture.
Steve Jones
That's exactly right. We're maintaining the 20% volume growth that we first put out there in the February call; surely we'll exceed that this year. And we see no reason why we wouldn't meet or exceed that next year as well. And we're also committed to being a low cost provider. We think that's a really important part of any of the lab's strategy that sort of changing landscape.
With respect to financial guidance for 2015, we will come out like we've done in previous years in the February call with full set of expectations around what we think. We just have to digest what the reimbursement levels are going to be before we can do that.
Drew Jones – Stephens
Thanks, guys.
Steve Jones
Thank you.
Operator
Thank you. Our next question comes from Amanda Murphy from William Blair &company.
Amanda Murphy - William Blair
Hey, guys. So I just had a couple quick follow-ups. On the margin side, I guess two there. You talked about PathLogic, obviously, the opportunity to expand margins there. Can you give us a perspective on where, ultimately, you think those margins can go? Is that -- do you think it could go up to your level? Or just kind of given the more solid tumor nature of the business, is it going to be ultimately lower?
Steve Jones
We think that the base PathLogic business before you add in all of the NeoGenomics' molecular and other kinds of testing is very much capable of getting into the lower to mid 30's gross margin. When you start adding in revenue synergies by selling our FISH tests and cytogenetic and other things like that into their business, egg starts to get scrambled, but the cooler anatomic pathology business that we purchase from them is certainly very much low to mid 30's business. And we help even higher I wouldn't model more than that for now, until we get a look at more experience with it. However, we think that lot of the revenue synergies are indeed going to come from higher margin FISH test and other tests like that. So it will be less and less of a drag on the overall corporate gross margin or consolidated gross margin, as time progresses.
Amanda Murphy - William Blair
And then just another quick one on the margins. So, the prior period adjustments, is the right way to think about that then to back that out of the margins, so you kind of get -- because that goes straight to profit, right? So you can get some more of an underlying growth margin?
Steve Jones
Yes, there's always a range of prior period adjustments that we have in any given quarter. This was a particularly strong quarter, which is why we mentioned it. As George mentioned, there's still room to do good things in our accounts receivable. We don't want people trying to model prior period adjustments in future periods, and so, I'd tell you that there is always -- there is all but two quarters since inception there's been a positive impact on prior quarter -- prior period revenue. And so we have always had this in our gross margin. To answer your question specifically, yes it is incremental gross margin when we have exceptionally strong periods but we don't really believe we're not going to continue to have exceptionally strong periods. So it's hard to make those adjustments and have something be apples-to-apples on a moving forward basis.
Amanda Murphy - William Blair
Got it. And just last one, and I'll let you guys go. But earlier, I asked about the FDA regulation, I don't know if you got to that. Just curious on your perspective there, and obviously, the industry is taking a pretty strong stance. So curious what your thoughts are, especially given some of the newer tests that you're moving to launch.
Steve Jones
This is a difficult one. I don't know if everyone is up to speed but the FDA has proposed some guidance to establish a whole regulatory frame work around laboratory developed tests. And the bulk of our tests are laboratory developed tests. This is a proposal. The draft is subject to comment. I think the comment period ends in either end of January or beginning of February.
The guidance is expected sometime probably in the summer of next year. But I'd say that this drafted guidance took four years to deliver. So, we're not really sure when the final rule will be promulgated. We're strongly opposed to this. Under this frame work, the FDA is proposing that laboratory tests are devices as opposed to procedures. And we're already regulated by under CLIA and by all kinds of -- all the States and so forth. It's another regulatory frame work for us. The problem is here that the -- there are about --- that we heard as many as 100, 000 laboratory developed tests in this country. It would be very difficult for the lab industry and also be very difficult for the agency to handle the sheer magnitude of the reporting that would potentially be required by this new regulation because the FDA would require that all of these laboratory developed tests be somehow reported to the agency. There are a lot of questions about this. There is not a lot of clarity right now.
Questions like what counts as a laboratory developed test? What of that test would require pre-market review? What test might be grandfathered? All of that sorts of stuff. We'd also say that right now, there's a lot of controversy. There is controversy both from a policy perspective and a legal perspective in terms of whether FDA has the authority to regulate the laboratory developed tests. The American Clinical Laboratory Association, which we're a member, the American Medical Association, the American Hospital Association, the host of other organizations, are all opposed to this.
Obviously, we're playing a role in our industries response keeping a close watch on this. The only thing we can say is I'll keep you posted on the status of the guidance as we learn more. It's scientifically and medically it's very harmful and Dr. Albitar, you may have a point here on this from a scientific or medical perspective.
Dr. Maher Albitar
Yes, for medical perspective, we in the lab, we practice medicine. We do not manufacture devices. It is art. It is constantly improving, constantly it's changing. It is more different than physicians when the patients comes and meet with physicians. To me when the FDA comes and say, "You know you have to have followed these. You have to freeze what you do in the lab and accepting things according to what you're submitted to us."
If it is really freezing medicine it is freezing advances and our experience in or with at IVD kind of products for testing really speak volumes how efficient that approach is. No question in my mind. I think there are some who are abusing the LVT but it is the same thing there are some abuses and there is no guarantee that with FDA regulation, that abuse will not really have -- would be there or would not have a different color. And it does make sense that the industry with your late outcome which mean the value of test at how you use a test, the same way these will looking and regulating chemos outcome of patient care. There are a lot of details we don't know and it depends on how FDA go with this and we'll see how this evolve. But if my opinion was any lab is prepared for this, it would be us because we do very rigorous validation and very rigorous investigations and research into everything we developed and offer. So, the devil is in the detail, but we are prepared.
Amanda Murphy - William Blair
Got it. Thanks very much.
Operator
Thank you. We have time for one last question and question comes from Jack Wallace from Sidoti & Company.
Jack Wallace - Sidoti
Thanks, guys. Quickly here, do we expect there to be any acquisitions by year-end? And are you looking at a pipeline of targets, or maybe one or two larger ones?
Doug VanOort
Yes, Jack. So, I can say that we're talking with a number of different players. I'd say that there's nothing in the pipeline that is sufficiently far in the pipeline that we would expect to close something in the next couple of months. We're working on it. These things as you will know have their own sort of course and you can count on us to be working on it but we can't forecast when or if these things will close.
Jack Wallace - Sidoti
Okay, thanks. And then sorry if I missed it from earlier, is there any update on the NEO score -- or the formerly NEO score test, the prostate test center that's in development?
Doug VanOort
Yes, we continued to make a lot of progress on our additional validation of this test. At this point we have signed up a number of urology groups. We're in dialogue with a number of others. As you know, we are continued to target about 800 to a 1000 patients to put through this additional validation. We've, I think probably have 90 or so samples already completed and we're working very hard on it. I'd add also that in addition to Dr. Albitar's fabulous work on this, we now have Rob Shovlin on our team. Rob has extensive experience in this whole area from variety of companies and which he is led or worked with. So, he and Dr. Albitar are teaming together and we will I think move smartly on this going forward.
Jack Wallace - Sidoti
Okay, great. Thanks. That will be all from me.
Doug VanOort
Okay.
Operator
Thank you. I'll now turn the call back over to Doug VanOort for closing comments.
Steve Jones
Hey, Doug before we close up here I do have one question that's come in via email that hasn't been covered before. Can you give us a rough breakdown of the rest of the payer mix and if you see anything encouraging/concerning for payer beside from the lack of quick clarity from the CMS or NCCI?
Our payer mix is running about 48% client bill right now, about 30% private payer and about 20% Medicare. Remaining 2% is accrued revenue for the most part. So there is a very, very small percentage of what we'd call patient pay, but that typically runs like less than half of 1%.
In terms of what we're seeing, we're encouraged that the private payers have started to formally recognize the new moldy Xcodes; that created a little bit of consternation late last year and earlier this year. That continues to work itself on and we continue to get more and more regional contracts that put us on contract with an even greater proportion of our private payer claims.
That's the last of the email questions that's come in. Doug, can you wrap this up?
Doug VanOort
Okay, Steve. Thank you. So, as we end the call, I do want to recognize all 437 NeoGenomics team members around the country for their dedication and commitment to building a world-class cancer genetics' testing program. And on behalf of our four NeoGenomics team, I want to thank each and every one of you who have joined our time here together for our quarter three, 2014 earnings call, and let you know that our fourth quarter, 2014 earnings call will be on or around February 12 of 2015.
For those of you listening, that are our investors or are considering an investment in NeoGenomics, we thank you for your interest in our company. Goodbye.
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