Q2 CC I took the opportunity to listen to the entire CC this afternoon. Mgmt. reported that integration of the legacy NEO business and Clarient continues to move along, but at a pace that I found slower than expected. The biggest task appears to be migrating the Clarient customer base onto the NEO LIS system, which will not be completed until mid 3rd quarter (I recall August being the estimate). Until then, mgmt. admits that the sales force is "distracted" by teaching Clarient customers use of the NEO LIS, detracting from their core duties of finding new customers. That said, NEO continued to grow their legacy business by 32% and margins (ex-Clarient) improved 40 basis points. Other positive news was an improvement in Biopharma business contracts and letters of intent, as well as a statement that some of the biopharma customers want NEO to be able to provide this segment of their business outside of the US (which mgmt stated was in their plans.) I was surprised, to some degree about statements regarding the number of Med Centers/Med schools who are now customers. These are big customers and generate lots of revenue. I had opined elsewhere that more and more hospitals will capitalize on NEO's tech only services as this relieves the hospitals of capital expenditures (for expensive equipment and manpower) while still allowing them to charge for services.
Consolidation of the Mission Viejo and Irvine labs also continue to occur, again with a slow steady pace. Mgmt sees significant cost savings based upon work efficiency improvements and supply chain cost savings. The proposed OPPS from CMS was stated to be a positive (versus the reduction in CMS reimbursement in Flow Cytometry reimbursement, which was substantial percent wise but small in the mix of revenue).
Lastly, a comment regarding conversion of preferred shares was made, with no specific timeline regarding conversion, but mgmt noting that they are sensitive to timing regarding this and will execute when they think they can manage it. They closed by reminding all that conversion will reduce overall shares available, which will have a positive impact on financial metrics.
Looking forward, I can see several potential developments that will be positive. First would be any announcement of a biopharma contract big enough to have material impact. This would likely come in the form of a multi-study or pharma-level contract that would include ALL of the work for that pharma. Any news of the opening of a European or Asian lab for biopharma work would also be material (biopharma revenue was stated to be about 20% of business if memory serves, but I was not taking notes) because biopharma work revenue is much higher margin than clinical work.
We beat by $2 million despite ongoing "distractions" on strong growth of tests numbers and growth of margins. When the dust integration settles but Q4, we may see outstanding revenue growth. Wild card? A new Federal administration that finds a way to terminate the sequester and focuses on "the moon-shot" of beating cancer, with better reimbursement for our business.
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